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Filed Pursuant to Rule 424(b)(1)
Registration File No.: 333-28411
PROSPECTUS
JULY 30, 1997
$150,000,000
[DECISIONONE CORPORATION LOGO]
DECISIONONE CORPORATION
9 3/4% SENIOR SUBORDINATED NOTES DUE 2007
The 9 3/4% Senior Subordinated Notes due 2007 (the "Senior Subordinated
Notes") offered hereby (the "Offering") by DecisionOne Corporation, a
Delaware corporation (the "Issuer") were originally issued by the Issuer as
part of the Merger Financing (as defined herein) in connection with the
Merger (as defined herein) of the Issuer's parent, DecisionOne Holdings Corp.
("Holdings") with Quaker Holding Co. ("Quaker"). See "The Merger and Merger
Financing." Quaker was organized by DLJ Merchant Banking Partners II, L.P.
("DLJMB") and affiliated funds and entities for the purpose of effecting the
Merger and Merger Financing.
The Senior Subordinated Notes will mature on August 1, 2007. Interest on
the Senior Subordinated Notes will be payable semi-annually on February 1 and
August 1 of each year, commencing on February 1, 1998. The Senior
Subordinated Notes will be redeemable at the option of the Issuer, in whole
or in part, at any time on or after August 1, 2002, in cash at the redemption
prices set forth herein, plus accrued and unpaid interest, if any, thereon to
the redemption date. In addition, at any time prior to August 1, 2000, the
Issuer may, at its option, on any one or more occasions, redeem up to 35% of
the aggregate principal amount of the Senior Subordinated Notes originally
issued at a redemption price equal to 109.75% of the aggregate principal
amount thereof, plus accrued and unpaid interest, if any, thereon to the
redemption date, with the net cash proceeds of one or more Equity Offerings
(as defined herein) by (i) the Issuer or (ii) Holdings to the extent the net
cash proceeds thereof are contributed to the Issuer, as a capital
contribution to the common equity of such Holder's Issuer; provided that at
least 65% of the original aggregate principal amount of the Senior
Subordinated Notes will remain outstanding immediately following each such
redemption. Upon the occurrence of a Change of Control (as defined herein),
each Holder of Senior Subordinated Notes will have the right to require the
Issuer to repurchase such Holder's Senior Subordinated Notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued
and unpaid interest, if any, thereon to the date of repurchase. See
"Description of the Senior Subordinated Notes."
The Senior Subordinated Notes will be general unsecured obligations of the
Issuer and will be subordinated in right of payment to all existing and
future Senior Debt (as defined herein) of the Issuer, including indebtedness
pursuant to the New Credit Facility (as defined herein). The Senior
Subordinated Notes will rank pari passu with any future senior subordinated
indebtedness of the Issuer and will rank senior to all Subordinated
Indebtedness (as defined herein) of the Issuer. The Senior Subordinated Notes
will be effectively subordinated to all liabilities of the Company's
subsidiaries that do not guarantee the Senior Subordinated Notes as set forth
herein. See "Description of Senior Subordinated Notes--Certain
Covenants--Subsidiary Guarantees." On the date of the Senior Subordinated
Note Indenture (as defined herein), none of the Company's subsidiaries will
guarantee the Senior Subordinated Notes. On a pro forma basis after giving
effect to the Merger, including the Merger Financing and the application of
the proceeds thereof, as of March 31, 1997, the Issuer would have had
outstanding approximately $503.0 million of Senior Debt and the Issuer's
subsidiaries would have had approximately $10.9 million of outstanding
liabilities (as defined herein), including trade payables.
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE SENIOR
SUBORDINATED NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus has been prepared for use by Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJSC") in connection with offers and sales of the
Senior Subordinated Notes which may be made by it from time to time in
market-making transactions at negotiated prices relating to prevailing market
prices at the time of sale. There is currently no public market for the
Senior Subordinated Notes. The Company has been advised by DLJSC that it
intends to make a market for the Senior Subordinated Notes, however, DLJSC is
not obligated to do so. Any market-making may be discontinued at any time,
and there is no assurance that an active public market for the Senior
Subordinated Notes will develop or, that if such market develops, that it
will continue. DLJSC may act as principal agent in any such transaction. See
"Plan of Distribution."
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
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FOR CALIFORNIA RESIDENTS ONLY
WITH RESPECT TO SALES OF THE 9 3/4% SENIOR SUBORDINATED NOTES DUE 2007 OF
DECISIONONE CORPORATION BEING OFFERED HEREBY TO CALIFORNIA RESIDENTS, SUCH
SECURITIES MAY BE SOLD ONLY TO: (1) "ACCREDITED INVESTORS" WITHIN THE MEANING
OF REGULATION D UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (2) BANKS,
SAVINGS AND LOAN ASSOCIATIONS, TRUST COMPANIES, INSURANCE COMPANIES,
INVESTMENT COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940,
PENSION AND PROFIT SHARING TRUSTS, ANY CORPORATIONS OR OTHER ENTITIES, WHICH,
TOGETHER WITH SUCH CORPORATION'S OR OTHER ENTITY'S AFFILIATES WHICH ARE UNDER
COMMON CONTROL, HAVE A NET WORTH ON A CONSOLIDATED BASIS ACCORDING TO THEIR
MOST RECENT REGULARLY PREPARED FINANCIAL STATEMENTS (WHICH SHALL HAVE BEEN
REVIEWED BUT NOT NECESSARILY AUDITED, BY OUTSIDE ACCOUNTANTS) OF NOT LESS
THAN $14,000,000 AND SUBSIDIARIES OF THE FOREGOING, (3) ANY PERSON (OTHER
THAN A PERSON FORMED FOR THE SOLE PURPOSE OF PURCHASING THE SECURITIES
OFFERED HEREBY) WHO PURCHASES AT LEAST $1,000,000 AGGREGATE AMOUNT OF THE
SECURITIES OFFERED HEREBY, OR (4) ANY NATURAL PERSON WHO (A) HAS AN INCOME OF
$65,000 AND A NET WORTH OF $250,000, OR (B) HAS A NET WORTH OF $500,000 (IN
EACH CASE EXCLUDING HOME, HOME FURNISHINGS AND PERSONAL AUTOMOBILES). EACH
CALIFORNIA RESIDENT PURCHASING THE SECURITIES OFFERED HEREBY AGREES THAT IT
WILL NOT SELL OR OTHERWISE TRANSFER SUCH SECURITY TO A CALIFORNIA RESIDENT
UNLESS THE TRANSFEREE COMES WITHIN ONE OF THE AFOREMENTIONED CATEGORIES AND
THAT IT WILL ADVISE THE TRANSFEREE OF THIS CONDITION WHICH TRANSFEREE, BY
BECOMING SUCH, WILL BE BOUND BY THE SAME RESTRICTIONS ON RESALE.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SENIOR
SUBORDINATED NOTES. SPECIFICALLY, THE UNDERWRITER MAY OVERALLOT IN CONNECTION
WITH THE OFFERING AND MAY BID FOR AND PURCHASE THE SENIOR SUBORDINATED NOTES
IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
AVAILABLE INFORMATION
The Issuer has filed a registration statement on Form S-1 (together with
all amendments, supplements and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with the Securities and Exchange Commission (the "Commission") with
respect to the Senior Subordinated Notes offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement,
certain parts of which have been omitted in accordance with the rules and
regulations of the Commission, and reference is hereby made to the
Registration Statement and the exhibits and schedules thereto for further
information. Summary and other statements contained herein concerning the
provisions of any document are not necessarily complete, and in each instance
reference is hereby made to the copy of the document filed as an exhibit to
the Registration Statement. Each such statement is qualified in its entirety
by such reference.
Following the Offering, the Issuer will be subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and in accordance therewith will file reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the following regional offices: Seven World Trade Center, 13th Floor,
New York, New York 10048; and at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained
from the Public Reference Section of the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition,
such material can also be obtained from the Commission's Web site at
http://www.sec.gov.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Investors are urged to read this Prospectus in
its entirety. As used in this Prospectus, the term "Holdings" means
DecisionOne Holdings Corp., including its predecessors and subsidiaries, the
term "Issuer" means DecisionOne Corporation (a wholly owned subsidiary of
Holdings), and the terms "Company" and "DecisionOne" mean the Issuer and its
predecessors and subsidiaries, all of which are wholly owned. On May 29,
1997, Holdings contributed to the Issuer all of its ownership interests in
its subsidiaries (other than the Issuer) (the "Corporate Reorganization").
All financial information contained herein is presented as if the Corporate
Reorganization had occurred on July 1, 1993. References to industry size and
statistics contained herein, unless otherwise indicated, are derived from
information provided by Dataquest Incorporated ("Dataquest").
THE COMPANY
OVERVIEW
The Company is the largest independent provider of multivendor computer
maintenance and technology support services in the United States. 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 ("OEM")) provider of these services across a broad
range of computing environments, including mainframes, midrange and
distributed systems, workgroups, personal computers ("PCs") and related
peripherals. The Company provides support for over 15,000 hardware products
manufactured by more than 1,000 OEMs. The Company also supports most major
operating systems and over 150 off-the-shelf ("shrink-wrapped") software
applications. The Company delivers its services through an extensive field
service organization of approximately 4,000 field technicians in over 150
service locations throughout the United States and Canada and strategic
alliances in selected international markets.
DecisionOne has emerged as the leading independent, multivendor provider
of computer maintenance and technology support services by (i) consummating
over 35 complementary acquisitions since the beginning of fiscal 1993, (ii)
expanding maintenance capabilities and introducing new technology support
services, (iii) increasing sales to existing customers by increasing
equipment under contract and by selling existing customers new technology
support services, (iv) adding new corporate customers and (v) providing
outsourcing services for OEMs, software publishers, system integrators and
other independent service organizations. As a result, the Company's revenues
have grown at a compound annual rate of 69.2% to approximately $820.4 million
for the annualized quarter ended March 31, 1997 from $114.1 million in fiscal
1993. Over the same period, the Company's Adjusted EBITDA (as defined herein)
has grown at a 74.2% compound annual rate to approximately $120.3 million for
the annualized quarter ended March 31, 1997 from $15.0 million in fiscal
1993.
In 1996, based on Dataquest projections, the Company estimates it had a 9%
market share of the $8.8 billion independent, multivendor segment of the
$40.5 billion U.S. hardware maintenance and technology support services
market. The independent, multivendor segment is projected by Dataquest to
grow at a 14% compound annual rate from $8.8 billion in 1996 to $14.8 billion
in 2000. The Company believes this growth is being driven by the
proliferation of computer equipment as well as outsourcing trends, including:
(i) the outsourcing by corporate customers of hardware maintenance and
technical support requirements and (ii) the outsourcing by major hardware
OEMs and software publishers of maintenance services (including warranty and
post-warranty services) and end-user technical support requirements. In
addition, the Company believes that demand for its services is being driven
by the increasing complexity of computing environments which has resulted
from the migration of computer systems from single OEM, centralized systems
to multivendor, decentralized systems. The Company believes that this
increased complexity has generally surpassed the technical capabilities of
many in-house support staffs and has
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accelerated the pace of outsourcing. The Company believes that customers are
increasingly turning to independent service providers when outsourcing due to
the increased use of multiple vendors for hardware and the perception that
OEM service providers are biased toward specifying their own equipment as
computer purchase requirements arise. Furthermore, many OEMs such as Sun
Microsystems, Inc. ("Sun") and Compaq Computer Corporation ("Compaq") are
outsourcing certain non-core customer service activities, including
maintenance services (including warranty and post-warranty services) and
product support services (such as end-user help desk services) to independent
service organizations such as the Company.
COMPETITIVE STRENGTHS
The Company believes that it possesses a number of competitive strengths
that have allowed it to become the leading independent provider of
multivendor computer maintenance and technology support services, including:
EXTENSIVE SERVICE INFRASTRUCTURE. The Company provides customers with
high quality service through an extensive infrastructure including: (i)
approximately 4,000 highly trained field technicians, (ii) over 150
geographic locations throughout the United States and Canada, (iii) a
substantial spare parts inventory to ensure supply and rapid response times,
(iv) a broad service offering which enhances the Company's ability to provide
customers with a single source solution, (v) an extensive proprietary
database of historical failure rates for over 15,000 hardware products
manufactured by over 1,000 OEMs, (vi) a detailed record of major customers'
hardware and software assets and a record of such customers' maintenance
patterns and (vii) proprietary dispatch systems to ensure rapid customer
response times.
INDEPENDENT, MULTIVENDOR SERVICE PROVIDER. The Company provides customers
with an independent, multivendor solution for their computer maintenance and
technology support needs. As an independent service provider, the Company
believes it is viewed by customers as impartial to any particular OEM's
products. As a multivendor service provider, the Company supports over 15,000
hardware products manufactured by more than 1,000 OEMs as well as most major
operating systems and over 150 shrink-wrapped software applications. OEM,
specialty and local service providers do not offer either the breadth of
services or the geographic presence throughout the United States and Canada
provided by the Company.
CONTRACT-BASED REVENUES. Approximately 85% of the Company's revenues in
fiscal 1996 were derived from contracts, under which equipment and services
may be added and deleted. Furthermore, the Company believes that its
extensive service infrastructure and its unique knowledge of its customers'
hardware and software service requirements enhance the Company's ability to
provide superior service. The Company believes that the resulting track
record of service to existing customers affords it a competitive advantage in
renewing existing contracts and winning new contracts. Although many of the
Company's existing customer contracts are currently terminable on short
notice, 49 out of the Company's top 50 customers in fiscal 1994 are still
customers today.
DIVERSIFIED AND STABLE FORTUNE 1000 CUSTOMER BASE. The Company services
over 51,000 customers at over 182,000 sites across the United States and
Canada. In fiscal 1996, the Company's top 10 customers represented 23% of
revenues and the top 100 customers represented 47% of revenues. The Company's
customers include a diverse group of national and multinational corporations,
including SABRE Group, Inc. (an affiliate of American Airlines, Inc.), Sun,
Compaq, NationsBank, DuPont Company ("DuPont"), Chevron Corporation, and
Netscape Communications Corporation ("Netscape"). The Company believes that
the scope of its service offerings and the breadth of its geographic presence
in the United States and Canada allow it to serve this diverse group of
national and multinational customers as well as thousands of smaller
customers who also require customized services.
MITIGATED TECHNOLOGY AND RECESSION RISKS. The Company provides services
across a broad range of computing environments, including mainframes,
midrange and distributed systems, workgroups, PCs and related peripherals.
Consequently, although each segment of the computer hardware and software
industry is subject to shifts in technology, the Company believes that the
diversity of computing environments for which it provides services mitigates
the potential adverse effects of technological
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changes in any one segment. Furthermore, the Company believes that because
computer maintenance requirements are based primarily on usage, the Company's
hardware maintenance business may be insulated from the adverse effects of
declines in spending during recessionary periods, so long as computer usage
continues to necessitate maintenance spending.
BUSINESS STRATEGY
DecisionOne has developed a business strategy which it believes will
enable it to profitably grow future revenue and cash flow and which includes
the following elements:
PROVIDE A SINGLE SOURCE TECHNOLOGY SUPPORT SOLUTION. The Company intends
to continue its strategy of offering its customers a broad and expanding
range of computer technology support services in a single interface format.
The Company believes it meets the customer's preference for a single
interface by offering maintenance and technology support services across most
leading brands of hardware and software within virtually all computing
environments. In addition, the Company's single source solution enables the
Company to retain customers when customers change, substitute or upgrade
their computing environments.
OFFER ADDITIONAL SERVICES TO EXISTING CUSTOMERS. The Company generates new
revenues from existing customers by adding new equipment to existing hardware
maintenance contracts and by providing existing customers with additional
support services. Recent revenue growth attributable to the expansion of
additional support services has been derived primarily from (i) end-user
support services such as help desk services, (ii) network support services
such as local area networks ("LAN") administration, security management and
fault management, (iii) logistics services such as parts repair, inventory
and asset management, and warranty parts management and (iv) program
management services such as technology deployment and computer and software
moves, adds and changes. The Company believes that the breadth of its
additional support services has permitted, and will continue to permit, the
Company to leverage its historic strength in hardware maintenance to increase
revenues from existing customers and has enabled the Company to grow sales to
its top 50 customers in fiscal 1994 by 33.3% through fiscal 1996.
LEVERAGE EXISTING SERVICE INFRASTRUCTURE. The Company believes, that due
to the large scale of the Company's service infrastructure, the Company
enjoys substantial operating leverage and has positioned itself to increase
productivity and profitability whether the Company grows internally or
through acquisitions. The principal areas in which the Company expects to
realize the benefits of operating leverage include: (i) increased customer
call density in a region permitting field service technicians in the region
to complete a greater number of service calls per day, (ii) increased
comparable equipment density allowing the Company to operate with
proportionally lower inventory of spare parts and (iii) productivity gains
driven by new services such as end-user support services which reduce
unnecessary trips by field technicians to existing customers and by the
addition of new equipment under existing maintenance contracts. The Company
intends to further improve the productivity of its existing infrastructure by
investing in upgrades of its management information systems.
PURSUE COMPLEMENTARY ACQUISITIONS. The Company believes it is well
positioned strategically to participate in the further consolidation of the
computer maintenance and technology support services market and expects to
continue to evaluate complementary acquisitions. Further, the Company
believes that pursuing complementary acquisitions is an attractive growth
strategy due to the significant synergies which the Company may achieve when
it successfully consolidates acquisitions into its service infrastructure.
Since the beginning of fiscal 1993, the Company has completed over 35
acquisitions. The Company's typical acquisition consists principally of
customer maintenance and support contracts as well as the accompanying spare
parts inventory. The Company generally reduces the cost structure necessary
to service the acquired customer contracts by leveraging DecisionOne's
extensive service infrastructure, spare parts inventory and administrative
function. For example, the Company was able to service the
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contracts acquired from Memorex Telex Corporation and certain of its
affiliates ("Memorex Telex") in November 1996 with approximately 36% fewer
employees than previously required by Memorex Telex. In addition, the Company
seeks to increase sales and profitability by offering acquired customers
additional services.
CAPITALIZE ON OUTSOURCING TREND AMONG OEMS, SOFTWARE PUBLISHERS AND
SYSTEMS INTEGRATORS. The Company expands its marketing reach by offering its
services through outsourcing arrangements and indirect channels. For fast
growing hardware OEMs and software publishers concerned with cost savings and
time-to-market issues such as Sun, Netscape and Compaq, the Company provides
outsourced customer support services such as help desk services, warranty and
post-warranty maintenance services, and technical product support services.
For systems integrators, the Company provides maintenance and technology
support services on a subcontract basis to several large outsourcing clients
of Electronic Data Systems Corp. ("EDS") and Computer Sciences Corp.
STRATEGIC INITIATIVES
During fiscal 1997, the Company has implemented several strategic
initiatives designed to rationalize its cost structure and capitalize on
economies of scale. These initiatives included:
o the acquisition of complementary contracts and assets which the Company
has been able to service with fewer employees than the prior owners by
leveraging the Company's existing infrastructure. For example, during
fiscal 1997, the Company acquired contracts and assets of Memorex Telex
and Xerox Canada and reduced the number of service personnel required
to support such contracts from 1,192 to 768 and 160 to 120,
respectively;
o ongoing initiatives to enhance the efficiency of the Company's field
technician service force, including the addition of functionalities to
the Company's information systems which enable the Company to match
field technician skill sets with call productivity history and workload
requirements and the implementation of best practices, benchmarking and
targeted training programs across the Company's over 150 branch
locations; and
o the renegotiation of certain vendor contracts on more favorable terms,
including the Company's data center outsourcing contract with EDS and
the Company's telecommunications contracts with several providers.
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As a result of these strategic initiatives and the Company's increased
operating leverage, the Company's Adjusted EBITDA has increased in each
successive quarter of fiscal 1997. Adjusted EBITDA for the quarter ended
March 31, 1997 increased to $30.1 million from $20.6 million for the quarter
ended September 30, 1996. Over the same period, Adjusted EBITDA margin
increased to 14.7% from 11.7%. In addition, these initiatives enabled the
Company to reduce 203 employees from its core business in November and
December of 1996 without impacting service levels and resulted in improved
revenue per employee from $30,700 in the quarter ended September 30, 1996 to
$32,400 in the quarter ended March 31, 1997. Certain quarterly data for
fiscal 1997 are shown in the table below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1996 MARCH 31, 1997
------------------ ----------------- --------------
(Dollars in thousands)
---------------------------------------------------
<S> <C> <C> <C>
Revenues................................ $176,426 $191,253 $205,070
Sequential growth...................... 3.2% 8.4% 7.2%
Gross profit............................ $ 41,861 $ 48,221 $ 54,698
% of revenues.......................... 23.7% 25.2% 26.7%
Adjusted EBITDA(1)...................... $ 20,589 $ 25,386 $ 30,063
% of revenues.......................... 11.7% 13.3% 14.7%
Revenue per average number of
employees.............................. $ 30.7 $ 31.6 $ 32.4
</TABLE>
- ------------
(1) As defined in Note 7 to the Summary Historical and Unaudited Pro Forma
Condensed Consolidated Financial Data.
RECENT DEVELOPMENTS
The Company's 1997 fiscal year ended on June 30, 1997. While the final
results of the quarter ended June 30, 1997 are not yet available, the Company
currently estimates that it recorded revenues of approximately $213.2 million
during the fourth quarter, and during such quarter realized operating income
of approximately $22.7 million and net income of approximately $11.2 million.
The Company currently estimates that revenues for the full fiscal year
ended June 30, 1997 were approximately $785.9 million and that it realized
operating income of approximately $67.8 million and net income of
approximately $31.1 million. Results of operations for the full fiscal year
ended June 30, 1997 include the impact of certain charges recorded during the
second quarter of fiscal 1997.
The above information is preliminary in nature only, and is subject in all
respects to completion of various internal analyses and procedures necessary
to finalize the Company's financial statements, and to completion of the
audit of the Company's financial statements for the fiscal year ended June
30, 1997.
HISTORY
DecisionOne is a wholly owned subsidiary of Holdings through which the
operations of Holdings are conducted. Founded in 1969, the Company began
operations as a provider of key punch machines under the tradename Decision
Data. During fiscal 1993, the Company decided to focus principally on
providing computer maintenance and technology support services and sold its
computer hardware products business. The Company established a major presence
in the servicing of midrange computer systems through the successful
acquisition and integration of assets and contracts of over 35 complementary
businesses from the beginning of fiscal 1993. In October 1995, the Company
significantly expanded its computer maintenance presence by acquiring Bell
Atlantic Business Systems Services, Inc. ("BABSS"). Prior to the acquisition,
BABSS established a strong record of internal growth, growing revenues from
$338.4 million in 1991 to $486.1 million in 1994, representing a compound
annual growth rate of 12.8%.
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THE MERGER AND MERGER FINANCING
Holdings and Quaker (which as of the date hereof is a wholly owned
subsidiary of DLJMB and affiliated funds and entities (the "Funds") have
entered into an Agreement and Plan of Merger, as amended (the "Merger
Agreement"), dated as of May 4, 1997. The Merger Agreement provides, among
other things, for the merger of Quaker with and into Holdings, with Holdings
continuing as the surviving corporation (the "Merger"). Certain additional
funds affiliated with DLJMB (the "Additional Funds") are expected to acquire
a portion of the securities of Quaker immediately prior to the Merger. As
used herein, all references to the "DLJMB Funds" prior to the time of the
acquisition of securities of Quaker by the Additional Funds shall refer to
the Funds, and thereafter, to the Funds and the Additional Funds,
collectively. The DLJMB Funds expect that a limited number of institutional
investors (the "Institutional Investors") may acquire a portion of the
securities of Quaker that would otherwise be purchased by the DLJMB Funds as
described in this Prospectus. In no event would any such purchases reduce the
fully diluted ownership by the DLJMB Funds of Holdings Common Stock after the
Effective Time to below a majority, or limit rights of the DLJMB Funds as
described in "Certain Relationships and Related Transactions."
In order to fund the payment of the cash portion of the Merger
Consideration (as defined herein), the Option Cash Proceeds (as defined
herein) and the Warrant Cash Proceeds (as defined herein), to refinance
outstanding indebtedness of the Company, and pay expenses incurred in
connection with the Merger, the Issuer is issuing the Senior Subordinated
Notes and will enter into a syndicated senior secured loan facility providing
for term loan borrowings in the aggregate principal amount of approximately
$470 million and revolving loan borrowings of $105 million (the "New Credit
Facility"). At the Effective Time (as defined herein), the Company is
expected to borrow all term loans available thereunder and approximately $8.3
million of revolving loans. The remaining revolving loans will, subject to a
borrowing base, be available to fund the working capital requirements of the
Company. The proceeds of such financings will, in part, be distributed to
Holdings in the form of a dividend and, in part, lent to Holdings pursuant to
an intercompany note. On May 4, 1997, DLJMB Inc., an affiliate of DLJMB,
received an executed commitment letter from DLJ Capital Funding, Inc. ("DLJ
Capital Funding") to provide the New Credit Facility, which will be
syndicated by DLJ Capital Funding. Additionally, on May 4, 1997, DLJMB Inc.
received a letter from DLJSC (as defined herein) with respect to the
underwriting, purchase or private placement of the Senior Subordinated Notes
in which DLJSC indicated that it was highly confident of its ability to sell
the Senior Subordinated Notes in the public market. Each of the commitments
is subject to customary conditions, including the negotiation, execution and
delivery of definitive documentation with respect to such commitment. See
"Description of the New Credit Facility," "The Merger and Merger Financing"
and "Certain Relationships and Related Transactions."
Quaker is expected to raise an additional $85 million through the
concurrent issuance of the Debentures, which may be sold together with the
Public Warrants to purchase the Quaker Common Stock in the public markets (or
alternatively, through the issuance of preferred stock to the DLJMB Funds and
the Institutional Investors). At the Effective Time, Holdings will succeed to
the obligations of Quaker with respect to the Debentures and any Public
Warrants issued together with the Debentures, and the Public Warrants will,
by their terms, become exercisable for an equal number of shares of Holdings
Common Stock. The DLJMB Funds and the Institutional Investors also expect to
purchase 9,782,508 shares of Quaker Common Stock and may acquire up to
1,417,180 warrants to purchase shares of Quaker Common Stock at an exercise
price of not less than $0.01 per share (the "DLJMB Warrants") for
approximately $225 million (the "DLJMB Equity Investment"). In lieu of
acquiring the DLJMB Warrants, the DLJMB Funds and the Institutional Investors
may acquire directly those shares of Quaker Common Stock (up to 1,417,180
shares) for which such DLJMB Warrants would have been exercisable, at a price
that would be equivalent to the exercise price of the DLJMB Warrants (the
"Direct Shares"). The number of DLJMB Warrants issued or Direct Shares
purchased will be reduced by the number of Public Warrants issued (if any).
Upon the effectiveness of the Merger ("Effective Time"), the proceeds of such
purchase will become an asset of Holdings, each share of Quaker Common Stock,
including the Direct Shares, if any, will become a share of Holdings Common
Stock and each warrant to acquire Quaker Common Stock will by its terms
become exercisable for an equal number of shares of Holdings Common Stock.
8
<PAGE>
The following table sets forth the estimated cash sources and uses of
funds as if the Merger and Merger Financing, including the application of the
proceeds therefrom, occurred and were completed at the Effective Time.
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
TOTAL SOURCES:
New Credit Facility:
Revolving credit facility ........................ $ 8.3
Term loans........................................ 470.0
Senior Subordinated Notes.......................... 150.0
Debentures and Public Warrants .................... 85.0
Common stock and warrants purchased by DLJMB
Funds............................................. 225.0
-------------
Total cash sources............................... $938.3
=============
TOTAL USES:
Cash Merger Consideration ......................... $605.9
Option Cash Proceeds and Warrant Cash Proceeds ... 58.4
Repayment of existing revolving credit facility .. 221.2
Estimated transaction fees and expenses............ 52.8
-------------
Total cash uses.................................. $938.3
=============
</TABLE>
9
<PAGE>
THE OFFERING
Securities Offered ............ $150.0 million aggregate principal amount of
9 3/4% Senior Subordinated Notes due 2007.
Maturity Date ................. August 1, 2007.
Interest Payment Dates ........ February 1 and August 1, commencing February
1, 1998.
Optional Redemption ........... The Senior Subordinated Notes will be
redeemable, in whole or in part, at any time
on or after August 1, 2002, in cash at the
redemption prices set forth herein, plus
accrued and unpaid interest, if any, thereon
to the redemption date. In addition, at any
time on or prior to August 1, 2000, the
Issuer may, at its option, on any one or
more occasions, redeem up to 35% of the
aggregate principal amount of the Senior
Subordinated Notes originally issued at a
redemption price equal to 109.75% of the
aggregate principal amount thereof, plus
accrued and unpaid interest, if any, thereon
to the redemption date, with the net cash
proceeds of one or more Equity Offerings by
(i) the Issuer or (ii) Holdings to the
extent the net cash proceeds thereof are
contributed to the Issuer as a capital
contribution to the common equity of the
Issuer; provided that at least 65% of the
original aggregate principal amount of the
Senior Subordinated Notes will remain
outstanding immediately following each such
redemption.
Change of Control ............. Upon the occurrence of a Change of Control,
each Holder of Senior Subordinated Notes
will have the right to require the Issuer to
offer to repurchase such Holder's Senior
Subordinated Notes in cash at a price equal
to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest,
if any, thereon to the date of repurchase.
The New Credit Facility will prohibit the
Issuer from purchasing the Senior
Subordinated Notes (except in certain
limited amounts) and will also provide that
certain change of control events with
respect to the Issuer will constitute a
default thereunder. Any future credit
agreements or other agreements relating to
Senior Debt to which the Issuer becomes a
party may contain similar restrictions and
provisions. In the event a Change of Control
occurs at a time when the Issuer is
prohibited from purchasing the Senior
Subordinated Notes, the Issuer could seek
the consent of its lenders to the purchase
of the Senior Subordinated Notes or could
attempt to refinance the borrowings that
contain such prohibition. If the Issuer does
not obtain such consent or repay such
borrowings, the Issuer will remain
prohibited from purchasing the Senior
Subordinated Notes by the relevant Senior
Debt. In such case, the Issuer's failure to
purchase the tendered Senior Subordinated
Notes would constitute an Event of Default
under the Senior Subordinated Note Indenture
which would, in turn, constitute a default
under the New Credit Facility and could
constitute a default under other Senior
Debt.
10
<PAGE>
In such circumstances, the subordination
provisions in the Senior Subordinated Note
Indenture would likely restrict payments to
the Holders of the Senior Subordinated
Notes. Furthermore, no assurance can be
given that the Issuer will have sufficient
resources to satisfy its repurchase
obligation with respect to the Senior
Subordinated Notes following a Change of
Control. See "Description of the Senior
Subordinated Notes."
Ranking ....................... The Senior Subordinated Notes will be
general unsecured obligations of the Issuer
and will be subordinated in right of payment
to all existing and future Senior Debt of
the Issuer, including indebtedness pursuant
to the New Credit Facility. The Senior
Subordinated Notes will rank pari passu with
any future senior subordinated indebtedness
of the Issuer and will rank senior to all
Subordinated Indebtedness of the Issuer. The
Senior Subordinated Notes will be
effectively subordinated to all liabilities
of the Issuer's subsidiaries that do not
guarantee the Senior Subordinated Notes as
set forth herein. On the date of the Senior
Subordinated Note Indenture, none of the
Company's subsidiaries will guarantee the
Senior Subordinated Notes. The Senior
Subordinated Note Indenture will provide
that if any Restricted Subsidiary of the
Company guarantees the payment of any
Indebtedness of the Company (other than the
Senior Subordinated Notes) or any
Indebtedness of any other Restricted
Subsidiary, such Restricted Subsidiary shall
simultaneously execute and deliver a
supplemental indenture to the Senior
Subordinated Note Indenture providing for a
Subsidiary Guarantee of payment of the
Senior Subordinated Notes by such Restricted
Subsidiary on the terms set forth in the
Senior Subordinated Note Indenture. See
"Description of Senior Subordinated
Notes--Certain Covenants--Subsidiary
Guarantees." On a pro forma basis after
giving effect to the Merger, including the
Merger Financing and the application of
proceeds thereof, as of March 31, 1997, the
Issuer would have had outstanding
approximately $503.0 million of Senior Debt
and the Issuer's subsidiaries would have had
approximately $10.9 million of outstanding
liabilities, including trade payables.
Certain Covenants ............. The Senior Subordinated Note Indenture will
contain certain covenants that, among other
things, limit the ability of the Issuer and
its Restricted Subsidiaries (as defined
herein) to: incur indebtedness and issue
preferred stock, repurchase Capital Stock
(as defined herein) and Subordinated
Indebtedness, engage in transactions with
affiliates, engage in sale and leaseback
transactions, incur or suffer to exist
certain liens, pay dividends or other
distributions, sell accounts receivable,
make investments, sell assets and engage in
certain mergers and consolidations.
Use of Proceeds ............... The net proceeds from the Offering, together
with the initial borrowings under the New
Credit Facility, the DLJMB Equity Investment
and the issuance of the Debentures, will be
used to
11
<PAGE>
fund payment of the cash portion of the
Merger Consideration, the Option Cash
Proceeds and the Warrant Cash Proceeds, to
refinance outstanding indebtedness of the
Company and to pay the expenses incurred in
connection with the Merger.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in connection with an investment in the Senior Subordinated Notes.
12
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL DATA
The summary historical consolidated financial data for and as of the end
of each of the years in the three-year period ended June 30, 1996 set forth
below have been derived from the audited consolidated financial statements of
the Company. The summary historical consolidated financial data set forth
below for and as of the end of the nine-month and the three-month periods
ended March 31, 1996 and March 31, 1997 have been derived from the unaudited
condensed consolidated financial statements of the Company. The historical
condensed consolidated results of operations of the Company for the nine
months and three months ended March 31, 1996 and 1997 are unaudited and are
not necessarily indicative of the Company's results of operations for the
full year. The unaudited historical consolidated financial data reflects all
adjustments (consisting of normal, recurring adjustments) which are, in the
opinion of management, necessary for a fair summary of the Company's
financial position, results of operations and cash flows for and as of the
end of the periods presented.
The unaudited summary consolidated pro forma financial data of the Company
set forth below are based on historical consolidated financial statements of
the Company, as adjusted to give effect to the Company's acquisition of BABSS
which occurred on October 20, 1995 and the Merger, including the Merger
Financing and the application of the proceeds thereof. The pro forma
statement of operations for the year ended June 30, 1996 gives effect to the
BABSS acquisition and the Merger, including the Merger Financing and the
application of the proceeds thereof, as if they had occurred as of July 1,
1995. The pro forma statements of operations for the nine-month and
three-month periods ended March 31, 1997 give effect to the Merger, including
the Merger Financing and the application of the proceeds thereof, as if they
had occurred as of July 1, 1996. The pro forma balance sheet gives effect to
the Merger, including the Merger Financing and the application of the
proceeds thereof, as if they had occurred at March 31, 1997. The pro forma
adjustments are based upon available information and upon certain assumptions
that management believes are reasonable under the circumstances. The pro
forma financial data do not purport to represent what the Company's actual
results of operations or actual financial position would have been if the
BABSS acquisition and the Merger, including the Merger Financing and the
application of the proceeds thereof, had occurred on such dates or to project
the Company's results of operations or financial position for any future
period or date.
The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Unaudited Condensed Consolidated Pro Forma Financial Data," "Selected
Consolidated Financial Data," and the Company's Consolidated Financial
Statements and Notes thereto, included elsewhere herein.
13
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
DATA
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
---------------------------------------------
PRO FORMA
1994 1995 1996 1996
---------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues............................................. $108,416 $163,020 $ 540,191 $697,676
Gross profit......................................... 31,436 49,537 137,875 180,432
Operating income(2)(3)............................... 15,983 20,779 49,373 68,687
Interest expense..................................... (4,979) (2,521) (14,953) (59,745)
Interest income...................................... 132 53 239 4,853
Income from continuing operations(4)(5) ............. 10,112 41,415 20,789 8,277
Net income .......................................... 10,112 42,528 18,862 6,350
CONSOLIDATED BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents............................ $ 978 $ 2,659 $ 8,221
Inventory............................................ 4,459 4,024 30,130
Repairable parts(6).................................. 9,473 27,360 154,970
Total assets......................................... 35,496 135,553 514,510
Total debt........................................... 4,539 25,571 190,903
Total stockholder's equity (deficit)................. (27,627) 14,677 180,793
CONSOLIDATED CASH FLOWS DATA:
Net cash provided by operations ..................... $ 28,722 $ 38,415 $ 51,894
Net cash (used in) investing activities ............. (3,348) (54,271) (346,354)
Net cash (used in) provided by financing activities (24,946) 17,537 300,022
OTHER DATA:
EBITDA(7)............................................ $ 22,672 $ 37,021 $ 114,816 $147,805
Amortization of repairable parts..................... 5,929 7,688 37,869 48,467
---------- ---------- ----------- -----------
Adjusted EBITDA(7)................................... 16,743 29,333 76,947 99,338
Adjusted EBITDA margin(8)............................ 15.4% 18.0% 14.2% 14.2%
Depreciation and amortization of intangibles ........ $ 7,161 $ 8,554 $ 23,982 $ 30,651
Repairable parts purchases........................... 1,857 12,154 63,514 74,287
Capital expenditures................................. 304 2,786 7,278 11,243
Cash interest expense................................ 1,232 2,314 14,743 57,031
Revenue per average number of employees(9) .......... 105.8 113.8 119.6 120.0
</TABLE>
14
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
DATA
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
----------------------- ---------------------
1996 1997 1996 1997
----------- ----------- ---------- ----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues............................. $ 369,167 $ 572,749 $172,673 $205,070
Gross profit......................... 96,459 144,780 42,711 54,698
Operating income(2)(3)............... 29,323 45,041 15,536 20,080
Interest expense..................... (11,289) (11,097) (5,855) (4,005)
Interest income...................... 69 393 54 316
Income from continuing operations(5) 10,866 19,916 5,842 9,507
Net income .......................... 10,866 19,916 5,842 9,507
CONSOLIDATED BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash equivalents............ $ 12,886
Inventory............................ 35,186
Repairable parts(6).................. 195,656
Total assets......................... 641,677
Total debt........................... 246,671
Total stockholder's equity
(deficit)........................... 201,095
CONSOLIDATED CASH FLOWS DATA:
Net cash provided by operations .... $ 35,489 $ 57,654 $ 20,590 $ 36,667
Net cash (used in) investing
activities ......................... (308,771) (105,329) (20,713) (34,569)
Net cash provided by financing
activities ......................... 276,032 52,388 4,933 2,510
OTHER DATA:
EBITDA(7)............................ $ 75,568 $ 121,680 $ 34,308 $ 46,419
Amortization of repairable parts ... 23,017 45,642 11,214 16,356
----------- ----------- ---------- ----------
Adjusted EBITDA(7)................... 52,551 76,038 23,094 30,063
Adjusted EBITDA margin(8)............ 14.2% 13.3% 13.4% 14.7%
Depreciation and amortization of
intangibles......................... $ 16,228 $ 26,697 $ 7,558 $ 9,983
Repairable parts purchases........... 31,715 64,803 19,560 28,815
Capital expenditures................. 3,331 6,093 1,153 2,261
Cash interest expense................ 11,134 10,578 5,803 3,642
Ratio of Adjusted EBITDA to cash
interest expense.................... 4.72x 7.19x 3.98x 8.25x
Revenue per average number of
employees(9)........................ $ 90.3 $ 94.7 $ 29.8 $ 32.4
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1997 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues............................. $572,749 $ 205,070
Gross profit......................... 144,780 54,698
Operating income(2)(3)............... 45,041 20,080
Interest expense..................... (44,516) (14,864)
Interest income...................... 3,815 1,457
Income from continuing operations(5) 2,517 3,870
Net income .......................... 2,517 3,870
CONSOLIDATED BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash equivalents............ $ 12,886
Inventory............................ 35,186
Repairable parts(6).................. 195,656
Total assets......................... 722,616
Total debt........................... 653,771
Total stockholder's equity
(deficit)........................... (125,066)
CONSOLIDATED CASH FLOWS DATA:
Net cash provided by operations ....
Net cash (used in) investing
activities .........................
Net cash provided by financing
activities .........................
OTHER DATA:
EBITDA(7)............................ $121,680 $ 46,419
Amortization of repairable parts ... 45,642 16,356
-------------- --------------
Adjusted EBITDA(7)................... 76,038 30,063
Adjusted EBITDA margin(8)............ 13.3% 14.7%
Depreciation and amortization of
intangibles......................... $ 26,697 $ 9,983
Repairable parts purchases........... 64,803 28,815
Capital expenditures................. 6,093 2,261
Cash interest expense................ 42,119 13,875
Ratio of Adjusted EBITDA to cash
interest expense.................... 1.81x 2.17x
Revenue per average number of
employees(9)........................ $ 94.7 $ 32.4
</TABLE>
15
<PAGE>
- ------------
(1) The Summary Statement of Operations Data excludes the effects of
discontinued operations. See Note 3 of the Notes to the Company's
Consolidated Financial Statements.
(2) Operating income includes a $6.4 million credit arising from unused
lease liabilities for the year ended June 30, 1994. During the nine
months ended March 31, 1997 the Company recorded a $4.3 million
charge for estimated future employee severance costs of $3.4 million
and unutilized lease costs of $0.9 million.
(3) Operating income includes a $7.0 million charge for future employee
severance costs and unutilized lease costs, incurred in connection
with the BABSS acquisition, for the nine months ended March 31, 1996.
The year ended June 30, 1996 includes a reversal of $3.4 million of
this charge due to the Company's ability to utilize and sublease
various facilities identified in the original charge. See Note 15 of
the Notes to the Company's Consolidated Financial Statements.
(4) Income from continuing operations for the year ended June 30, 1994
reflects interest expense arising from the Company's subordinated
debt which was refinanced as a part of the 1994 Restructuring. See
Note 10 of the Notes to the Company's Consolidated Financial
Statements.
(5) Income from continuing operations for the year ended June 30, 1994
includes income taxes based on an effective tax rate substantially
less than the effective tax rates used for the years ended June 30,
1995 and 1996, and the three and nine months ended March 31, 1996 and
1997. The year ended June 30, 1995 includes a $23.1 million net
benefit arising from the recognition of future tax benefits of tax
loss carryforwards and temporary timing differences. See Note 11 of
the Notes to the Company's Consolidated Financial Statements.
(6) Repairable parts represent parts that can be repaired and reused and
are required in order to meet the requirements of the contracts with
the Company's maintenance customers. These parts are principally
purchased from equipment manufacturers and other third parties. As
these parts are purchased, they are capitalized at cost and amortized
using the straight-line method over three to five years, the
estimated useful life of these repairable parts. Costs to refurbish
these parts are charged to expense as incurred.
(7) "EBITDA" represents income from continuing operations before interest
expense, interest income, income taxes, depreciation, amortization of
repairable parts, amortization of intangibles, amortization of
discounts and capitalized expenses related to indebtedness and
non-recurring employee severance charges and provisions for
unutilized leases. The Company's historical results include
amortization of repairable parts which is unique to the industry in
which the Company competes. "Adjusted EBITDA" represents EBITDA
reduced by amortization of repairable parts. Neither EBITDA nor
Adjusted EBITDA is intended to represent cash flow from operations as
defined by generally accepted accounting principles and should not be
considered as an alternative to net income as an indicator of the
Company's operating performance or to cash flows as a measure of
liquidity and may not be comparable to similarly titled measures of
other companies. Adjusted EBITDA is presented because it is relevant
to certain covenants expected to be contained in the agreements
relating to the Merger Financing and the Company believes that
Adjusted EBITDA is a more consistent indicator of the Company's
ability to meet its debt service, capital expenditure and working
capital requirements than EBITDA.
(8) Adjusted EBITDA margin measures Adjusted EBITDA as a percentage of
revenues.
(9) Revenue per average number of employees is calculated by dividing
revenues for applicable periods by the average number of employees
during the respective periods.
16
<PAGE>
RISK FACTORS
In addition to the other information set forth herein, prospective
investors should carefully consider the following information in evaluating
the Company and its business before making an investment in the Senior
Subordinated Notes.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
The information herein contains forward-looking statements that involve a
number of risks and uncertainties. A number of factors could cause actual
results, performance, achievements of the Company, or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These factors
include, but are not limited to, the competitive environment in the computer
maintenance and technology support services industry in general and in the
Company's specific market areas; changes in prevailing interest rates and the
availability of and terms of financing to fund the anticipated growth of the
Company's business; inflation; changes in costs of goods and services;
economic conditions in general and in the Company's specific market areas;
demographic changes; changes in or failure to comply with federal, state
and/or local government regulations; liability and other claims asserted
against the Company; changes in operating strategy or development plans; the
ability to attract and retain qualified personnel; the significant
indebtedness of the Company; labor disturbances; changes in the Company's
acquisition and capital expenditure plans; and other factors referenced
herein. In addition, such forward-looking statements are necessarily
dependent upon assumptions, estimates and dates that may be incorrect or
imprecise and involve known and unknown risks uncertainties and other
factors. Accordingly, any forward-looking statements included herein do not
purport to be predictions of future events or circumstances and may not be
realized. Forward-looking statements can be identified by, among other
things, the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should," "seeks," "pro forma" or "anticipates," "intends" or
the negative of any thereof, or other variations thereon or comparable
terminology, or by discussions of strategy or intentions. Given these
uncertainties, prospective investors are cautioned not to place undue
reliance on such forward-looking statements. The Company disclaims any
obligations to update any such factors or to publicly announce the results of
any revisions to any of the forward-looking statements contained herein to
reflect future events or developments.
SUBSTANTIAL LEVERAGE; LIQUIDITY; STOCKHOLDER'S DEFICIT
In connection with the Merger and the Merger Financing, including the
application of the proceeds therefrom, the Company will incur a significant
amount of indebtedness. As of March 31, 1997, after giving pro forma effect
to the Merger, including the Merger Financing and the application of the
proceeds thereof, the Company would have had (i) total consolidated
indebtedness of approximately $653.8 million, (ii) $78.0 million of
additional borrowings available under the New Credit Facility and (iii) a
stockholder's deficit of $125.1 million. In addition, subject to the
restrictions in the New Credit Facility and the Senior Subordinated Note
Indenture, the Company may incur additional indebtedness from time to time.
The level of the Company's indebtedness could have important consequences
to the Company, including: (i) limiting cash flow available for general
corporate purposes including acquisitions because a substantial portion of
the Company's cash flow from operations must be dedicated to debt service;
(ii) limiting the Company's ability to obtain additional debt financing in
the future for working capital, repairable parts purchases, capital
expenditures or acquisitions; (iii) limiting the Company's flexibility in
reacting to competitive and other changes in the industry and economic
conditions generally; and (iv) exposing the Company to risks inherent in
interest rate fluctuations because certain of the Company's borrowings may be
at variable rates of interest, which could result in higher interest expense
in the event of increases in interest rates.
The Company's ability to make scheduled payments of principal of, to pay
interest on or to refinance its indebtedness and to satisfy its other debt
obligations will depend upon its future operating performance, which will be
affected by general economic, financial, competitive, legislative,
regulatory,
17
<PAGE>
business and other factors beyond its control. The Company anticipates that
its operating cash flow, together with borrowings under the New Credit
Facility, will be sufficient to meet its anticipated future operating
expenses, capital expenditures and to service its debt requirements as they
become due. However, if the Company's future operating cash flows are less
than currently anticipated it may be forced, in order to meet its debt
service obligations, to reduce or delay acquisitions, purchases of repairable
parts or capital expenditures, sell assets or reduce operating expenses,
including, but not limited to, investment spending such as selling and
marketing expenses, expenditures on management information systems and
expenditures on new products. If the Company were unable to meet its debt
service obligations, it could attempt to restructure or refinance its
indebtedness or to seek additional equity capital. There can be no assurance
that the Company will be able to effect any of the foregoing on satisfactory
terms, if at all. In addition, subject to the restrictions and limitations
contained in the agreements relating to the Merger Financing, the Company may
incur significant additional indebtedness to finance future acquisitions,
which could adversely affect the Company's operating cash flows and its
ability to service its indebtedness. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Senior Subordinated Note Indenture will restrict, among other things,
the Company's ability to incur additional indebtedness, incur liens, pay
dividends or make certain other restricted payments, enter into certain
transactions with affiliates, impose restrictions on the ability of a
Restricted Subsidiary to pay dividends or make certain payments to the
Company, merge or consolidate with any other person or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of
the assets of the Company. In addition, the New Credit Facility contains
other and more restrictive covenants and prohibits the Company from prepaying
its other indebtedness (including the Senior Subordinated Notes). See
"Description of New Credit Facility" and "Description of the Senior
Subordinated Notes--Certain Covenants." The New Credit Facility requires the
Company to maintain specified financial ratios and satisfy certain other
financial condition tests. The Company's ability to meet those financial
ratios and tests can be affected by events beyond its control, and there can
be no assurance that the Company will meet those tests. A breach of any of
these covenants could result in a default under the New Credit Facility
and/or the Senior Subordinated Notes. Upon the occurrence of an event of
default under the New Credit Facility, the lenders could elect to declare all
amounts outstanding under the New Credit Facility, to be immediately due and
payable. If the Company were unable to repay those amounts, the lenders could
proceed against the collateral granted to them to secure that indebtedness.
If the lenders under the New Credit Facility accelerate, there can be no
assurance that the assets of the Company, would be sufficient to repay in
full such indebtedness and the other indebtedness of the Company, including
the Senior Subordinated Notes. Substantially all of the Issuer's assets are
pledged as security under the New Credit Facility. See "Description of New
Credit Facility."
SUBORDINATION; ASSET ENCUMBRANCES
The Senior Subordinated Notes will be general unsecured obligations of the
Issuer and will be subordinated in right of payment to all existing and
future Senior Debt of the Issuer, including all indebtedness under the New
Credit Facility. As of March 31, 1997, on a pro forma basis after giving
effect to the Merger, including the Merger Financing and the application of
the net proceeds thereof, the Company would have had approximately $503.0
million of Senior Debt, $500.1 million of which would have been secured
borrowings and approximately $78.0 million of additional revolving borrowings
available under the New Credit Facility. By reason of such subordination, in
the event of the insolvency, liquidation, reorganization, dissolution or
other winding-up of the Issuer or upon a default in payment with respect to,
or the acceleration of, any Senior Debt, the holders of such Senior Debt and
any other creditors who are holders of Senior Debt and creditors of
subsidiaries, if any, must be paid in full before the Holders of the Senior
Subordinated Notes may be paid. If the Issuer incurs any additional pari
passu debt, the holders of such debt would be entitled to share ratably with
the Holders of the Senior Subordinated Notes in any proceeds distributed in
connection with any insolvency, liquidation, reorganization, dissolution or
other winding-up of the Issuer. This may have the effect of reducing the
amount
18
<PAGE>
of proceeds paid to Holders of the Senior Subordinated Notes. In addition, no
cash payments may be made with respect to the Senior Subordinated Notes
during the continuance of a payment default with respect to Senior Debt and,
under certain circumstances, no payments may be made with respect to the
principal of (and premium, if any) on the Senior Subordinated Notes for a
period of up to 179 days if a non-payment default exists with respect to
Senior Debt. In addition, holders of indebtedness and other liabilities of
the Issuer's subsidiaries that do not guarantee the Senior Subordinated Notes
as set forth herein will have claims that are effectively senior to the
Senior Subordinated Notes. On the date of the Senior Subordinated Note
Indenture, none of the Company's subsidiaries will guarantee the Senior
Subordinated Notes. See "Description of the Senior Subordinated Notes."
HOLDING COMPANY STRUCTURE
The Company currently conducts a small percentage of its business through
subsidiaries. While the Company conducts a majority of its business and
operations at the Issuer level, in the future the Issuer may be dependent on
the cash flow of its subsidiaries and distributions thereof from its
subsidiaries to the Issuer in order to meet its debt service obligations.
Subject to the provisions of the Senior Subordinated Note Indenture, future
borrowings by the Company's subsidiaries may contain restrictions or
prohibitions on the payment of dividends by such subsidiaries to the Company.
In addition, under applicable state law, subsidiaries of the Issuer may be
limited in the amount that they are permitted to pay as dividends on their
capital stock.
TRADING MARKET FOR THE NOTES
The Senior Subordinated Notes are not listed for trading on any securities
exchange or on any automated dealer quotation system. The Company has been
advised by DLJSC that it intends to make a market in the Senior Subordinated
Notes; however, DLJSC is not obligated to do so. Any market-making may be
discontinued at any time, and there is no assurance that an active public
market for the Senior Subordinated Notes will develop or, that if such market
develops, that it will continue. Further, the liquidity of, and trading
market for the Senior Subordinated Notes may be adversely affected by
declines and volatility in the market for high yield securities generally.
The liquidity of and trading market for the Senior Subordinated Notes may be
adversely affected by any changes in the Company's financial performance or
prospects.
FRAUDULENT TRANSFER STATUTES
Under federal or state fraudulent transfer laws, if a court were to find
that, at the time the Senior Subordinated Notes were issued, the Issuer (i)
issued the Senior Subordinated Notes with the intent of hindering, delaying
or defrauding current or future creditors or (ii)(A) received less than fair
consideration or reasonably equivalent value for incurring the indebtedness
represented by the Senior Subordinated Notes and (B)(1) was insolvent or was
rendered insolvent by reason of the issuance of the Senior Subordinated
Notes, (2) was engaged, or about to engage, in a business or transaction for
which its assets
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were unreasonably small or (3) intended to incur, or believed (or should have
believed) it would incur, debts beyond its ability to pay as such debts
mature (as all of the foregoing terms are defined in or interpreted under
such fraudulent transfer statutes), such court could avoid all or a portion
of the Issuer's obligations to the Holders of the Senior Subordinated Notes,
subordinate the Issuer's obligations to the Holders of the Senior
Subordinated Notes to other existing and future indebtedness of the Issuer,
the effect of which would be to entitle such other creditors to be paid in
full before any payment could be made on the Senior Subordinated Notes, and
take other action detrimental to the Holders of the Senior Subordinated
Notes, including in certain circumstances, invalidating the Senior
Subordinated Notes. In that event, there would be no assurance that any
repayment on the Senior Subordinated Notes would ever be recovered by the
Holders of the Senior Subordinated Notes.
The definition of insolvency for purposes of the foregoing considerations
varies among jurisdictions depending upon the federal or state law that is
being applied in any such proceeding. However, the Issuer generally would be
considered insolvent at the time it incurs the indebtedness constituting the
Senior Subordinated Notes, if (i) the fair market value (or fair saleable
value) of its assets is less than the amount required to pay its total
existing debts and liabilities (including the probable liability on
contingent liabilities) as they become absolute or matured or (ii) it is
incurring debts beyond its ability to pay as such debts mature. There can be
no assurance as to what standard a court would apply in order to determine
whether the Issuer was "insolvent" as of the date the Senior Subordinated
Notes were issued, or that, regardless of the method of valuation, a court
would not determine that the Issuer was insolvent on that date. Nor can there
be any assurance that a court would not determine, regardless of whether the
Issuer was insolvent on the date the Senior Subordinated Notes were issued,
that the payments constituted fraudulent transfers on another ground. To the
extent that proceeds from the sale of the Senior Subordinated Notes are used
to repay indebtedness under the Company's existing indebtedness, or to fund
the cash portion of the Merger Consideration, a court may find that the
Company did not receive fair consideration or reasonably equivalent value for
the incurrence of the indebtedness represented by the Senior Subordinated
Notes.
POSSIBLE INABILITY TO REPURCHASE SENIOR SUBORDINATED NOTES UPON CHANGE OF
CONTROL
In the event of a Change of Control, each Holder of Senior Subordinated
Notes will have the right to require the Issuer to repurchase all or any part
of such Holder's Senior Subordinated Notes at the price specified therefor in
the Senior Subordinated Note Indenture. Under the Senior Subordinated Note
Indenture, a Change of Control will occur upon the happening of certain
events including among others: (i) any sale, lease, transfer, conveyance or
other disposition (other than by way of merger or consolidation) in one or a
series of related transactions, of all or substantially all of the assets of
the Issuer and its Subsidiaries taken as a whole to any "person" (as defined
in Section 13(d) of the Exchange Act) or "group" (as defined in Sections
13(d)(3) and 14(d)(2) of the Exchange Act) other than the Principals (as
defined herein) and their Related Parties (as defined herein); (ii) the
Issuer effects certain consolidations or mergers; (iii) the Issuer
consummates any transaction or series of related transactions (including,
without limitation, by way of merger or consolidation) the result of which is
that any "person" (as defined above) or "group" (as defined above) other than
the Principals and their Related Parties becomes the "beneficial owner" (as
defined above) of more than 50% of the voting power of the Voting Stock (as
defined herein) of the Issuer or any parent holding company of the Issuer or
(iv) the first day on which a majority of the members of the Board of
Directors of the Issuer or any parent holding company of the Issuer are not
Continuing Directors (as defined herein).
The New Credit Facility will prohibit the Issuer from purchasing the
Senior Subordinated Notes (except in certain limited amounts) and will also
provide that certain change of control events with respect to the Issuer will
constitute a default thereunder. Any future credit agreements or other
agreements relating to Senior Debt to which the Issuer becomes a party may
contain similar restrictions and provisions. In the event a Change of Control
occurs at a time when the Issuer is prohibited from purchasing the Senior
Subordinated Notes, the Issuer could seek the consent of its lenders to the
purchase of the Senior Subordinated Notes or could attempt to refinance the
borrowings that contain such prohibition. If the Issuer does not obtain such
consent or repay such borrowings, the Issuer will remain prohibited from
purchasing the Senior Subordinated Notes by the relevant Senior Debt. In such
case, the
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Issuer's failure to purchase the tendered Senior Subordinated Notes would
constitute an event of default under the Senior Subordinated Note Indenture
which would, in turn, constitute a default under the New Credit Facility and
could constitute a default under other Senior Debt. In such circumstances,
the subordination provisions in the Senior Subordinated Note Indenture would
likely restrict payments to the Holders of the Senior Subordinated Notes.
Furthermore, no assurance can be given that the Issuer will have sufficient
resources to satisfy its repurchase obligation with respect to the Senior
Subordinated Notes following a Change of Control. See "Description of the
Senior Subordinated Notes."
CONTROL BY THE DLJMB FUNDS
Following the Merger, up to 86.9% of the outstanding shares of Holdings
Common Stock (or 77.2% on a fully diluted basis) (or, if the DLJMB Funds
purchase the Direct Shares, 88.4% of the outstanding shares of Holdings
Common Stock) will be held by the stockholders of Quaker. As of the date
hereof, all of the outstanding capital stock of Quaker is owned in the
aggregate by the DLJMB Funds. While the DLJMB Funds expect that the
Institutional Investors may acquire a portion of the securities of Quaker
that would otherwise be purchased by the DLJMB Funds in the DLJMB Equity
Investment, in no event would any such purchases reduce the fully diluted
ownership by the DLJMB Funds of Holdings Common Stock after the Effective
Time to below a majority, or limit the rights of the DLJMB Funds as described
in "Certain Relationships and Related Transactions."
It is expected that at the Effective Time, the DLJMB Funds, the
Institutional Investors and any members of Holdings' management who choose to
purchase shares of Holdings Common Stock will enter into a stockholders'
agreement (the "Investors' Agreement") which will contain provisions that,
among other things, will entitle the DLJMB Funds to appoint a majority of the
members of the Board of Directors. As a result of its stock ownership and the
Investors' Agreement, following the Effective Time the DLJMB Funds will
control Holdings (and, through Holdings, the Issuer,) and have the power to
elect a majority of the directors of Holdings and the Issuer, appoint new
management and approve any action requiring the approval of the holders of
Holdings Common Stock and common stock of the Issuer, including adopting
certain amendments to the certificate of incorporation of Holdings and the
Issuer and approving mergers or sales of all or substantially all of the
assets of Holdings and the Issuer. The directors elected by the DLJMB Funds
will have the authority to effect decisions affecting the capital structure
of Holdings and the Issuer, including the issuance of additional capital
stock, the implementation of stock repurchase programs and the declaration of
dividends.
The general partners of each of the DLJMB Funds and the members of DLJ
First are affiliates or employees of Donaldson, Lufkin & Jenrette, Inc.
("DLJ, Inc."). DLJ Capital Funding, which has committed to DLJMB to provide
the New Credit Facility in connection with the Merger, is also an affiliate
of DLJ, Inc. Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC"),
which is the Underwriter with respect to the Debentures and the Senior
Subordinated Notes, is also an affiliate of DLJ, Inc.
LOSS OF CONTRACT-BASED REVENUE; FIXED FEE CONTRACTS
Over 85% of the Company's revenues during fiscal 1996 were contract-based.
As is customary in the computer services industry, the Company experiences
reductions in its contract-based revenue as customers may eliminate certain
equipment or services from coverage under the contracts, typically upon 30
days' notice, or either cancel or elect not to renew their contracts upon 30,
60 or 90 days' notice. The Company believes the principal reasons for the
loss of contract-based revenue are the replacement of the equipment being
serviced with new equipment covered under a manufacturer's warranty, the
discontinuance of the use of equipment being serviced for a customer due to
obsolescence or a customer's determination to utilize a competitor's services
or to move technical support services in-house. While the Company
historically has been able to offset the reduction of contract-based revenue
and maintain revenue growth through acquisitions and new contracts,
notwithstanding the reduction in contract-based revenue, there can be no
assurance it will continue to do so in the future, and any failure to
consummate acquisitions, enter into new contracts or add additional services
and equipment to existing contracts could have a material adverse effect on
the Company's profitability.
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Under many of the Company's contracts, the customer pays a fixed fee for
customized bundled services which are priced by the Company based on its best
estimates of various factors, including estimated future equipment failure
rates, cost of spare parts and labor expenses. While the Company believes it
has historically been able to estimate these factors accurately enough to be
able to price these fixed-fee contracts on terms favorable to the Company,
there can be no assurance the Company will be able to continue to do so in
the future.
MANAGEMENT AND FUNDING OF GROWTH
Any future growth of the Company will require the Company to manage its
expanding domestic operations and international affiliations and to adapt its
operational and financial systems to respond to changes in its business
environment, while maintaining a competitive cost structure. The acquisition
strategy of the Company and the expansion of the Company's service offerings
have placed and will continue to place significant demands on the Company and
its management to improve the Company's operational, financial and management
information systems, to develop further the management skills of the
Company's managers and supervisors, and to continue to retain, train,
motivate and effectively manage the Company's employees. For example, the
Company's acquisition and integration of BABSS resulted in the loss of
certain members of its finance and accounting organization which resulted in
a difficulty in the timely performance of certain internal reconciliations
and account analyses. In response to these difficulties, the Company has
taken various personnel and procedural actions, including, among other
things, increasing the size of, and restructuring, its accounting staff,
instituting an internal audit function and enhancing its accounting systems,
policies and procedures. The failure of the Company to manage its prior or
any future growth effectively could have a material adverse effect on the
Company.
Additionally, the Company's ability to maintain and increase its revenue
base and to respond to shifts in customer demand and changes in industry
trends will be partially dependent on its ability to generate sufficient cash
flow or obtain sufficient capital for the purpose of, among other things,
financing acquisitions, satisfying customer contractual requirements and
financing infrastructure growth, including a significant investment in
repairable parts, which are classified as non-current assets. There can be no
assurance the Company will be able to generate sufficient cash flow or that
financing will be available on acceptable terms (or permitted to be incurred
under the terms of the Merger Financing and any future indebtedness) to fund
the Company's future growth.
ACQUISITION GROWTH STRATEGY
The Company has historically pursued an aggressive acquisition strategy,
acquiring certain contracts and assets in 35 transactions from the beginning
of fiscal 1993 through March 31, 1997. Future acquisitions and/or internal
revenue growth will be necessary to offset expected declines in
contract-based revenues. As a result, the Company expects to continue to
evaluate acquisitions that can provide meaningful benefits by expanding the
Company's existing and future hardware maintenance and technology support
capabilities and leveraging its existing and future infrastructure. However,
there are various risks associated with pursuing an acquisition strategy of
this nature. The risks include problems inherent in integrating new
businesses, including potential loss of customers and key personnel and
potential disruption of operations. There can be no assurance that contracts
acquired by the Company will generate significant revenues or that customers
covered by such acquired contracts will not choose to terminate such
contracts. The rate at which any such contracts are terminated may be higher
than the rates at which the Company's contracts have historically been
terminated. There also can be no assurance that suitable acquisition
candidates will be available, that acquisitions can be completed on
reasonable terms, that the Company will successfully integrate the operations
of any acquired entities or that the Company will have access to adequate
funds to effect any desired acquisitions. Future acquisitions may be limited
by restrictions in the Company's indebtedness.
COMPETITION; COMPETITIVE ADVANTAGES OF OEMS
Competition among computer support service providers, both original
equipment manufacturer and independent service organizations, is intense. The
Company believes approximately 80% of that portion
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of industry hardware maintenance services related to mainframes and
stand-alone midrange systems is currently serviced by OEM service
organizations. In addition, the Company believes that OEM service
organizations provide a smaller, but still significant, portion of the
computer maintenance services related to distributed systems, workgroups and
PCs. The remainder of the market is serviced by a small number of larger,
independent companies, such as the Company, offering a broader range of
service capabilities, as well as numerous small companies focusing on
narrower areas of expertise or serving limited geographic areas.
In many instances, OEM service organizations have greater resources than
the Company, and, because of their access to the OEM's engineering data, may
be able to respond more quickly to servicing equipment that incorporates new
or emerging technologies. Moreover, some OEMs, especially in the mainframe
environment, do not make available to end-users or independent service
organizations the technical information, repairable parts, diagnostics,
engineering changes and other support items required to service their
products, and design and sell their products in a manner so as to make it
virtually impossible for a third party to perform maintenance services
without potentially infringing upon certain proprietary rights of the OEM. In
addition OEMs are sometimes able to develop proprietary remote diagnostic or
monitoring systems which the Company may not be able to offer. Therefore, OEM
service organizations sometimes have a cost and timing advantage over the
Company because the Company must first develop or acquire from another party
the required support items before the Company can provide services for that
equipment. An OEM's cost advantage, the unavailability of required support
items or various proprietary rights of the OEM may preclude the Company from
servicing certain products. Furthermore, OEMs usually provide warranty
coverage for new equipment for specified periods, during which it is not
economically feasible for the Company to compete for the provision of
maintenance services. To the extent OEMs choose, for marketing reasons or
otherwise, to expand their warranty periods or terms, the Company's business
may be adversely affected.
In June 1994, International Business Machines Corporation ("IBM") filed in
the United States District Court for the Southern District of New York (the
"Court") a motion to terminate a 1956 consent decree (the "IBM Consent
Decree") that, among other things, requires IBM to provide repairable parts,
documentation and other support items for IBM electronic data processing
systems to third parties on reasonable terms and places other restrictions on
IBM's conduct. On January 18, 1996, the Court entered an order approving a
modification of the IBM Consent Decree that, among other things, terminated
the IBM Consent Decree except insofar as it applies to the System 360/370/390
(mainframes) and AS/400 (midrange) families of IBM products. In July 1996,
IBM and the U.S. Department of Justice ("DOJ") reached an agreement in
tentative settlement of the remainder of IBM's motion and jointly moved to
terminate on a phased basis, the remaining provisions of the IBM Consent
Decree (the "Joint Motions"). On May 1, 1997 the Court granted the Joint
Motion. The order granting the Joint Motion is subject to appeal.
Consequently, certain of the remaining provisions of the IBM Consent Decree
(primarily relating to sales and marketing restrictions on IBM) terminate
either immediately upon, or within six months of, entry of the Court order;
all of the other remaining provisions (including those requiring IBM to
provide parts and other support items to third parties) terminate on July 2,
2000 with respect to AS/400 systems and on July 2, 2001 with respect to
System 360/370/390 mainframes. The impact, if any, upon the Company of the
termination of such sales and marketing restrictions is impossible to predict
because it depends upon what changes, if any, IBM will make in its sales and
marketing policies and practices. As a result of the termination of the IBM
Consent Decree, the Company's ability to service midrange and mainframe
products may be adversely affected. Furthermore, as the Company's business is
highly dependent upon its ability to service a wide variety of equipment in a
multivendor environment, the inability to compete effectively for the service
of IBM mainframes and midrange products could cause the loss of a substantial
portion of the Company's customer base to IBM or an IBM affiliate, which
would have a material adverse effect on the Company's business.
INVENTORY AND REPAIRABLE PARTS MANAGEMENT
In order to service its customers, the Company is required to maintain a
high level of inventory and repairable parts for extended periods of time.
Any decrease in the demand for the Company's maintenance services could
result in a substantial portion of the Company's inventory and repairable
parts
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becoming excess, obsolete or otherwise unusable. In addition, rapid changes
in technology could render significant portions of the Company's inventory
and repairable parts obsolete, thereby giving rise to write-offs and a
reduction in profitability. The inability of the Company to manage its
inventory and repairable parts or the need to write them off in the future
could have a material adverse effect on the Company's business, financial
results and results of operations.
Inventory and repairable parts purchases are made from OEMs and other
vendors. The Company typically has more than a single source of supply for
each part and component, but from time to time it will have only a single
supplier for a particular part. In some cases, the Company's OEM customer may
be the only source of supply for a repair part or component. Should a
supplier be unwilling or unable to supply any part or component in a timely
manner, the Company's business could be adversely affected. In addition, the
Company is dependent upon IBM for obtaining certain parts that are critical
to the maintenance of certain IBM mainframe and midrange systems that IBM is
currently required to make available to third parties pursuant to the IBM
Consent Decree. There can no assurance that IBM will continue to make parts
available for AS/400 Systems after July 2, 2000 and for System 360/370/390
mainframes after July 2, 2001. Even if such parts or components are
available, a shortage of supply could result in an increase in procurement
costs which, if not passed on to the customer, may adversely affect the
Company's profitability.
COPYRIGHT ISSUES
In connection with the Company's performance of most hardware maintenance,
the computer system which is being serviced must be turned on for the purpose
of service or repair. When the computer is turned on, the resident operating
system software and, in some cases diagnostic software, is transferred from a
peripheral storage device or a hard disk drive into the computer's random
access memory. Within the past several years, several OEMs have been involved
in litigation with independent service organizations, including the Company,
in which they have claimed such transfer constitutes the making of an
unauthorized "copy" of such software by the independent service organization
which infringes on the software copyrights held by the OEMs. The Company is
aware of three cases in this area which have been decided in favor of the
OEM. Although the Company was not a party in any of these cases, three
similar claims have been asserted against the Company, each of which has been
resolved. Litigation of this nature can be time consuming and expensive, and
there can be no assurance the Company will not be a party to similar
litigation in the future, or that such litigation would be resolved on terms
that do not have a material adverse effect on the Company.
DEPENDENCE ON COMPUTER INDUSTRY TRENDS; RISK OF TECHNOLOGICAL CHANGE
The Company's future success is dependent upon the continuation of a
number of trends in the computer industry, including the migration by
information technology end-users to multivendor and multisystem computing
environments, the overall increase in the sophistication and interdependency
of computing technology, and a focus by information technology managers on
cost-efficient management. The Company believes these trends have resulted in
a movement by both end-users and OEMs towards outsourcing and an increased
demand for support service providers that have the ability to provide a broad
range of multivendor support services. There can be no assurance these trends
will continue into the future.
Additionally, rapid technological change and compressed product life
cycles are prevalent in the computer industry, which may lead to the
development of improved or lower cost technologies, higher quality hardware
with significantly reduced failure rates and maintenance needs, or customer
decisions to replace rather than continue to maintain aging hardware, and
which could result in a reduced need for the Company's services in the
future. Moreover, such rapid technological changes could adversely affect the
Company's ability to predict equipment failure rates, and, therefore, to
establish prices that provide adequate profitability. Similarly, new computer
systems could be built based upon proprietary, as opposed to open, systems
that could not be serviced by the Company.
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DEPENDENCE ON KEY PERSONNEL
The Company's continued success depends, to a large extent, upon the
efforts and abilities of key managerial employees, particularly the Company's
executive officers. See "Management." Competition for qualified management
personnel in the industry is intense. There are not currently any employment
contracts which would ensure the continued employment of any executive
officer following the Merger. 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.
POTENTIAL ENVIRONMENTAL LIABILITIES
The Company or certain businesses as to which it is alleged that the
Company is a successor have been identified as potentially responsible
parties in respect of three waste disposal sites that have been identified by
the United States Environmental Protection Agency as Superfund Sites. In
addition, the Company received a notice several years ago that it may be a
potentially responsible party with respect to a fourth, related site, but has
not received any other communication with respect to that site. Complete
information as to the scope of required clean-up at these sites is not yet
available and, therefore, management's evaluation may be affected as further
information becomes available. However, in light of information currently
available to management, including information regarding assessments of the
sites to date and the nature of involvement of the Company's predecessor at
the sites, it is management's opinion that the Company currently has
sufficient reserves for its share, if any, of the cost of clean-up of these
sites and to the extent current reserves prove inadequate, any payments in
excess of the reserved amounts will not be material to the consolidated
financial position, results of operations or liquidity of the Company. See
"Business--Legal Proceedings" and Note 16 of the Notes to the Company's
Consolidated Financial Statements.
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THE MERGER AND MERGER FINANCING
THE MERGER FINANCING
In order to fund the payment of the cash portion of the Merger
Consideration, the Option Cash Proceeds and the Warrant Cash Proceeds, to
refinance outstanding indebtedness of the Company, and pay expenses incurred
in connection with the Merger, the Issuer is issuing the Senior Subordinated
Notes and will enter into a syndicated senior secured loan facility providing
for term loan borrowings in the aggregate principal amount of approximately
$470 million and revolving loan borrowings of $105 million. At the Effective
Time, the Company is expected to borrow all term loans available thereunder
and approximately $8.3 million of revolving loans. The remaining revolving
loans will, subject to a borrowing base, be available to fund the working
capital requirements of the Company. The proceeds of such financings will, in
part, be distributed to Holdings in the form of a dividend and, in part, lent
to Holdings pursuant to an intercompany note. On May 4, 1997, DLJMB Inc., an
affiliate of DLJMB, received an executed commitment letter from DLJ Capital
Funding to provide the New Credit Facility, which will be syndicated by DLJ
Capital Funding. Additionally, on May 4, 1997, DLJMB Inc. received a letter
from DLJSC with respect to the underwriting, purchase or private placement of
the Senior Subordinated Notes in which DLJSC indicated that it was highly
confident of its ability to sell the Senior Subordinated Notes in the public
market. Each of the commitments is subject to customary conditions, including
the negotiation, execution and delivery of definitive documentation with
respect to such commitment. See "Description of the New Credit Facility" and
"Certain Relationships and Related Transactions."
Quaker is expected to raise an additional $85 million through the
concurrent issuance of the Debentures, which may be sold together with the
Public Warrants to purchase Quaker Common Stock in the public markets (or
alternatively, through the issuance of preferred stock to the DLJMB Funds and
the Institutional Investors). At the Effective Time, Holdings will succeed to
the obligations of Quaker with respect to the Debentures and any Public
Warrants issued together with the Debentures, and the Public Warrants will,
by their terms, become exercisable for an equal number of shares of Holdings
Common Stock. The DLJMB Funds and the Institutional Investors also expect to
purchase 9,782,508 shares of Quaker Common Stock and may acquire the DLJMB
Warrants to purchase shares of Holdings Common Stock at an exercise price not
less than $0.01 per share immediately prior to the Effective Time for
approximately $225 million. In lieu of acquiring the DLJMB Warrants, the
DLJMB Funds and the Institutional Investors may acquire directly those shares
of Common Stock (up to 1,417,180 shares) for which such DLJMB Warrants would
have been exercisable at a price that would be equivalent to the exercise
price of the DLJMB Warrants (the "Direct Shares"). The number of DLJMB
Warrants issued or Direct Shares purchased will be reduced by the number of
Public Warrants issued (if any). At the Effective Time, the proceeds of such
purchase will become an asset of Holdings, each share of Quaker Common Stock,
including the Direct Shares, if any, will become a share of Holdings Common
Stock and each warrant to acquire Quaker Common Stock will by its terms
become exercisable for an equal number of shares of Holdings Common Stock.
THE MERGER AGREEMENT
The Merger Agreement provides, among other things, for the merger of
Quaker with and into Holdings, with Holdings continuing as the surviving
corporation. Pursuant to the Merger Agreement, at the Effective Time, each
share of Holdings Common Stock held by Holdings as treasury stock or owned by
Quaker immediately prior to the Effective Time will be cancelled, and no
payment will be made with respect thereto; each share of Quaker Common Stock
outstanding immediately prior to the Effective Time will be converted into
and become one share of common stock of the surviving corporation with the
same rights, powers and privileges as the shares so converted; each share of
preferred stock, par value $0.01 per share, of Quaker ("Quaker Preferred
Stock"), if any, outstanding immediately prior to the Effective Time will be
converted into and become one share of preferred stock of the surviving
corporation with the same rights, powers and privileges as the shares of
preferred stock so converted; each outstanding warrant to purchase shares of
Quaker Common Stock (each, a "Quaker Warrant") will, pursuant to its terms,
become exercisable for an equal number of shares of Holdings Common Stock on
the same terms and conditions as the Quaker Warrant; and each share of
Holdings Common Stock outstanding immediately prior to the Effective Time
will, except as otherwise provided with respect to shares as to which
appraisal rights have been exercised, be converted into the following (the
"Merger
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Consideration"): for each such share with respect to which an election to
retain Holdings Common Stock has been effectively made, revoked or lost
("Stock Electing Shares"), the right to retain one share of Holdings Common
Stock, and for each such share (other than Stock Electing Shares), the right
to receive in cash from Quaker an amount equal to $23.00 (the "Cash Merger
Consideration"). The Merger contemplates that approximately 94.7% of the
presently issued and outstanding shares of Holdings Common Stock will be
converted, at the election of the holder, into cash, as described above, and
that approximately 5.3% (or 1,474,345 as of April 21, 1997) of such shares
will be retained by existing stockholders. Because 5.3% of the shares
outstanding after the Merger must be retained by existing stockholders of
Holdings, the right to receive $23.00 per share or retain shares of Holdings
Common Stock is subject to proration. The shares which are to be retained
will represent approximately 13.1% of the shares of Holdings Common Stock (or
11.6% on a fully diluted basis) expected to be issued and outstanding
immediately after the Merger. If the Merger is approved, 9,782,609 shares of
Quaker Common Stock will be converted into Holdings Common Stock that will
represent approximately 86.9% of Holdings Common Stock (or 77.2% on a fully
diluted basis) (or, if the DLJMB Funds purchase the Direct Shares, 88.4% of
the outstanding Holdings Common Stock) after the Merger. The DLJMB Funds
expect that the Institutional Investors may acquire a portion of the
securities of Quaker that would otherwise be purchased by the DLJMB Funds in
the DLJMB Equity Investment. In no event would any such purchases reduce the
fully diluted ownership by the DLJMB Funds of Holdings Common Stock after the
Merger to below a majority, or limit the rights of the DLJMB Funds under the
Investors Agreement.
The DLJMB Warrants, issued by Quaker, will be exercisable for a maximum of
1,417,180 shares of Quaker Common Stock at an exercise price of not less than
$.01 per share; however, the number of DLJMB Warrants (or if issued the
Direct Shares) will be decreased by the number, if any, of Public Warrants
that are issued together with the Debentures. All such Quaker Warrants will,
by their terms, become exercisable for an equal number of shares of Holdings
Common Stock on identical terms following the Effective Time. As a result,
following the Effective Time, the DLJMB Warrants and Public Warrants will
permit the holders thereof to purchase up to an additional 1,417,180 shares
of Holdings Common Stock which would represent, when exercised, approximately
11.2% of the Holdings Common Stock (on a fully diluted basis) after the
Merger.
At the Effective Time, each outstanding option to acquire shares of
Holdings Common Stock granted to employees and directors, whether vested or
not (the "Options"), will be cancelled and, in lieu thereof, as soon as
reasonably practicable as of or after the Effective Time, the holders of such
Options will receive, with respect to each Option, a cash payment in an
amount equal to the product of (x) the excess, if any, of $23.00 over the
exercise price of such Option multiplied by (y) the number of shares of
Holdings Common Stock subject to such Option (the "Option Cash Proceeds").
Alternatively, a portion of such options may be converted into options to
purchase Holdings Common Stock after the Effective Time.
Holdings will use its reasonable best efforts to cause holders of all
outstanding warrants to purchase Holdings Common Stock (the "Existing
Warrants") to surrender such Existing Warrants to Holdings prior to the
Effective Time in exchange for a cash payment immediately after the Effective
Time of an amount equal to the (x) excess, if any, of $23.00 over the
exercise price of such Existing Warrant, multiplied by (y) the number of
shares of Holdings Common Stock subject to such Existing Warrant (the
"Warrant Cash Proceeds"), and upon such other terms and conditions
satisfactory to Quaker.
Holdings will submit the Merger Agreement to its stockholders for approval
and adoption at a special meeting of stockholders of Holdings, which is
expected to be held August 7, 1997 (the "Special Meeting"). Approval of the
Merger Agreement requires an affirmative vote of the outstanding shares of
Holdings Common Stock. J.H. Whitney & Co. and certain partnerships associated
with Welsh, Carson, Anderson & Stowe have entered into a Voting Agreement and
Irrevocable Proxy, dated as of May 4, 1997, pursuant to which they have
agreed upon the terms set forth therein to vote shares constituting
approximately 30% of the outstanding Holdings Common Stock in favor of
approval and adoption of the Merger Agreement.
The obligations of Quaker and Holdings to effect the Merger are further
subject to, certain customary conditions, including approval of the Merger
Agreement by the stockholders of Holdings.
27
<PAGE>
The Merger Agreement contains customary representations, warranties and
covenants of Holdings and Quaker, and may be terminated at any time prior to
the Effective Time (notwithstanding any approval of the Merger Agreement by
the stockholders of Holdings) under certain circumstances, including by
either Holdings or Quaker, if the Merger has not been consummated by the
later of (x) the earlier of September 15, 1997 and ten business days after
the Special Meeting, and (y) August 15, 1997, provided that the party seeking
to exercise such right is not then in breach in any material respect of any
of its obligations under the Merger Agreement.
28
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering (after deducting
underwriting discounts and commissions and other expenses of the Offering)
were approximately $144.8 million. Such net proceeds were used, together with
the initial borrowings under the New Credit Facility, the DLJMB Equity
Investment and the issuance of Debentures to finance the conversion into cash
of approximately 94.7% of the shares of Holdings Common Stock then
outstanding, to refinance the outstanding indebtedness of the Company under
the existing bank credit facility (approximately $239.9 million outstanding
at an interest rate of 6.44% as of March 31, 1997 and which matures April 26,
2001), fund payments of the Option Cash Proceeds and the Warrant Cash
Proceeds, and finance the expenses and fees incurred in connection with the
Merger. See "The Merger and Merger Financing." Approximately $299 million of
the proceeds to the Issuer from the initial borrowings under the New Credit
Facility and the Senior Subordinated Notes were dividended or loaned to
Holdings to fund a portion of the Cash Merger Consideration and fees and
expenses of Holdings in connection therewith.
The following table sets forth the estimated cash sources and uses of
funds as if the Merger and Merger Financing, including the application of the
net proceeds therefrom, occurred and were completed at the Effective Time.
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
TOTAL SOURCES:
New Credit Facility:
Revolving credit facility......................... $ 8.3
Term loans........................................ 470.0
Senior Subordinated Notes.......................... 150.0
Senior Discount Debentures and Warrants............ 85.0
Common stock and warrants purchased by DLJMB
Funds............................................. 225.0
------
Total cash sources............................... $938.3
======
TOTAL USES:
Cash Merger Consideration ......................... $605.9
Option Cash Proceeds and Warrant Cash Proceeds ... 58.4
Repayment of existing revolving credit facility .. 221.2
Estimated transaction fees and expenses............ 52.8
------
Total cash uses.................................. $938.3
======
</TABLE>
29
<PAGE>
CAPITALIZATION
The following table sets forth the historical consolidated capitalization
of the Company as of March 31, 1997, and on a pro forma basis to give effect
to the Merger, including the Merger Financing and the application of the
proceeds thereof, as if they had occurred on March 31, 1997. See "Use of
Proceeds." The information set forth below should be read in conjunction with
the Company's Unaudited Condensed Consolidated Pro Forma Financial Data, the
Company's Consolidated Financial Statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
------------------------
HISTORICAL PRO FORMA
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................ $ 12,886 $ 12,886
============ ===========
Total debt (including current portion):
New Credit Facility:
Revolving credit facility (1).......... $ -- $ 26,950
Term loan facility .................... -- 470,000
Existing revolving credit facility (1) . 239,850 --
Senior Subordinated Notes offered
hereby................................. -- 150,000
Notes payable and other debt............ 5,398 5,398
Capitalized lease obligations........... 1,423 1,423
------------ -----------
Total debt............................ 246,671 653,771
Shareholder's equity (deficit)(2) ...... 201,095 (125,066)
------------ -----------
Total capitalization.................. $447,766 $ 528,705
============ ===========
</TABLE>
- ------------
(1) It is assumed that, at the Effective Time, actual borrowings under the
existing revolving credit facility will be approximately $221.2
million. Any variation in the actual borrowings outstanding under the
existing revolving credit facility at the Effective Time will result in
a corresponding change in borrowings under the New Credit Facility.
(2) For a description of the pro forma adjustments, see Note 6 to the Notes
to Unaudited Condensed Consolidated Pro Forma Balance Sheet Data.
30
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL DATA
The following unaudited condensed consolidated pro forma financial data
(the "Pro Forma Financial Data") of the Company are based on historical
consolidated financial statements of the Company as adjusted to give effect
to the Company's acquisition of BABSS on October 20, 1995 and the Merger,
including the Merger Financing and the application of the proceeds thereof.
The unaudited condensed consolidated pro forma statement of operations data
for the year ended June 30, 1996 gives effect to the BABSS acquisition and
the Merger, including the Merger Financing and the application of the
proceeds thereof, as if they had occurred as of July 1, 1995. The unaudited
condensed consolidated pro forma statements of operations data for the
nine-month and three-month periods ended March 31, 1997 give effect to the
Merger, including the Merger Financing and the application of the proceeds
thereof, as if it had occurred as of July 1, 1996. The pro forma balance
sheet gives effect to the Merger, including the Merger Financing and the
application of the proceeds thereof, as if they had occurred as of March 31,
1997. The pro forma adjustments are based upon available information and upon
certain assumptions that management believes are reasonable under the
circumstances. The Pro Forma Financial Data and accompanying notes should be
read in conjunction with the historical consolidated financial statements of
the Company, including the notes thereto, and other financial information
pertaining to the Company. The Pro Forma Financial Data do not purport to
represent what the Company's actual results of operations or actual financial
position would have been if the Merger, including the Merger Financing and
the application of the proceeds thereof, and BABSS acquisition in fact
occurred on such dates or to project the Company's results of operations or
financial position for any future period or date. The Pro Forma Financial
Data do not give effect to any transactions other than the BABSS acquisition
and the Merger, including the Merger Financing and the application of the
proceeds thereof, discussed in the notes to the Pro Forma Financial Data
included elsewhere herein.
As a result of the proposed Merger, Holdings, the Company and Quaker will
incur various costs currently estimated to range between $95 million and $105
million (pretax) in connection with consummating the transaction. These costs
consist primarily of professional fees, registration costs, compensation
costs and other expenses. While the exact timing, nature and amount of these
costs are subject to change the Company anticipates that a one-time pretax
charge of approximately $76 million ($69 million after tax) will be recorded
in the quarter in which the Merger is consummated. As a result of the
foregoing, the Company expects to record a significant net loss in the
quarter in which the Merger is recorded. Because this loss will result
directly from the one-time charge incurred in connection with the Merger, and
this charge will be funded entirely through the proceeds of the Merger
Financing, the Company does not expect this loss to materially impact its
liquidity, ongoing operations or market position. For a discussion of the
consequences of the incurrence of indebtedness in connection with the Merger
Financing, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
The pro forma adjustments were applied to the respective historical
consolidated financial statements of the Company to reflect and account for
the Merger as a recapitalization; accordingly, the historical basis of the
Company's assets and liabilities has not been impacted thereby.
31
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1996
-------------------------------------------------------
HISTORICAL RESULTS BABSS ACQUISITION
-------------------------- ----------------------------
THE COMPANY BABSS ADJUSTMENTS PRO FORMA
------------- ---------- ------------- -----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C>
Revenues............................... $540,191 $157,485 -- $697,676
Cost of revenues....................... 402,316 127,049 $ (9,549)(1) 517,244
(1,250)(2)
83 (3)
(1,405)(4)
------------- ---------- ------------- -----------
Gross profit........................... 137,875 30,436 12,121 180,432
Operating Expenses:
Selling, general, and administrative
expenses............................. 69,237 27,152 (1,701)(1) 92,211
(500)(2)
83 (3)
(997)(4)
(1,063)(5)
Amortization and write off of
intangibles.......................... 15,673 625 (625)(6) 19,534
3,861 (7)
Employee severance and unutilized
lease cost........................... 3,592 (3,592)(8)
------------- ---------- ------------- -----------
Operating income....................... 49,373 2,659 16,655 68,687
Interest expense....................... (14,953) (539) 539 (9) (20,570)
(5,617)(10)
Interest income........................ 239 52 291
------------- ---------- ------------- -----------
Income from continuing operations
before income taxes, and
extraordinary item.................... 34,659 2,172 11,577 48,408
(Provision) benefit for income taxes .. (13,870) 250 (5,743) (11) (19,363)
------------- ---------- ------------- -----------
Income from continuing operations
before extraordinary item............. 20,789 2,422 5,834 29,045
Extraordinary item--early retirement
of debt............................... (1,927) (1,927)
------------- ---------- ------------- -----------
Net income ............................ $ 18,862 $ 2,422 $ 5,834 $ 27,118
============= ========== ============= ===========
OTHER DATA:
EBITDA (15)........................... $114,816 $ 16,524 $147,805
Amortization of repairable parts .... 37,869 10,598 48,467
------------- ---------- -----------
Adjusted EBITDA (15).................. 76,947 5,926 99,338
Adjusted EBITDA margin (16)........... 14.2% 3.8% 14.2%
Depreciation and amortization of
intangibles.......................... $ 23,982 $ 3,267 $ 30,651
Repairable parts purchases ........... 63,514 10,773 74,287
Capital expenditures ................. 7,278 3,965 11,243
Cash interest expense................. 14,743 539 20,360
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
THE MERGER
-------------------------------
PRO FORMA,
ADJUSTMENTS AS ADJUSTED
-------------- -------------
<S> <C> <C>
Revenues............................... $697,676
Cost of revenues....................... 517,244
-------------
Gross profit........................... 180,432
Operating Expenses:
Selling, general, and administrative
expenses............................. 92,211
Amortization and write off of
intangibles.......................... 19,534
Employee severance and unutilized
lease cost...........................
-------------- -------------
Operating income....................... 68,687
Interest expense....................... (58,815)(12) (59,745)
19,640 (13)
Interest income........................ 4,562 (14) 4,853
-------------- -------------
Income from continuing operations
before income taxes, and
extraordinary item.................... (34,613) 13,795
(Provision) benefit for income taxes .. 13,845 (11) (5,518)
-------------- -------------
Income from continuing operations
before extraordinary item............. (20,768) 8,277
Extraordinary item--early retirement
of debt............................... (1,927)
-------------- -------------
Net income ............................ $(20,768) $ 6,350
============== =============
OTHER DATA:
EBITDA (15)........................... $147,805
Amortization of repairable parts .... 48,467
-------------
Adjusted EBITDA (15).................. 99,338
Adjusted EBITDA margin (16)........... 14.2%
Depreciation and amortization of
intangibles.......................... $ 30,651
Repairable parts purchases ........... 74,287
Capital expenditures ................. 11,243
Cash interest expense................. 57,031
</TABLE>
32
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31, 1997
-------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------- -----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C>
Revenues.......................................... $572,749 $572,749
Cost of revenues ................................. 427,969 427,969
------------ -----------
Gross profit...................................... 144,780 144,780
Operating Expenses:
Selling, general, and administrative expenses ... 78,578 78,578
Amortization and write off of intangibles ....... 16,861 16,861
Employee severance and unutilized lease cost .... 4,300 4,300
------------ -----------
Operating income.................................. 45,041 45,041
(44,111)(12)
Interest expense.................................. (11,097) 10,692 (13) (44,516)
Interest income................................... 393 3,422 (14) 3,815
------------ ------------- -----------
Income before income taxes........................ 34,337 (29,997) 4,340
(Provision) benefit for income taxes.............. (14,421) 12,598 (11) (1,823)
------------ ------------- -----------
Net income ....................................... $ 19,916 $(17,399) $ 2,517
============ ============= ===========
OTHER DATA:
EBITDA (15)...................................... $121,680 $121,680
Amortization of repairable parts................. 45,642 45,642
------------ -----------
Adjusted EBITDA (15)............................. 76,038 76,038
Adjusted EBITDA margin (16)...................... 13.3% 13.3%
Depreciation and amortization of intangibles .... $ 26,697 $ 26,697
Repairable parts purchases....................... 64,803 64,803
Capital expenditures............................. 6,093 6,093
Cash interest expense............................ 10,578 42,119
Ratio of Adjusted EBITDA to cash interest
expense......................................... 7.19x 1.81x
</TABLE>
33
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
--------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
------------ -------------- -----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C>
Revenues.......................................... $205,070 $205,070
Cost of revenues ................................. 150,372 150,372
------------ -----------
Gross profit...................................... 54,698 54,698
Operating Expenses:
Selling, general, and administrative expenses ... 28,228 28,228
Amortization and write off of intangibles ....... 6,390 6,390
------------ -----------
Operating income.................................. 20,080 20,080
Interest expense.................................. (4,005) (14,704)(12) (14,864)
3,845 (13)
Interest income................................... 316 1,141 (14) 1,457
------------ -------------- -----------
Income before income taxes........................ 16,391 (9,718) 6,673
(Provision) benefit for income taxes.............. (6,884) 4,081 (11) (2,803)
------------ -------------- -----------
Net income ....................................... $ 9,507 $ (5,637) $ 3,870
============ ============== ===========
OTHER DATA:
EBITDA (15)...................................... $ 46,419 $ 46,419
Amortization of repairable parts................. 16,356 16,356
------------ -----------
Adjusted EBITDA (15)............................. 30,063 30,063
Adjusted EBITDA margin (16)...................... 14.7% 14.7%
Depreciation and amortization of intangibles .... $ 9,983 $ 9,983
Repairable parts purchases....................... 28,815 28,815
Capital expenditures............................. 2,261 2,261
Cash interest expense............................ 3,642 13,875
Ratio of Adjusted EBITDA to cash interest
expense......................................... 8.25x 2.17x
</TABLE>
34
<PAGE>
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED PRO FORMA STATEMENTS OF OPERATIONS DATA
(1) To reflect employee-related cost savings associated with the
redundancies created by the combination of the Company and BABSS.
Components of savings include, but are not limited to, salaries,
fringe benefits (except for those separately accounted for in Note 4
to the Pro Forma Combined Financial Data), travel and other.
Personnel reductions, totaling 405 employees, were implemented in the
field (260), operations support (90), sales (10) and administration
(45). These personnel reductions were announced and substantially
effected by December 31, 1995. The reductions were spread throughout
the United States with the only area of concentration being at the
respective headquarters locations in Horsham and Frazer,
Pennsylvania.
(2) To reflect rental expense reductions associated with facilities that
have been deemed "unutilized" as a result of the combination of the
Company and BABSS. See Note 15 of the Notes to the Company's
Consolidated Financial Statements. Included in such facilities are
the Company's former corporate headquarters, several large repair
depots (identified as surplus) as well as numerous duplicate field
offices throughout the United States. All remaining lease liabilities
associated with this unutilized space have either been included in
the purchase accounting of the BABSS acquisition or have been
expensed as part of the Company's net charge of $3.6 million recorded
in the results of operations for the twelve months ended June 30,
1996.
(3) To reflect additional depreciation resulting from a $2 million
increase in property and equipment valuation recorded as part of the
overall purchase price allocation of the BABSS acquisition, assuming
an estimated four-year depreciable life.
(4) To eliminate BABSS benefit expenses associated with pension and
postemployment benefits that are not part of the Company's benefit
package and have not, therefore, been incurred subsequent to the
acquisition. See Note 3 and 11 of the Notes to DecisionOne
Corporation's (formerly BABSS, (the "Predecessor")) Consolidated
Financial Statements included elsewhere herein. Both of these benefit
programs ceased to exist as of the acquisition date.
(5) To eliminate redundant corporate overhead allocations recorded in the
historical BABSS financial statements which have not been incurred
subsequent to the acquisition. BABSS was predominantly a
self-sufficient operation. The parent company of BABSS charged
corporate overhead to BABSS; these charges are not a component of the
ongoing expense structure of the Company.
(6) To eliminate intangible amortization expense recorded in the
historical BABSS financial statements.
(7) To reflect amortization expense resulting from the adjustments to
intangible assets recorded as part of the purchase price allocation
of BABSS. See Note 8 of the Notes to the Company's Consolidated
Financial Statements.
(8) To eliminate the non-recurring charge for employee severance and
unutilized lease costs.
(9) To eliminate intercompany interest expense charged by Bell Atlantic
Corporation, the parent company of BABSS, to BABSS.
(10) To reflect interest expense associated with the financing of the
BABSS acquisition. The assumed borrowing level associated with this
adjustment was $242.0 million, which is comprised of $212.0 million
of term loan debt and $30.0 million of notes to Significant
Stockholders (the "Affiliate Notes"). In April 1996, the Company used
the proceeds of Holdings' initial public offering to reduce the term
loan debt by $70.0 million and repay the Affiliate Notes. The
interest rate on the term loan was 8.75% per annum, and the effective
interest rate on the Affiliate Notes was 12.9% per annum. The
interest rate swap agreements entered into by the Company have not
been given effect in the calculation of these adjustments, based on
immateriality.
35
<PAGE>
The pro forma interest adjustment has been computed as follows:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 1996
---------------
(IN THOUSANDS)
<S> <C>
Term loan interest.............................................. $ 17,019
Affiliate Notes interest:
Stated rate (10.101% per annum)................................ 2,273
Amortization of original issue discount........................ 354
Less actual interest expense included in the historical results (14,029)
---------------
Pro forma interest adjustment................................... $ 5,617
===============
</TABLE>
(11) To adjust the income tax (provision) benefit for effect of all pro
forma entries above at an effective tax rate of 40% and 42% for the
year ended June 30, 1996 and nine-month and three-month periods ended
March 31, 1997, respectively. Utilization of the Company's net
operating loss ("NOLs") tax carryforwards have not been reflected in
the pro forma income tax expense. The recognition of the Company's
NOLs have been recorded in the historical financials, see Note 11 of
the Notes to the Company's Consolidated Financial Statements.
(12) To reflect the additional interest expense attributable to the Merger
Financing, as follows:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
JUNE 30, 1996 MARCH 31, 1997 MARCH 31, 1997
--------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
New Credit Facility:
Term Loan A and revolving credit
facility.............................. $18,311 $13,733 $ 4,578
Term Loan B .......................... 23,375 17,531 5,844
Senior Subordinated Notes ............. 14,625 10,969 3,656
Amortization of deferred financing
costs................................. 2,504 1,878 626
--------------- -------------- --------------
$58,815 $44,111 $14,704
=============== ============== ==============
</TABLE>
The amounts and assumed interest rates of the Merger Financing are as
follows:
<TABLE>
<CAPTION>
ASSUMED
RATE
AMOUNT PER ANNUM
-------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
New Credit Facility:
Term Loan A and revolving credit facility $221,950 LIBOR + 2.50%
Term Loan B ............................... 275,000 LIBOR + 2.75%
Senior Subordinated Notes .................. 150,000 9.75%
</TABLE>
The interest rates for the New Credit Facility are variable. The effect of
a 1/4% change in interest rates on the above New Credit Facility would be
$1.2 million, $0.9 million, and $0.3 million for the year ended June 30,
1996, nine months ended March 31, 1997 and the three months ended March
31, 1997, respectively.
(13) To reflect the elimination of interest expense (including
amortization of deferred financing costs, which are not considered to
be material) attributable to indebtedness to be paid in connection
with the Merger as follows:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
JUNE 30, 1996 MARCH 31, 1997 MARCH 31, 1997
--------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Existing revolving credit facility
(including BABSS pro forma) ............. $19,640 $10,692 $3,845
</TABLE>
36
<PAGE>
(14) To reflect the interest income attributable to the intercompany loan
from the Company to Holdings in the principal amount of $55.3 million
at a rate of 8.25% per annum. Interest on the intercompany loan will
accrue and compound until maturity. At the Company's option, interest
on the intercompany loan will be payable in cash.
(15) "EBITDA" represents income from continuing operations before interest
expense, interest income, income taxes, depreciation, amortization of
repairable parts inventory, amortization of intangibles, amortization
of discounts and capitalized expenses related to indebtedness, and
non-recurring employee severance charges and provisions for
unutilized leases. The Company's historical financial results include
amortization of repairable parts which is unique to the industry in
which the Company competes. "Adjusted EBITDA" represents EBITDA
reduced by amortization of repairable parts. Neither EBITDA nor
Adjusted EBITDA is intended to represent cash flow from operations as
defined by generally accepted accounting principles and should not be
considered as an alternative to net income as an indicator of the
Company's operating performance or to cash flows as a measure of
liquidity and may not be comparable to similarly titled measures of
other companies. Adjusted EBITDA is presented because it is relevant
to certain covenants expected to be contained in the agreements
relating to the Merger Financing and the Company believes that
Adjusted EBITDA is a more consistent indicator of the Company's
ability to meet its debt service, capital expenditure and working
capital requirements than EBITDA.
(16) Adjusted EBITDA margin measures Adjusted EBITDA as a percentage of
revenues.
37
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET DATA
AS OF MARCH 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------ -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................ $ 12,886 $ -- (1) $ 12,886
Accounts receivable, net................. 136,401 136,401
Inventories.............................. 35,186 35,186
Other.................................... 7,637 7,637
------------ -----------
Total current assets..................... 192,110 192,110
Loan to Holdings ........................ -- 55,300 (2) 55,300
Repairable parts, net.................... 195,656 195,656
Property & equipment, net................ 33,283 33,283
Intangibles, net and other assets........ 220,628 7,000 (3) 246,267
18,875 (4)
(236)(5)
------------ -------------- -----------
Total assets............................... $641,677 $ 80,939 $ 722,616
============ ============== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Current portion of long-term debt........ $ 4,756 $ 4,756
Accounts payable and accrued expenses.... 101,516 101,516
Deferred revenues........................ 72,096 72,096
Other.................................... 3,691 3,691
------------ -----------
Total current liabilities................ 182,059 182,059
New Credit Facility:
Revolving credit facility................ -- $ 26,950 (1) 26,950
Term loans............................... -- 470,000 (1) 470,000
Senior Subordinated Notes ............... -- 150,000 (1) 150,000
Existing revolving credit facility....... 239,850 (239,850)(1) --
Other long term debt..................... 2,065 2,065
Other liabilities........................ 16,608 16,608
------------ -------------- -----------
Total liabilities....................... 440,582 407,100 847,682
------------ -------------- -----------
Total stockholder's equity (deficit).... 201,095 (326,161) (6) (125,066)
------------ -------------- -----------
Total liabilities and stockholder's
equity................................... $641,677 $ 80,939 $ 722,616
============ ============== ===========
</TABLE>
38
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET DATA
(1) The net effect on cash and cash equivalents of the Merger, including
the Merger Financing and the application of the proceeds thereof as
of March 31, 1997, is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
TOTAL SOURCES:
New Credit Facility:
Revolving credit facility(a).................... $ 26,950
Term loans...................................... 470,000
Senior Subordinated Notes........................ 150,000
--------------
Total sources.................................. $646,950
==============
TOTAL USES:
Dividend to Holdings ............................ $244,000
Loan to Holdings ................................ 55,300
Option Cash Proceeds............................. 45,400
Warrant Cash Proceeds............................ 13,000
Repayment of existing revolving credit facility 239,850
Estimated transaction fees and expenses ......... 49,400
--------------
Total uses..................................... $646,950
==============
</TABLE>
(2) Represents loan to Holdings at an interest rate of 8.25% per annum.
(3) Represents the anticipated tax benefit related to the transaction
fees and expenses. The anticipated tax benefit is limited due to the
expected non-deductibility of certain Merger transaction fees and
expenses and limitations on the recognition of deferred tax benefits
resulting from net operating losses expected to be reported in the
fiscal year ended June 30, 1998.
(4) Represents the portion of estimated transaction fees and expenses
attributable to the New Credit Facility and the Senior Subordinated
Notes, which will be recorded as deferred debt issuance costs and
will be amortized over the life of the debt to be issued. Such
estimated deferred debt issuance costs include estimated fees and
expenses payable to banks, and advisors and underwriting discounts
and commissions.
(5) The adjustment reflects the write-off deferred debt issuance costs
associated with the existing revolving credit financing.
(6) Represents the net change in stockholders' equity as a result of the
Merger, including the Merger Financing and the application of the
proceeds thereof:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Dividend to Holdings ..................... $(244,000)
Transaction fees and expenses(b).......... (30,525)
Write-off of deferred debt issuance
costs.................................... (236)
Option Cash Proceeds(c) .................. (45,400)
Warrant Cash Proceeds..................... (13,000)
Tax benefit of above expense adjustments . 7,000
--------------
Total................................... $(326,161)
==============
</TABLE>
(a) Based on borrowings of $239.9 million that were outstanding
under the existing revolving credit facility as of March 31,
1997. Any variation in the actual borrowings outstanding
under the existing revolving credit facility on the closing
date will result in a corresponding change in borrowings
under the New Credit Facility.
(b) Represents the portion of the total $49.4 million of
estimated transaction fees and expenses which will be
recorded as an expense immediately upon consummation of the
Merger and related transactions; the remainder of such
transaction fees and expenses are recorded in Note (4) above
as deferred debt issuance costs.
(c) Represents compensation costs of the Company resulting from
the cancellation of options which will be recorded as an
expense immediately upon consummation of the Merger and
related transactions.
39
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the periods and
dates indicated set forth below have been derived from the audited
consolidated financial statements and the unaudited condensed consolidated
financial statements of the Company. The condensed consolidated results of
operations of the Company for the nine months and three months ended March
31, 1996 and 1997 are unaudited and are not necessarily indicative of the
Company's results of operations for the full year. The unaudited condensed
consolidated financial data reflects all adjustments (consisting of normal,
recurring adjustments) which are, in the opinion of management, necessary for
a fair summary of the Company's financial position, results of operations and
cash flows for and as of the end of the periods presented.
The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and Notes thereto, included
elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
----------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- -----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues....................................... $112,773 $114,060 $108,416 $163,020 $ 540,191
Gross profit................................... 27,753 27,575 31,436 49,537 137,875
Operating income(2)(3)......................... 11,288 4,406 15,983 20,779 49,373
Interest expense............................... (9,881) (9,353) (4,979) (2,521) (14,953)
Interest income................................ 178 25 132 53 239
Income (loss) from continuing
operations(4)(5).............................. 1,441 (5,234) 10,112 41,415 20,789
Net income (loss).............................. 2,524 (10,590) 10,112 42,528 18,862
Ratio of earnings to fixed charges(6)(7) ...... 1.13x -- 2.67x 5.09x 2.79x
CONSOLIDATED BALANCE SHEET DATA
(AT PERIOD END):
Cash and cash equivalents...................... $ 737 $ 550 $ 978 $ 2,659 $ 8,221
Inventory...................................... 14,787 7,146 4,459 4,024 30,130
Repairable parts(8)............................ 19,657 13,545 9,473 27,360 154,970
Total assets................................... 84,846 44,721 35,496 135,553 514,510
Total debt..................................... 72,972 51,530 4,539 25,571 190,903
Total stockholder's equity (deficit)........... (47,477) (58,146) (27,627) 14,677 180,793
CONSOLIDATED CASH FLOWS DATA:
Net cash provided by operations ............... $ 16,550 $ 17,137 $ 28,722 $ 38,415 $ 51,894
Net cash (used in) provided by investing
activities ................................... (8,226) 11,779 (3,348) (54,271) (346,354)
Net cash (used in) provided by financing
activities ................................... (8,905) (29,103) (24,946) 17,537 300,022
OTHER DATA:
EBITDA(9)...................................... $ 27,871 $ 24,361 $ 22,672 $ 37,021 $ 114,816
Amortization of repairable parts............... 12,016 9,375 5,929 7,688 37,869
---------- ---------- ---------- ---------- -----------
Adjusted EBITDA(9)............................. 15,855 14,986 16,743 29,333 76,947
Adjusted EBITDA margin(10)..................... 14.1% 13.1% 15.4% 18.0% 14.2%
Depreciation and amortization of intangibles .. $ 4,567 $ 4,769 $ 7,161 $ 8,554 $ 23,982
Repairable parts purchases..................... 4,939 3,263 1,857 12,154 63,514
Capital expenditures........................... 1,752 681 304 2,786 7,278
Cash interest expense.......................... 4,474 3,428 1,232 2,314 14,743
Revenue per average number of employees(11) ... 70.9 82.3 105.8 113.8 119.6
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
----------------------- ---------------------
1996 1997 1996 1997
----------- ----------- ---------- ----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues.......................................... $ 369,167 $ 572,749 $172,673 $205,070
Gross profit...................................... 96,459 144,780 42,711 54,698
Operating income(2)(3)............................ 29,323 45,041 15,536 20,080
Interest expense.................................. (11,289) (11,097) (5,855) (4,005)
Interest income................................... 69 393 54 316
Income (loss) from continuing operations(5) ..... 10,866 19,916 5,842 9,507
Net income (loss)................................. 10,866 19,916 5,842 9,507
Ratio of earnings to fixed charges(6)(7) ......... 2.34x 3.17x 2.31x 3.90x
CONSOLIDATED BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents......................... $ 12,886
Inventory......................................... 35,186
Repairable parts(8)............................... 195,656
Total assets...................................... 641,677
Total debt........................................ 246,671
Total stockholder's equity........................ 201,095
CONSOLIDATED CASH FLOWS DATA:
Net cash provided by operations .................. $ 35,489 $ 57,654 $ 20,590 $ 36,667
Net cash (used in) investing activities ......... (308,771) (105,329) (20,713) (34,569)
Net cash provided by financing activities ....... 276,032 52,388 4,933 2,510
OTHER DATA:
EBITDA(9)......................................... $ 75,568 $ 121,680 $ 34,308 $ 46,419
Amortization of repairable parts ................. 23,017 45,642 11,214 16,356
----------- ----------- ---------- ----------
Adjusted EBITDA(9)................................ 52,551 76,038 23,094 30,063
Adjusted EBITDA margin(10)........................ 14.2% 13.3% 13.4% 14.7%
Depreciation and amortization of intangibles ..... $ 16,228 $ 26,697 $ 7,558 $ 9,983
Repairable parts purchases........................ 31,715 64,803 19,560 28,815
Capital expenditures.............................. 3,331 6,093 1,153 2,261
Cash interest expense............................. 11,134 10,578 5,803 3,642
Ratio of Adjusted EBITDA to cash interest
expense.......................................... 4.72x 7.19x 3.98x 8.25x
Revenue per average number of employees(11) ...... $ 90.3 $ 94.7 $ 29.8 $ 32.4
</TABLE>
41
<PAGE>
- ------------
(1) The Summary Statement of Operations Data excludes the effects of
discontinued operations. See Note 3 of the Notes to the Company's
Consolidated Financial Statements.
(2) Operating income includes a $5.8 million charge and a $6.4 million
credit arising from unused lease liabilities for the years ended June
30, 1993 and 1994. During the nine months ended March 31, 1997 the
Company recorded a $4.3 million charge for estimated future employee
severance costs of $3.4 million and unutilized lease costs of $0.9
million.
(3) Operating income includes a $7.0 million charge for future employee
severance costs and unutilized lease costs, incurred in connection
with the BABSS acquisition, for the nine months ended March 31, 1996.
The year ended June 30, 1996 includes a reversal of $3.4 million of
this charge due to the Company's ability to utilize and sublease
various facilities identified in the original charge. See Note 15 of
the Notes to the Company's Consolidated Financial Statements.
(4) Income (loss) from continuing operations for the years ended June 30,
1992 through 1994 reflects interest expense arising from the
Company's subordinated debt which was refinanced as a part of the
1994 Restructuring. See Note 10 of the Notes to the Company's
Consolidated Financial Statements.
(5) Income (loss) from continuing operations for the years ended June 30,
1992 through 1994 include income taxes based on an effective tax rate
substantially less than the effective tax rates used for the years
ended June 30, 1995 and 1996, and the three and nine months ended
March 31, 1996 and 1997. The year ended June 30, 1995 includes a
$23.1 million net benefit arising from the recognition of future tax
benefits of tax loss carryforwards and temporary timing differences.
See Note 11 of the Notes to the Company's Consolidated Financial
Statements.
(6) In calculating this ratio, "earnings" represents income from
continuing operations before provision for income taxes and
extraordinary items plus fixed charges. Fixed charges consist of
interest and amortization of discounts and capitalized expenses
related to indebtedness and one-third of rent expense, which is
representative of the interest factor.
(7) For the year ended June 30, 1993, earnings were insufficient to cover
fixed charges by $4.9 million.
(8) Repairable parts represent parts that can be repaired and reused and
are required in order to meet the requirements of the contracts with
the Company's maintenance customers. These parts are principally
purchased from equipment manufacturers and other third parties. As
these parts are purchased, they are capitalized at cost and amortized
using the straight-line method over three to five years, the
estimated useful life of these repairable parts. Costs to refurbish
these parts are charged to expense as incurred.
(9) "EBITDA" represents income (loss) from continuing operations before
interest expense, interest income, income taxes, depreciation,
amortization of repairable parts, amortization of intangibles,
amortization of discounts and capitalized expenses related to
indebtedness and non-recurring employee severance charges and
provisions for unutilized leases. The Company's historical results
include amortization of repairable parts which is unique to the
industry in which the Company competes. "Adjusted EBITDA" represents
EBITDA reduced by amortization of repairable parts. Neither EBITDA
nor Adjusted EBITDA is intended to represent cash flow from
operations as defined by generally accepted accounting principles and
should not be considered as an alternative to net income as an
indicator of the Company's operating performance or to cash flows as
a measure of liquidity and may not be comparable to similarly titled
measures of other companies. Adjusted EBITDA is presented because it
is relevant to certain covenants expected to be contained in the
agreements relating to the Merger Financing and the Company believes
that Adjusted EBITDA is a more consistent indicator of the Company's
ability to meet its debt service, capital expenditure and working
capital requirements than EBITDA.
(10) Adjusted EBITDA margin measures Adjusted EBITDA as a percentage of
revenues.
(11) Revenue per average number of employees is calculated by dividing
revenues for applicable periods by the average number of employees
during the respective periods.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements including the notes thereto.
This discussion contains forward-looking statements which involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors."
COMPANY HISTORY
DecisionOne Corporation is a wholly owned subsidiary of Holdings through
which the operations of Holdings are conducted. The Company began operations
as a provider of key punch machines under the tradename "Decision Data."
During the 1980s, its operations expanded to include the sale of midrange
computer hardware and related maintenance services. During fiscal 1993, the
Company decided to focus on providing computer maintenance and support
services and sold its computer hardware products business.
Since the beginning of fiscal 1993, the Company established a major
presence in the computer maintenance and technology support services industry
through the acquisition and integration of assets and contracts of over 35
complementary businesses. The most significant of these were IDEA Servcom,
Inc. ("Servcom"), certain assets and liabilities of which were acquired in
August 1994 for cash consideration of $29.5 million, BABSS which was acquired
in October 1995 for cash consideration of approximately $250.0 million and
certain assets of the U.S. computer service business of Memorex Telex which
were acquired in November 1996 for cash consideration of approximately $24.4
million after certain purchase price adjustments. These acquisitions were
accounted for as purchase transactions.
At the time of its acquisition by the Company, BABSS was among the largest
independent, multivendor service organizations servicing end-user
organizations and OEMs. Prior to the acquisition of BABSS, the Company had
higher gross margins than BABSS principally because approximately 30% of the
Company's revenues in fiscal 1995 were attributable to higher margin
contracts involving systems that can be serviced by a limited number of
service providers ("proprietary systems"), whereas BABSS had limited revenues
from proprietary systems. Prior to the acquisition, BABSS established a
strong record of internal revenue growth, growing revenues from $338.4
million in 1991 to $486.1 million in 1994, representing a compound annual
rate of 12.8%.
The Company's primary source of revenues is contracted services for
multivendor computer maintenance and technology support services, including
hardware support, end-user and software support, network support and other
support services. Approximately 85% of the Company's revenues during the last
fiscal year were derived from maintenance contracts covering a broad spectrum
of computer hardware. These contracts typically have a stipulated monthly fee
over a fixed initial term (typically one year) and continue thereafter unless
cancelled by either party. Such contracts generally provide that customers
may eliminate certain equipment and services from the contract upon notice to
the Company. In addition, the Company enters into per incident arrangements
with its customers. Per incident contracts can cover a range of bundled
services for computer maintenance or support services or for a specific
service, such as network support or equipment relocation services. Another
form of per incident service revenues includes time and material billings for
services as needed, principally maintenance and repair, provided by the
Company. Furthermore, the Company derives other revenues from the repair of
hardware and components at the Company's logistics services and depot repair
facilities. Pricing of the Company's services is based on various factors
including equipment failure rates, cost of repairable parts and labor
expenses. The Company customizes its contracts to the individual customer
based generally on the nature of the customer's requirements, the term of the
contract and the services that are provided.
The Company experiences reductions in revenue when customers replace
equipment being serviced with new equipment covered under a manufacturer's
warranty, discontinue the use of equipment being
43
<PAGE>
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.
Cost of revenues is comprised principally of personnel-related costs
(including fringe benefits), inventory cost recognition, amortization of
repairable parts and facilities costs and related expenses.
The acquisition of contracts and assets has generally provided the Company
with an opportunity to realize economies of scale because the Company
generally does not increase its costs related to facilities, personnel and
repairable parts in the same proportion as increases in acquired revenues.
The proposed Merger, which will be recorded as a recapitalization for
accounting purposes, is subject to a number of conditions, including
regulatory approvals and approval by Holdings' stockholders. The transaction
is estimated to have an aggregate cash value of approximately $957 million,
including refinancing of the Company's existing revolving credit facility
balance at March 31, 1997. The Company expects the Merger to close by
September 1997.
As a result of the proposed Merger, including the Merger Financing and the
application of the proceeds thereof, Holdings, the Company and Quaker will
incur various costs currently estimated to range between $95 million and $105
million (pretax) in connection with consummating the transaction. These costs
consist primarily of compensation costs, underwriting discounts and
commissions, professional and advisory fees and other expenses. While the
exact timing, nature and amount of these costs are subject to change, the
Company anticipates that a one-time pretax charge of approximately $76
million ($69 million after tax) will be recorded in the quarter in which the
Merger is consummated. As a result of the foregoing, the Company expects to
record a significant net loss in the quarter in which the Merger is recorded.
Because this loss will result directly from the one-time charge incurred in
connection with the Merger, and this charge will be funded entirely through
the proceeds of the Merger Financing, the Company does not expect this loss
to materially impact its liquidity, ongoing operations or market position.
For a discussion of the consequences of the incurrence of indebtedness in
connection with the Merger Financing, see "--Liquidity and Capital
Resources."
RECENT DEVELOPMENTS
The Company's 1997 fiscal year ended on June 30, 1997. While the final
results of the quarter ended June 30, 1997 are not yet available, the Company
currently estimates that it recorded revenues of approximately $213.2 million
during the fourth quarter, and during such quarter realized operating income
of approximately $22.7 million and net income of approximately $11.2 million.
The Company currently estimates that revenues for the full fiscal year
ended June 30, 1997 were approximately $785.9 million and that it realized
operating income of approximately $67.8 million and net income of
approximately $31.1 million. Results of operations for the full fiscal year
ended June 30, 1997 include the impact of certain charges recorded during the
second quarter of fiscal 1997, as discussed below.
The above information is preliminary in nature only, and is subject in all
respects to completion of various internal analyses and procedures necessary
to finalize the Company's financial statements, and to completion of the
audit of the Company's financial statements for the fiscal year ended June
30, 1997.
RESULTS OF OPERATIONS
The following discussion of results of operations is presented for the
three and nine month periods ended March 31, 1997, and fiscal years ended
June 30, 1996, 1995 and 1994. The results of operations of the Company
include the operations of Memorex Telex from November 15, 1996, BABSS from
October 20, 1995 and Servcom from September 1, 1994.
44
<PAGE>
The following table sets forth, for the periods indicated, certain
operating data expressed in dollar amounts and as a percentage of revenues:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEARS ENDED JUNE 30, MARCH 31,
-------------------------------- ---------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................... $108,416 $163,020 $540,191 $369,167 $572,749
Cost of revenues........... 76,980 113,483 402,316 272,708 427,969
---------- ---------- ---------- ---------- ----------
Gross profit............... 31,436 49,537 137,875 96,459 144,780
Operating Expenses:
Selling, general and
administrative expenses .. 16,474 21,982 69,237 49,519 78,578
Amortization and write-off
of intangibles............ 5,380 6,776 15,673 10,617 16,861
Employee severance and
unutilized lease costs
(credit).................. (6,401) -- 3,592 7,000 4,300
---------- ---------- ---------- ---------- ----------
Operating income........... 15,983 20,779 49,373 29,323 45,041
OTHER DATA:
EBITDA..................... 22,672 37,021 114,816 75,568 121,680
Adjusted EBITDA (1)........ 16,743 29,333 76,947 52,551 76,038
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1996 1997
---------- ----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................... $172,673 $205,070
Cost of revenues........... 129,962 150,372
---------- ----------
Gross profit............... 42,711 54,698
Operating Expenses:
Selling, general and
administrative expenses .. 22,303 28,228
Amortization and write-off
of intangibles............ 4,872 6,390
Employee severance and
unutilized lease costs
(credit).................. -- --
---------- ----------
Operating income........... 15,536 20,080
OTHER DATA:
EBITDA..................... 34,308 46,419
Adjusted EBITDA (1)........ 23,094 30,063
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE NINE MONTHS ENDED THREE MONTHS
30, MARCH 31, ENDED MARCH 31,
-------------------------- ----------------- -----------------
1994 1995 1996 1996 1997 1996 1997
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........... 71.0 69.6 74.5 73.9 74.7 75.3 73.3
-------- -------- -------- -------- -------- -------- --------
Gross profit............... 29.0 30.4 25.5 26.1 25.3 24.7 26.7
Operating Expenses:
Selling, general and
administrative expenses .. 15.2 13.5 12.8 13.4 13.7 12.9 13.8
Amortization and write-off
of intangibles............ 5.0 4.2 2.9 2.9 2.9 2.8 3.1
Employee severance and
unutilized lease costs
(credit).................. (5.9) -- 0.7 1.9 0.8 -- --
-------- -------- -------- -------- -------- -------- --------
Operating income........... 14.7 12.7 9.1 7.9 7.9 9.0 9.8
OTHER DATA:
EBITDA..................... 20.9 22.7 21.3 20.5 21.2 19.9 22.6
Adjusted EBITDA (1)........ 15.4 18.0 14.2 14.2 13.3 13.4 14.7
</TABLE>
- ------------
(1) As defined in Note 7 to the Summary Historical and Unaudited Pro Forma
Condensed Consolidated Financial Data.
<PAGE>
THREE AND NINE MONTHS ENDED MARCH 31, 1997
The following discussion of results of operations is presented for the
Company for the fiscal quarters ended March 31, 1997 and 1996 (the "1997
Quarter" and "1996 Quarter", respectively), and for the nine-month periods
then ended (the "1997 Period" and the "1996 Period", respectively).
Revenues: Revenues for the 1997 Quarter increased by $32.4 million, or
18.8%, to $205.1 million as compared to revenues for the 1996 Quarter of
$172.7 million. This increase is attributable primarily to the acquisition of
Memorex Telex in November 1996, which resulted in increased revenues of
approximately $25 million as compared to the 1996 Quarter.
45
<PAGE>
For the 1997 Period, revenues increased to $572.7 million, as compared to
revenues of $369.2 million for the 1996 Period. This 55.1% increase was due
primarily to the BABSS acquisition, which occurred on October 20, 1995.
Gross Profit: Gross profit increased by $12.0 million, or 28.1%, from
$42.7 million for the 1996 Quarter to $54.7 million for the 1997 Quarter.
This increase is due principally to the increase in revenues during the 1997
Quarter attributable to the Memorex Telex acquisition, which occurred during
the second quarter of fiscal 1997. As a percentage of revenues, gross profit
increased from 24.7% in the 1996 Quarter to 26.7% in the 1997 Quarter.
The improvement in gross profit margin was primarily attributable to (i)
increased revenues from both acquisitions (including contract and asset
acquisitions from Memorex Telex, Xerox Canada and EMC) during the 1997 Period
and internal sales growth without a proportionate increase in personnel and
other operating expenses, (ii) head count reductions in the Company's field
technician force effected in November 1996 and (iii) more efficient
utilization of the Company's field service personnel and resources to service
the increased revenues referred to above.
Gross profit increased by $48.3 million, or 50.1%, from $96.5 million in
the 1996 Period to $144.8 million in the 1997 Period. The increase was due
primarily to the increase in revenues during the 1997 Period attributable to
the full period effect of the BABSS acquisition and, to a lesser extent, the
Memorex Telex acquisition. As a percentage of revenues, gross profit
decreased from 26.1% in the 1997 Period to 25.3% in the 1996 Period. The
decrease in gross margin was attributable to the full period effect in the
1997 Period of the change in mix of the Company's services resulting from the
BABSS acquisition, partially offset by improved gross profit margins
attributable to the efficiencies and productivity improvements described
above during the second and third quarters of the 1997 Period. As a result of
the BABSS acquisition, a significantly smaller portion of the Company's
revenues was derived from proprietary systems which typically generate higher
profit margins than services for non-proprietary systems.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased by $5.9 million, or 26.5%, from $22.3
million for the 1996 Quarter to $28.2 million for the 1997 Quarter. This
increase was attributable primarily to the Memorex Telex acquisition,
including increased sales force salaries and commissions, as well as
increased travel and bad debt expenses. As a percentage of revenues, selling,
general and administrative expenses increased from 12.9% for the 1996 Quarter
to 13.8% for the 1997 Quarter. Selling, general and administrative expenses
increased by $29.1 million, or 58.8% from $49.5 million in the 1996 Period to
$78.6 million in the 1997 Period. This increase was due primarily to the
acquisition of BABSS in October 1995. Selling, general and administrative
expenses as a percentage of revenue increased from 13.4% for the 1996 Period
to 13.7% for the 1997 Period.
Amortization of Intangibles: Amortization of intangible assets increased
by $1.5 million, or 30.6%, from $4.9 million for the 1996 Quarter to $6.4
million for the 1997 Quarter. This increase was attributable principally to
the amortization of intangibles, primarily goodwill, arising from
acquisitions during the 1997 Period, principally Memorex Telex in November,
1996.
Amortization of intangible assets increased by $6.3 million, or 59.4%,
from $10.6 million for the 1996 Period to $16.9 million for the 1997 Period.
This increase was attributable principally to the amortization of intangibles
resulting from the BABSS and Memorex Telex acquisitions.
Employee severance and unutilized lease costs (credit): The Company
recorded charges of $4.3 million and $7.0 million, respectively, in the
second quarter of 1997 and 1996 for estimated future employee severance costs
and unutilized lease/contract losses in connection with specific
acquisitions. See Note 4 to the Unaudited Condensed Consolidated Financial
Statements.
Interest Expense: Interest expense, net of interest income, decreased by
$2.1 million, or 36.2%, from $5.8 million for the 1996 Quarter to $3.7
million for the 1997 Quarter. This decrease was primarily attributable to the
Company's reduced average borrowing rate on long-term indebtedness, which
equaled approximately 9.0% and 6.4%, respectively, for the corresponding
periods. The decrease in the average borrowing rate resulted from the
refinancing of the Company's revolving credit facility in April, 1996. This
interest rate-related decrease, coupled with lower average outstanding
borrowings in the 1997 Quarter resulted in decreased overall interest
expense.
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Interest expense, net of interest income, decreased by $0.5 million, or
4.6%, from $11.2 million for the 1996 Period to $10.7 million for the 1997
Period. This decrease was also due primarily to the factors noted above.
Income Taxes: The Company's income tax provisions for the 1997 Quarter and
the 1997 Period reflect an estimated effective income tax rate of
approximately 42%, while the effective income tax rate for the 1996 Quarter
and the 1996 Period was approximately 40%. This increase in the Company's
anticipated effective income tax rate was due primarily to the prior-year
impact of certain non-recurring foreign income tax benefits relating to net
operating loss carryforwards.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues: Revenues increased by $377.2 million, or 231.4%, from $163.0
million for the fiscal year ended June 30, 1995 to $540.2 million for the
fiscal year ended June 30, 1996. The increase is largely a result of
acquisitions, principally the BABSS acquisition in October 1995 which
accounted for approximately $350 million of the increase.
Gross profit: Gross profit increased by $88.4 million, or 178.6%, from
$49.5 million during the fiscal year ended June 30, 1995 to $137.9 million
for the fiscal year ended June 30, 1996. As a percentage of revenues, gross
profit decreased from 30.4% to 25.5%, reflecting the change in mix of
services resulting from the acquisition of BABSS. As a result of that
acquisition, a smaller portion of revenues was derived from proprietary
systems which typically generate higher profit margins than services for
non-proprietary systems.
Selling, general and administrative expenses: Selling, general and
administrative expenses increased by $47.2 million, from $22.0 million for
the fiscal year ended June 30, 1995 to $69.2 million for the fiscal year
ended June 30, 1996, principally as a result of the additional expenses
relating to the revenue growth discussed above. As a percentage of revenues,
selling, general and administrative decreased from 13.5% to 12.8%,
respectively, reflecting economies of scale.
Amortization and write-off of intangibles: Amortization of intangibles
increased by $8.9 million, from $6.8 million for the fiscal year ended June
30, 1995 to $15.7 million for the fiscal year ended June 30, 1996,
principally due to the amortization of intangibles arising from the BABSS
acquisition.
Employee severance and unutilized lease costs (credit): During fiscal
1996, the Company recorded $3.6 million (net of adjustments recording during
the year) in employee severance and unutilized lease costs. These costs were
related principally to future rent obligations and related costs for
facilities of the Company that the Company determined were no longer required
as a result of the acquisition of BABSS.
Interest expense: Interest expense increased by $12.2 million, from $2.5
million for the fiscal year ended June 30, 1995 to $14.7 million for the
fiscal year ended June 30, 1996, principally as a result of the indebtedness
incurred to finance the acquisition of BABSS. See Note 10 of the Notes to the
Company's Consolidated Financial Statements.
Provision for income taxes: The income tax provision for the fiscal year
ended June 30, 1996 was based on an effective tax rate of approximately 40%.
For the fiscal year ended June 30, 1995, the Company reported an income tax
benefit equivalent of approximately 126%, arising primarily from the
recognition of future tax benefits of tax loss carry-forwards and temporary
timing differences. See Note 11 of the Notes to the Company's Consolidated
Financial Statements.
Extraordinary item--early extinguishment of debt: Upon consummation of
Holdings' initial public offering in April 1996, the Company was required to
pay the total outstanding principal amount of its $30 million of 10.101%
subordinated debentures due October 20, 2001. This prepayment resulted in the
write-off of unamortized original issue discount of approximately $1.9
million, net of income tax effect of $1.3 million, related to warrants issued
with the debentures.
FISCAL 1995 COMPARED TO FISCAL 1994
Revenues: Revenues increased by $54.6 million, or 50.4%, from $108.4
million for fiscal 1994 to $163.0 million for fiscal 1995. The increase
principally reflected the benefit throughout the period of the
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Company's acquisition of certain assets and liabilities of Servcom in August
1994. Servcom had a monthly revenue base of approximately $5 million at the
time of the acquisition.
Gross profit: Gross profit increased by $18.1 million, or 57.6%, from
$31.4 million in fiscal 1994 to $49.5 million in fiscal 1995. As a percentage
of revenues, gross profit increased from 29.0% to 30.4%, principally as a
result of increased revenues from service contracts without a proportionate
increase in personnel costs.
Selling, general and administrative: Selling, general and administrative
expenses increased by $5.5 million, from $16.5 million in fiscal 1994 to
$22.0 million in fiscal 1995. The increase is related predominantly to the
Servcom acquisition, which required additional administrative and selling
support for the Servcom customer contracts. As a percentage of revenues,
selling, general and administrative expenses decreased from 15.2% to 13.5%,
due to economies of scale.
Amortization and write-off of intangibles: Amortization of intangibles
increased by $1.4 million, from $5.4 million in fiscal 1994 to $6.8 million
in fiscal 1995. The amortization in fiscal 1994 included a $2.9 million
write-off of intangibles relating to acquisitions in prior years.
Furthermore, amortization of intangibles arising from acquisitions made in
1991 and 1992 ended during fiscal 1994, offsetting, in part, the additional
amortization of intangibles recorded during fiscal 1995 as a result of the
August 1994 acquisition of Servcom.
Employee severance and unutilized lease costs (credit): During fiscal
1994, the Company recorded a benefit of $6.4 million arising from the
settlement of lease obligations for facilities no longer used in the
Company's business, which obligations had previously been accrued in fiscal
1993. During fiscal 1995, there were no comparable lease settlements.
Interest expense: Interest expense decreased $2.3 million, from $4.8
million in fiscal 1994 to $2.5 million in fiscal 1995, due to the
restructuring of indebtedness of the Company in 1994 (see Note 10 of the
Notes to the Company's Consolidated Financial Statements) and a decrease in
the prevailing interest rates on bank loans.
Income taxes: During fiscal 1995, the Company recorded a $23.1 million
income tax benefit related to the expected utilization of tax loss
carryforwards (which is net of a $10 million offsetting charge for potential
limitations on their use) and the future tax benefit of other deductible
temporary differences. As of June 30, 1995, based on its ability to generate
taxable income, the Company recorded the appropriate deferred taxes. See Note
11 of the Notes to the Company's Consolidated Financial Statements. The
effective tax rate in 1994 was approximately 9.2%, which resulted from
application of alternative minimum income tax and state taxes.
Discontinued operations: During fiscal 1995, the Company revised its
estimates of certain accruals created as a result of the disposal of its
computer products division during fiscal 1993. The reversal of certain
accruals resulted in $1.1 million in additional net income in fiscal 1995.
See Note 3 of the Notes to the Company's Consolidated Financial Statements.
LIMITATION ON USE OF NET OPERATING LOSS CARRYFORWARDS AND OTHER TAX CREDITS
As of June 30, 1996, the Company had tax loss carryforwards of
approximately $38.1 million and $15.2 million for Federal and state income
tax purposes, respectively, which are scheduled to expire between 1997 and
2009. The Company also had minimum tax credits of approximately $1.2 million
as of June 30, 1996, with no applicable expiration period. These
carryforwards and credits may be utilized, as applicable, to reduce future
taxable income. Holdings' initial public offering resulted in an "ownership
change" pursuant to Section 382 of the Code, which in turn resulted in the
usage, for U.S. federal income tax purposes, of these carryforwards and
credits during any future period being limited to approximately $20 million
per annum. See Note 11 to the Company's Consolidated Financial Statements for
the year ended June 30, 1996. In addition, the Merger will cause another
"ownership change" of Holdings under Section 382 of the Code, and the
Company, therefore, estimates that, for U.S. federal income tax purposes, the
limitation on its use of tax loss carryforwards and other credits in any
post-Merger period will be reduced to approximately $9.0 million per annum.
The Company anticipates that fees and
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expenses incurred in connection with the Merger will result in additional tax
loss carryforwards arising in fiscal 1998. For financial reporting purposes,
the anticipated tax benefit associated with these carryforwards will be
limited due primarily to the length of the period during which the
anticipated tax benefit is expected to be realized.
LIQUIDITY AND CAPITAL RESOURCES
Post-Merger
Following the Merger, the Company's principal sources of liquidity will be
cash flow from operations and borrowings under the New Credit Facility. The
Company's principal uses of cash will be debt service requirements, capital
expenditures, purchases of repairable parts and acquisitions, and working
capital. The Company expects that ongoing requirements for debt service,
capital expenditures, repairable parts and working capital will be funded
from operating cash flow and borrowing under the New Credit Facility. In
connection with future acquisitions, the Company may require additional
funding which may be provided in the form of additional debt, equity
financing or a combination thereof.
The Company will incur substantial indebtedness in connection with the
Merger and the Merger Financing. On a pro forma basis, after giving effect to
the Merger, the Merger Financing and the application of the proceeds thereof,
the Company would have had approximately $653.8 million of indebtedness
outstanding as of March 31, 1997 as compared to $246.7 million of
indebtedness outstanding as of March 31, 1997. In addition, on the same pro
forma basis, the Company would have a stockholders' deficit of $125.1 million
at March 31, 1997 as compared to a stockholders' equity of $201.1 million as
of March 31, 1997. The Company's significant debt service obligations
following the Merger could, under certain circumstances, have material
consequences to security holders of the Company. See "Risk Factors."
In connection with the Merger, Quaker expects to raise $85 million through
the issuance of the Debentures, which may be sold together with Public
Warrants to purchase the Quaker Common Stock in the public markets (or,
alternatively, through the issuance of preferred stock to the DLJMB Funds).
At the Effective Time, Holdings will succeed to the obligations of Quaker
with respect to the Debentures and any Public Warrants issued together with
the Debentures, and the Public Warrants will, by their terms, become
exercisable for an equal number of shares of Holdings Common Stock. In
addition, the Issuer expects to issue the Senior Subordinated Notes for
approximately $150 million of gross proceeds, and expects to enter into the
New Credit Facility providing for term loans of $470 million and revolving
loans of up to $105 million. At the Effective Time, the Issuer is expected to
borrow all term loans available thereunder and approximately $8.3 million of
revolving loans. The remaining revolving loans will, subject to a borrowing
base, be available to fund the working capital requirements of the Company
after the Merger. Approximately $299 million of the proceeds to the Issuer
from the initial borrowings under the New Credit Facility and the Senior
Subordinated Notes will be dividended or loaned to Holdings to fund a portion
of the Cash Merger Consideration and fees and expenses of Holdings in
connection therewith. Each financing is subject to customary conditions,
including the negotiation, execution and delivery of definitive documentation
with respect to such financing.
The DLJMB Funds and certain Institutional Investors also expect to
purchase approximately 9,782,508 shares of Quaker Common Stock and the DLJMB
Warrants (or the Direct Shares) for approximately $225 million. Upon the
effectiveness of the Merger, the proceeds of such purchase will become an
asset of Holdings. The proceeds of the Debentures, the Senior Subordinated
Notes, the initial borrowings under the New Credit Facility and the purchase
of common stock by DLJMB Funds will be used to finance the payment of the
cash portion of the Merger Consideration, the Option Cash Proceeds and the
Warrant Cash Proceeds, to refinance outstanding indebtedness of the Company
and to pay expenses incurred in connection with the Merger.
The term loan facility under the New Credit Facility will consist of (i) a
$195 million Term Loan A and (ii) a $275 million Term Loan B. Term Loan A
will mature six years after the closing date and Term Loan B will mature
eight years after the closing date. Commitments under the revolving credit
facility of the New Credit Facility will terminate six years after the
closing date.
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Borrowings under the New Credit Facility will bear interest based on a
margin over, at the Company's option, the base rate or LIBOR. The applicable
margin will vary based on the Company's ratio of consolidated indebtedness to
Adjusted EBITDA. The Company's obligations under the New Credit Facility will
be secured by substantially all of the assets of the Company, including a
pledge of the capital stock of all of its direct material subsidiaries,
subject to certain limitations with respect to foreign subsidiaries. In
addition, Holdings will guarantee the obligations of the Company under the
New Credit Facility. Such guarantee will only be recourse to Holdings' pledge
of all of the outstanding capital stock of the Company to secure the
Company's obligations under the New Credit Facility. The New Credit Facility
will contain customary covenants and events of default, including substantial
restrictions on the Company's ability to make dividends or other
distributions to Holdings.
The Debentures will be issued by Quaker and, at the Effective Time, will
become obligations of Holdings. The Debentures will not be guaranteed by the
Company or any of the Company's subsidiaries. The Debentures will mature in
2008. No interest will accrue or be payable on the Debentures until August 1,
2002. Thereafter, interest on the Debentures will be payable semi-annually in
cash. The Debentures will contain customary covenants and events of default,
including covenants that limit the ability of Holdings and its subsidiaries
to incur debt, pay dividends and make certain investments.
The Senior Subordinated Notes will be issued by the Issuer and, upon
issuance, will not be guaranteed by Holdings or any of the Issuer's
subsidiaries. The Senior Subordinated Notes will mature in 2007. Interest on
the Senior Subordinated Notes will be payable semi-annually in cash. The
Senior Subordinated Notes will contain customary covenants and events of
default, including covenants that limit the ability of the Issuer and its
subsidiaries to incur debt, pay dividends and make certain investments.
As of March 31, 1997, the Company had no material commitments for
purchases of repairable parts or for capital expenditures.
The Company has budgeted approximately $10 million in incremental
expenditures for information systems to be incurred in fiscal 1998. The
initiatives to be funded include the following: (i) enhancements to the
Company's service entitlement process which will further ensure that
customers are billed for all work performed; (ii) improvements to the
Company's dispatch system and field engineer data collection and technical
support tools which are designed to increase productivity; (iii) enhancements
to the Company's help desk and central dispatch systems to provide an
integrated support solution to the customer base, and (iv) improvements to
the Company's field inventory tracking system which will facilitate increased
transfer of inventory among field locations and reduce purchases of
repairable parts. There can be no assurance that these amounts will be so
expended by the Company, nor when these amounts will be so expended.
The Company anticipates that its operating cash flow, together with
borrowings under the New Credit Facility, will be sufficient to meet its
anticipated future operating expenses, capital expenditures and to service
its debt requirements as they become due. However, the Company's ability to
make scheduled payments of principal of, to pay interest on or to refinance
its indebtedness and to satisfy its other debt obligations will depend upon
its future operating performance, which will be affected by general economic,
financial, competitive, legislative, regulatory, business and other factors
beyond its control. See "Risk Factors--Substantial Leverage; Ability to
Service Indebtedness; Stockholders' Deficit."
Historical
Financing: Until Holdings' initial public offering in April 1996, the
Company's principal sources of capital had been borrowings from banks
(primarily to finance acquisitions), private placements of equity and debt
securities with principal stockholders and cash flow generated by operations.
In April 1996, Holdings completed an initial public offering raising $106
million through the issuance of 6.3 million shares of common stock. The
proceeds of the initial public offering were used to repay approximately $70
million of the Company's then existing term loan (the "1995 Term Loan") and
the Affiliate Notes.
The Company has relied on banks as the primary source of funds required
for larger acquisitions, such as the August 1994 acquisition of certain
assets and liabilities of Servcom and the October 1995 acquisition of BABSS.
Since July 1993, the Company's smaller acquisitions have been funded
primarily through a combination of seller financing, cash and the assumption
of liabilities under acquired prepaid service contracts.
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In April 1996, the Company converted the 1995 Term Loan and an existing
$30 million revolving credit facility into a $225 million variable rate,
unsecured revolving credit facility (the "1996 Revolving Credit Facility").
During November 1996, in connection with the acquisition of certain assets of
the U.S. computer service business of Memorex Telex, the Company's lender
approved a $75 million increase to the 1996 Revolving Credit Facility,
raising the total loan commitment to $300 million. See Note 3 to the
unaudited Condensed Consolidated Financial Statements.
The 1996 Revolving Credit Facility provides for revolving borrowings up to
$300 million. The commitments thereunder terminate on April 26, 2001. The
interest rate applicable to the 1996 Revolving Credit Facility varies, at the
Company's option, based upon LIBOR (plus an applicable margin not to exceed
1%) or the prime rate. The Company has entered into interest rate swap
agreements resulting in fixed Euro dollar interest rates of 5.4% on $40.0
million through December 1997 and 5.5% on another $40.0 million through
December 1998. See Notes 2 and 10 to the Company's audited Consolidated
Financial Statements. Although it may be exposed to losses in the event of
nonperformance by counterparties to such swap agreements, the Company does
not expect such losses, if any, to be material. As of March 31, 1997, the
interest rate applicable to loans under the 1996 Revolving Credit Facility
was LIBOR plus .75%, or an effective rate of approximately 6.5%, and
available borrowings under the 1996 Revolving Credit Facility were $55.5
million.
Borrowings incurred under the 1996 Revolving Credit Facility in the 1997
Quarter and the 1997 Period were approximately $2.6 million and $52.9
million, respectively. Borrowings incurred during the 1997 Period included
substantially all of the funding required with respect to the Memorex Telex
acquisition. The obligations of the Company thereunder are guaranteed by
Holdings and certain of the Company's subsidiaries, except for its Canadian
subsidiary. In connection with the Merger, the Merger Financing and the
application of the proceeds thereof, all indebtedness outstanding under the
1996 Revolving Credit Facility will be repaid.
Cash Flow and Leverage: Cash flow from operating activities for the 1997
Quarter was approximately $36.7 million. These funds, together with
borrowings under the 1996 Revolving Credit Facility, provided the required
capital to fund capital expenditures of approximately $31.0 million, as well
as the acquisition of assets from complementary businesses for approximately
$3.5 million. Cash flow from operating activities for the 1997 Period was
approximately $57.7 million. These funds, together with borrowings under the
1996 Revolving Credit Facility, provided the capital required to fund capital
expenditures of approximately $70.9 million, as well as the acquisition of
assets from complementary businesses for approximately $34.4 million.
Reducing cash flow from operating activities for the 1997 Quarter and the
1997 Period was a $1.8 million payment to the Internal Revenue Service in
full satisfaction of certain interest liabilities related to prior tax
periods. See Note 9 to the Company's audited consolidated financial
statements for the fiscal year ended June 30, 1996. The Company had
adequately accrued for this liability prior to payment, and no further
amounts are due with regard to these matters.
In fiscal years 1996, 1995, and 1994, the Company generated net cash flow
from operating activities of $51.9 million, $38.4 million, and $28.7 million,
respectively. Cash required to fund the purchase of repairable parts and for
capital expenditures totaled $70.8 million, $14.9 million and $2.2 million,
during fiscal 1996, 1995 and 1994, respectively.
The majority of the Company's capital expenditures have historically
consisted of purchases of repairable parts needed to meet the service
requirements of customers under computer maintenance contracts. These
repairable parts are generally purchased from OEMs and other third parties.
The Company expended $86.4 million for the purchase of repairable parts in
fiscal 1997 including purchases relating to the Company's Compaq "End of
Life" Program. As of March 31, 1997, the Company had no material commitments
for purchases of repairable parts or for capital expenditures other than
those in the ordinary course of business.
The Company maintains a significant inventory of expendable and repairable
parts. Expendable parts are expensed as they are used in the operations of
the business. Repairable parts are recorded at cost at the time of their
acquisition and amortized over five years. The Company maintains a high level
of inventories due to the wide range of products serviced, ranging from
mainframe to personal computers.
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The Company provides for obsolescence when accounting for expendable
inventories and reviews obsolescence as it applies to its repairable parts.
The Company believes it has provided adequate reserves for obsolescence for
expendable inventories. The Company believes that accumulated amortization on
repairable parts renders the need for an obsolescence reserve with respect to
repairable parts unnecessary.
The most significant of the Company's acquisitions during the 1997 Period
was the Memorex Telex acquisition on November 15, 1996. The base purchase
price was $50.4 million, comprised of the Company's assumption of $26.0
million of liabilities under acquired customer maintenance contracts, and
$24.4 million in cash after taking into account certain purchase price
adjustments.
The balance sheet reflects working capital (deficiency) as of March 31,
1997 of $10.1 million, and as of June 30, 1996, 1995, and 1994, of $12.9
million, ($51.8) million and ($34.0) million, respectively, which deficits
for 1995 and 1994 were primarily attributable to the use of short-term
liabilities to fund the purchase of long-term assets.
The allowance for uncollectible accounts at March 31, 1997 and 1996
amounted to 7.9% and 9.4% of trade receivables, respectively. The allowance
for uncollectible accounts at June 30, 1996 and 1995 amounted to 9.4% and
19.2% of trade receivables, respectively, because of the Company's write-off
experience with respect to accounts receivable obtained by acquisition and
the potential offset against an OEM's trade receivable in respect of
unreturned, unused and replaced parts.
The Company, or certain businesses as to which it is alleged that the
Company is a successor, have been identified as potentially responsible
parties in respect of three waste disposal sites that have been identified by
the U.S. Environmental Protection Agency as Superfund sites. In addition, the
Company received a notice several years ago that it may be a potentially
responsible party in respect of a fourth, related site, but has not received
any other communication in respect of that site. The Company has estimated
that its share of the costs of the clean-up of one of the sites will be
approximately $500,000, which has been provided for in liabilities related to
the discontinued products division in the Company's financial statements.
Complete information as to the scope of required clean-up at these sites is
not yet available and, therefore, management's evaluation may be affected as
further information becomes available. However, in light of information
currently available to management, including information regarding
assessments of the sites to date and the nature of involvement of the
Company's predecessor at the sites, it is management's opinion that the
Company's share, if any, of the cost of clean-up of these sites will not be
material to the consolidated financial position, results of operations or
liquidity of the Company. See Note 16 of the Notes to the Company's
Consolidated Financial Statements. See "Risk Factors--Potential Environmental
Liabilities."
EFFECT OF INFLATION; SEASONALITY
Inflation has not been a material factor affecting the Company's business.
In recent years, the cost of electronic components has remained relatively
stable due to competitive pressures within the industry, which has enabled
the Company to contain its service costs. The Company's general operating
expenses, such as salaries, employee benefits, and facilities costs, are
subject to normal inflationary pressures.
The operations of the Company are generally not subject to seasonal
fluctuations.
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BUSINESS
OVERVIEW
The Company is the largest independent provider of multivendor computer
maintenance and technology support services in the United States, based on
Dataquest estimates for calendar year 1996. The Company offers its customers
a single source solution for virtually all of their computer maintenance and
technology support requirements, including hardware maintenance services,
software support, end-user/help desk services, network support and other
technology support services. The Company believes it is the most
comprehensive independent (i.e., not affiliated with an OEM) provider of
these services across a broad range of computing environments, including
mainframes, midrange and distributed systems, workgroups, PCs and related
peripherals. The Company provides support for over 15,000 hardware products
manufactured by more than 1,000 OEMs. The Company also supports most major
operating systems and over 150 shrink-wrapped software applications. The
Company delivers its services through an extensive field service organization
of approximately 4,000 field technicians in over 150 service locations
throughout the United States and Canada and strategic alliances in selected
international markets.
DecisionOne has emerged as the leading independent, multivendor provider
of computer maintenance and technology support services by (i) consummating
over 35 complementary acquisitions since the beginning of fiscal 1993, (ii)
expanding maintenance capabilities and introducing new technology support
services, (iii) increasing sales to existing customers by increasing
equipment under contract and by selling existing customers new technology
support services, (iv) adding new corporate customers and (v) providing
outsourcing services for OEMs, software publishers, system integrators and
other independent service organizations. As a result, the Company's revenues
have grown at a compound annual rate of 69.2% to approximately $820.4 million
for the annualized quarter ended March 31, 1997 from $114.1 million in fiscal
1993. Over the same period, the Company's Adjusted EBITDA has grown at a
74.2% compound annual rate to approximately $120.3 million for the annualized
quarter ended March 31, 1997 from $15.0 million in fiscal 1993.
In 1996, based on Dataquest projections, the Company estimates it had a 9%
market share of the $8.8 billion independent, multivendor segment of the
$40.5 billion U.S. hardware maintenance and technology support services
market. The independent, multivendor segment is projected by Dataquest to
grow at a 14% compound annual rate from $8.8 billion in 1996 to $14.8 billion
in 2000. The Company believes this growth is being driven by the
proliferation of computer equipment as well as outsourcing trends, including:
(i) the outsourcing by corporate customers of hardware maintenance and
technical support requirements and (ii) the outsourcing by major hardware
OEMs and software publishers of maintenance services (including warranty and
post-warranty services) and end-user technical support requirements. In
addition, the Company believes that demand for its services is being driven
by the increasing complexity of computing environments which has resulted
from the migration of computer systems from single OEM, centralized systems
to multivendor, decentralized systems. The Company believes that this
increased complexity has generally surpassed the technical capabilities of
many in-house support staffs and has accelerated the pace of outsourcing. The
Company believes that customers are increasingly turning to independent
service providers when outsourcing due to the increased use of multiple
vendors for hardware and the perception that OEM service providers are biased
toward specifying their own equipment as computer purchase requirements
arise. Furthermore, many OEMs such as Sun and Compaq are outsourcing certain
non-core customer service activities, including maintenance services
(including warranty and post-warranty services) and product support services
(such as end-user help desk services) to independent service organizations
such as the Company.
COMPETITIVE STRENGTHS
The Company believes that it possesses a number of competitive strengths
that have allowed it to become the leading independent provider of
multivendor computer maintenance and technology support services, including:
EXTENSIVE SERVICE INFRASTRUCTURE. The Company provides customers with
high quality service through an extensive infrastructure including: (i)
approximately 4,000 highly trained field technicians, (ii)
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over 150 geographic locations throughout the United States and Canada, (iii)
a substantial spare parts inventory to ensure supply and rapid response
times, (iv) a broad service offering which enhances the Company's ability to
provide customers with a single source solution, (v) an extensive proprietary
database of historical failure rates for over 15,000 hardware products
manufactured by over 1,000 OEMs, (vi) a detailed record of major customers'
hardware and software assets and a record of such customers' maintenance
patterns and (vii) proprietary dispatch systems to ensure rapid customer
response times.
INDEPENDENT, MULTIVENDOR SERVICE PROVIDER. The Company provides customers
with an independent, multivendor solution for their computer maintenance and
technology support needs. As an independent service provider, the Company
believes it is viewed by customers as impartial to any particular OEM's
products. As a multivendor service provider, the Company supports over 15,000
hardware products manufactured by more than 1,000 OEMs as well as most major
operating systems and over 150 shrink-wrapped software applications. OEM,
specialty and local service providers do not offer either the breadth of
services or the geographic presence throughout the United States and Canada
provided by the Company.
CONTRACT-BASED REVENUES. Approximately 85% of the Company's revenues in
fiscal 1996 were derived from contracts, under which equipment and services
may be added and deleted. Furthermore, the Company believes that its
extensive service infrastructure and its unique knowledge of its customers'
hardware and software service requirements enhance the Company's ability to
provide superior service. The Company believes that the resulting track
record of service to existing customers affords it a competitive advantage in
renewing existing contracts and winning new contracts. Although many of the
Company's existing customer contracts are currently terminable on short
notice, 49 out of the Company's top 50 customers in fiscal 1994 are still
customers today.
DIVERSIFIED AND STABLE FORTUNE 1000 CUSTOMER BASE. The Company services
over 51,000 customers at over 182,000 sites across the United States and
Canada. In fiscal 1996, the Company's top 10 customers represented 23% of
revenues and the top 100 customers represented 47% of revenues. The Company's
customers include a diverse group of national and multinational corporations,
including SABRE Group, Inc. (an affiliate of American Airlines, Inc.), Sun,
Compaq, NationsBank, DuPont, Chevron Corporation and Netscape. The Company
believes that the scope of its service offerings and the breadth of its
geographic presence in the United States and Canada allow it to serve this
diverse group of national and multinational customers as well as thousands of
smaller customers who also require customized services.
MITIGATED TECHNOLOGY AND RECESSION RISKS. The Company provides services
across a broad range of computing environments, including mainframes,
midrange and distributed systems, workgroups, PCs and related peripherals.
Consequently, although each segment of the computer hardware and software
industry is subject to shifts in technology, the Company believes that the
diversity of computing environments for which it provides services mitigates
the potential adverse effects of technological changes in any one segment.
Furthermore, the Company believes that because computer maintenance
requirements are based primarily on usage, the Company's hardware maintenance
business may be insulated from the adverse effects of declines in spending
during recessionary periods, so long as computer usage continues to
necessitate maintenance spending.
BUSINESS STRATEGY
DecisionOne has developed a business strategy which it believes will
enable it to profitably grow future revenue and cash flow and which includes
the following elements:
PROVIDE A SINGLE SOURCE TECHNOLOGY SUPPORT SOLUTION. The Company intends
to continue its strategy of offering its customers a broad and expanding
range of computer technology support services in a single interface format.
The Company believes it meets the customer's preference for a single
interface by offering maintenance and technology support services across most
leading brands of hardware and software within virtually all computing
environments. In addition, the Company's single source solution enables the
Company to retain customers when customers change, substitute or upgrade
their computing environments.
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OFFER ADDITIONAL SERVICES TO EXISTING CUSTOMERS. The Company generates new
revenues from existing customers by adding new equipment to existing hardware
maintenance contracts and by providing existing customers with additional
support services. Recent revenue growth attributable to the expansion of
additional support services has been derived primarily from (i) end-user
support services such as help desk services, (ii) network support services
such as LAN administration, security management and fault management, (iii)
logistics services such as parts repair, inventory and asset management, and
warranty parts management and (iv) program management services such as
technology deployment and computer and software moves, adds and changes. The
Company believes that the breadth of its additional support services has
permitted, and will continue to permit, the Company to leverage its historic
strength in hardware maintenance to increase revenues from existing customers
and has enabled the Company to grow sales to its top 50 customers in fiscal
1994 by 33.3% through fiscal 1996.
LEVERAGE EXISTING SERVICE INFRASTRUCTURE. The Company believes that, due
to the large scale of the Company's service infrastructure, the Company
enjoys substantial operating leverage and has positioned itself to increase
productivity and profitability whether the Company grows internally or
through acquisitions. The principal areas in which the Company expects to
realize the benefits of operating leverage include: (i) increased customer
call density in a region permitting field service technicians in the region
to complete a greater number of service calls per day, (ii) increased
comparable equipment density allowing the Company to operate with
proportionally lower inventory of spare parts and (iii) productivity gains
driven by new services such as end-user support services which reduce
unnecessary trips by field technicians to existing customers and by the
addition of new equipment under existing maintenance contracts. The Company
intends to further improve the productivity of its existing infrastructure by
investing in upgrades of its management information systems.
PURSUE COMPLEMENTARY ACQUISITIONS. The Company believes it is well
positioned strategically to participate in the further consolidation of the
computer maintenance and technology support services market and expects to
continue to evaluate complementary acquisitions. Further, the Company
believes that pursuing complementary acquisitions is an attractive growth
strategy due to the significant synergies which the Company may achieve when
it successfully consolidates acquisitions into its service infrastructure.
Since the beginning of fiscal 1993, the Company has completed over 35
acquisitions. The Company's typical acquisition consists principally of
customer maintenance and support contracts as well as the accompanying spare
parts inventory. The Company generally reduces the cost structure necessary
to service the acquired customer contracts by leveraging DecisionOne's
extensive service infrastructure, spare parts inventory and administrative
function. For example, the Company was able to service the contracts acquired
from Memorex Telex in November 1996 with approximately 36% fewer employees
than previously required by Memorex Telex. In addition, the Company seeks to
increase sales and profitability by offering acquired customers additional
services.
CAPITALIZE ON OUTSOURCING TREND AMONG OEMS, SOFTWARE PUBLISHERS AND
SYSTEMS INTEGRATORS. The Company expands its marketing reach by offering its
services through outsourcing arrangements and indirect channels. For fast
growing hardware OEMs and software publishers concerned with cost savings and
time-to-market issues such as Sun, Netscape and Compaq, the Company provides
outsourced customer support services such as help desk services, warranty and
post-warranty maintenance services, and technical product support services.
For systems integrators, the Company provides maintenance and technology
support services on a subcontract basis to several large outsourcing clients
of EDS and Computer Sciences Corp.
INDUSTRY BACKGROUND
The United States market for computer hardware maintenance and technology
support services is large and growing. According to Dataquest projections,
the hardware maintenance and technology support services market was
approximately $40.5 billion in 1996 and is projected to grow at a compound
annual rate of 5.6% to $50.3 billion by the year 2000. Within the market
surveyed by Dataquest, Dataquest estimates that the independent, multivendor
segment was approximately $8.8 billion in 1996 and projects the segment to
grow at a 14% compound annual rate to $14.8 billion by the year 2000.
According to Dataquest, independent, multivendor service providers such as
the Company are taking market share
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from the OEM service providers faster than OEMs are contracting new business.
The Company believes that this is occurring for several reasons including:
(i) customers are looking for single-source providers who support multiple
computer hardware and software platforms, (ii) independent service providers
are viewed as being unbiased toward computer purchase decisions and (iii)
OEMs are increasingly outsourcing customer maintenance service (including
warranty and post-warranty services) and technical customer support such as
help desk services to independents in order to focus on their core design,
technology and marketing competencies. According to Dataquest, within the
independent, multivendor segment, hardware maintenance was the dominant
service, accounting for approximately 71% of 1996 revenues, with technology
support services, including software support, network support and end-user
training, comprising the remaining 29% of 1996 revenues.
The independent, multivendor segment is also fragmented and consolidating.
According to Dataquest, the top 10 participants accounted for less than 50%
of the market in 1995. Participants in the independent multivendor segment
include: (i) several large independent service providers, (ii) the
multivendor segments of OEM service organizations and (iii) hundreds of
smaller independent companies servicing either product niches or limited
geographical areas of the United States. The significant market position of
OEMs is due largely to their traditional role of servicing their own
installed base of equipment and their customers' former reliance on
centralized, single vendor solutions (i.e. mainframe systems).
COMPANY SERVICES
The Company provides a comprehensive range of core technology support
services to customers across a broad range of computing environments,
including mainframes, midrange and distributed systems, workgroups, PCs and
related peripherals. The Company customizes its service offerings to the
individual customer's needs in response to the nature of the customer's
requirements, the term of the contract and the combination of services that
are provided. Services are bundled to match the support requirements of
customers and include hardware support, end-user and software support,
network support, management information services, program management,
planning support and ancillary support services.
Hardware Support
Hardware support services consist of remedial and preventive maintenance
for computers and computer peripheral devices. The Company supports over
15,000 different hardware products manufactured by more than 1,000 OEMs. The
Company's customer support centers ("CSCs") handle over 330,000 calls per
month regarding hardware support. The Company maintains and manages an
inventory of over 3.5 million parts representing more than 300,000 part
numbers. The Company also has access to a network of computer equipment
vendors, brokers and highly skilled repair suppliers, as well as access to
certain IBM Designated Parts Sales Locations.
In addition to its on-site diagnostic tools, the Company uses industry and
proprietary software diagnostic capabilities to monitor system performance on
a remote basis. Also, large customers are provided remote, on-line access to
certain of the Company's systems to log service requests and track service
delivery.
The Company prices its products and services on either a fixed fee or per
incident basis. Pricing is based on various factors including equipment
failure rates, cost of repairable parts and labor expenses.
End-User and Software Support
The Company's CSCs handle over 90,000 calls per month for help desk and
software support. Levels of support range from basic and network support for
corporate end-users to advanced operating system support for systems
administrators. Customized support also is available for vertical market
applications and OEM accounts. Operational services are available seven days
per week, twenty-four hours a day.
The Company currently provides support for PC/workstation operating
systems such as Windows(Registered Trademark) 95, Windows(Registered
Trademark), MS-DOS(Registered Trademark), and Sun Microsystems'
Solaris(Registered Trademark), as well as support on network operating
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systems such as Novell Netware(Registered Trademark) and Windows(Registered
Trademark) NT. Groupware products like Lotus Notes and Internet browsers such
as Netscape also are fully supported. Additionally, over 100 PC software
products ranging from spreadsheets and word processing to communications and
graphics are supported, as are numerous on-line services.
The Company is a Microsoft Authorized Support Center, providing help desk
support for a broad range of Microsoft business software applications and
operating systems. Technical support is delivered through the Company's
network of CSCs and ranges from basic end-user software support to second
level professional support, and work in conjunction with Microsoft desktop
applications and operating systems, like Microsoft Windows(Registered
Trademark) 95 and Windows(Registered Trademark) NT.
Network Support
The Company provides support services for networked computing
environments, including management, administration, and operations support
for both local area networks and wide area networks ("WANs"). Network support
services are designed to reduce the cost of ownership of networked computing,
improve productivity of network users, and supplement customers' internal
support staffs. The Company's remote network management services provide
monitoring of fault and performance data in customers' networks and problem
resolution from the Company's network management center. The Company also
provides on-site network services to assist customers with network
administration, operations, and remedial support. Network specialists may be
resident at the customer site or dispatched as necessary.
Logistics Services
The Company also repairs and refurbishes computer parts and assemblies at
seven depot repair centers in the United States. In addition to supporting
its own business, these services are provided primarily for OEMs,
distributors and other third-party maintenance companies. Subassemblies
repaired include system logic boards, hard disk drive assemblies,
peripherals, power supplies and related equipment. The Company's depot repair
facilities located in Malvern, Pennsylvania; Boston, Massachusetts;
Milwaukee, Wisconsin; and San Francisco, California are certified to ISO-9002
standards.
The Company also provides logistics services, including the planning and
forecasting of parts requirements and parts sourcing, inventory and warranty
management, for Compaq and other manufacturers. Under terms of the Compaq
logistics service contract, the Company handles orders from customers,
dealers and distributors in North America for parts that are no longer
produced by Compaq. The parts are used to repair Compaq desktops, laptops and
servers and include such components as flat panels (LCDs), motherboards,
monitors, power supplies and related parts. In addition to repair and
replacement work, the Company manages the program's logistics requirements
and parts warranty reimbursement activities.
Program Management
The Company provides ongoing management services for companies that wish
to outsource all or a portion of their services management requirements.
Typical services include third-party vendor management, on-site personnel
support and program evaluation, as well as a variety of support capabilities
required to prepare a system for operation and improve its efficiency. These
support capabilities include support for system installation,
de-installation, moves, upgrades, reconfigurations, system configuration
audits, inventory tracking services and data restoration assistance.
Planning Support
The Company assists customers in defining their enterprise service
requirements, establishing service delivery benchmarks, recommending process
improvements and auditing the results of implemented programs over time. The
objective of these consulting services is to assist customers in reducing the
total cost of ownership and improving operating efficiency in their service
environments.
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Information Services
The Company makes service improvement recommendations to customers based
on information accumulated from its hardware, network and end-user support
services. Management information services allow customers to make informed
decisions relating to hardware and software procurements as well as the need
for increased employee training. The Company believes these services
differentiate it from OEMs and software developers that may favor their own
products.
The Company's AssetOne(Trademark) service tracks customers' desktop assets
and provides information on hardware configuration, software utilization,
warranty status, equipment location and user profiles. This information can
then be used to improve the way customers' assets are deployed, serviced, and
used in order to reduce costs and increase end-user productivity.
Support Partner Programs
The Company maintains strategic alliances with several significant
companies in order to provide customers with comprehensive technology support
solutions. The Company does not receive revenues for services provided by its
strategic partners. Key relationships include: General Electric Computer
Leasing Corp., which provides computer acquisition, disposition and financing
services; SunGard Recovery Services Inc., which provides disaster recovery
services; and MicroAge, Inc., which supplies hardware products such as
personal computers, peripherals, network products and related devices.
SALES AND MARKETING
The Company's core product capabilities are bundled to match the support
requirements of customers. Individual service portfolios exist for data
center, mid-range and desktop environments. In addition, a product portfolio
exists for OEMs who seek support for parts sourcing and repair, inventory
management and related logistics services.
The Company sells its services through both direct and indirect sales
channels. The Company's direct sales force consists of approximately 275
sales professionals who are organized into a general commercial sales group
as well as into several dedicated groups including: a Federal Group, which
sells to the Federal Government; a National Accounts Group, which focuses on
large and multinational corporate customers; and a Telesales Group, which
focuses on small accounts.
The Company also sells its services through its indirect sales force
comprised of approximately 25 sales professionals. Product support
relationships exist with OEMs such as Sequent Computer Corporation, EMC(2)
Corporation ("EMC"), Sun and Compaq, and software developers such as
Netscape, Novell, Inc., Microsoft Corporation and SunSoft, Inc.
INTERNATIONAL BUSINESS PARTNERS
In order to provide international service to its multinational customers,
the Company supplements its broad North American infrastructure with
strategic alliances in selected international markets. The Company maintains
relationships with International Computers Limited ("ICL") and FBA Computer
Technology Services ("FBA"). The Company licenses many of its proprietary
multivendor support tools to FBA and to ICL Sorbus Ltd. ("ICL Sorbus"), which
is ICL's multivendor services group in Western Europe. As a result, the
Company is able to offer its multinational customers service in Western
Europe, Asia and Australia.
ICL is a leading information technology company that has approximately
23,000 employees operating in about 80 countries around the world. In Western
Europe, the ICL Sorbus companies provide multivendor services in 17 countries
with approximately 250 service locations and about 5,000 employees. Several
of the Company's major customers, including SABRE Group, Inc. and DuPont
benefit from the agreement between the Company and ICL Sorbus, whereby ICL
Sorbus agrees to provide services at the European locations of the Company's
multinational customers. Through ICL Sorbus, the Company utilizes the service
branches of both ICL and ICL's parent company, Fujitsu Ltd., to provide
worldwide multivendor support throughout Asia, the Pacific Rim, the Middle
East and Africa.
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FBA, an affiliate of Fujitsu Ltd., provides multivendor services in
Australia and New Zealand from 21 locations with 150 employees. In addition
to providing technical support to FBA, the Company has supplied various
management and sales support personnel to FBA. FBA also provides services to
certain of the Company's multinational customers, including Sun.
SERVICE INFRASTRUCTURE
Centralized Dispatch. When a customer places a call for remedial
maintenance, the Company uses its Dispatch Data Gathering system ("DDG") to
manage the process. When a customer is identified, the DDG system displays
the customer's service level requirements and covered equipment. Specific
information on the symptoms of the problem and the products that are
malfunctioning are entered into the system to begin tracking the service
event. The Company's Customer Support Representative ("CSR") selects, based
upon the requirements of the service event, the appropriate Customer Service
Engineer ("CSE") from a list of pre-assigned primary and back-up personnel
and passes this information to the selected CSE.
The Company maintains three CSCs in Malvern, Pennsylvania; Bloomington,
Minnesota; and Tulsa, Oklahoma. Customers can reach the CSCs by calling one
toll-free telephone number. The CSCs currently are staffed with over 575 CSRs
and 29 staff/operations managers. There is a duty manager on call in each
center at all times. CSCs are available on a 24 hour, 7 day per week basis.
Redundancy for disaster recovery purposes is designed into the CSC system
through the three locations' use of automatic telecommunications switching.
Inventory Logistics. In order to meet customer computer repair
requirements, the Company maintains a tiered approach to inventory
management. Parts or assemblies with low failure rates are stocked in either
the Company's central distribution center located in Malvern, Pennsylvania or
in its critical parts center in Dallas, Texas. The Company also maintains six
regional distribution centers in Atlanta, Georgia; Newark, New Jersey; Los
Angeles, California; San Francisco, California; Chicago, Illinois; and
Wilmington, Ohio for critical parts needed more frequently throughout the
United States. In order to service customers whose response time requirements
are two to four hours, higher usage parts are maintained at the Company's
branch offices or local attended stocking locations. Customer site parts
storage is arranged when customer response time requirements are two hours or
less.
The Company's field inventory system ("FIS") is a real-time system which
tracks the inventory and repairable parts assigned to its field workforce and
located at seven distribution centers, field offices or at customer sites.
Parts information processed through FIS is integrated with the Company's
other key systems, including DDG and International Support Information System
("ISIS").
SERVICE TECHNOLOGY
The Company has developed several proprietary technologies for use in
service planning, support and delivery. These service tools include
proprietary databases, remote diagnostic and system monitoring software, and
instructional documentation. These technical support tools not only provide
remote and on-site predictive and remedial service support, but also enable
the Company to collect extensive, objective systems performance measurement
information (on the customer's environment as well as benchmarking against
the Company's database) which its customers can use to identify potential
efficiencies, evaluate competing products and technologies, and determine
whether its requirements are being met.
The Company's proprietary service technologies include ISIS, SERVICE EDGE
and MAXwatch(Trademark). The Company licenses certain of these technologies
and provides other technical support to certain foreign multivendor service
providers, including ICL Sorbus in Europe, FBA in Australia and New Zealand,
and PT Metrodata Electronics in Indonesia.
International Support Information Systems. ISIS is a database accessible
to the Company's customer service engineers that is comprised of diagnostic
and symptom fix data for thousands of products, service updates, and service
planning information, such as machine performance and parts usage
information,
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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(Trademark). MAXwatch(Trademark) is an on-site program for
products of Digital Equipment Corporation ("Digital") which monitors system
integrity, proactively detects and corrects certain system errors, and
automatically "calls home" for remote technical support when pre-defined
error thresholds are exceeded. A similar product, MAX400, is available for
IBM AS/400 systems.
DecisionOne, AssetOne(Trademark), ISIS, SERVICE EDGE and
MAXwatch(Trademark) are service marks or trademarks owned by the Company. All
other brand names, service marks or trademarks appearing herein are the
property of their respective owners.
TRAINING
The Company maintains the technical expertise of its engineers through
training programs designed to teach the various techniques for determining
the status of a customer's total computer operations. The Company's training
offers support professionals a broad exposure to various computer system
technologies.
The Company's training facilities include 26 classrooms, 23,000 square
feet of hands-on lab space, 26 full-time instructors and video specialists
and a curriculum of over 80 courses. The Company has five training centers
and labs located in Frazer, Pennsylvania; Malvern, Pennsylvania; Bloomington,
Minnesota; Milwaukee, Wisconsin; and Phoenix, Arizona. Six months following
course work, the Company surveys the engineers to gauge the effectiveness and
applicability of its training curriculum.
CUSTOMERS
The Company services over 51,000 customers at over 182,000 sites across
the United States and Canada. The Company sells services to five types of
customers: large businesses that have complex computing support needs and
typically maintain a data center, distributed computing and work group
environments; medium-sized businesses that rely primarily on distributed
systems for their computing needs; small businesses that principally use LANs
and WANs for computing; individuals who use stand-alone computing systems;
and OEMs and software developers that contract with the Company for warranty
services, logistic support services or help desk support. A significant
portion of the Company's revenues are attributable to large businesses with
complex computing support needs.
COMPETITION
Competition among computer support service providers, both OEM and
independent service organizations, is intense. The Company believes that
approximately 80% of that portion of the hardware maintenance services market
that is related to mainframes and stand-alone midrange systems is currently
serviced by OEM service organizations. In addition, the Company believes that
OEM service organizations provide a smaller, but still significant, portion
of the computer maintenance services related to distributed systems,
workgroups and PCs. The remainder of the market is serviced by a small number
of larger, independent companies, such as the Company, offering a broader
range of service capabilities, as well as numerous small companies focusing
on narrower areas of expertise.
The Company considers its principal competitors to include: IBM and its
affiliate Technology Service Solutions, Digital, and Wang Laboratories, Inc.,
the multivendor service divisions of certain other OEMs, other national
independent service organizations that are not affiliated with OEMs such as
Vanstar Corporation, Entex Corporation and Stream International, Inc., and
various regional service providers.
The Company believes that the primary competitive factors in the computer
services industry are the quality of a company's services, the ability to
service a wide range of products supplied by a variety of
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vendors, the geographic coverage of a company's services and the cost to the
customer of those services. The Company believes that customers are
increasingly looking for service providers capable of providing a
single-source solution for their increasingly complex multivendor systems.
See "Risk Factors--Competition; Competitive Advantages of OEMs."
FACILITIES
The Company leases certain office and warehouse facilities under operating
leases and subleases that expire at various dates through November 30, 2005.
The Company's executive offices are located at the Frazer, Pennsylvania
facilities listed below. The principal facilities currently leased or
subleased by the Company are as follows:
<TABLE>
<CAPTION>
SQUARE
LOCATION FOOTAGE LEASE EXPIRATION
- ------------------------------------------ --------- ----------------
<S> <C> <C>
Frazer, Pennsylvania (Office) ............. 109,800 November 2005
Frazer, Pennsylvania (Office) ............. 35,968 April 2003
Malvern, Pennsylvania (Depot/Call Center) 200,000 May 2000
Horsham, Pennsylvania (Warehouse) ........ 100,000 December 1999
Bloomington, Minnesota (Call Center) ...... 66,000 March 1998
Hayward, California (Depot) ............... 91,000 September 1999
Northborough, Massachusetts (Depot) ...... 52,778 July 1998
Wilmington, Ohio (Warehouse)............... 83,000 January 2001
Grove City, Ohio (Depot)................... 118,500 January 2002
</TABLE>
In addition, the Company owns two facilities located in Tulsa, Oklahoma
(multi-purpose) and the suburbs of Milwaukee, Wisconsin (logistics services).
The Company's management believes that its current facilities will be
adequate to meet its projected growth for the foreseeable future.
EMPLOYEES
As of June 30, 1997, the Company had approximately 6,500 full-time and 60
part-time employees. None of the Company's employees is currently covered by
collective bargaining agreements. Management considers employee relations to
be good.
LEGAL PROCEEDINGS
The Company is a party, from time to time, to lawsuits arising in the
ordinary course of business. The Company believes it is not currently a party
to any material legal proceedings. However, within the past several years,
several OEMs have been involved in litigation with independent service
organizations, including the Company, in which such OEMs have claimed
infringement of software copyrights held by the OEMs. The Company currently
is not involved in any such litigation. See "Risk Factors--Copyright Issues."
The Company, or certain businesses as to which it is alleged that the
Company is a successor, have been identified as potentially responsible
parties in respect of three waste disposal sites that have been identified by
the United States Environmental Protection Agency as Superfund Sites: (i) PAS
Irwin Dump Site, Oswego, New York (and six satellite sites, including the
Fulton Terminals Site, Fulton, New York); (ii) North Penn Area 6 Site,
Lansdale, Pennsylvania; and (iii) Revere Chemical Site, Nockamixon,
Pennsylvania. In addition, the Company received a notice several years ago
that it may be a potentially responsible party with respect to the Boarhead
Farms Site, Bridgeton, Pennsylvania, at a site related to the Revere Chemical
site, but has not received any additional communication with respect to that
site. Under applicable law, all parties responsible for disposal of hazardous
substances at those sites are jointly and severally liable for clean-up
costs. The Company has estimated that its share of the costs of the clean-up
of one of the sites will be approximately $500,000, which has been provided
for in liabilities related to the discontinued products division in the
accompanying consolidated balance sheets as of June 30, 1996, 1995 and 1994.
Complete information as to the scope of required clean-up at these sites is
not
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yet available and, therefore, management's evaluation may be affected as
further information becomes available. However, in light of information
currently available to management, including information regarding
assessments of the sites to date and the nature of involvement of the
Company's predecessor at the sites, it is management's opinion that the
Company's share, if any, of the cost of clean-up of these sites will not be
material to the consolidated financial position, results of operations or
liquidity of the Company. See Note 16 of the Notes to the Company's
Consolidated Financial Statements.
REGULATION
Under the National Industrial Security Operating Manual, companies with
contracts or subcontracts with the U.S. government that involve access to
classified information must, if they will come under foreign ownership,
control or influence ("FOCI"), notify the U.S. Department of Defense. If they
wish to retain their security clearances such companies must propose a plan
of action to mitigate or negate the FOCI. The Company currently requires
security clearances in order to perform services under certain classified
contracts. As a result, on May 13, 1997, Holdings notified the Defense
Department of the proposed Merger, and on June 27, 1997, it submitted to the
Defense Department its plan to mitigate or negate FOCI through use of a
Special Security Agreement. Among other things, the Company has proposed to
mitigate the FOCI by the addition of two independent directors to the board
of directors of the Company. There is no deadline by which the Department of
Defense must approve a plan. If no plan has been approved by the date of the
Merger, the status of existing contracts will be subject to case-by-case
review and the Company will be unable to bid on new classified government
work until and unless such an approval is forthcoming.
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MANAGEMENT
THE COMPANY
The following table sets forth certain information concerning the current
directors and executive officers of the Company. It is expected that such
persons will serve in such capacities with the Company following the
Effective Time.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------- ----- -------------------------------------------------
<S> <C> <C>
Kenneth Draeger ....... 56 Chairman and Chief Executive Officer and Director
Stephen J. Felice .... 40 President
Thomas J. Fitzpatrick 39 Vice President and Chief Financial Officer
Joseph S. Giordano ... 42 Senior Vice President--Operations
James J. Greenwell ... 38 Senior Vice President--Sales & Marketing
Thomas M. Molchan .... 42 General Counsel and Corporate Secretary
Dwight T. Wilson ...... 41 Vice President--Human Resources
</TABLE>
Kenneth Draeger has been the Chief Executive Officer, and a Director of
the Company since October 1995, and Chairman of the Company since November
1995. From July 1992 to October 1995, he was the Chief Executive Officer and
a Director of the Company's predecessor, Servcom. From 1988 to 1991, Mr.
Draeger was President of Agfa/Compugraphic, a manufacturer of electronic
pre-press equipment. Mr. Draeger is also a director of Galileo Corporation.
Stephen J. Felice has been the President of the Company since October
1995. Mr. Felice joined BABSS in March 1987. He served as Vice President and
General Manager, Sales and Operations of BABSS from January 1991 to October
1995 and was responsible for all service delivery, sales activity, customer
management, and marketing channels with management responsibility over almost
3,000 employees.
Thomas J. Fitzpatrick has been the Vice President and Chief Financial
Officer of the Company since August 1996. Prior to August 1996 Mr.
Fitzpatrick was Vice President of Network Finance at Bell Atlantic Network
Services, Inc. Mr. Fitzpatrick served more than eight years at BABSS,
including over four years as Vice President and Chief Financial Officer.
Joseph S. Giordano has been Senior Vice President--Operations of the
Company since October 1995. From October 1993 to October 1995, Mr. Giordano
was Vice President Sales and Service Delivery of BABSS. From January 1991 to
October 1993, he was an Area General Manager of BABSS.
James J. Greenwell has been Senior Vice President--Sales & Marketing of
the Company since October 1995, and was Vice President Sales and Marketing of
Servcom from 1993 to October 1995. From January 1992 to 1993, Mr. Greenwell
was Director of Operations of Servcom's Qantel operation. Prior to January
1992, he was Vice President, Sales and Marketing of Qantel Corporation.
Thomas M. Molchan has been General Counsel and Corporate Secretary of the
Company since October 1995. From December 1986 to October 1995, he was Vice
President and General Counsel of BABSS.
Dwight T. Wilson has been Vice President--Human Resources of the Company
since October 1995. From April 1994 to October 1995, Mr. Wilson was Vice
President--Human Resources of BABSS. From October 1990 to March 1994, Mr.
Wilson was Director, Human Resources Policies and Planning of BABSS.
In addition, it is expected that at the Effective Time, Peter T. Grauer
and Kirk B. Wortman will become directors of the Company.
Peter T. Grauer has been a Managing Director of DLJ Merchant Banking II,
Inc. since September 1992. From April 1989 to September 1992, he was
Co-Chairman of Grauer & Wheat, Inc., an investment firm specializing in
leveraged buyouts. Prior thereto, Mr. Grauer was a Senior Vice President of
Donaldson, Lufkin & Jenrette Securities Corporation. Mr. Grauer is a director
of Doane Products Co., SDW Holdings, Inc. and Total Renal Care, Inc.
(NYSE:(TRL)).
63
<PAGE>
Kirk B. Wortman has been a Principal of DLJ Merchant Banking II, Inc.
since February 1997. For the five years prior to joining DLJ Merchant
Banking, Inc. he worked in the Leveraged Finance Group within DLJ's
Investment Banking Group, most recently as a Senior Vice President.
In connection with the Company's efforts to ensure continuance of certain
existing contracts with the U.S. government, the Company has submitted a
Special Security Agreement to the Department of Defense for approval. If
approved, the agreement would provide, among other things, that at least two
individuals (the "Outside Directors") would have no prior relationship with
the Company or any of its affiliates will be named to its Board of Directors.
The agreement would also require that the Board of Directors include at least
one officer of the Company (an "Officer Director") and that the total number
of Outside Directors and Officer Director always be greater than the number
of directors representing Holdings. The agreement would also provide that the
Outside Directors could be removed, and new or replacement Outside Directors
or Officer Directors could not serve, unless approved by the Defense
Investigative Service. See "Business--Regulation."
HOLDINGS
The following table sets forth the name, age and position with Holdings of
each person who is expected to serve as a director of Holdings following the
Effective Time.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ ----- -------------------------------------------------
<S> <C> <C>
Kenneth Draeger ......... 56 Chairman and Chief Executive Officer and Director
Peter T. Grauer ......... 51 Director
Lawrence M.v.D. Schloss 42 Director
Tom G. Greig ............ 49 Director
Kirk B. Wortman ......... 35 Director
</TABLE>
In addition, it is expected that two additional directors, not affiliated
with DLJMB or Holdings, will be appointed at the Effective Time.
Lawrence M.v.D. Schloss has been the Managing Partner of DLJ Merchant
Banking II, Inc. since November 1995. Prior to November 1995, he was the
Chief Operating Officer and Managing Director of DLJ Merchant Banking, Inc.
Mr. Schloss currently serves as Chairman of the Board of McCulloch
Corporation and as a director of Wilson, Greatbatch, Inc. Mr. Schloss has
previously served as a director of GTECH Corporation (NYSE:GTK), Krueger
International, Inc., OSi Specialties, Inc. and MPB Corporation.
Tom G. Greig is a Managing Director in the Investment Banking Division of
DLJ and serves as co-head of the Technology Investment Banking Group. Mr.
Greig is a director of Manufacturers Services Limited, a contract electronics
manufacturer. Mr. Greig has over 20 years of experience in the investment
banking industry, the majority of which he has spent working with technology
based companies.
64
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth for the years ended June 30, 1997, 1996 and
1995 certain compensation paid by the Company to its Chief Executive Officer
and the four other most highly paid executive officers of the Company whose
cash compensation exceeded $100,000 for the year ended June 30, 1997. Certain
members of management are expected to enter into new employment agreements at
the Effective Time which may alter their compensation arrangements.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
---------------------------------------------------- --------------
SECURITIES
OTHER UNDERLYING
SALARY BONUS ANNUAL OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#)
- ---------------------------------- ------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Kenneth Draeger 1997 425,000 -- (1) -- 50,000
Chief Executive Officer 1996 355,000 484,500 (2) -- 70,000
1995 250,625 375,000 -- --
Stephen J. Felice 1997 225,000 60,000 (1) -- 9,000
President 1996 157,500(3) 130,340 (3) -- 100,000
1995 -- -- -- --
Thomas J. Fitzpatrick 1997 168,077 (4) 59,866 (1)(4) 224,908 (5) 100,000
Vice President and Chief 1996 -- -- -- --
Financial Officer 1995 -- -- -- --
Thomas M. Molchan 1997 139,300 27,500 (1) -- 10,000
General Counsel and Corporate 1996 90,020(3) 42,725 (3) -- 33,000
Secretary 1995 -- -- -- --
James J. Greenwell 1997 140,500 22,500 (1) -- --
Senior Vice President--Sales and 1996 131,000 58,460 -- 10,000
Marketing 1995 129,500 90,000 -- 40,000
</TABLE>
- ------------
(1) Final payment of bonuses for fiscal 1997 will be determined in August
1997. Therefore, there may be additional bonus payments for fiscal
1997 which have not been determined at the time of filing.
(2) Mr. Draeger's bonus for fiscal 1996 was paid in two parts. $357,000
of this bonus was paid on August 15, 1996. The remaining $127,500 was
paid on May 15, 1997 after completion of ten consecutive trading days
where the share price of Holdings Common Stock closed above $18.00.
(3) Messrs. Felice and Molchan joined the Company and were named
executive officers on October 21, 1995. The salaries and bonuses
shown reflect the amount earned after such date through June 30,
1996.
(4) Mr. Fitzpatrick joined the Company and was named an executive officer
on August 12, 1996. The salary and bonus reflect the amount earned
after such date through June 30, 1997. Of the bonus amount, $30,000
was a one-time signing bonus.
(5) Of this amount, $223,908 is for relocation assistance. The other
$1,000 was for tax preparation assistance.
65
<PAGE>
The following table summarizes stock options to purchase Holdings Common
Stock granted during fiscal 1997 to the persons named in the Summary
Compensation Table.
<TABLE>
<CAPTION>
HOLDINGS' OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------------------------------------------------
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT
------------------------------------------------------- ASSUMED ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES PERCENT OF APPRECIATION FOR
UNDERLYING TOTAL OPTIONS OPTION TERM(1)
OPTIONS GRANTED TO EXERCISE OF
GRANTED(1) EMPLOYEES IN BASE PRICE EXPIRATION
NAME(2) (#) FISCAL 1997 ($/SH) DATE 5%($) 10%($)
- --------------------- ------------ --------------- ------------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth Draeger....... 50,000 4.3% $16.750 12/04/06 $ 526,699 $1,334,759
Stephen J. Felice .... 9,000 0.8 16.750 12/04/06 94,806 240,257
Thomas J. 100,000 (3) 8.7 22.875 08/12/06 1,438,596 3,645,686
Fitzpatrick.......... 100,000 8.7 14.000 09/08/06 880,452 2,231,239
Thomas M. Molchan .... 10,000 0.9 16.750 12/04/06 105,340 266,952
James J. Greenwell ... -- -- -- -- -- --
</TABLE>
- ------------
(1) Options vest in four equal annual installments commencing on the
first anniversary of the date of grant. Unvested options are subject
to termination upon termination of the optionee's service with the
Company.
(2) Potential Realizable Values are based on an assumption that the share
price of Holdings Common Stock starts equal to the exercise price
shown for each particular option grant and appreciates at the annual
rate shown (compounded annually) from the date of the grant until the
end of the term of the option. These amounts are reported net of the
option exercise price, but before any taxes associated with exercise
or subsequent sale of the underlying stock. The actual value, if any,
an optionholder may realize will be a function of the extent to which
the share price exceeds the exercise price on the date the option is
exercised and also will depend on the optionholder's continued
employment through the vesting period. The actual value to be
realized by the optionholder may be greater or less than the values
estimated in this table.
(3) This grant, which was issued on August 13, 1996 was subsequently
cancelled and, as shown in the table, replaced by another grant on
September 9, 1996.
The following table summarizes option exercises during fiscal 1997 and the
value of vested and unvested options for the persons named in the Summary
Compensation Table at June 30, 1997. Year-end values are based upon a price
of $22.75 per share, which was the closing market price of a share of
Holdings Common Stock on June 30, 1997, the last trading day of the fiscal
year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END HOLDINGS'
OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT JUNE 30, 1997 AT JUNE 30, 1997
----------------------------- -----------------------------
SHARES
ACQUIRED ON
EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) ($) (#) (#) ($) ($)
- ---------------------- ------------- -------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth Draeger........ 25,000 337,500 1,109,780 102,500 24,561,355 1,074,375
Stephen J. Felice .... 3,000 24,750 22,000 84,000 324,500 1,160,250
Thomas J. Fitzpatrick -- -- -- 100,000 -- 600,000
Thomas M. Molchan...... -- -- 8,250 34,750 121,688 425,063
James J. Greenwell .... 60,000 1,040,000 79,000 27,500 1,629,000 445,625
</TABLE>
Neither the Company nor Holdings currently grants any long-term
incentives, other than stock options, to its executives or other employees,
nor does it sponsor any defined benefit or actuarial plans at this time.
Immediately prior to the Effective Time, all outstanding options granted
to employees and directors, whether or not vested, will be cancelled, and the
holders of such options will receive a cash payment in
66
<PAGE>
respect of such options following the Effective Time. Alternatively, a
portion of such options may be converted into options to purchase Holdings
Common Stock following the Merger. See "The Merger and Merger Financing."
EXISTING EMPLOYMENT AND SEVERANCE AGREEMENTS
Mr. Draeger entered into an employment agreement with Decision Data Inc.,
the predecessor of a wholly owned subsidiary of Holdings, in October 1992.
The employment agreement, which is terminable at will by either party,
provides for a base salary of not less than $250,000 plus an annual bonus
awarded pursuant to a target formula developed by the Board of Directors of
Holdings. The employment agreement also provides for a bonus to be paid to
Mr. Draeger in the event of a change of control of Holdings, ranging from
$300,000 if the Equity Value (as defined in the employment agreement) of the
transaction is at least $40.0 million, to an amount equal to $2.0 million
plus 2% of any excess in Equity Value over $100.0 million for transactions
with an Equity Value in excess of $100.0 million. The amount payable to Mr.
Draeger upon consummation of the Merger is approximately $13.9 million. In
addition, severance benefits are payable to Mr. Draeger in the event that his
employment is terminated, other than for cause (as defined in the agreement),
death or disability, for a period of 18 months following such termination in
a monthly amount equal to one-twelfth of his annual salary. Mr. Draeger has
agreed not to compete with Holdings or any of its affiliates (as defined in
the agreement) for a one year period after termination of his employment for
any reason. Mr. Draeger is expected to enter into a new employment agreement
with Holdings or the Company at the Effective Time.
Messrs. Felice, Fitzpatrick, Giordano, Greenwell, Molchan and Wilson have
severance arrangements with the Company which in various instances provide
for a severance payment of up to one times base annual salary, a pro-rata
portion of accrued bonus, and the continuation of certain benefits for up to
one year in the event of termination without cause.
COMPENSATION OF DIRECTORS
Currently, directors of the Company receive no compensation in their
capacity as directors of the Company.
67
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF HOLDINGS
All of the Company's issued and outstanding capital stock is owned by
Holdings. The following table sets forth certain information with respect to
the beneficial ownership of the Holdings Common Stock immediately following
the consummation of the Merger by (i) any person or group who beneficially
owns more than five percent of Holdings Common Stock and (ii) all directors
and executive officers of Holdings and the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED PERCENTAGE OF OUTSTANDING
AFTER THE RECAPITALIZATION COMMON STOCK
------------------------------ -----------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER:
- --------------------------------------------------------
<S> <C> <C>
DLJ Merchant Banking Partners II, L.P.
and related investors (1)(2) ........................... 11,199,789 88.37%
Lawrence M.v.D. Schloss (3) ............................. -- --
DLJ Merchant Banking Partners II, Inc.
277 Park Avenue
New York, NY 10172
Peter T. Grauer (3) ..................................... -- --
DLJ Merchant Banking Partners II, Inc.
277 Park Avenue
New York, NY 10172
Thomas G. Greig (3) ..................................... -- --
Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, NY 10172
Kirk B. Wortman (3) ..................................... -- --
DLJ Merchant Banking Partners II, Inc.
277 Park Avenue
New York, NY 10172
All directors and officers as a group
(11 persons)(3)(4) ..................................... -- --
</TABLE>
(footnotes on following page)
68
<PAGE>
- ------------
(1) Includes 1,417,180 shares of Holdings Common Stock issuable upon the
exercise of the DLJMB Warrants. The number of DLJMB Warrants will be
reduced by the number of Public Warrants issued. See "The Merger and
the Merger Financing."
(2) Consists of shares held directly by the following investors related to
DLJ Merchant Banking Partners II, L.P. ("DLJMB"): DLJ Offshore Partners
II, C.V. ("Offshore"), a Netherlands Antilles limited partnership, DLJ
Diversified Partners, L.P. ("Diversified"), a Delaware limited
partnership, DLJMB Funding II, Inc. ("Funding"), a Delaware
corporation, DLJ Merchant Banking Partners II-A, L.P. ("DLJMBPIIA"), a
Delaware limited partnership, DLJ Diversified Partners--A L.P.
("Diversified A"), a Delaware limited partnership, DLJ Millennium
Partners, L.P. ("Millennium"), a Delaware limited partnership, DLJ
Millennium Partners-A, L.P. ("Millennium A"), a Delaware limited
partnership, DLJ EAB Partners, L.P. ("EAB"), UK Investment Plan 1997
Partners ("UK Partners"), a Delaware partnership, and DLJ First ESC
LLC, a Delaware limited liability company ("DLJ First"). See "Certain
Relationships and Related Transactions" and "Underwriting." The address
of each of DLJMB, Diversified, Funding, DLJMBPIIA, Diversified A,
Millenium, Millenium A, DLJ First and EAB is 277 Park Avenue, New York,
New York 10172. The address of Offshore is John B. Gorsiraweg 14,
Willemstad, Curacao, Netherlands Antilles. The address of UK Partners
is 2121 Avenue of the Stars, Fox Plaza, Suite 3000, Los Angeles,
California 90067. The DLJMB Funds expect that the Institutional
Investors may acquire a portion of the securities of Quaker that would
otherwise be purchased by the DLJMB Funds. In no event would any such
purchases reduce the fully diluted ownership by the DLJMB Funds of
Holdings Common Stock after the Effective Time to below a majority, or
limit the rights of the DLJMB Funds under the Investors' Agreement. The
Institutional Investors include Apollo Advisors II, L.P. ("Apollo"),
Bain Capital, Inc. ("Bain Capital"), Thomas H. Lee Company ("THL"),
certain investment funds associated with DLJ Capital Corp. ("Sprout")
and Ontario Teacher's Pension Plan Board ("Teachers").
Any investment by Apollo in Quaker (expected to represent approximately
6.57% of the outstanding Holdings Common Stock) would be made by Apollo
Investment Fund III, L.P., a Delaware limited partnership ("AIF III"),
Apollo Overseas Partners III, L.P., a Delaware limited partnership
("Overseas Partners"), and Apollo (U.K.) Partners III, L.P., a limited
partnership organized under the laws of England ("Apollo UK Partners")
(collectively, "Apollo Entities"). Each of the Apollo Entities is
principally engaged in the business of investment securities.
Apollo Advisors II, L.P., a Delaware limited partnership ("Advisors"),
is the general partner of AIF III and the managing general partner of
Overseas Partners and Apollo UK Partners. Advisors is principally
engaged in the business of providing advice regarding investments by,
and serving as the general partner of, the Apollo Entities. The address
of Apollo is 1301 Avenue of the Americas, 38th Floor, New York, New
York 10019.
Any investment by Bain Capital in Quaker (expected to represent
approximately 6.57% of the outstanding Holdings Common Stock) would by
made by Bain Capital Fund V, L.P., Bain Capital Fund, V-B, L.P., BCIP
Associates, and BCIP Trust Associates, L.P. Bain Capital Investors V,
Inc. is the general partner of Bain Capital Partners V, L.P. ("BCP V"),
a Delaware limited partnership. BCP V is the general partner of Bain
Capital Fund V, L.P. and Bain Capital Fund V-B, L.P. (the "Bain Fund
Vs"), both of which are Delaware limited partnerships. The Bain Fund
Vs' primary business activity is to make investments in private equity
securities and other interests in business organizations, domestic and
foreign.
BCIP Associates, a general partnership, and BCIP Trust Associates,
L.P., a limited partnership (together the "BCIPs"), are both organized
under the laws of the State of Delaware. The BCIPs' primary business
activity is to make investments in private equity securities and other
interests in business organizations, domestic and foreign. The address
of Bain Capital is Two Copley Place, Boston, Massachusetts 02116.
69
<PAGE>
Any investment by THL in Quaker (expected to represent approximately
6.57% of the outstanding Holdings Common Stock) would be made by Thomas
H. Lee Equity Fund III, L.P., a Delaware limited partnership ("Fund
III"), Thomas H. Lee Foreign Fund III, L.P., a Delaware limited
partnership ("Foreign Fund"), THL Co-Investors III-A, LLC, a
Massachusetts limited liability company ("Co-Investors A"), and THL
Co-Investors III-B, LLC, a Massachusetts limited liability company
("Co-Investors B"). The general partner of each of Fund III and Foreign
Fund is THL Equity Advisors III Limited Partnership, a Massachusetts
limited partnership ("Equity Advisors"). The general partner of Equity
Advisors is THL Equity Trust III, a Massachusetts business trust, the
beneficial owners of which are affiliates of Thomas H. Lee Company. The
manager of each of Co-Investors A and Co-Investors B is Thomas H. Lee.
The address of THL is 75 State Street, 26th Floor, Boston,
Massachusetts 02109.
DLJ Capital Corporation ("DLJCC"), a Delaware corporation, Sprout
Growth II, L.P., a Delaware limited partnership, The Sprout CEO Fund,
L.P., a Delaware limited partnership, and one additional entity managed
by the Sprout Group, the Venture Capital affiliate of DLJ, may also
acquire capital stock of Quaker. DLJCC is a wholly owned subsidiary of
DLJ. Sprout Growth II, L.P. has two general partners: DLJCC is also the
managing general partner and DLJ Growth Associates II, L.P. is the
general partner. DLJ Growth Associates II, L.P. is a Delaware limited
partnership, whose general partners are a group of individual employees
of DLJCC and DLJ Growth Associates (II), Inc., a Delaware corporation
which is a wholly owned subsidiary of DLJCC. DLJCC is the managing
general partner of The Sprout CEO Fund. The address of Sprout is 277
Park Avenue, New York, New York 10172.
Teachers is an independent corporation established in 1990 to
administer the benefits and manage the investments of the pension plan
for over 200,000 Ontario teachers. At year end 1996, the fund assets
stood at a total of Cdn $51 billion. The address of Teachers is 5650
Yonge Street, 5th Floor, North York, Ontario M2M 4H5.
(3) Messrs. Schloss, Grauer and Wortman are officers of DLJ Merchant
Banking II, Inc., an affiliate of DLJMB and the Underwriter. Mr. Greig
is an officer of DLJSC. Share data shown for such individuals excludes
shares shown as held by the DLJMB Funds, as to which such individuals
disclaim beneficial ownership.
(4) Does not include Holding Common Stock owned at the Effective Time or
options which may be issued to or retained by certain employees of the
Company under Holdings' stock option plan or shares which may be
purchased by certain employees of the Company under Holdings' stock
purchase plan.
70
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Merger, DLJMB has proposed that an Investors'
Agreement be entered into, at the Effective Time, among the Company, the
DLJMB Funds, the Institutional Investors and the members of management who
own shares of Holdings Common Stock (the "Management Shareholders"). It is
expected that the terms of the Investors' Agreement will restrict transfers
of the shares of Holdings Common Stock by the Management Shareholders, permit
the Management Shareholders to participate in certain sales of shares of
Holdings Common Stock by the DLJMB Funds, require the Management Shareholders
to sell shares of Holdings Common Stock in certain circumstances should the
DLJMB Funds choose to sell any such shares owned by the DLJMB Funds, permit
the Management Shareholders and the Institutional Shareholders to purchase
equity securities proposed to be issued by the Company on a preemptive basis
in the event the DLJMB Funds choose to acquire any such equity securities,
and provide for certain registration rights. It is also expected that the
Investors' Agreement will provide that the DLJMB Funds have the right to
appoint a majority of the members of the Board of Directors of Holdings.
In addition, DLJ Capital Funding received customary fees and reimbursement
of expenses in connection with the arrangement and syndication of the New
Credit Facility and as a lender thereunder. DLJSC received customary fees in
connection with the underwriting of the Senior Subordinated Notes and the
Debentures. DLJSC will receive a merger advisory fee of $5.0 million in cash
from Quaker upon consummation of the Merger. It is also expected that DLJSC
will receive an annual fee from Holdings for financial advisory services.
Each DLJMB Warrant, if any that is issued, will entitle the holder thereof
to purchase one share of Holdings Common Stock at an exercise price of not
less than $0.01 per share subject to customary antidilution provisions and
other customary terms. The DLJMB Warrants will be exercisable at any time
prior to 5:00 p.m., New York City time, on August 15, 2007. The exercise of
the DLJMB Warrants also will be subject to applicable federal and state
securities laws. Each Public Warrant will have the same terms as the DLJMB
Warrants, other than the exercise price and certain antidilution provisions.
The DLJMB Funds will be entitled to request six demand registrations with
respect to the DLJMB Warrants (together with all or any portion of the Senior
Preferred Stock owned by them) and the Holdings Common Stock owned by them,
which demand registration rights will be immediately exercisable subject to
customary deferral and cutback provisions. In addition, the holders of the
DLJMB Warrants will also be entitled to unlimited piggyback registration
rights with respect to such Warrants (together with all or any portion of the
Senior Preferred Stock) subject to customary cutback provisions. If the DLJMB
Warrants are sold in connection with a registered sale or a sale under Rule
144A of the Securities Act of the Senior Preferred Stock, the Holdings will
(not earlier than the time the Company registers the Senior Preferred Stock
(or exchange securities in the case of a Rule 144A offering)) file a shelf
registration statement covering the Holdings Common Stock underlying such
DLJMB Warrants.
71
<PAGE>
DESCRIPTION OF NEW CREDIT FACILITY
The New Credit Facility will be provided by a syndicate of banks and other
financial institutions led by Donaldson, Lufkin & Jenrette Securities
Corporation, as arranger (the "Arranger"), DLJ Capital Funding, as
syndication agent (the "Syndication Agent") and NationsBank, N.A., as
administrative agent (the "Administrative Agent"). The New Credit Facility
will include a $470.0 million Term Loan Facility and a $105.0 million
Revolving Credit Facility (subject to adjustment as provided below), which
will provide for loans and up to $25.0 million of letters of credit. The Term
Loan Facility is comprised of a term A facility of $195.0 million (the "Term
A Facility"), which will have a maturity of six years and a term B facility
of $275 million (the "Term B Facility"), which will have a maturity of eight
years. The revolving facility will terminate six years after the date of
initial funding of the New Credit Facility and is subject to an increase of
up to $50.0 million at the Company's request at any time prior to the
revolving facility termination date.
The New Credit Facility will bear interest, at the Company's option, at
the Administrative Agent's alternate base rate or reserve-adjusted London
Interbank Offered Rate ("LIBOR") plus, in each case, applicable margins of
(i) in the case of alternate base rate loans (x) 1.25% for revolving and Term
A loans and (y) 1.50% for Term B loans and (ii) in the case of LIBOR loans
(x) 2.50% for revolving and Term A loans, and (y) 2.75% for Term B loans.
The Company will pay a commitment fee calculated at a rate of 1/2 of 1.00%
per annum on the daily average unused commitment under the Revolving Credit
Facility (whether or not then available). Such fee will be payable quarterly
in arrears and upon termination of the Revolving Credit Facility (whether at
stated maturity or otherwise).
Beginning six months after the consummation of the Merger and the Merger
Financing, the applicable margins for the Term A Facility and the Revolving
Credit Facility, as well as the commitment fee, will be subject to reductions
based on the ratio of consolidated debt to Adjusted EBITDA (as defined in the
New Credit Facility).
The Company will pay a letter of credit fee calculated at a rate per annum
equal to the then applicable margin for LIBOR loans under the Revolving
Credit Facility plus a fronting fee on the stated amount of each letter of
credit. Such fees will be payable quarterly in arrears. In addition, the
Company will pay customary transaction charges in connection with any letters
of credit.
The Term Loan Facility will be subject to the following amortization
schedule:
<TABLE>
<CAPTION>
YEAR TERM LOAN A TERM LOAN B
- ------ ------------- -------------
<S> <C> <C>
1 $ 0.00 $ 2.75
2 9.75 2.75
3 19.50 2.75
4 39.00 2.75
5 48.75 2.75
6 78.00 2.75
7 -- 142.25
8 -- 116.25
------------- -------------
$195.00 $275.00
</TABLE>
The Term Loan Facility will be subject to mandatory prepayment: (i) with
100% of the net cash proceeds from the issuance of debt, subject to certain
exceptions, (ii) with 100% of the net cash proceeds of asset sales, subject
to certain exceptions, (iii) with 50% of the Company's excess cash flow (as
defined in the New Credit Facility) unless the Leverage Ratio (as defined in
the New Credit Facility) equals or is less than 3.5 to 1.0, and (iv) with 50%
of the net cash proceeds from the issuance of equity. The Company's
obligations under the New Credit Facility will be secured by a first-priority
perfected lien on: (i) all property and assets, tangible and intangible, of
the Company including a pledge of the capital stock of all of the Company's
direct material subsidiaries, and (ii) all intercompany indebtedness;
provided,
72
<PAGE>
however, no more than 65% of the equity interests of the foreign subsidiaries
will be required to be pledged as security in the event that a pledge of a
greater percentage would result in material increased tax or similar
liabilities for the Company and its subsidiaries on a consolidated basis.
Holdings will guarantee the obligations of the Company under the New Credit
Facility. Such guarantee will only be recourse to Holdings' pledge of all of
the outstanding capital stock of the Company to secure the Company's
obligations under the New Credit Facility. In addition, obligations under the
New Credit Facility will be guaranteed by all material (as defined in the New
Credit Facility) domestic subsidiaries of the Company and all foreign
subsidiaries of the Company if such foreign subsidiaries' guarantees will not
have material adverse tax consequences on the Company. Currently, the Company
has no material subsidiaries and therefore no such guarantees are required.
The New Credit Facility will contain customary covenants and restrictions
on the Company's ability to engage in certain activities, including, but not
limited to: (i) limitations on the incurrence of liens and indebtedness, (ii)
restrictions on sale lease-back transactions, consolidations, mergers, sale
of assets, capital expenditures, transactions with affiliates and
investments, and (iii) severe restrictions on dividends, and other similar
distributions.
The New Credit Facility will also contain financial covenants requiring
the Company to maintain a minimum level of Adjusted EBITDA (as defined in the
New Credit Facility); a minimum Interest Coverage Ratio (as defined in the
New Credit Facility); a minimum Fixed Charge Coverage Ratio (as defined in
the New Credit Facility); and a maximum Leverage Ratio (as defined in the New
Credit Facility).
73
<PAGE>
DESCRIPTION OF THE SENIOR SUBORDINATED NOTES
GENERAL
The Senior Subordinated Notes will be issued pursuant to the indenture
(the "Senior Subordinated Note Indenture") between the Company and State
Street Bank and Trust Company , as trustee (the "Trustee"). The terms of the
Senior Subordinated Notes include those stated in the Senior Subordinated
Note Indenture and those made part of the Senior Subordinated Note Indenture
by reference to the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). The Senior Subordinated Notes are subject to all such terms,
and Holders of Senior Subordinated Notes are referred to the Senior
Subordinated Note Indenture and the Trust Indenture Act for a statement
thereof. The following summary of certain provisions of the Senior
Subordinated Note Indenture does not purport to be complete and is qualified
in its entirety by reference to the Senior Subordinated Note Indenture,
including the definitions therein of certain terms used below. A copy of the
proposed form of Senior Subordinated Note Indenture has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part and
is available as set forth below under "--Additional Information." The
definitions of certain terms used in the following summary are set forth
below under "--Certain Definitions." For purposes of this summary, the term
"Company" refers only to DecisionOne Corporation and not to any of its
Subsidiaries.
The Senior Subordinated Notes will be general unsecured obligations of the
Company and will be subordinated in right of payment to all Senior Debt of
the Company, whether outstanding on the date of the Senior Subordinated Note
Indenture or incurred thereafter. See "--Subordination." The Senior
Subordinated Notes will be effectively subordinated to all Indebtedness and
other liabilities of the Company's Subsidiaries. On the date of issuance of
the Senior Subordinated Notes, none of the Company's Subsidiaries will
guarantee the Company's obligations under the Senior Subordinated Notes.
However, the Company's obligations under the Senior Subordinated Notes may be
unconditionally guaranteed on an unsecured, senior subordinated basis,
jointly and severally, by each Subsidiary of the Company that executes and
delivers a supplemental indenture to the Senior Subordinated Note Indenture
pursuant to the terms of the covenant described below under the caption
entitled "--Certain Covenants--Subsidiary Guarantees." See "--Certain
Covenants--Subsidiary Guarantees." As of March 31, 1997, on a pro forma basis
after giving effect to the Merger, including the Merger Financing and the
application of the proceeds therefrom, the Company would have had Senior Debt
of approximately $503.0 million and the Company's Subsidiaries would have had
approximately $10.9 million of outstanding liabilities, including trade
payables. The Senior Subordinated Note Indenture will permit the incurrence
of certain additional Senior Debt and Indebtedness of the Company's
Subsidiaries in the future. See "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock."
As of the date of the Senior Subordinated Note Indenture, all of the
Company's Subsidiaries will be Restricted Subsidiaries. However, under
certain circumstances, the Company will be permitted to designate current or
future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries
will not be subject to many of the restrictive covenants set forth in the
Senior Subordinated Note Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Senior Subordinated Notes will be limited in aggregate principal
amount to $150.0 million and will mature on August 1, 2007. Interest on the
Senior Subordinated Notes will accrue at the rate of 9 3/4% per annum and
will be payable semiannually in arrears on February 1 and August 1,
commencing on February 1, 1998, to Holders of record on the immediately
preceding January 15 and July 15. Interest on the Senior Subordinated Notes
will accrue from the most recent date to which interest has been paid or, if
no interest has been paid, from the date of original issuance. Interest will
be computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest on the Senior Subordinated Notes
will be payable at the office or agency of the Company maintained for such
purpose within the City and State of New York or, at the option of the
Company, payment of interest may be made by check mailed to the Holders of
the Senior Subordinated Notes at their respective addresses set forth in the
register of Holders of Senior Subordinated Notes; provided that all payments
with respect to Senior Subordinated Notes represented by one or more
permanent global Senior Subordinated Notes will be
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paid by wire transfer of immediately available funds to the account of the
Depository Trust Company or any successor thereto. Until otherwise designated
by the Company, the Company's office or agency in New York will be the office
of the Trustee maintained for such purpose. The Senior Subordinated Notes
will be issued in minimum denominations of $1,000 and integral multiples
thereof.
SUBORDINATION
The payment of Subordinated Note Obligations will be subordinated in right
of payment, as set forth in the Senior Subordinated Note Indenture, to the
prior payment in full in cash or cash equivalents of all Senior Debt, whether
outstanding on the date of the Senior Subordinated Note Indenture or
thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property,
an assignment for the benefit of creditors or any marshaling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to
receive payment in full in cash or cash equivalents of all Obligations due in
respect of such Senior Debt (including interest after the commencement of any
such proceeding at the rate specified in the applicable Senior Debt) before
the Holders of Senior Subordinated Notes will be entitled to receive any
payment with respect to Subordinated Note Obligations (except that Holders of
Senior Subordinated Notes may receive Permitted Junior Securities and
payments made from the trust described under "--Legal Defeasance and Covenant
Defeasance"), and until all Obligations with respect to Senior Debt are paid
in full in cash or cash equivalents, any distribution to which the Holders of
Senior Subordinated Notes would be entitled shall be made to the holders of
Senior Debt (except that Holders of Senior Subordinated Notes may receive
Permitted Junior Securities and payments made from the trust described under
"--Legal Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the
Subordinated Note Obligations (except in Permitted Junior Securities or from
the trust described under "--Legal Defeasance and Covenant Defeasance") if
(i) a default in the payment of the principal of (including reimbursement
obligations in respect of letters of credit), premium, if any, or interest
on, or commitment fees related to, Designated Senior Debt occurs and is
continuing beyond any applicable period of grace or (ii) any other default
occurs and is continuing with respect to Designated Senior Debt that permits
holders of the Designated Senior Debt as to which such default relates to
accelerate its maturity and the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the Company or the holders of any Designated
Senior Debt (or their representative). Payments on the Senior Subordinated
Notes may and shall be resumed (a) in the case of a payment default, upon the
date on which such default is cured or waived and (b) in case of a nonpayment
default, the earlier of the date on which such nonpayment default is cured or
waived or 179 days after the date on which the applicable Payment Blockage
Notice is received, unless the maturity of any Designated Senior Debt has
been accelerated. No new period of payment blockage may be commenced unless
and until 360 days have elapsed since the effectiveness of the immediately
prior Payment Blockage Notice. No nonpayment default that existed or was
continuing on the date of delivery of any Payment Blockage Notice to the
Trustee shall be, or be made, the basis for a subsequent Payment Blockage
Notice unless such default shall have been cured or waived for a period of
not less than 90 days.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of Senior Subordinated Notes may
recover less ratably than creditors of the Company who are holders of Senior
Debt. On a pro forma basis, after giving effect to the Merger, including the
Offering and the initial borrowing under the New Credit Facility, the
principal amount of Senior Debt outstanding at March 31, 1997 would have been
approximately $503.0 million. The Senior Subordinated Note Indenture will
limit, subject to certain financial tests, the amount of additional
Indebtedness, including Senior Debt, that the Company and its Subsidiaries
can incur. See "--Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock."
"Designated Senior Debt" means (i) so long as Indebtedness is outstanding
pursuant to the New Credit Facility, all such Indebtedness incurred under the
New Credit Facility and, thereafter, (ii) any other
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Senior Debt or Guarantor Senior Debt permitted under the Senior Subordinated
Note Indenture the principal amount of which is $50.0 million or more and
that has been designated by the Company as "Designated Senior Debt."
"Permitted Junior Securities" means Equity Interests in the Company or
debt securities of the Company or the relevant Guarantor that are
subordinated to all Senior Debt (and any debt securities issued in exchange
for Senior Debt) or Guarantor Senior Debt (and any debt securities issued in
exchange for Guarantor Senior Debt), as applicable, to substantially the same
extent as, or to a greater extent than, the Senior Subordinated Notes are
subordinated to Senior Debt or the Subsidiary Guarantees are subordinated to
Guarantor Senior Debt, as applicable, pursuant to the Senior Subordinated
Note Indenture.
"Senior Debt" means (i) all Obligations of the Company outstanding under
the New Credit Facility and all Hedging Obligations payable to a lender under
the New Credit Facility or any of its affiliates, including, without
limitation, in each case, interest accruing subsequent to the filing of, or
which would have accrued but for the filing of, a petition for bankruptcy,
whether or not such interest is an allowable claim in such bankruptcy
proceeding, (ii) any other Indebtedness permitted to be incurred by the
Company under the terms of the Senior Subordinated Note Indenture, unless the
instrument under which such Indebtedness is incurred expressly provides that
it is on a parity with or subordinated in right of payment to the Senior
Subordinated Notes and (iii) all Obligations with respect to the foregoing.
Notwithstanding anything to the contrary in the foregoing, Senior Debt will
not include (a) any liability for federal, state, local or other taxes owed
or owing by the Company or any of its Subsidiaries, (b) any Indebtedness of
the Company to any of its Subsidiaries or other Affiliates, (c) any accounts
payable or trade liabilities arising in the ordinary course of business
(including instruments evidencing such liabilities) other than obligations in
respect of bankers' acceptances and letters of credit under the New Credit
Facility, (d) any Indebtedness that is incurred in violation of the Senior
Subordinated Note Indenture, (e) Indebtedness which, when incurred and
without respect to any election under Section 1111(b) of Title 11, United
States Code, is without recourse to the Company, (f) any Indebtedness,
guarantee or obligation of the Company which is subordinate or junior in
right of payment to any other Indebtedness, guarantee or obligation of the
Company, (g) Indebtedness evidenced by the Senior Subordinated Notes and (h)
Capital Stock of the Company.
"Subordinated Note Obligations" means all Obligations with respect to the
Senior Subordinated Notes, including, without limitation, principal, premium
(if any) and interest payable pursuant to the terms of the Senior
Subordinated Notes (including upon the acceleration or redemption thereof),
together with and including any amounts received or receivable upon the
exercise of rights of rescission or other rights of action (including claims
for damages) or otherwise.
OPTIONAL REDEMPTION
Except as provided in the next paragraph, the Senior Subordinated Notes
will not be redeemable at the Company's option prior to August 1, 2002.
Thereafter, the Senior Subordinated Notes will be subject to redemption at
the option of the Company, in whole or in part, upon not less than 30 nor
more than 60 days' notice, at the redemption prices (expressed as percentages
of principal amount) set forth below, together with accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on August 1 of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR PRINCIPAL AMOUNT
- -------------------- ----------------
<S> <C>
2002 ................ 104.875%
2003 ................ 103.250
2004 ................ 101.625
2005 and thereafter 100.000%
</TABLE>
Prior to August 1, 2000, the Company may, at its option, on any one or
more occasions, redeem up to 35% of the aggregate principal amount of Senior
Subordinated Notes originally offered in the Offering at a redemption price
equal to 109.750% of the principal amount thereof, plus accrued and unpaid
interest
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thereon to the redemption date, with the net cash proceeds of one or more
Equity Offerings by (i) the Company or (ii) Holdings to the extent the net
cash proceeds thereof are contributed to the Company as a capital
contribution to the common equity of the Company; provided that at least 65%
of the original aggregate principal amount of Senior Subordinated Notes
remains outstanding immediately after the occurrence of each such redemption;
and provided, further, that any such redemption shall occur within 90 days of
the date of the closing of each such Equity Offering.
MANDATORY REDEMPTION
Except as set forth below under "--Repurchase at the Option of Holders,"
the Company is not required to make any mandatory redemption or sinking fund
payments with respect to the Senior Subordinated Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Senior
Subordinated Notes will have the right to require the Company to repurchase
all or any part (equal to $1,000 or an integral multiple thereof) of such
Holder's Senior Subordinated Notes pursuant to the offer described below (the
"Change of Control Offer") at an offer price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest thereon
to the date of purchase (the "Change of Control Payment"). Within 30 days
following any Change of Control, the Company will mail a notice to each
Holder describing the transaction or transactions that constitute the Change
of Control and offering to repurchase Senior Subordinated Notes pursuant to
the procedures required by the Senior Subordinated Note Indenture and
described in such notice. The Company will comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable
in connection with the repurchase of the Senior Subordinated Notes as a
result of a Change of Control. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the Senior
Subordinated Note Indenture relating to such Change of Control Offer, the
Company will comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations described in the Senior
Subordinated Note Indenture by virtue thereof.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Senior Subordinated Notes or portions
thereof properly tendered pursuant to the Change of Control Offer, (2)
deposit with the Paying Agent an amount equal to the Change of Control
Payment in respect of all Senior Subordinated Notes or portions thereof so
tendered and (3) deliver or cause to be delivered to the Trustee the Senior
Subordinated Notes so accepted together with an Officers' Certificate stating
the aggregate principal amount of Senior Subordinated Notes or portions
thereof being purchased by the Company. The Paying Agent will promptly mail
to each Holder of Senior Subordinated Notes so tendered the Change of Control
Payment for such Senior Subordinated Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each
Holder a new Senior Subordinated Note equal in principal amount to any
unpurchased portion of the Senior Subordinated Notes surrendered, if any;
provided that each such new Senior Subordinated Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The Senior Subordinated Note Indenture will provide that, prior to
complying with the provisions of this covenant, but in any event within 30
days following a Change of Control, the Company will either repay all
outstanding amounts under all Senior Debt or offer to repay in full all
outstanding amounts under all Senior Debt and repay the Obligations owed to
each lender who has accepted such offer or obtain the requisite consents, if
any, under all outstanding Senior Debt to permit the repurchase of the Senior
Subordinated Notes required by this covenant.
Except as described above with respect to a Change of Control, the Senior
Subordinated Note Indenture does not contain provisions that permit the
Holders of the Senior Subordinated Notes to require that the Company
repurchase or redeem the Senior Subordinated Notes in the event of a
takeover, recapitalization or similar restructuring.
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The Company's other Senior Debt, including the New Credit Facility,
contains prohibitions of certain events that would constitute a Change of
Control. In addition, the exercise by the Holders of Senior Subordinated
Notes of their right to require the Company to repurchase the Senior
Subordinated Notes could cause a default under such other Senior Debt, even
if the Change of Control itself does not, due to the financial effect of such
repurchases on the Company. Finally, the Company's ability to pay cash to the
Holders of Senior Subordinated Notes upon a repurchase may be limited by the
Company's then existing financial resources.
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or
substantially all" of the assets of the Company and its Subsidiaries, taken
as a whole. Although there is a developing body of case law interpreting the
phrase "substantially all," there is no precisely established definition of
the phrase under applicable law. Accordingly, the ability of a Holder of
Senior Subordinated Notes to require the Company to repurchase such Senior
Subordinated Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
Asset Sales
The Senior Subordinated Note Indenture will provide that the Company will
not, and will not permit any of its Restricted Subsidiaries to, engage in an
Asset Sale unless (i) the Company (or the Restricted Subsidiary, as the case
may be) receives consideration at the time of such Asset Sale at least equal
to the fair market value (evidenced by a resolution of the Board of Directors
set forth in an Officers' Certificate delivered to the Trustee) of the assets
or Equity Interests issued or sold or otherwise disposed of and (ii) at least
75% of the consideration therefor received by the Company or such Restricted
Subsidiary is in the form of (I) cash or Cash Equivalents or (II) property or
assets that are used or useful in a Permitted Business, or Capital Stock of
any Person primarily engaged in a Permitted Business if, as a result of the
acquisition by the Company or any Restricted Subsidiary thereof, such Person
becomes a Restricted Subsidiary; provided that the amount of (x) any
liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet or in the notes thereto), of the Company or any
Restricted Subsidiary (other than contingent liabilities and liabilities of
the Company that are by their terms subordinated to the Senior Subordinated
Notes or any guarantee thereof) that are assumed by the transferee of any
such assets pursuant to a customary novation agreement that releases the
Company or such Restricted Subsidiary from further liability and (y) any
notes or other obligations received by the Company or any such Restricted
Subsidiary from such transferee that are converted by the Company or such
Restricted Subsidiary into cash or Cash Equivalents (to the extent of the
cash or Cash Equivalents received) within 180 days following the closing of
such Asset Sale, will be deemed to be cash for purposes of this provision;
provided further, that the 75% limitation referred to above shall not apply
to any sale, transfer or other disposition of assets in which the cash
portion of the consideration received therefor, determined in accordance with
the foregoing proviso, is equal to or greater than what the after-tax net
proceeds would have been had such transaction complied with the
aforementioned 75% limitation.
Within 365 days after the Company's or any Restricted Subsidiary's receipt
of any Net Proceeds from an Asset Sale, the Company or such Restricted
Subsidiary may apply such Net Proceeds (a) to permanently reduce Indebtedness
under Senior Debt or Guarantor Senior Debt (and to correspondingly reduce
commitments with respect thereto), to permanently reduce Indebtedness of a
Restricted Subsidiary that is not a Guarantor or Pari Passu Indebtedness
(provided that if the Company shall so repay Pari Passu Indebtedness, it will
equally and ratably reduce Indebtedness under the Notes if the Notes are then
redeemable or, if the Notes may not be then redeemed, the Company shall make
an offer (in accordance with the procedures set forth below for an Asset Sale
Offer) to all Holders to purchase at 100% of the principal amount thereof the
amount of Senior Subordinated Notes that would otherwise be redeemed or (b)
to an investment in property, capital expenditures or assets that are used or
useful in a Permitted Business, or Capital Stock of any Person primarily
engaged in a Permitted Business if, as a result of the acquisition by the
Company or any Restricted Subsidiary thereof, such Person becomes a
Restricted Subsidiary. Any Net Proceeds from Asset Sales that are not applied
or invested as provided in the preceding sentence of this paragraph will be
deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds exceeds $15.0 million, the Company will be required to make an
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offer to all Holders of Senior Subordinated Notes (an "Asset Sale Offer") to
purchase the maximum principal amount of Senior Subordinated Notes that may
be purchased out of the Excess Proceeds at an offer price in cash in an
amount equal to 100% of the principal amount thereof plus accrued and unpaid
interest thereon to the date of purchase, in accordance with the procedures
set forth in the Senior Subordinated Note Indenture. To the extent that the
aggregate amount of Senior Subordinated Notes tendered pursuant to an Asset
Sale Offer is less than the Excess Proceeds, the Company may use any
remaining Excess Proceeds for general corporate purposes. If the aggregate
principal amount of Senior Subordinated Notes surrendered by Holders thereof
exceeds the amount of Excess Proceeds, the Trustee shall select the Senior
Subordinated Notes to be purchased on a pro rata basis. Upon completion of
such Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Senior Subordinated Notes pursuant to an Asset Sale Offer.
To the extent that the provisions of any securities laws or regulations
conflict with the provisions of the Senior Subordinated Note Indenture
relating to such Asset Sale Offer, the Company will comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations described in the Senior Subordinated Note Indenture
by virtue thereof.
Selection and Notice
If less than all of the Senior Subordinated Notes are to be redeemed at
any time, selection of Senior Subordinated Notes for redemption will be made
by the Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the Senior Subordinated Notes are
listed or, if the Senior Subordinated Notes are not so listed, on a pro rata
basis, by lot or by such other method as the Trustee deems fair and
appropriate, provided that no Senior Subordinated Notes with a principal
amount of $1,000 or less shall be redeemed in part. Notice of redemption
shall be mailed by first class mail at least 30 but not more than 60 days
before the redemption date to each Holder of Senior Subordinated Notes to be
redeemed at its registered address. If any Senior Subordinated Note is to be
redeemed in part only, the notice of redemption that relates to such Senior
Subordinated Note shall state the portion of the principal amount thereof to
be redeemed. A new Senior Subordinated Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Senior Subordinated Note. On and after the
redemption date, interest will cease to accrue on Senior Subordinated Notes
or portions thereof called for redemption.
CERTAIN COVENANTS
Restricted Payments
The Senior Subordinated Note Indenture will provide that the Company will
not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly: (i) declare or pay any dividend or make any other payment or
distribution on account of any Equity Interests of the Company or any of its
Restricted Subsidiaries (other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the Company or dividends
or distributions payable to the Company or any Wholly Owned Restricted
Subsidiary); (ii) purchase, redeem or otherwise acquire or retire for value
any Equity Interests of the Company, any of its Restricted Subsidiaries or
any other Affiliate of the Company (other than any such Equity Interests
owned by the Company or any Restricted Subsidiary of the Company); (iii) make
any principal payment on, or purchase, redeem, defease or otherwise acquire
or retire for value any Indebtedness of the Company that is subordinated in
right of payment to the Senior Subordinated Notes, except in accordance with
the scheduled mandatory redemption or repayment provisions set forth in the
original documentation governing such Indebtedness (but not pursuant to any
mandatory offer to repurchase upon the occurrence of any event); or (iv) make
any Restricted Investment (all such payments and other actions set forth in
clauses (i) through (iv) above being collectively referred to as "Restricted
Payments"), unless:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof, and
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(b) immediately after giving effect to such transaction on a pro forma
basis, the Company would have been permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test
set forth in the first paragraph of the covenant described below under
caption entitled "--Incurrence of Indebtedness and Issuance of Preferred
Stock," and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the date of the Senior Subordinated Note Indenture (excluding
Restricted Payments permitted by clauses (i) (to the extent that the
declaration of any dividend referred to therein reduces amounts available
for Restricted Payments pursuant to this clause (c)), (ii), (iii), (v),
(vi), (vii), (viii), (x), (xi), (xii), (xv), (xvii) and (xviii) of the
next succeeding paragraph), is less than the sum of (1) 50% of the
Adjusted Consolidated Net Income of the Company for the period (taken as
one accounting period) from the beginning of the first calendar month
commencing after the date of the Senior Subordinated Note Indenture to the
end of the Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted Payment
(or, if such Adjusted Consolidated Net Income for such period is a
deficit, minus 100% of such deficit), plus (2) 100% of the Qualified
Proceeds received by the Company since the date of the Senior Subordinated
Note Indenture from contributions to the Company's capital or the issue or
sale since the date of the Senior Subordinated Note Indenture of Equity
Interests of the Company or of convertible debt securities of the Company
that have been converted into such Equity Interests (other than Equity
Interests (or convertible debt securities) sold to a Subsidiary of the
Company and other than Designated Preferred Stock, Disqualified Stock or
convertible debt securities that have been converted into Disqualified
Stock), plus (3) the amount equal to the net reduction in Investments in
Persons after the date of the Senior Subordinated Note Indenture who are
not Restricted Subsidiaries (other than Permitted Investments) resulting
from (x) Qualified Proceeds received as a dividend, repayment of a loan or
advance or other transfer of assets (valued at the fair market value
thereof) to the Company or any Restricted Subsidiary from such Persons,
(y) Qualified Proceeds received upon the sale or liquidation of such
Investment and (z) the redesignation of Unrestricted Subsidiaries (other
than any Unrestricted Subsidiary designated as such pursuant to clause
(ix) or (xvi) of the following paragraph) whose assets are used or useful
in, or which is engaged in, one or more Permitted Business as Restricted
Subsidiaries (valued (proportionate to the Company's equity interest in
such Subsidiary) at the fair market value of the net assets of such
Subsidiary at the time of such redesignation) not to exceed, in the case
of clauses (x), (y) and (z), the amount of Investments previously made by
the Company or any Restricted Subsidiary in such Person, which amount was
a Restricted Payment, plus (4) all cash payments received after the date
of the Senior Subordinated Note Indenture by the Company from Holdings
with respect to the Intercompany Note; provided that no proceeds received
by the Company from the issue or sale of any Equity Interests of the
Company will be counted in determining the amount available for Restricted
Payments under this clause (c) to the extent such proceeds were used to
redeem, repurchase, retire or acquire any Equity Interests or Subordinated
Indebtedness of the Company pursuant to clauses (ii) and (iv) of the next
succeeding paragraph.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment would
have complied with the provisions of the Senior Subordinated Note
Indenture;
(ii) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company or Subordinated Indebtedness of
the Company or any Guarantor in exchange for, or out of the net
proceeds of, the substantially concurrent sale (other than to a
Subsidiary of the Company) of Equity Interests of the Company (other
than Disqualified Stock); provided that the amount of any such net
cash proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (c)(2)
of the preceding paragraph;
(iii) the defeasance, redemption, repurchase or other acquisition of
Subordinated Indebtedness with the net proceeds from an incurrence of
Permitted Refinancing Indebtedness;
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(iv) the repurchase, redemption or other acquisition or retirement
for value of any Equity Interests of the Company or Holdings held by
any member of the Company's or any of the Company's Restricted
Subsidiaries' management pursuant to any management equity
subscription agreement or stock option agreement and any dividend to
Holdings to fund any such repurchase, redemption or acquisition;
provided that (A) the aggregate price paid for all such repurchased,
redeemed, acquired or retired Equity Interests shall not exceed (I)
$5.0 million in any calendar year (with unused amounts in any calendar
year being carried over to succeeding calendar years subject to a
maximum (without giving effect to the following clause (II)) of $10.0
million in any calendar year) plus (II) the aggregate cash proceeds
received by the Company during such calendar year from any reissuance
of Equity Interests by Holdings or the Company to members of
management of the Company and its Restricted Subsidiaries and (B) no
Default or Event of Default shall have occurred and be continuing
immediately after such transaction; provided further that the
aggregate cash proceeds referred to in clause (II) above shall be
excluded from clause (c)(2) of the preceding paragraph;
(v) the payment of dividends or the making of loans or advances by
the Company to Holdings not to exceed $2.0 million in any fiscal year
for costs and expenses incurred by Holdings in its capacity as a
holding company or for services rendered by Holdings on behalf of the
Company;
(vi) the payment of dividends by a Restricted Subsidiary on any class
of common stock of such Restricted Subsidiary if (A) such dividend is
paid pro rata to all holders of such class of common stock and (B) at
least 51% of such class of common stock is held by the Company or one
or more of its Restricted Subsidiaries;
(vii) the repurchase of any class of common stock of a Restricted
Subsidiary if (A) such repurchase is made pro rata with respect to
such class of common stock and (B) at least 51% of such class of
common stock is held by the Company or one or more of its Restricted
Subsidiaries;
(viii) payments to Holdings (A) pursuant to the Tax Sharing Agreement
as in effect on the date of the Senior Subordinated Note Indenture and
(B) pursuant to the Tax Sharing Agreement as amended from time to
time; provided however; that in no event shall the amount permitted to
be paid pursuant to this clause (viii) (B) exceed the amount the
Company would be required to pay for income taxes were it to file a
consolidated tax return for itself and its consolidated Restricted
Subsidiaries;
(ix) any other Restricted Investment made in a Permitted Business
which, together with all other Restricted Investments made pursuant to
this clause (ix) since the date of the Senior Subordinated Note
Indenture, does not exceed $30.0 million (in each case, after giving
effect to all subsequent reductions in the amount of any Restricted
Investment made pursuant to this clause (ix), either as a result of
(A) the repayment or disposition thereof for cash or (B) as a result
of the redesignation of an Unrestricted Subsidiary as a Restricted
Subsidiary (valued proportionate to the Company's equity interest in
such Subsidiary at the time of such redesignation) at the fair market
value of the net assets of such Subsidiary at the time of such
redesignation), in the case of clause (A) and (B), not to exceed the
amount of such Restricted Investment previously made pursuant to this
clause (ix); provided that no Default or Event of Default shall have
occurred and be continuing immediately after making such Restricted
Investment;
(x) the declaration and payment of dividends to holders of any class
or series of Disqualified Stock of the Company or any Guarantor issued
after the date of the Senior Subordinated Note Indenture in accordance
with the covenant described below under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock;" provided that no
Default or Event of Default shall have occurred and be continuing
immediately after such declaration or payment;
(xi) repurchases of Equity Interests deemed to occur upon exercise of
stock options if such Equity Interests represent a portion of the
exercise price of such options;
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(xii) (A) payments made by the Company in respect of statutory
appraisal rights (and any settlement thereof) and (B) payments made by
the Company to fund the cash consideration payable in the Merger
(including pursuant to statutory appraisal rights and any settlement
thereof) to security holders of Holdings (including without
limitation, the Cash Merger Consideration, the Option Cash Proceeds
and the Warrant Cash Proceeds) and fees and expenses of the Company
and Holdings in connection with the Merger and (C) dividends to
Holdings for any such payments referred to in clause (B);
(xiii) a Restricted Payment to pay for the repurchase, retirement or
other acquisition or retirement for value of Equity Interests of
Holdings outstanding on the date of the Senior Subordinated Note
Indenture and which are not held by the Principals or any member of
management of Holdings or any Subsidiary of Holdings on the date of
the Senior Subordinated Note Indenture (including any Equity Interests
issued in respect of such Equity Interests as a result of a stock
split, recapitalization, merger, combination, consolidation or
otherwise, but excluding any Equity Interests issued pursuant to any
management equity plan or stock option plan or similar agreement),
provided that the aggregate Restricted Payments made under this clause
(xiii) shall not exceed $40.0 million, provided further that prior to
the first anniversary of the consummation of the Merger, the aggregate
amount of Restricted Payments made under this clause (xiii) shall not
exceed $20.0 million, provided further that notwithstanding the
foregoing proviso, the Company shall be permitted to make Restricted
Payments under this clause (xiii) only if after giving effect thereto,
the Company would be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described under the
caption entitled "--Incurrence of Indebtedness and Issuance of
Preferred Stock;" provided that no Default or Event of Default shall
have occurred and be continuing immediately after making such
Restricted Payment;
(xiv) the payment of dividends on the Company's common stock,
following the first public offering of the Company's or Holdings'
common stock after the date of the Senior Subordinated Note Indenture,
of up to 6.0% per annum of (A) the net proceeds received by the
Company from such public offering of its common stock or (B) the net
proceeds received by the Company from such public offering of
Holdings' common stock as common equity or preferred equity (other
than Disqualified Stock), other than, in each case, with respect to
public offerings with respect to the Company's or Holdings' common
stock registered on Form S-8; provided that no Default or Event of
Default shall have occurred and be continuing immediately after any
such payment of dividends;
(xv) the declaration and payment of dividends to holders of any class
or series of Designated Preferred Stock issued after the date of the
Senior Subordinated Note Indenture; provided, however, immediately
after the date of issuance of such Designated Preferred Stock, after
giving effect to such issuance on a pro forma basis, the Company would
have been permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant described below under caption entitled
"--Incurrence of Indebtedness and Issuance of Preferred Stock;"
(xvi) any other Restricted Payment which, together with all other
Restricted Payments made pursuant to this clause (xvi) since the date
of the Senior Subordinated Note Indenture, does not exceed $20.0
million (in each case, after giving effect to all subsequent
reductions in the amount of any Restricted Investment made pursuant to
this clause (xvi) either as a result of (A) the repayment or
disposition thereof for cash or (B) the redesignation of an
Unrestricted Subsidiary as a Restricted Subsidiary (valued
proportionate to the Company's equity interest in such Subsidiary at
the time of such redesignation) at the fair market value of the net
assets of such Subsidiary at the time of such redesignation), in the
case of clause (A) and (B), not to exceed the amount of such
Restricted Investment previously made pursuant to this clause (xvi);
provided that no Default or Event of Default shall have occurred and
be continuing immediately after making such Restricted Payment;
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(xvii) the pledge by the Company of the Capital Stock of an
Unrestricted Subsidiary of the Company to secure Non-Recourse Debt of
such Unrestricted Subsidiary; and
(xviii) distributions or payments of Receivables Fees.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such designation, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash)
in the Subsidiary so designated will be deemed to be Restricted Payments at
the time of such designation and will reduce the amount available for
Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Restricted Investments
in an amount equal to the greater of (i) the net book value of such
Investments at the time of such designation and (ii) the fair market value of
such Investments at the time of such designation. Such designation will only
be permitted if such Restricted Investment would be permitted at such time
and if such Restricted Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary.
The amount of (i) all Restricted Payments (other than Restricted Payments
made in cash) shall be the fair market value on the date of the Restricted
Payment of the asset(s) or securities proposed to be transferred or issued by
the Company or such Restricted Subsidiary, as the case may be, pursuant to
the Restricted Payment and (ii) Qualified Proceeds (other than cash) shall be
the fair market value on the date of receipt thereof by the Company of such
Qualified Proceeds. The fair market value of any non-cash Restricted Payment
and Qualified Proceeds shall be determined by the Board of Directors whose
resolution with respect thereto shall be delivered to the Trustee, such
determination to be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if such
fair market value exceeds $20.0 million. Not later than the date of making
any Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting
forth the basis upon which the calculations required by the covenant
"Restricted Payments" were computed, which calculations shall be based upon
the Company's latest available financial statements.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Senior Subordinated Note Indenture will provide that (i) the Company
will not, and will not permit any of its Restricted Subsidiaries to, directly
or indirectly, create, incur, issue, assume, guarantee or otherwise become,
directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt), (ii) that
neither the Company nor any Guarantor will issue any Disqualified Stock and
(iii) the Company will not permit any of the Company's Restricted
Subsidiaries that are not Guarantors to issue any shares of preferred stock;
provided, however, that the Company and any Guarantor may incur Indebtedness
(including Acquired Debt) or issue shares of Disqualified Stock, if the
Company's Fixed Charge Coverage Ratio for the Company's most recently ended
four fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is
incurred or such Disqualified Stock is issued would have been at least 2.00
to 1.00, determined on a pro forma basis (including a pro forma application
of the net proceeds therefrom), as if the additional Indebtedness had been
incurred, or the Disqualified Stock had been issued, as the case may be, at
the beginning of such four-quarter period.
The foregoing provisions will not apply to (collectively, "Permitted
Debt"):
(i) the incurrence by the Company and the Guarantors of Indebtedness
under the New Credit Facility; provided that the aggregate principal
amount of all Indebtedness (with letters of credit and bankers'
acceptances being deemed to have a principal amount equal to the maximum
face amount thereunder) outstanding under the New Credit Facility after
giving effect to such incurrence does not exceed an amount equal to $625.0
million;
(ii) the incurrence by the Company and any Guarantor of Indebtedness
represented by the Senior Subordinated Notes and the Subsidiary
Guarantees;
(iii) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in
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each case, incurred for the purpose of financing all or any part of the
purchase price or cost of construction or improvement of property used in
the business of the Company or such Restricted Subsidiary, in aggregate
principal amount not to exceed $25.0 million at any time outstanding;
(iv) Existing Indebtedness;
(v) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund,
Indebtedness that was permitted by the Senior Subordinated Note Indenture;
(vi) Indebtedness of the Company to a Restricted Subsidiary; provided
that any such Indebtedness is made pursuant to an intercompany note and is
subordinated in right of payment to the Senior Subordinated Notes;
provided further that any subsequent issuance or transfer of any Capital
Stock or other event which results in any such Restricted Subsidiary
ceasing to be a Restricted Subsidiary or any subsequent transfer of any
such Indebtedness (except to the Company or another Restricted Subsidiary)
shall be deemed, in each case, to be an incurrence of such Indebtedness;
(vii) Indebtedness of a Restricted Subsidiary to the Company or another
Restricted Subsidiary; provided that (i) any such Indebtedness is made
pursuant to an intercompany note and (ii) if a Guarantor incurs such
Indebtedness to a Restricted Subsidiary that is not a Guarantor, such
Indebtedness is subordinated in right of payment to the Subsidiary
Guarantee of such Guarantor; provided further that any subsequent issuance
or transfer of any Capital Stock of any Restricted Subsidiary to whom such
Indebtedness is owed or any other event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any
subsequent transfer of any such Indebtedness (except to the Company or
another Restricted Subsidiary) shall be deemed, in each case, to be an
incurrence of such Indebtedness;
(viii) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging (a) interest rate risk with respect to any floating rate
Indebtedness of such Person that is permitted by the terms of the Senior
Subordinated Note Indenture to be outstanding or (b) exchange rate risk
with respect to agreements or Indebtedness of such Person payable
denominated in a currency other than U.S. dollars; provided that such
agreements do not increase the Indebtedness of the obligor outstanding at
any time other than as a result of fluctuations in foreign currency
exchange rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder;
(ix) the incurrence by the Company or any of its Restricted Subsidiaries
of Acquired Debt in an aggregate principal amount at any time outstanding
not to exceed $25.0 million;
(x) the incurrence by the Company of Indebtedness (in addition to
Indebtedness permitted by any other clause of this paragraph) in an
aggregate principal amount at any time outstanding not to exceed $35.0
million;
(xi) Indebtedness arising from agreements of the Company or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, incurred or assumed in connection with
the disposition of any business, assets or a Restricted Subsidiary, other
than guarantees of Indebtedness incurred by any Person acquiring all or
any portion of such business, assets or a Restricted Subsidiary for the
purpose of financing such acquisition; provided, however, that (i) such
Indebtedness is not reflected on the balance sheet of the Company or any
Restricted Subsidiary (contingent obligations referred to in a footnote to
financial statements and not otherwise reflected on the balance sheet will
not be deemed to be reflected on such balance sheet for purposes of this
clause (i)) and (ii) the maximum assumable liability in respect of all
such Indebtedness shall at no time exceed the gross proceeds including
noncash proceeds (the fair market value of such noncash proceeds being
measured at the time received and without giving effect to any subsequent
changes in value) actually received by the Company and its Restricted
Subsidiaries in connection with such disposition;
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(xii) obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
in the ordinary course of business; and
(xiii) any guarantee by a Restricted Subsidiary of the Company of Senior
Debt or Pari Passu Indebtedness of the Company that was permitted to be
incurred under the Senior Subordinated Note Indenture; provided that,
prior to or concurrently with the issuance of such guarantee such
Restricted Subsidiary complies with the terms of the covenant entitled
"--Subsidiary Guarantees."
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xiii) above or
is entitled to be incurred pursuant to the first paragraph of this covenant,
the Company shall, in its sole discretion, classify such item of Indebtedness
in any manner that complies with this covenant and such item of Indebtedness
will be treated as having been incurred pursuant to only one of such clauses
or pursuant to the first paragraph hereof. Accrual of interest and the
accretion of accreted value will not be deemed to be an incurrence of
Indebtedness for purposes of this covenant.
Sale and Leaseback Transactions
The Senior Subordinated Note Indenture will provide that the Company will
not, and will not permit any of its Restricted Subsidiaries to, enter into
any sale and leaseback transaction; provided that the Company and any
Guarantor may enter into a sale and leaseback transaction if (i) the Company
or such Guarantor could have (a) incurred Indebtedness in an amount equal to
the Attributable Debt relating to such sale and leaseback transaction
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption entitled
"--Incurrence of Indebtedness and Issuance of Preferred Stock" and (b)
incurred a Lien to secure such Indebtedness pursuant to the covenant
described below under the caption entitled "--Liens," (ii) the gross cash
proceeds of such sale and leaseback transaction are at least equal to the
fair market value (as determined in good faith by the Board of Directors and
set forth in an Officers' Certificate delivered to the Trustee) of the
property that is the subject of such sale and leaseback transaction and (iii)
the transfer of assets in such sale and leaseback transaction is permitted
by, and the proceeds of such transaction are applied in compliance with, the
covenant described above under the caption entitled "--Repurchase at the
Option of Holders--Asset Sales."
Anti-Layering
The Senior Subordinated Note Indenture will provide that (i) the Company
will not directly or indirectly incur, create, issue, assume, guarantee or
otherwise become liable for any Indebtedness that is subordinate or junior in
right of payment to any Senior Debt and senior in any respect in right of
payment to the Senior Subordinated Notes and (ii) no Guarantor will incur,
create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to its
Guarantor Senior Debt and senior in any respect in right of payment to such
Guarantor's Subsidiary Guarantee.
Liens
The Senior Subordinated Note Indenture will provide that the Company will
not, and will not permit any Restricted Subsidiary to, directly or
indirectly, create, incur, assume or suffer to exist any Lien that secures
obligations under any Pari Passu Indebtedness or Subordinated Indebtedness on
any asset or property now owned or hereafter acquired by the Company or any
of its Restricted Subsidiaries, or any income or profits therefrom or assign
or convey any right to receive income therefrom, unless the Senior
Subordinated Notes or the Subsidiary Guarantees, as applicable, are equally
and ratably secured with the obligations so secured until such time as such
obligations are no longer secured by a Lien; provided, that in any case
involving a Lien securing Subordinated Indebtedness, such Lien is
subordinated to the Lien securing the Senior Subordinated Notes or the
Subsidiary Guarantees, as applicable, to the same extent that such
Subordinated Indebtedness is subordinated to the Senior Subordinated Notes or
the Subsidiary Guarantees, as applicable.
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Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Senior Subordinated Note Indenture will provide that the Company will
not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective
any encumbrance or restriction on the ability of any Restricted Subsidiary
to: (i) (a) pay dividends or make any other distributions to the Company or
any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with
respect to any other interest or participation in, or measured by, its
profits or (b) pay any Indebtedness owed to the Company or any of its
Restricted Subsidiaries; (ii) make loans or advances to the Company or any of
its Restricted Subsidiaries; or (iii) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness, as in effect on the date of the Senior Subordinated Note
Indenture; (b) the New Credit Facility and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof; provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings are no more restrictive with respect to such dividend and other
payment restrictions in the aggregate than those contained in the New Credit
Facility, as in effect on the date of the Senior Subordinated Note Indenture;
(c) the Senior Subordinated Note Indenture and the Senior Subordinated Notes;
(d) applicable law or any applicable rule, regulation or order; (e) any
agreement or other instrument of a Person acquired by the Company or any of
its Restricted Subsidiaries, as in effect at the time of such acquisition
(but not created in contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person, or the property or assets of the Person,
so acquired; (f) customary non-assignment provisions in leases entered into
in the ordinary course of business and consistent with past practices; (g)
purchase money obligations for property acquired in the ordinary course of
business that impose restrictions of the nature described in clause (iii)
above on the property so acquired; (h) contracts for the sale of assets,
including, without limitation, customary restrictions with respect to a
Subsidiary pursuant to an agreement that has been entered into for the sale
or disposition of all or substantially all of the Capital Stock or assets of
such Subsidiary; or (i) Permitted Refinancing Indebtedness; provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive with respect to such dividend and other
payment restrictions in the aggregate than those contained in the agreements
governing the Indebtedness being refinanced.
Merger, Consolidation, or Sale of Assets
The Senior Subordinated Note Indenture will provide that the Company may
not consolidate or merge with or into (whether or not the Company is the
surviving entity), or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets in one or
more related transactions to, another Person unless (i) the Company is the
surviving corporation or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the Person formed
by or surviving any such consolidation or merger (if other than the Company)
or the Person to which such sale, assignment, transfer, lease, conveyance or
other disposition will have been made assumes all the obligations of the
Company under the Senior Subordinated Notes and the Senior Subordinated Note
Indenture pursuant to a supplemental indenture in form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction, no
Default or Event of Default exists; (iv) the Company or the Person formed by
or surviving any such consolidation or merger, or to which such sale,
assignment, transfer, lease, conveyance or other disposition will have been
made will, at the time of such transaction after giving pro forma effect
thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under the
caption entitled "--Incurrence of Indebtedness and Issuance of Preferred
Stock" and (v) each Guarantor, if any, unless it is the other party to the
transactions described above, shall have by supplemental indenture confirmed
that its Subsidiary Guarantee shall apply to such Person's obligations under
the Indenture and the Senior Subordinated Notes. The foregoing clause (iv)
will not prohibit (a) a merger
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between the Company and a Wholly Owned Subsidiary of a Wholly Owned
Subsidiary of Holdings created for the purpose of holding the Capital Stock
of the Company, (b) a merger between the Company and a Wholly Owned
Restricted Subsidiary or (c) a merger between the Company and an Affiliate
incorporated solely for the purpose of reincorporating the Company in another
State of the United States so long as, in each case, the amount of
Indebtedness of the Company and its Restricted Subsidiaries is not increased
thereby.
Transactions with Affiliates
The Senior Subordinated Note Indenture will provide that the Company will
not, and will not permit any of its Restricted Subsidiaries to, make any
payment to, or sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase any property or assets from, or enter
into or make or amend any transaction, contract, agreement, understanding,
loan, advance or guarantee with or for the benefit of, any Affiliate (each of
the foregoing, an "Affiliate Transaction"), unless (i) such Affiliate
Transaction is on terms that are no less favorable to the Company or such
Restricted Subsidiary than those that would have been obtained in a
comparable transaction by the Company or such Restricted Subsidiary with an
unrelated Person and (ii) if such Affiliate Transaction involves aggregate
payments in excess of $5.0 million, the Company delivers to the Trustee
either (x) a resolution of the Board of Directors of the Company set forth in
an Officers' Certificate certifying that such Affiliate Transaction complies
with clause (i) above and such Affiliate Transaction is approved by a
majority of the members of the Board of Directors of the Company or (y) an
opinion as to the fairness to the Holders of the Senior Subordinated Notes of
such Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national standing;
provided, however, that (a) any employment agreement entered into by the
Company or any of its Restricted Subsidiaries in the ordinary course of
business and consistent with the past practice of the Company or such
Restricted Subsidiary, (b) transactions between or among the Company and/or
its Restricted Subsidiaries, (c) transactions between the Company or its
Restricted Subsidiaries on the one hand, and the Underwriter or its
Affiliates on the other hand, involving the provisions of financial,
consulting or underwriting services by the Underwriter or its Affiliates,
provided that the fees payable to the Underwriter or its Affiliates do not
exceed the usual and customary fees of the Underwriter and its Affiliates for
similar services, (d) transactions in accordance with the Specified
Agreements, as amended; provided that no such amendment contains any
provisions that are materially adverse to the Holders of the Senior
Subordinated Notes, (e) payment of employee benefits, including bonuses,
retirement plans and stock options, in the ordinary course of business,
consistent with past practice, (f) the payment of reasonable and customary
fees to, and indemnity provided on behalf of, officers, directors, employees
or consultants of the Company or any Restricted Subsidiary; (g) Restricted
Payments permitted by the provisions of the Senior Subordinated Note
Indenture described above under clauses (i), (iv), (v), (vi), (vii), (viii),
(xi), (xii) and (xvii) of the second paragraph of the covenant described
above under the caption entitled "--Restricted Payments," (h) payments and
transactions in connection with the Merger and the application of the net
proceeds from the Offering, including the payment of any fees and expenses
with respect thereto, (i) transactions pursuant to the Intercompany Note and
any forgiveness of Indebtedness thereunder, (j) transactions permitted by the
provisions of the Indenture under the covenant described below under the
caption entitled "--Sales of Accounts Receivable," in each case, shall not be
deemed Affiliate Transactions and (k) transactions pursuant to the Management
Loans.
Subsidiary Guarantees
(a) The Indenture will provide that the Company will not permit any
Restricted Subsidiary to guarantee the payment of any Indebtedness of the
Company or any Indebtedness of any other Restricted Subsidiary (in each case,
the "Guaranteed Debt") unless (i) if such Restricted Subsidiary is not a
Guarantor, such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the Senior Subordinated Note Indenture providing
for a Subsidiary Guarantee of payment of the Senior Subordinated Notes by
such Restricted Subsidiary, (ii) if the Senior Subordinated Notes or the
Subsidiary Guarantee (if any) of such Restricted Subsidiary are subordinated
in right of payment to the Guaranteed Debt, the Subsidiary Guarantee under
the supplemental indenture shall be subordinated to such Restricted
Subsidiary's guarantee with respect to the Guaranteed Debt substantially to
the same extent
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as the Senior Subordinated Notes or the Subsidiary Guarantee are subordinated
to the Guaranteed Debt under the Senior Subordinated Note Indenture, (iii) if
the Guaranteed Debt is by its express terms subordinated in right of payment
to the Senior Subordinated Notes or the Subsidiary Guarantee (if any) of such
Restricted Subsidiary, any such guarantee of such Restricted Subsidiary with
respect to the Guaranteed Debt shall be subordinated in right of payment to
such Restricted Subsidiary's Subsidiary Guarantee with respect to the Senior
Subordinated Notes substantially to the same extent as the Guaranteed Debt is
subordinated to the Senior Subordinated Notes or the Subsidiary Guarantee (if
any) of such Restricted Subsidiary, (iv) such Restricted Subsidiary waives
and will not in any manner whatsoever claim or take the benefit or advantage
of, any rights of reimbursement, indemnity or subrogation or any other rights
against the Company or any other Restricted Subsidiary as a result of any
payment by such Restricted Subsidiary under its Subsidiary Guarantee, and (v)
such Restricted Subsidiary shall deliver to the Trustee an opinion of counsel
to the effect that (A) such Subsidiary Guarantee of the Senior Subordinated
Notes has been duly executed and authorized and (B) such Subsidiary Guarantee
of the Senior Subordinated Notes constitutes a valid, binding and enforceable
obligation of such Restricted Subsidiary, except insofar as enforcement
thereof may be limited by bankruptcy, insolvency or similar laws (including,
without limitation, all laws relating to fraudulent transfers) and except
insofar as enforcement thereof is subject to general principles of equity.
(b) Notwithstanding the foregoing and the other provisions of the Senior
Subordinated Note Indenture, any Subsidiary Guarantee by a Restricted
Subsidiary of the Senior Subordinated Notes shall provide by its terms that
it shall be automatically and unconditionally released and discharged upon
(i) any sale, exchange or transfer, to any Person not an Affiliate of the
Company, of all of the Company's Capital Stock in, or all or substantially
all the assets of, such Restricted Subsidiary (which sale, exchange or
transfer is not prohibited by the Senior Subordinated Note Indenture) or (ii)
the release or discharge of the guarantee which resulted in the creation of
such Subsidiary Guarantee, except a discharge or release by or as a result of
payment under such guarantee.
Sales of Accounts Receivable
The Company may, and any of its Restricted Subsidiaries may, sell at any
time and from time to time, accounts receivable to any Accounts Receivable
Subsidiary; provided that (i) the aggregate consideration received in each
such sale is at least equal to the aggregate fair market value of the
receivables sold, as determined by the Board of Directors in good faith, (ii)
no less than 80% of the consideration received in each such sale consists of
either cash or a promissory note (a "Promissory Note") which is subordinated
to no Indebtedness or obligation other than the financial institution or
other entities providing the financing to the Accounts Receivable Subsidiary
with respect to such accounts receivable (the "Financier") and the remainder
of such consideration consists of an Equity Interest in such Accounts
Receivable Subsidiary; provided further that the Initial Sale will include
all accounts receivable of the Company and/or its Restricted Subsidiaries
that are party to such arrangements that constitute eligible receivables
under such arrangements, (iii) the cash proceeds received from the Initial
Sale less reasonable and customary transaction costs will be deemed to be Net
Proceeds and will be applied in accordance with the second paragraph of the
covenant described above under the caption entitled "--Repurchase at the
Option of Holders--Asset Sales," and (iv) the Company and its Restricted
Subsidiaries will sell all accounts receivable that constitute eligible
receivables under such arrangements to the Accounts Receivable Subsidiary no
less frequently than on a weekly basis.
The Company (i) will not permit any Accounts Receivable Subsidiary to sell
any accounts receivable purchased from the Company or any of its Restricted
Subsidiaries to any other person except on an arm's-length basis and solely
for consideration in the form of cash or Cash Equivalents, (ii) will not
permit the Accounts Receivable Subsidiary to engage in any business or
transaction other than the purchase, financing and sale of accounts
receivable of the Company and its Restricted Subsidiaries and activities
incidental thereto, (iii) will not permit any Accounts Receivable Subsidiary
to incur Indebtedness in an amount in excess of 97% of the book value of such
Accounts Receivable Subsidiary's total assets, as determined in accordance
with GAAP, (iv) will, at least as frequently as monthly, cause the Accounts
Receivable Subsidiary to remit to the Company as payment for additional
receivables or on the Promissory Notes or as a dividend, all available cash
or Cash Equivalents not held in a collection account
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pledged to a Financier, to the extent not applied to pay or maintain reserves
for reasonable operating expenses of the Accounts Receivable Subsidiary or to
satisfy reasonable minimum capital requirements based on then current market
practices of rating agencies in similar transactions involving receivables of
a similar type and quality, as determined by the Board of Directors in good
faith and (v) will not, and will not permit any of its Subsidiaries to, sell
accounts receivable to any Accounts Receivable Subsidiary upon (1) the
occurrence of an Event of Default with respect to the Company and its
Restricted Subsidiaries and (2) the occurrence of certain events of
bankruptcy or insolvency with respect to such Accounts Receivable Subsidiary.
Reports
The Senior Subordinated Note Indenture will provide that, whether or not
required by the rules and regulations of the Securities and Exchange
Commission (the "Commission"), so long as any Senior Subordinated Notes are
outstanding, the Company will furnish to the Holders of Senior Subordinated
Notes (i) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and
10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that describes the financial condition and results of operations
of the Company and its Restricted Subsidiaries and, with respect to the
annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required
to be filed with the Commission on Form 8-K if the Company were required to
file such reports. In addition whether or not required by the rules and
regulations of the Commission, the Company will file a copy of all such
information and reports with the Commission for public availability (unless
the Commission will not accept such a filing) and make such information
available to securities analysts and prospective investors upon request.
EVENTS OF DEFAULT AND REMEDIES
The Senior Subordinated Note Indenture will provide that each of the
following constitutes an Event of Default:
(i) default for 30 days in the payment when due of interest on the Senior
Subordinated Notes (whether or not prohibited by the subordination
provisions of the Senior Subordinated Note Indenture);
(ii) default in payment when due of principal or premium, if any, on the
Senior Subordinated Notes at maturity, upon redemption or otherwise
(whether or not prohibited by the subordination provisions of the Senior
Subordinated Note Indenture);
(iii) failure by the Company or any Guarantor for 30 days after receipt
of notice from the Trustee or Holders of at least 30% in principal amount
of the Senior Subordinated Notes then outstanding to comply with the
provisions of the covenants described under the captions entitled
"--Repurchase at the Option of Holders--Change of Control," "--Repurchase
at the Option of Holders--Asset Sales," "--Certain Covenants--Restricted
Payments," "--Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock," "--Certain Covenants--Sale and Leaseback
Transactions" or "--Certain Covenants--Merger, Consolidation or Sale of
Assets;"
(iv) failure by the Company or any Guarantor for 60 days after notice
from the Trustee or the Holders of at least 30% in principal amount of the
Senior Subordinated Notes then outstanding to comply with its other
agreements in the Senior Subordinated Note Indenture or the Senior
Subordinated Notes;
(v) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Restricted Subsidiaries) whether such Indebtedness or guarantee now
exists, or is created after the date of the Senior Subordinated Note
Indenture, which default (i) is caused by a failure to pay Indebtedness at
its stated final maturity (after giving effect to any applicable grace
period provided
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in such Indebtedness) (a "Payment Default") or (ii) results in the
acceleration of such Indebtedness prior to its stated final maturity and,
in each case, the principal amount of any such Indebtedness, together with
the principal amount of any other such Indebtedness under which there has
been a Payment Default or the maturity of which has been so accelerated,
aggregates $20.0 million or more;
(vi) failure by the Company or any of its Restricted Subsidiaries to pay
final judgments aggregating in excess of $20.0 million (net of any amounts
with respect to which a reputable and creditworthy insurance company has
acknowledged liability in writing), which judgments are not paid,
discharged or stayed within 60 days after their entry;
(vii) certain events of bankruptcy or insolvency with respect to the
Company or any Restricted Subsidiary that is a Significant Subsidiary; and
(viii) the termination of any Subsidiary Guarantee for any reason not
permitted by the Senior Subordinated Note Indenture, or the denial of any
Guarantor or any Person acting on behalf of any Guarantor of such
Guarantor's obligations under its respective Subsidiary Guarantee.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 30% in principal amount of the then outstanding Senior
Subordinated Notes may declare all the Senior Subordinated Notes to be due
and payable immediately; provided, however, that, so long as any Indebtedness
permitted to be incurred pursuant to the New Credit Facility shall be
outstanding, no such acceleration shall be effective until the earlier of (i)
acceleration of any such Indebtedness under the New Credit Facility or (ii)
five business days after the giving of written notice to the Company and the
representative under the New Credit Facility of such acceleration.
Notwithstanding the foregoing, in the case of an Event of Default arising
from certain events of bankruptcy or insolvency with respect to the Company
or any Guarantor that constitutes a Significant Subsidiary, all outstanding
Senior Subordinated Notes will become due and payable without further action
or notice. Holders of the Senior Subordinated Notes may not enforce the
Senior Subordinated Note Indenture or the Senior Subordinated Notes except as
provided in the Senior Subordinated Note Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then
outstanding Senior Subordinated Notes may direct the Trustee in its exercise
of any trust or power. In the event of a declaration of acceleration of the
Senior Subordinated Notes because an Event of Default has occurred and is
continuing as a result of the acceleration of any Indebtedness described in
clause (v) of the preceding paragraph, the declaration of acceleration of the
Senior Subordinated Notes shall be automatically annulled if the holders of
any Indebtedness described in clause (v) of the preceding paragraph have
rescinded the declaration of acceleration in respect of such Indebtedness
within 30 days of the date of such declaration and if (a) the annulment of
the acceleration of the Senior Subordinated Notes would not conflict with any
judgment or decree of a court of competent jurisdiction and (b) all existing
Events of Default, except nonpayment of principal or interest on the Notes
that became due solely because of the acceleration of the Senior Subordinated
Notes, have been cured or waived.
The Holders of a majority in aggregate principal amount of the Senior
Subordinated Notes then outstanding, by notice to the Trustee, may on behalf
of the Holders of all of the Senior Subordinated Notes waive any existing
Default or Event of Default and its consequences under the Senior
Subordinated Note Indenture, except a continuing Default or Event of Default
in the payment of interest or premium on, or principal of, the Senior
Subordinated Notes. The Trustee may withhold from Holders of the Senior
Subordinated Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in such Holders'
interest.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Senior Subordinated Note Indenture, and the
Company is required upon becoming aware of any Default or Event of Default to
deliver to the Trustee a statement specifying such Default or Event of
Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Guarantor, if any, shall have any liability for any obligations of the
Company or the Guarantors, if any, under the Senior
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Subordinated Notes, the Subsidiary Guarantees, if any, or the Senior
Subordinated Note Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of Senior
Subordinated Notes by accepting a Senior Subordinated Note waives and
releases all such liability. The waiver and release are part of the
consideration for issuance of the Senior Subordinated Notes. Such waiver may
not be effective to waive liabilities under the federal securities laws and
it is the view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have the
obligation of the Company discharged with respect to the outstanding Senior
Subordinated Notes and have each Guarantor's obligation discharged with
respect to its Subsidiary Guarantee ("legal defeasance"). Such legal
defeasance means that the Company and any Guarantor will be deemed to have
paid and discharged the entire indebtedness represented by the outstanding
Senior Subordinated Notes and Subsidiary Guarantees, except for (a) the
rights of Holders of outstanding Senior Subordinated Notes to receive
payments in respect of the principal of, premium, if any, and interest on the
Senior Subordinated Notes when such payments are due, or on the redemption
date, as the case may be, (b) the Company's obligations with respect to the
Senior Subordinated Notes concerning issuing temporary Senior Subordinated
Notes, registration of Senior Subordinated Notes, mutilated, destroyed, lost
or stolen Senior Subordinated Notes and the maintenance of an office or
agency for payment and money for security payments held in trust, (c) the
rights, powers, trusts, duties, indemnities and immunities of the Trustee,
and the Company's obligations in connection therewith and (d) the legal
defeasance provisions of the Senior Subordinated Note Indenture. In addition,
the Company may, at its option and at any time, elect to have the obligations
of the Company and each Guarantor released with respect to certain covenants
that are described in the Senior Subordinated Note Indenture ("covenant
defeasance") and thereafter any omission to comply with such obligations
shall not constitute a Default or Event of Default with respect to the Senior
Subordinated Notes. In the event covenant defeasance occurs, certain events
(not including non-payment, bankruptcy, receivership, rehabilitation and
insolvency events) described under "--Events of Default and Remedies" will no
longer constitute an Event of Default with respect to the Senior Subordinated
Notes.
In order to exercise either legal defeasance or covenant defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the Senior Subordinated Notes, cash in U.S.
dollars, non-callable Government Securities, or a combination thereof, in
such amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants selected by the Trustee, to pay the
principal of, premium, if any, and interest on the outstanding Senior
Subordinated Notes on the stated maturity or on the applicable optional
redemption date, as the case may be, and the Company must specify whether the
Senior Subordinated Notes are being defeased to maturity or to a particular
redemption date; (ii) in the case of legal defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Senior Subordinated Note Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm
that, subject to customary assumptions and exclusions, the Holders of the
outstanding Senior Subordinated Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such legal defeasance and will
be subject to federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such legal defeasance had
not occurred; (iii) in the case of covenant defeasance, the Company shall
have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that, subject to customary
assumptions and exclusions, the Holders of the outstanding Senior
Subordinated Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such covenant defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such covenant defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such deposit)
or insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the
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period ending on the 91st day after the date of deposit; (v) such legal
defeasance or covenant defeasance will not result in a breach or violation
of, or constitute a default under any material agreement or instrument (other
than the Senior Subordinated Note Indenture) to which the Company or any of
its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company must have delivered to the Trustee an
opinion of counsel to the effect that, subject to customary assumptions and
exclusions (which assumptions and exclusions shall not relate to the
operation of Section 547 of the United States Bankruptcy Code or any
analogous New York State law provision), after the 91st day following the
deposit, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of Senior Subordinated Notes over the other
creditors of the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and (viii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel
(which opinion of counsel may be subject to customary assumptions and
exclusions), each stating that all conditions precedent provided for or
relating to the legal defeasance or the covenant defeasance, as the case may
be, have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Senior Subordinated Notes in accordance
with the Senior Subordinated Note Indenture. The Registrar and the Trustee
may require a Holder, among other things, to furnish appropriate endorsements
and transfer documents and the Company may require a Holder to pay any taxes
and fees required by law or permitted by the Senior Subordinated Note
Indenture. The Company is not required to transfer or exchange any Senior
Subordinated Note selected for redemption. Also, the Company is not required
to transfer or exchange any Senior Subordinated Note for a period of 15 days
before a selection of Senior Subordinated Notes to be redeemed.
The registered Holder of a Senior Subordinated Note will be treated as the
owner of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Senior
Subordinated Note Indenture, the Senior Subordinated Notes or the Subsidiary
Guarantees may be amended or supplemented with the consent of the Holders of
at least a majority in principal amount of the Senior Subordinated Notes then
outstanding (including, without limitation, consents obtained in connection
with a purchase of, or tender offer or exchange offer for, Senior
Subordinated Notes), and any existing default or compliance with any
provision of the Senior Subordinated Note Indenture or the Senior
Subordinated Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Senior Subordinated
Notes (including, without limitation, consents obtained in connection with a
purchase of, or tender offer or exchange offer for, Senior Subordinated
Notes).
Without the consent of each Holder affected, however, an amendment or
waiver may not (with respect to any Senior Subordinated Note held by a
non-consenting Holder): (i) reduce the principal amount of Senior
Subordinated Notes whose Holders must consent to an amendment, supplement or
waiver; (ii) reduce the principal of or change the fixed maturity of any
Senior Subordinated Note or alter the provisions with respect to the
redemption of the Senior Subordinated Notes (other than provisions relating
to the covenants described above under the caption entitled "--Repurchase at
the Option of Holders"); (iii) reduce the rate of or change the time for
payment of interest on any Senior Subordinated Notes; (iv) waive a Default or
Event of Default in the payment of principal of, or premium, if any, or
interest on the Senior Subordinated Notes (except a rescission of
acceleration of the Senior Subordinated Notes by the Holders of at least a
majority in aggregate principal amount of the Senior Subordinated Notes and a
waiver of the payment default that resulted from such acceleration); (v) make
any Senior Subordinated Note payable in money other than that stated in the
Senior Subordinated Notes; (vi) waive a redemption or repurchase payment with
respect to any Senior Subordinated Note (other a payment required by one of
the covenants described above under the caption entitled "--Repurchase at the
Option
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of Holders"), (vii) make any change in the foregoing amendment and waiver
provisions or (viii) except as provided under the caption "--Legal Defeasance
and Covenant Defeasance" or in accordance with the terms of any Subsidiary
Guarantee, release a Guarantor from its obligations under its Subsidiary
Guarantee or make any change in a Subsidiary Guarantee that would adversely
affect the Holders of the Senior Subordinated Notes. Notwithstanding the
foregoing, any (i) amendment or waiver to the covenant described above under
the caption "--Repurchase at the Option of Holders--Change of Control," and
(ii) any amendment or waiver relating to the subordination provisions of the
Senior Subordinated Notes and the Subsidiary Guarantees will require the
consent of the Holders of at least two-thirds in aggregate principal amount
of the Senior Subordinated Notes then outstanding if such amendment would
adversely affect the rights of Holders of Senior Subordinated Notes.
Notwithstanding the foregoing, without the consent of any Holder of Senior
Subordinated Notes, the Company, a Guarantor (with respect to a Subsidiary
Guarantee or the Indenture to which it is a party) and the Trustee may amend
or supplement the Senior Subordinated Note Indenture, the Senior Subordinated
Notes or the Subsidiary Guarantees to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Senior Subordinated Notes in
addition to or in place of certificated Senior Subordinated Notes, to provide
for the assumption of the Company's or any Guarantor's obligations to Holders
of the Senior Subordinated Notes in the case of a merger or consolidation, to
make any change that would provide any additional rights or benefits to the
Holders of the Senior Subordinated Notes or that does not adversely affect
the legal rights under the Senior Subordinated Note Indenture of any such
Holder, to comply with requirements of the Commission in order to effect or
maintain the qualification of the Senior Subordinated Note Indenture under
the Trust Indenture Act or to allow any Guarantor to guarantee the Senior
Subordinated Notes.
CONCERNING THE TRUSTEE
The Senior Subordinated Note Indenture contains certain limitations on the
rights of the Trustee, should the Trustee become a creditor of the Company,
to obtain payment of claims in certain cases, or to realize on certain
property received in respect of any such claim as security or otherwise. The
Trustee will be permitted to engage in other transactions with the Company;
however, if the Trustee acquires any conflicting interest, it must eliminate
such conflict within 90 days, apply to the Commission for permission to
continue as Trustee or resign.
The Holders of a majority in aggregate principal amount of the then
outstanding Senior Subordinated Notes will have the right to direct the time,
method and place of conducting any proceeding for exercising any remedy
available to the Trustee subject to certain exceptions. The Senior
Subordinated Note Indenture provides that in case an Event of Default shall
occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Senior
Subordinated Note Indenture at the request of any Holder of Senior
Subordinated Notes, unless such Holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Senior
Subordinated Note Indenture, without charge by writing to the Company, 50
East Swedesford Road, Frazer, Pennsylvania 19355, Attention: General Counsel.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Senior Subordinated
Note Indenture. Reference is made to the Senior Subordinated Note Indenture
for a full disclosure of all such terms, as well as any other capitalized
terms used herein for which no definition is provided.
"Accounts Receivable Subsidiary" means any newly created, Wholly Owned
Subsidiary of the Company (i) which is formed solely for the purpose of, and
which engages in no activities other than
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activities in connection with, financing accounts receivable of the Company
and/or its Restricted Subsidiaries, (ii) which is designated by the Board of
Directors of the Company as an Accounts Receivables Subsidiary pursuant to a
Board of Directors' resolution set forth in an Officers' Certificate and
delivered to the Trustee, (iii) that has total assets at the time of such
designation with a book value not exceeding $500,000 plus the reasonable fees
and expenses required to establish such Accounts Receivable Subsidiary and
any accounts receivable financing, (iv) no portion of Indebtedness or any
other obligation (contingent or otherwise) of which (a) is at any time
recourse to or obligates the Company or any Restricted Subsidiary of the
Company in any way, other than pursuant to (I) representations and covenants
entered into in the ordinary course of business in connection with the sale
of accounts receivable to such Accounts Receivable Subsidiary or (II) any
guarantee of any such accounts receivable financing by the Company or any
Restricted Subsidiary that is permitted to be incurred pursuant to the
covenant described under the caption entitled "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," or
(b) subjects any property or asset of the Company or any Restricted
Subsidiary of the Company, directly or indirectly, contingently or otherwise,
to the satisfaction thereof, other than pursuant to (I) representations and
covenants entered into in the ordinary course of business in connection with
sales of accounts receivable or (II) any guarantee of any such accounts
receivable financing by the Company that is permitted to be incurred pursuant
to the covenant described under the caption entitled "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," (v)
with which neither the Company nor any Restricted Subsidiary of the Company
has any contract, agreement, arrangement or understanding other than
contracts, agreements, arrangements and understandings entered into in the
ordinary course of business in connection with sales of accounts receivable
in accordance with the covenant described under the caption "--Certain
Covenants--Sales of Accounts Receivable" and fees payable in the ordinary
course of business in connection with servicing accounts receivable and (vi)
with respect to which neither the Company nor any Restricted Subsidiary of
the Company has any obligation (a) to subscribe for additional shares of
Capital Stock or other Equity Interests therein or make any additional
capital contribution or similar payment or transfer thereto other than in
connection with the sale of accounts receivable to such Accounts Receivable
Subsidiary in accordance with the covenant described under "--Certain
Covenants--Sales of Accounts Receivable" or (b) to maintain or preserve the
solvency or any balance sheet term, financial condition, level of income or
results of operations thereof.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person
merges with or into or becomes a Subsidiary of such specified Person
including, without limitation, Indebtedness incurred in connection with, or
in contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person or assumed in
connection with the acquisition of any asset used or useful in a Permitted
Business acquired by such specified Person.
"Adjusted Consolidated Net Income" means, with respect to any Person for
any period, the Consolidated Net Income of such Person for such period plus,
to the extent deducted in calculating Consolidated Net Income, the sum of (i)
100% of the aggregate amortization of intangibles plus, with respect to the
Company, up to $25 million arising from any write-off of intangibles
reflected on the Company's balance sheet as of March 31, 1997 for such period
of such Person and its Restricted Subsidiaries less any tax benefit recorded
by such Person as a result of such amortization, (ii) 100% of non-cash
compensation expense for such period incurred by such Person and its
Restricted Subsidiaries related to stock options or other Equity Interests
granted to the employees or directors of such Person and its Restricted
Subsidiaries, (iii) expenses and charges of the Company related to the Merger
which are paid, taken or otherwise accounted for within 90 days of the
consummation of the Merger, and (iv) 100% of any loss realized in connection
with the extinguishment of Indebtedness pursuant to the Intercompany Loan.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and
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"under common control with") as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a sale and leaseback)
other than (A) in the ordinary course of business or (B) sales of accounts
receivables to the Accounts Receivables Subsidiary in accordance with the
covenant described under the caption entitled "--Certain Covenants--Sales of
Accounts Receivable" (provided that the sale, lease, conveyance or other
disposition of all or substantially all of the assets of the Company and its
Subsidiaries taken as a whole will be governed by the provisions of the
Senior Subordinated Note Indenture described above under the caption entitled
"--Repurchase at the Option of Holders--Change of Control" and/or the
provisions described above under the caption entitled "--Certain
Covenants--Merger, Consolidation or Sale of Assets" and not by the provisions
of the Asset Sale covenant); and (ii) the issue by any Restricted Subsidiary
of the Company of any Equity Interests of such Restricted Subsidiary and the
sale by the Company or any of its Restricted Subsidiaries of Equity Interests
of any of the Company's Subsidiaries, in the case of clauses (i) and (ii),
whether in a single transaction or series of related transactions (a) that
have a fair market value in excess of $1.0 million or (b) for net proceeds in
excess of $1.0 million. Notwithstanding the foregoing: (1) a transfer of
assets by the Company to a Restricted Subsidiary or by a Restricted
Subsidiary to the Company or to another Restricted Subsidiary, (2) an
issuance of Equity Interests by a Restricted Subsidiary to the Company or to
another Restricted Subsidiary, (3) a Restricted Payment that is permitted by
the covenant described above under the caption entitled "--Certain
Covenants--Restricted Payments," (4) the sale and leaseback of any assets
within 90 days of the acquisition of such assets, (5) foreclosures on assets
and (6) a disposition of Cash Equivalents in the ordinary course of business
will not be deemed to be Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining
term of the lease included in such sale and leaseback transaction (including
any period for which such lease has been extended or may, at the option of
the lessor, be extended).
"Business" shall have the meaning assigned to such term in Article 11,
Rule 11-01(d) of Regulation S-X, promulgated pursuant to the Securities Act,
as such regulation is in effect on the date of the Indenture.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means, (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated)
of corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right
to receive a share of the profits and losses of, or distributions of assets
of, the issuing Person.
"Cash Equivalents" means (i) Government Securities, (ii) any certificate
of deposit maturing not more than 365 days after the date of acquisition
issued by, or time deposit of, an Eligible Institution or any lender under
the New Credit Facility, (iii) commercial paper maturing not more than 365
days after the date of acquisition of an issuer (other than an Affiliate of
the Company) with a rating, at the time as of which any investment therein is
made, of "A-3" (or higher) according to S&P or "P-2" (or higher) according to
Moody's or carrying an equivalent rating by a nationally recognized rating
agency if both of the two named rating agencies cease publishing ratings of
investments, (iv) any bankers acceptances or money market deposit accounts
issued by an Eligible Institution and (v) any fund investing exclusively in
investments of the types described in clauses (i) through (iv) above.
"Change of Control" means the occurrence of any of the following: (i) any
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation) in one or a series of
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related transactions, of all or substantially all of the assets of the
Company and its Subsidiaries taken as a whole to any "person" (as defined in
Section 13(d) of the Exchange Act) or "group" (as defined in Sections
13(d)(3) and 14(d)(2) of the Exchange Act) other than the Principals and
their Related Parties; (ii) the adoption of a plan for the liquidation or
dissolution of the Company; (iii) the Company consolidates with, or merges
with or into, another "person" (as defined above) or "group" (as defined
above) in a transaction or series of related transactions in which the Voting
Stock of the Company is converted into or exchanged for cash, securities or
other property, other than any transaction where (A) the outstanding Voting
Stock of the Company is converted into or exchanged for Voting Stock (other
than Disqualified Stock) of the surviving or transferee corporation and (B)
either (1) the "beneficial owners" (as defined in Rule 13d-3 under the
Exchange Act) of the Voting Stock of the Company immediately prior to such
transaction own, directly or indirectly through one or more Subsidiaries, not
less than a majority of the total Voting Stock of the surviving or transferee
corporation immediately after such transaction or (2) if, immediately prior
to such transaction the Company is a direct or indirect Subsidiary of any
other Person (such other Person, the "Holding Company"), then the "beneficial
owners" (as defined above) of the Voting Stock of such Holding Company
immediately prior to such transaction own, directly or indirectly through one
or more Subsidiaries, not less than a majority of the Voting Stock of the
surviving or transferee corporation immediately after such transaction; (iv)
the consummation of any transaction or series of related transactions
(including, without limitation, by way of merger or consolidation) the result
of which is that any "person" (as defined above) or "group" (as defined
above) other than the Principals and their Related Parties becomes the
"beneficial owner" (as defined above) of more than 50% of the voting power of
the Voting Stock of the Company or any Holding Company of the Company or (v)
the first day on which a majority of the members of the Board of Directors of
the Company or any Holding Company of the Company are not Continuing
Directors.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person and its Restricted Subsidiaries
for such period, plus, to the extent deducted in computing Consolidated Net
Income, (i) provision for taxes based on income or profits of such Person and
its Restricted Subsidiaries for such period, (ii) Fixed Charges of such
Person for such period, (iii) depreciation and amortization (including
amortization of goodwill and other intangibles) and all other non-cash
charges (excluding any such non-cash charge to the extent that it represents
(x) an accrual of or reserve for cash charges in any future period, (y)
amortization of a prepaid cash expense that was paid in a prior period or (z)
amortization attributable to rotable inventory which has been capitalized in
accordance with GAAP) of such Person and its Restricted Subsidiaries for such
period, (iv) any net loss realized in connection with any Asset Sale and any
extraordinary or non-recurring loss, in each case, on a consolidated basis
determined in accordance with GAAP and (v) expenses and charges of the
Company related to the Merger which are paid, taken or otherwise accounted
for within 90 days of the consummation of the Merger. Notwithstanding the
foregoing, the provision for taxes based on the income or profits of, the
Fixed Charges of, and the depreciation and amortization and other non-cash
charges of, a Restricted Subsidiary of a Person shall be added to
Consolidated Net Income to compute Consolidated Cash Flow only to the extent
(and in the same proportion) that the Net Income of such Restricted
Subsidiary was included in calculating the Consolidated Net Income of such
Person.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of: (a) the interest expense of such Person and its
Restricted Subsidiaries for such period, on a consolidated basis, determined
in accordance with GAAP (including amortization of original issue discount,
non-cash interest payments, the interest component of all payments associated
with Capital Lease Obligations, imputed interest with respect to Attributable
Debt, commissions, discounts and other fees and charges incurred in respect
of letter of credit or bankers' acceptance financings, and net payments, if
any, pursuant to Hedging Obligations; provided, however, that in no event
shall any amortization of deferred financing costs be included in
Consolidated Interest Expense) and (b) consolidated capitalized interest of
such Person and its Restricted Subsidiaries for such period, whether paid or
accrued.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in
accordance with GAAP; provided, however, that (i) the Net Income or loss of
any Person
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that is not a Restricted Subsidiary or that is accounted for by the equity
method of accounting shall be included only to the extent of the amount of
dividends or distributions paid to the referent Person or a Restricted
Subsidiary thereof in cash, (ii) the Net Income of any Person acquired in a
pooling of interests transaction for any period prior to, the date of such
acquisition shall be excluded, (iii) the cumulative effect of a change in
accounting principles, shall be excluded, and (iv) the Net Income of any
Restricted Subsidiary shall be excluded to the extent that the declaration or
payment of dividends or similar distributions by that Restricted Subsidiary
of that Net Income is not, at the date of determination, permitted without
any prior governmental approval (which has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors the Company or any Holding Company of the Company
who (i) was a member of such Board of Directors immediately after
consummation of the Merger, including the Offering and the application of the
net proceeds thereof, or (ii) was nominated for election or elected to such
Board of Directors with the approval of a majority of the Continuing
Directors who were members of such Board at the time of such nomination or
election or any successor Continuing Directors appointed by such Continuing
Directors (or their successors).
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Designated Preferred Stock" means preferred stock of the Company (other
than Disqualified Stock) that is issued for cash (other than to a Restricted
Subsidiary) and is so designated as Designated Preferred Stock, pursuant to
an Officers' Certificate executed by the principal executive officer and the
principal financial officer of the Company, on the issuance date thereof, the
cash proceeds of which are excluded from the calculation set forth in clause
(c) of the covenant described under the caption entitled "--Certain
Covenants--Restricted Payments."
"Disqualified Stock" means, with respect to any Person, any Capital Stock
that, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, is exchangeable for Indebtedness (except to the
extent exchangeable at the option of such Person subject to the terms of any
debt instrument to which such Person is a party), or is redeemable at the
option of the Holder thereof, in whole or in part, on or prior to the date on
which the Senior Subordinated Notes mature; provided, however, that if such
Capital Stock is issued to any plan for the benefit of employees of the
Company or its Subsidiaries or by any such plan to such employees, such
Capital Stock shall not constitute Disqualified Stock solely because it may
be required to be repurchased by the Company in order to satisfy applicable
statutory or regulatory obligations.
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus not less than $100.0 million or its equivalent
in foreign currency, whose short-term debt is rated "A-3" or higher according
to Standard & Poor's Ratings Group ("S&P") or "P-2" or higher according to
Moody's Investor Services, Inc. ("Moody's") or carrying an equivalent rating
by a nationally recognized rating agency if both of the two named rating
agencies cease publishing ratings of investments.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any (i) issuance of common stock or preferred
stock by the Company (other than to Holdings and other than Disqualified
Stock) or Holdings (other than Disqualified Stock) that is registered
pursuant to the Securities Act, other than issuances registered on Form S-8
and issuances registered on Form S-4, and (ii) any private issuance of common
stock or preferred stock by the Company (other than to Holdings and other
than Disqualified Stock) or Holdings (other than Disqualified Stock),
excluding, in the case of clauses (i) and (ii) above, issuances of common
stock pursuant to employee benefit plans of Holdings or the Company or
otherwise as compensation to employees of the Company or Holdings.
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"Existing Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries (other than Indebtedness under the New Credit
Facility) in existence on the date of the Senior Subordinated Note Indenture
until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the Consolidated Interest Expense of such Person
for such period and (ii) any interest expense on Indebtedness of another
Person that is guaranteed by the referent Person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or one of its
Restricted Subsidiaries (whether or not such guarantee or Lien is called
upon) and (iii) the product of (a) all cash dividend payments of the Company
and any Guarantor on any series of preferred stock of the Company or such
Guarantor times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state
and local statutory tax rate of such Person, expressed as a decimal, in each
case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person
and its Restricted Subsidiaries for such period. In the event that the
Company or any of its Restricted Subsidiaries incurs, assumes, guarantees,
redeems or repays any Indebtedness (other than revolving credit borrowings)
or issues or redeems preferred stock subsequent to the commencement of the
period for which the Fixed Charge Coverage Ratio is being calculated but on
or prior to the date on which the event for which the calculation of the
Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed
Charge Coverage Ratio shall be calculated giving pro forma effect to such
incurrence, assumption, guarantee, redemption or repayment of Indebtedness,
or such issuance or redemption of preferred stock, as if the same had
occurred at the beginning of the applicable four-quarter reference period.
For purposes of making the computation referred to above, (i) the
Consolidated Cash Flow of the Company shall include (a) the Consolidated Cash
Flow of the Company and its Restricted Subsidiaries for the latest
four-quarter period for which consolidated internal financial statements of
the Company are available as derived from such financial statements plus or
minus (b) with respect to any Business or Qualified Contracts that have been
acquired by the Company or any of its Restricted Subsidiaries, including
through mergers or consolidations, after the first day of the applicable
four-quarter period and prior to the Calculation Date, the result of (1) the
Consolidated Cash Flow of such Business or Qualified Contracts for the most
recent three-month period prior to such acquisition for which internal
financial statements in respect of such acquired Business or Qualified
Contracts are available times four multiplied by (2) a fraction the numerator
of which is 365 minus the number of days during the relevant four-quarter
period for which the results of operations of such Business or Qualified
Contracts were included in clause (a) of this sentence and the denominator of
which is 365, (ii) the acquisition of any Business or Qualified Contracts
that has been made by the Company or any of its Restricted Subsidiaries,
including through mergers or consolidations and including any related
financing transactions after the first day of the applicable four-quarter
period and on or prior to the Calculation Date shall give pro forma effect to
financing transactions (including the incurrence of Acquired Debt) in
connection with the acquisition of such Business or Qualified Contracts, as
if such acquisition had occurred at the beginning of the applicable reference
period, and (iii) the Consolidated Cash Flow and expenses attributable to
discontinued operations as determined in accordance with GAAP, and
operations, Businesses and Qualified Contracts disposed of prior to the
Calculation Date shall be excluded. For purposes of the foregoing clause (i),
the Consolidated Cash Flow attributable to any Business or Qualified
Contracts acquired by the Company or any Restricted Subsidiary of the Company
shall be calculated utilizing the actual revenues attributable to such
Business or Qualified Contracts for the applicable period and the expenses
that would have been attributable to such Business or Qualified Contracts had
the Company acquired such Business or Qualified Contracts at the beginning of
the applicable three-month period, as determined in good faith by the
Company, taking into account the Company's historical expenses in connection
with the provision of similar services for similar equipment under similar
contracts. If since the beginning of the applicable four-quarter period any
Person (that subsequently becomes a Restricted Subsidiary or was merged with
or into the Company or any Restricted Subsidiary since the beginning of such
period) shall have made or engaged in any Investment, disposition of
operations, Businesses or Qualified Contracts, or merger or consolidation, or
shall have discontinued any operations or acquired
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any Business or Qualified Contracts that would have required adjustment
pursuant to this definition had such Person been a Restricted Subsidiary at
the time of such Investment, disposition, merger, consolidation, discontinued
operation or acquisition, then "Consolidated Cash Flow" shall be calculated
giving pro forma effect thereto for such period as if such Investment,
acquisition, disposition, merger, consolidation or discontinued operation had
occurred at the beginning of the applicable four-quarter period.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment
of the accounting profession of the United States, which are in effect on the
date of the Senior Subordinated Note Indenture; provided, however, that all
reports and other financial information provided by the Company to the
Holders, the Trustee and/or the Commission shall be prepared accordance with
GAAP, as in effect on the date of such report or other financial information.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which
guarantee or obligations the full faith and credit of the United States of
America is pledged.
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantor" means any Restricted Subsidiary that shall have guaranteed,
pursuant to a supplemental indenture and the requirements therefor set forth
in the Senior Subordinated Note Indenture, the payment of all principal of,
and interest and premium, if any, on, the Senior Subordinated Notes and all
other amounts payable under the Senior Subordinated Notes or the Senior
Subordinated Note Indenture, which guarantee shall be subordinate to all
Senior Debt and pari passu with or senior to all other Indebtedness of such
Restricted Subsidiary.
"Guarantor Senior Debt" means, with respect to any Guarantor, (i) all
Indebtedness of such Guarantor outstanding under the New Credit Facility and
all Hedging Obligations with respect thereto, (ii) any other Indebtedness
permitted to be incurred by such Guarantor under the terms of the Senior
Subordinated Note Indenture, unless the instrument under which such
Indebtedness is incurred expressly provides that it is on a parity with or
subordinated in right of payment to the Subsidiary Guarantee of such
Guarantor and (iii) all Obligations with respect to the foregoing.
Notwithstanding anything to the contrary in the foregoing, Guarantor Senior
Debt will not include (a) any liability for federal, state, local or other
taxes owed or owing by such Guarantor or any of its Subsidiaries, (b) any
Indebtedness of such Guarantor to any of its Subsidiaries or other
Affiliates, (c) any accounts payable or trade liabilities arising in the
ordinary course of business (including instruments evidencing such
liabilities) other than obligations in respect of bankers' acceptances and
letters of credit under the New Credit Facility, (d) any Indebtedness that is
incurred in violation of the Senior Subordinated Note Indenture, (e)
Indebtedness which, when incurred and without respect to any election under
Section 1111(b) of Title 11, United States Code, is without recourse to such
Guarantor, (f) any Indebtedness, guarantee or obligation of such Guarantor
which is subordinate or junior to any other Indebtedness, guarantee or
obligation of such Guarantor, (g) Indebtedness evidenced by the Subsidiary
Guarantee of such Guarantor and (h) Capital Stock of such Guarantor.
"Hedging Obligations" means, with respect to any Person, the obligations
of such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or foreign exchange rates.
"Holdings" means DecisionOne Holdings Corp., a Delaware corporation, the
corporate parent of the Company, or its successors.
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"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or representing Capital Lease
Obligations or the balance deferred and unpaid of the purchase price of any
property, except any such balance that constitutes an accrued expense or
trade payable, or representing any Hedging Obligations, if and to the extent
any of the foregoing indebtedness (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such
indebtedness is assumed by such Person), the maximum fixed repurchase price
of Disqualified Stock issued by such Person and the liquidation preference of
preferred stock issued by such Person, in each case, if held by any Person
other than the Company or a Wholly Owned Restricted Subsidiary of the
Company, and, to the extent not otherwise included, the guarantee by such
Person of any indebtedness of any other Person; provided that Indebtedness
shall not include the pledge by the Company of the Capital Stock of an
Unrestricted Subsidiary of the Company to secure Non-Recourse Debt of such
Unrestricted Subsidiary.
"Initial Sale" means (i) the first transaction after the commencement of
any accounts receivable financing arrangement in which accounts receivable
are sold by the Company and/or its Restricted Subsidiaries to an Accounts
Receivable Subsidiary and (ii) the first transaction following any amendment
to any such arrangement pursuant to which the class of eligible receivables
to be purchased pursuant to such arrangement is expanded in which such
expanded class of accounts receivable are sold by the Company and/or its
Restricted Subsidiaries to an Accounts Receivable Subsidiary.
"Intercompany Note" means the note issued by Holdings to the Company on
the Closing Date to evidence the loan by the Company to Holdings of certain
proceeds of the Offerings which proceeds, together with dividends to Holdings
will fund the merger consideration and costs and expenses in connection
therewith.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees), advances or capital contributions
(excluding commission, travel and similar advances to officers and employees
made in the ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities, and all
other items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP; provided that an acquisition of assets,
Equity Interests or other securities by the Company for consideration
consisting of common equity securities of the Company shall not be deemed to
be an Investment. If the Company or any Subsidiary of the Company sells or
otherwise disposes of any Equity Interests of any direct or indirect
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, such Person is no longer a Subsidiary of the Company, the
Company shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Equity Interests of
such Subsidiary not sold or disposed of in an amount determined as provided
in the final paragraph of the covenant described above under the caption
entitled "--Certain Covenants--Restricted Payments."
"Investors' Agreement" means the investors' agreement, dated as of August
7, 1997, among the Company, the DLJMB Funds, the Institutional Investors and
the Management Shareholders, as amended from time to time.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable
law (including any conditional sale or other title retention agreement, any
lease in the nature thereof, any option or other agreement to sell or give a
security interest).
"Management Loans" means one or more loans by the Company or Holdings to
officers and/or directors of the Company and any of its Restricted
Subsidiaries to finance the purchase by such officers and directors of common
stock of Holdings; provided, however, that the aggregate principal amount of
all such Management Loans outstanding at any time shall not exceed $10.0
million.
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"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP, excluding, however, (i) any
gain (but not loss), together with any related provision for taxes on such
gain (but not loss), realized in connection with (a) any Asset Sale
(including, without limitation, dispositions pursuant to sale and leaseback
transactions) or (b) the extinguishment of any Indebtedness of such Person or
any of its Restricted Subsidiaries, and (ii) any extraordinary or
nonrecurring gain (but not loss), together with any related provision for
taxes on such extraordinary or nonrecurring gain (but not loss), and (iii)
with respect to the Company, the after-tax amount of any interest income with
respect to the Intercompany Note.
"Net Proceeds" means the aggregate cash proceeds received by the Company
or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale), net of
the direct costs relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied
to the repayment of Indebtedness (other than Indebtedness of the Company or
any Restricted Subsidiary referred to in clause (a) of the second paragraph
of the covenant described above under the caption "--Repurchase at the Option
of Holders--Asset Sales") secured by a Lien on the asset or assets that are
the subject of such Asset Sale and any reserve for adjustment in respect of
the sale price of such asset or assets established in accordance with GAAP.
"New Credit Facility" means that certain credit agreement by and among the
Company, Donaldson, Lufkin & Jenrette Securities Corporation, as arranger,
DLJ Capital Funding, Inc., as syndication agent, and the lenders party
thereto, including any related notes, guarantees, collateral documents,
instruments and agreement executed in connection therewith, and in each case
as amended, modified, renewed, refunded, replaced, refinanced from time to
time, including any agreement extending the maturity of or refinancing or
refunding all or any portion of the Indebtedness thereunder or increasing the
amount that may be borrowed under such agreement or any successor agreement,
whether or not among the same parties.
"Non-Recourse Debt" means Indebtedness (i) no default with respect to,
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such
other Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity; and (ii) as to which the lenders have been
notified in writing that they will not have any recourse to the stock (other
than the stock of an Unrestricted Subsidiary pledged by the Company to secure
debt of such Unrestricted Subsidiary) or assets of the Company or any of its
Restricted Subsidiaries; provided, however, that in no event shall
Indebtedness of any Unrestricted Subsidiary fail to be Non-Recourse Debt
solely as a result of any default provisions contained in a guarantee thereof
by the Company or any of its Restricted Subsidiaries if the Company or such
Restricted Subsidiary was otherwise permitted to incur such guarantee
pursuant to the Senior Subordinated Note Indenture.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Other Qualified Notes" means any outstanding Indebtedness that ranks pari
passu in right of payment with the Senior Subordinated Notes issued pursuant
to an indenture or other agreement, in either case, having a provision
substantially similar to the Asset Sale Offer provision contained in the
Senior Subordinated Note Indenture.
"Pari Passu Indebtedness" means Indebtedness of the Company or any
Guarantor that ranks pari passu in right of payment to the Senior
Subordinated Notes or any Subsidiary Guarantee.
"Permitted Business" means the equipment maintenance or support services
business or any business reasonably ancillary or related thereto.
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"Permitted Investments" means (i) Investments in the Company or in a
Restricted Subsidiary of the Company, (ii) Investments in cash or Cash
Equivalents, (iii) Investments by the Company or any Restricted Subsidiary of
the Company in a Person if, as a result of such Investment, (a) such person
becomes a Restricted Subsidiary of the Company or (b) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Restricted Subsidiary of the Company, (iv) Investments in accounts and notes
receivable acquired in the ordinary course of business, (v) any non-cash
consideration received in connection with an Asset Sale that complies with
the covenant described above under the caption entitled "--Repurchase at the
Option of Holders--Asset Sales," (vi) loans and advances to officers,
directors and employees for business-related travel expenses, moving expenses
and other similar expenses, in each case, incurred in the ordinary course of
business, (vii) any guarantees permitted to be made pursuant to the covenant
described under the caption "--Certain Covenants--Incurrence of Indebtedness
and Issuance of Preferred Stock," (viii) Investments in any Accounts
Receivable Subsidiary made in connection with the formation of an Accounts
Receivable Subsidiary or received in consideration of sales of accounts
receivable, in each case, in accordance with the covenant described under the
caption entitled "--Certain Covenants--Sales of Accounts Receivable," (ix)
the Intercompany Note and (x) the Management Loans.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted
Subsidiaries; provided that: (i) the principal amount (or accreted value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount of (or accreted value, if applicable), plus accrued interest
on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of reasonable expenses and premiums incurred in
connection therewith); (ii) such Permitted Refinancing Indebtedness has a
final maturity date at least as late as the final maturity date of, and has a
Weighted Average Life to Maturity equal to or greater than the Weighted
Average Life to Maturity of, the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; (iii) if the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded is subordinated
in right of payment to the Senior Subordinated Notes, such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and is subordinated in right of payment to, the Senior
Subordinated Notes on terms at least as favorable to the Holders of Senior
Subordinated Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iv) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is Pari Passu Indebtedness, such Permitted
Refinancing Indebtedness has a final maturity date on or later than the final
maturity date of, and is subordinated or pari passu in right of payment to,
the Senior Subordinated Notes on terms at least as favorable to the Holders
of Senior Subordinated Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded and (v) such Indebtedness is incurred either by the
Company or by the Restricted Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Principals" means DLJ Merchant Banking, Inc., DLJ Offshore Partners II,
C.V., DLJ Diversified Partners, L.P., DLJMB Funding II, Inc., UK Investment
Plan 1997 Partners and DLJ First ESC LLC and each of their respective
Affiliates.
"Qualified Contract" means any contract for the provision of computer
maintenance and/or technology support services with respect to which the
Company and its Restricted Subsidiaries have not received notice that the
counterparty to such contract intends to terminate such contract prior to the
expiration of its term or not to renew such contract at the end of its term.
"Qualified Proceeds" means any of the following or any combination of the
following:
(i) cash, (ii) Cash Equivalents, (iii) assets that are used or useful in a
Permitted Business and (iv) the Capital Stock of any Person engaged in a
Permitted Business if, in connection with the receipt by the Company or any
Restricted Subsidiary of the Company of such Capital Stock, (a) such Person
becomes a Restricted Subsidiary of the Company or any Restricted Subsidiary
of the Company or (b) such Person is merged, consolidated or amalgamated with
or into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or any Restricted Subsidiary of the Company.
102
<PAGE>
"Receivables Fees" means distributions or payments made directly or by
means of discounts with respect to any participation interests issued or sold
in connection with, and other fees paid to a Person that is not a Restricted
Subsidiary in connection with, any receivables financing permitted pursuant
to the covenant entitled "Sales of Accounts Receivable."
"Related Party" means, with respect to the Principals, (i) any controlling
stockholder or partner of any Principal on the date of the Senior
Subordinated Note Indenture, or (ii) any trust, corporation, partnership or
other entity, the beneficiaries, stockholders, partners, owners or Persons
beneficially holding (directly or through one or more Subsidiaries) a 51% or
more controlling interest of which consist of the Principals and/or such
other Persons referred to in the immediately preceding clauses (i) or (ii).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
of the Indenture.
"Specified Agreements" means the Investors' Agreement and the Tax Sharing
Agreement.
"Subordinated Indebtedness" means any Indebtedness of the Company or any
Guarantor which is expressly by its terms subordinated in right of payment to
the Senior Subordinated Notes or any Subsidiary Guarantee.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of Voting Stock is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or one or more Subsidiaries of such Person (or any combination
thereof); provided, however, that the Accounts Receivable Subsidiary and its
Subsidiaries shall not be deemed Subsidiaries of the Company or any of its
other Subsidiaries.
"Tax Sharing Agreement" means the tax sharing agreement, dated as of
August 7, 1997, between the Company and Holdings, as amended from time to
time.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, but only to the extent that such Subsidiary: (i) has no
Indebtedness other than Non-Recourse Debt; (ii) is not party to any
agreement, contract, arrangement or understanding with the Company or any
Restricted Subsidiary of the Company unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to the Company
or such Restricted Subsidiary than those that might be obtained at the time
from Persons who are not Affiliates of the Company; (iii) is a Person with
respect to which neither the Company nor any of its Restricted Subsidiaries
has any direct or indirect obligation (a) to subscribe for additional Equity
Interests or (b) to maintain or preserve such Person's financial condition or
to cause such Person to achieve any specified levels, of operating results;
and (iv) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of the Company or any of its Restricted
Subsidiaries. Any such designation by the Board of Directors shall be
evidenced to the Trustee by filing with the Trustee a certified copy of the
Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions and was permitted by the covenant described above under the
caption entitled "--Certain Covenants--Restricted Payments." If, at any time,
any Unrestricted Subsidiary would fail to meet the foregoing requirements as
a Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Senior Subordinated Note Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a
Restricted Subsidiary of the Company as of such date (and, if such
Indebtedness is not permitted to be incurred as of such date under the
covenant described under the caption entitled
103
<PAGE>
"--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock," the Company shall be in default of such covenant). The Board of
Directors of the Company may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that such designation
shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of the Company of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if (i)
such Indebtedness is permitted under the covenant described under the caption
entitled "--Certain Covenants--Incurrence of Indebtedness and Issuance
Preferred of Stock" and (ii) no Default or Event of Default would be in
existence following such designation.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors,
managers or trustees of any Person (irrespective of whether or not, at the
time, stock of any other class or classes shall have, or might have, voting
power by reason of the happening of any contingency).
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the
then outstanding principal amount of such Indebtedness into (ii) the total of
the product obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or by such
Person and one or more Wholly Owned Subsidiaries of such Person.
104
<PAGE>
PLAN OF DISTRIBUTION
This Prospectus has been prepared for use by DLJSC in connection with
offers and sales of the Senior Subordinated Notes in market-making
transactions at negotiated prices related to prevailing market prices at the
time of the sale. DLJSC may act as principal or agent in such transactions.
The Company has been advised by DLJSC that it intends to make a market in the
Senior Subordinated Notes; however, DLJSC is not obligated to do so. Any
market-making may be discontinued at any time, and there is no assurance that
an active public market for the Senior Subordinated Notes will develop or,
that if such market develops, that it will continue.
DLJSC served as the underwriter in the Offering and received total
underwriting discounts and commissions of $4,500,000 in connection therewith.
DLJ Capital Funding, Inc., an affiliate of DLJSC, received customary fees
and reimbursement of expenses in connection with the arrangement and
syndication of the New Credit Facility and as a lender thereunder. DLJSC
received customary fees in connection with the underwriting of the Senior
Subordinated Notes and the Units. In addition, DLJSC received a merger
advisory fee of $5.0 million in cash from Quaker upon consummation of the
Merger. It is also expected that DLJSC will receive an annual fee from
Holdings for financial advisory services. See "Certain Relationships and
Related Transactions."
DLJMB and certain related entities, all of which are affiliates of DLJSC,
will own a significant amount of Holding Common Stock following the Merger.
In addition, Holdings, the DLJMB Funds and the members of management who
owned shares of Holdings Common Stock following the Merger (the "Management
Shareholders") are party to the Investors' Agreement. The Investors'
Agreement restricts transfer of the shares of Holdings Common Stock by the
Management Shareholders, permits the Management Shareholders to participate
in certain sales of shares of Holdings Common Stock by the DLJMB Funds,
requires the Management Shareholders to sell shares of Holdings Common Stock
in certain circumstances should the DLJMB Funds choose to sell any such
shares owned by the DLJMB Funds and provides for certain registration rights.
The Investors' Agreement also provides that the DLJMB Funds have the right to
appoint a majority of the members of the Board of Directors of Holdings.
105
<PAGE>
LEGAL MATTERS
The validity of the Senior Subordinated Notes offered hereby was passed
upon for the Company by Davis Polk & Wardwell.
EXPERTS
The Consolidated Financial Statements of the Company as of June 30, 1996
and for each of the three years in the period ended June 30, 1996 and the
Consolidated Financial Statements of DecisionOne Corporation (formerly BABSS
(the "Predecessor")) as of December 31, 1994 and October 20, 1995 and for the
years ended December 31, 1993 and 1994 and the period from January 1, 1995 to
October 20, 1995, and the related financial statement schedules appearing in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as set forth in their reports included herein and are included in
reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
106
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
DECISIONONE CORPORATION
Audited Financial Statements:
Independent Auditors' Report.............................................................. F-2
Consolidated Balance Sheets as of June 30, 1995 and 1996.................................. F-3
Consolidated Statements of Operations for the Years Ended
June 30, 1994, 1995 and 1996............................................................. F-4
Consolidated Statements of Shareholder's Equity for the Years Ended
June 30, 1994, 1995 and 1996............................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1994, 1995 and 1996............................................................. F-6
Notes to Consolidated Financial Statements................................................ F-7
Unaudited Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of June 30, 1996 and March 31, 1997 ... F-22
Unaudited Condensed Consolidated Statements of Operations for the
Nine Months Ended March 31, 1996 and 1997................................................ F-23
Unaudited Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 1996 and 1997................................................ F-24
Unaudited Notes to Condensed Consolidated Financial Statements............................ F-25
PREDECESSOR FINANCIAL STATEMENTS--
DECISIONONE CORPORATION (FORMERLY BELL ATLANTIC BUSINESS SYSTEMS SERVICES, INC.)
Audited Financial Statements:
Independent Auditors' Report.............................................................. F-27
Consolidated Balance Sheets as of December 31, 1994 and October 20, 1995 ................. F-28
Consolidated Statements of Operations for the Years Ended December 31, 1993
and 1994 and the Period January 1, 1995 to October 20, 1995.............................. F-29
Consolidated Statements of Shareholder's Equity for the Years Ended December 31, 1993
and 1994 and for the Period January 1, 1995 to October 20, 1995.......................... F-30
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993
and 1994 and for the Period January 1, 1995 to October 20, 1995.......................... F-31
Notes to Consolidated Financial Statements................................................ F-32
</TABLE>
F-1
<PAGE>
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, 1995 and 1996, and the
related consolidated statements of operations, shareholder's equity and cash
flows for each of the three years in the period ended June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of DecisionOne Corporation,
Inc. and subsidiaries at June 30, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended June 30, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, on May
29, 1997, DecisionOne Holdings Corp. completed a restructuring of the legal
organization of certain of its subsidiaries. The Company's consolidated
financial statements have been presented giving effect to the reorganization
for all periods presented in a manner similar to a pooling of interests.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
May 30, 1997
F-2
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 2,659 $ 8,221
Accounts receivable, net.................................... 27,758 92,650
Inventories................................................. 4,024 30,130
Prepaid expenses, income tax receivable and other assets ... 763 4,752
Deferred tax asset.......................................... 8,503 8,018
---------- ----------
Total current assets....................................... 43,707 143,771
---------- ----------
Repairable Parts, net........................................ 27,360 154,970
Property and Equipment, net.................................. 4,429 32,430
Deferred Tax Asset, net...................................... 25,011 16,405
Intangibles, net............................................. 34,568 164,659
Other Assets................................................. 478 2,275
---------- ----------
Total Assets................................................. $135,553 $514,510
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Current portion of long-term debt........................... $ 19,414 $ 2,321
Accounts payable............................................ 11,412 53,347
Accrued expenses............................................ 21,773 36,217
Deferred revenues........................................... 40,222 38,485
Income taxes payable........................................ 1,648
Net liabilities related to discontinued products division .. 1,056 479
---------- ----------
Total current liabilities.................................. 95,525 130,849
---------- ----------
Revolving Credit Loan and Long-Term Debt..................... 6,157 188,582
Other Liabilities............................................ 12,383 14,286
Shareholder's Equity:
Common stock, no par value; one share authorized, issued
and outstanding in 1995 and 1996 ..........................
Additional paid-in capital.................................. 114,891 255,535
Accumulated deficit......................................... (92,378) (73,516)
Foreign currency translation adjustment..................... 680 622
Pension liability adjustment................................ (1,705) (1,848)
---------- ----------
Total shareholder's equity................................. 21,488 180,793
---------- ----------
Total Liabilities and Shareholder's Equity................... $135,553 $514,510
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
--------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Service.................................................. $ 97,548 $154,044 $526,703
Other.................................................... 10,868 8,976 13,488
--------- ---------- ----------
108,416 163,020 540,191
--------- ---------- ----------
Cost of Revenues:
Service.................................................. 70,502 107,922 393,311
Other.................................................... 6,478 5,561 9,005
--------- ---------- ----------
76,980 113,483 402,316
--------- ---------- ----------
Gross Profit.............................................. 31,436 49,537 137,875
Operating Expenses:
Selling, general and administrative expenses............. 16,474 21,982 69,237
Amortization and write-off of intangibles................ 5,380 6,776 15,673
Credit for unused leases, net............................ (6,401)
Employee severance and unutilized lease costs .......... -- -- 3,592
--------- ---------- ----------
Operating Income.......................................... 15,983 20,779 49,373
Interest expense, net of interest income of $132 in 1994,
$53 in 1995 and $239 in 1996............................. 4,847 2,468 14,714
--------- ---------- ----------
Income from continuing operations before income taxes
(benefit), discontinued operations and extraordinary
item..................................................... 11,136 18,311 34,659
Provision for income taxes (benefit)...................... 1,024 (23,104) 13,870
--------- ---------- ----------
Income before discontinued operations and extraordinary
item..................................................... 10,112 41,415 20,789
Discontined operations--income from operations of
discontinued products division........................... -- 1,113 --
--------- ---------- ----------
Income before extraordinary item.......................... 10,112 42,528 20,789
Extraordinary item, net of tax benefit of $1,284 ......... -- -- 1,927
--------- ---------- ----------
Net Income................................................ $ 10,112 $ 45,528 $ 18,862
========= ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY PENSION
PAID-IN ACCUMULATED TRANSLATION LIABILITY
CAPITAL DEFICIT ADJUSTMENT ADJUSTMENT
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Balance, June 30, 1993.................. $ 87,413 $(145,018) $445 $ (986)
Net income............................ 10,112
Adjustment to pension liability....... (639)
Foreign currency translation
adjustment .......................... 12
Capital contribution.................. 27,470 -- -- --
------------ ------------- ------------- ------------
Balance, June 30, 1994.................. 114,883 (134,906) 457 (1,625)
Net Income............................ 42,528
Adjustment to pension liability....... (80)
Foreign currency translation
adjustment .......................... 223
Contributed capital................... 8 -- -- --
------------ ------------- ------------- ------------
Balance, June 30, 1995.................. 114,891 (92,378) 680 (1,705)
Net income............................ 18,862
Adjustment to pension liability....... (143)
Contributed capital................... 142,090
Foreign currency translation
adjustment .......................... (58)
Dividends declared.................... (1,446) -- -- --
------------ ------------- ------------- ------------
Balance, June 30, 1996.................. $255,535 $ (73,516) $622 $(1,848)
============ ============= ============= ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Operating Activities:
Net income............................................. $ 10,112 $ 42,528 $ 18,862
Adjustments to reconcile net income to net cash
provided by operating activities:
Income from discontinued operations................... (1,113)
Write-down of intangible assets....................... 2,932 70
Net credit on unused leases, net...................... (6,401)
Depreciation and amortization of property and
equipment ........................................... 1,781 1,778 8,309
Amortization of intangibles........................... 2,448 6,706 15,673
Amortization of repairable parts...................... 5,929 7,688 37,869
Deferred income taxes................................. (23,104) (7,579)
Provision (recovery of loss) on accounts receivable... (162) 1,930 (3,434)
Provision for inventory obsolescence.................. 1,580 1,995 1,171
Extraordinary item.................................... 1,927
Changes in operating assets and liabilities, net of
effects from companies acquired, which provided
(used) cash:
Accounts receivable.................................. (3,498) (8,836) (1,900)
Inventories.......................................... 1,107 931 (1,248)
Accounts payable..................................... (787) 4,552 29
Accrued expenses..................................... 264 (5,723) 227
Deferred revenues.................................... 9,547 6,811 (33,928)
Net changes in other assets and liabilities........... 3,870 2,202 (6,110)
---------- ---------- -----------
Net cash provided by operating activities........... 28,722 38,415 51,894
---------- ---------- -----------
Investing Activities:
Capital expenditures--net of retirements............... (304) (2,786) (7,278)
Repairable parts purchases............................. (1,857) (12,154) (63,514)
Purchases of companies................................. (1,187) (39,331) (275,562)
---------- ---------- -----------
Net cash used in investing activities............... (3,348) (54,271) (346,354)
---------- ---------- -----------
Financing Activities:
Proceeds from issuance of subordinated debentures...... 26,600
Capital contribution................................... 2,250 142,090
Proceeds from borrowings............................... 11,000 32,000 703,720
Payment on subordinated debentures..................... (30,000)
Payments on borrowings................................. (37,713) (14,463) (537,548)
Principal payments under capital leases................ (3,423)
Payment of dividends................................... (1,446)
Other.................................................. (483) -- 29
---------- ---------- -----------
Net cash provided by (used in) financing activities. (24,946) 17,537 300,022
---------- ---------- -----------
Net increase in cash and cash equivalents................ 428 1,681 5,562
Cash and cash equivalents, beginning of year............. 550 978 2,659
---------- ---------- -----------
Cash and cash equivalents, end of year................. $ 978 $ 2,659 $ 8,221
========== ========== ===========
Supplemental Disclosures of Cash Flow Information:
Net cash paid during the year for:
Interest.............................................. $ 485 $ 2,065 $ 14,838
Income taxes.......................................... 397 1,009 5,344
Noncash investing/financing activities:
Interest exchanged for debt........................... 2,073
Issuance of seller notes in connection with
acquisitions ........................................ 1,313 2,866 587
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
1. NATURE OF BUSINESS
DecisionOne Corporation (a wholly owned subsidiary of DecisionOne Holdings
Corp.) and its wholly owned subsidiaries (the "Company") are providers of
multi-vendor computer maintenance and technology support services. The
Company's services include hardware support, user and software support,
network support and other support services. These services are offered by the
Company across a broad range of computing environments, including mainframes,
midrange and distributed systems, workgroups, personal computers and related
peripherals. The Company maintains approximately 3,900 technical personnel
located in over 150 service locations in North America.
Through June 30, 1995, the Company's services predominantly involved the
provision of maintenance services to the midrange computer market. On October
20, 1995, the Company acquired Bell Atlantic Business Systems Services, Inc.
("BABSS") (see Note 4). BABSS provided computer maintenance and technology
support services for computer systems ranging from the data center, which
includes both mainframe and midrange systems, to desk top. Subsequent to the
acquisition, DecisionOne Holdings Corp.'s principal operating subsidiary,
Decision Servcom, Inc., was merged into BABSS, which had changed its name to
DecisionOne Corporation. As a result, DecisionOne Corporation is the
principal operating subsidiary of the Company.
On May 29, 1997, DecisionOne Holdings Corp. ("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 all periods presented.
The Company's wholly owned, international subsidiaries are not significant
to the Company's financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION -- The consolidated financial statements include the
accounts of DecisionOne Corporation and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS -- Cash and cash equivalents are highly liquid
investments with remaining maturities of three months or less at the time of
purchase.
INVENTORIES -- Inventories are stated at the lower of cost or market, cost
principally being determined using the weighted average method. The Company
previously determined cost using the FIFO (first-in, first-out) method. The
change has no material effect on the financial statements.
REPAIRABLE PARTS -- Repairable parts are required in order to meet the
requirements of the contracts with the Company's maintenance customers. These
parts are principally purchased from equipment manufacturers and other third
parties. As these parts are purchased, they are capitalized at cost and
amortized principally using the straight-line method over three to five
years, their estimated useful life. Repairable parts are repaired by the
Company based upon anticipated need and generally have an economic life that
extends beyond the normal life cycle of the applicable product. Costs of
refurbishing parts are charged to operations as incurred. Repairable parts
are stated at cost, less accumulated amortization of $46,554 and $45,064 as
of June 30, 1995 and 1996, respectively. Repairable parts amortization
expense for the years ended June 30, 1994, 1995 and 1996 was $5,929, $7,688
and $37,869 respectively.
F-7
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation is provided for using the straight-line method over the
estimated useful lives of the depreciable assets. Capitalized equipment
leases and leasehold improvements are amortized over the shorter of the
related lease terms or asset lives. Maintenance and repairs are charged to
expense as incurred; renewals and betterments are capitalized. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is charged to operations.
INTANGIBLE ASSETS -- Intangible assets are comprised of excess purchase
price over net assets acquired (goodwill), debt issuance costs and other
intangible assets, including the fair value of contractual profit
participation rights, acquired customer contracts, tradenames, other
intangibles, and amounts assigned to noncompete agreements.
Goodwill is being amortized on a straight-line basis over 20 years. Other
intangibles are being amortized, primarily on a straight-line basis, over 3
to 8 years for customer contracts; 20 years for contractual profit
participation rights; 1 to 6 years for tradenames and other intangibles; and
over four-year terms for specific noncompete agreements. Debt issuance costs
are amortized using the interest method over the term of the related debt.
CARRYING VALUE OF LONG-TERM ASSETS -- The Company evaluates the carrying
value of long-term assets, property and equipment, repairable parts and
intangible assets, based upon current and anticipated undiscounted cash
flows, and recognizes an impairment when such estimated cash flows will be
less than the carrying value of the asset. Measurement of the amount of
impairment, if any, is based upon the difference between carrying value and
fair value.
REVENUE -- The Company enters into maintenance contracts whereby it
services various manufacturers' equipment. Revenues from these contracts are
recognized ratably over the terms of such contracts. Revenues from
multi-period contracts are recorded as deferred revenues and are recognized
ratably over the term of the contracts.
Revenues derived from the maintenance of equipment not under contract are
recognized as the service is performed.
Revenues derived from other technology support services are recognized as
the service is performed or ratably over the term of the contract.
Estimated losses on contracts, if any, are charged against earnings in the
period in which such losses are identified.
FOREIGN CURRENCY TRANSLATION -- Gains and losses resulting from foreign
currency translation are accumulated as a separate component of shareholder's
equity. Gains and losses resulting from foreign currency transactions are
included in operations.
CREDIT RISK -- Concentration of credit risk with respect to trade
receivables is limited due to the large number of customers comprising the
Company's customer base and their dispersion across many industries.
INCOME TAXES -- Effective July 1, 1993, the Company changed its policy of
accounting for income taxes to conform to Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109"), Accounting for Income Taxes. The Company
previously followed Financial Accounting Standards No. 96, Accounting for
Income Taxes. SFAS No. 109 requires, among other things, the accrual of
deferred tax liabilities for future taxable amounts, deferred tax assets for
future deductions and operating loss carryforwards and a
F-8
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
valuation allowance to reduce deferred tax assets to the amounts that are
more likely than not to be realized. The adoption of SFAS No. 109 on July 1,
1993 did not have a material effect on the Company's consolidated financial
position or results of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The following disclosures of the
estimated fair value of financial instruments were made in accordance with
the requirements of SFAS No. 107, Disclosures about Fair Value of Financial
Instruments. The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies.
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, AND ACCOUNTS PAYABLE --
The carrying amount of these items are a reasonable estimate of their fair
value.
SHORT-TERM DEBT AND LONG-TERM DEBT -- Rates currently available to the
Company for debt with similar terms and remaining maturities are used to
estimate the fair value for debt issues. Accordingly, the carrying amount of
debt is a reasonable estimate of its fair value.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates
and assumptions.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS -- Effective July 1, 1994, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 106, ("SFAS No. 106") Employers' Accounting for Postretirement Benefits
Other Than Pensions, and Statement of Financial Accounting Standards No. 112
("SFAS No. 112"), Employers' Accounting for Postemployment Benefits. The
adoption of SFAS No. 106 and SFAS No. 112 did not have a material effect on
the Company's consolidated financial position or results of operations.
DERIVATIVE FINANCIAL INSTRUMENTS -- Derivative financial instruments,
which constitute interest rate swaps (see Note 10), are used by the Company
in the management of its interest rate exposure and are accounted for on an
accrual basis. These derivative financial instruments are used to hedge risk
caused by fluctuating interest rates. Hedged financial instruments are
accounted for based on settlement accounting. Income and expense are recorded
in the same category as that arising from the related asset or liability. The
amounts to be paid or received under interest rate swap agreements are
recognized as interest income or expense in the periods in which they accrue.
Gains and losses resulting from effective hedges of existing assets,
liabilities or firm commitments are deferred and recognized when the
offsetting gains and losses are recognized on the related hedged items. Gains
realized on termination of interest rate swap contracts are deferred and
amortized over the remaining terms of the original swap agreements. The
Company does not hold or issue any derivative financial instruments for
trading purposes.
3. DISCONTINUED OPERATIONS
On February 9, 1993, the Company sold all of the inventory, fixed assets
and other intangible assets, as defined in the asset purchase agreement, of
its products division. The remaining assets and liabilities of the
discontinued operations consisted mainly of accounts receivable and accrued
expenses for warranty, lease commitments and other accrued costs. In 1993,
the Company established liabilities based on the best available information.
In 1995, the Company revised its estimates as a result of settlement of these
liabilities and the consolidated statement of operations for 1995 reflects an
increase in net income of $1,113 for the change in estimate.
F-9
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
3. DISCONTINUED OPERATIONS (Continued)
In conjunction with the sale of the products division, the Company
entered into a maintenance service agreement with the purchaser. The
agreement provides that the Company has the option to be the exclusive
provider of warranty, extended warranty and maintenance services of products
marketed by the purchaser for a term of 5 years after the date of the sale.
4. BUSINESS ACQUISITIONS
During the years ended June 30, 1994, 1995 and 1996, the Company acquired
certain net assets of a series of service companies as follows:
<TABLE>
<CAPTION>
CONSIDERATION
----------------------------
TOTAL
NUMBER OF PURCHASE
YEARS ENDED ACQUISITIONS CASH NOTES PRICE
- --------------- -------------- --------- -------- ---------
<S> <C> <C> <C> <C>
Significant business acquisitions:
June 30, 1995 .................. 1 $ 27,413 $2,094 $ 29,507
June 30, 1996 .................. 1 250,549 250,549
Nonsignificant business and
maintenance contract acquisitions:
June 30, 1994 .................. 5 975 1,490 2,465
June 30, 1995 .................. 5 9,327 255 9,582
June 30, 1996 .................. 5 14,853 578 15,431
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
OTHER
YEARS ENDED INTANGIBLES GOODWILL
- --------------- ------------- ----------
<S> <C> <C>
Significant business acquisitions:
June 30, 1995 ................. $15,600 $ 7,394
June 30, 1996 ................. 72,581 60,533
Nonsignificant business and
maintenance contract acquisitions:
June 30, 1994 ................. 3,193
June 30, 1995 ................. 4,577 8,680
June 30, 1996 ................. 6,522 6,318
</TABLE>
The Company purchased substantially all of the operating assets and
assumed certain liabilities of the acquired entities. These acquisitions have
been accounted for as purchase transactions, with the purchase price of each
acquisition allocated to the assets and liabilities acquired based on their
respective estimated fair values at the dates of acquisition. The results of
operations of the acquired entities have been included in the accompanying
consolidated financial statements from the dates of acquisition.
On August 31, 1994, the Company purchased certain net assets and
liabilities of IDEA/Servcom, Inc. ("Servcom") for approximately $29,500. This
acquisition was funded by cash and the issuance of a $2,600
noninterest-bearing note to the seller. See seller notes payable section of
Note 10. The excess of asset purchase price over the fair value of assets
acquired at the date of purchase resulted in goodwill of approximately
$7,400.
On October 20, 1995, the Company acquired all of the outstanding common
stock of BABSS, a subsidiary of Bell Atlantic Corporation ("BAC") for
approximately $250,549. The acquisition was funded with the proceeds from the
issuance by Holdings of $30,000 of Series C preferred stock, $30,000 of
subordinated debentures issued by the Company and the balance from additional
bank borrowings. The proceeds from the issuance of preferred stock was
contributed to the Company. The excess of asset purchase price over the fair
value of assets acquired at the date of purchase resulted in goodwill of
approximately $58,796 initially recorded. Subsequent to the acquisition, the
Company recorded a net adjustment increasing goodwill by $1,737 and adjusted
other balance sheet accounts principally by the same amount. This resulted
from the adjustment and reclassification of certain tax accruals offset by
favorable negotiations on certain leased facilities (see Note 9). As part of
the acquisition, the Company purchased from BAC contractual profit
participation rights whereby the Company will receive a fixed percentage of
the annual operating profits (3.2% or 3.5%, depending upon the level of
profits) earned by a former foreign affiliate of BAC which provides computer
maintenance and technology support services in Europe. The value of the
discounted estimated future cash flows over a twenty-year period from these
contractual profit participation rights is $25,000.
F-10
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
4. BUSINESS ACQUISITIONS (CONTINUED)
The following summarized unaudited pro forma information for significant
acquisitions that have a material effect on the Company's results of
operations for the years ended June 30, 1995 and 1996 assumes that the
Servcom and BABSS acquisitions occurred as of July 1, 1994. The
nonsignificant business and maintenance contract acquisitions are not
considered material individually or in the aggregate. The pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of the results of operations which actually would have resulted
had the significant acquisitions been in effect on the dates indicated or
which may result in the future.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------
1995 1996
---------- ----------
(UNAUDITED)
<S> <C> <C>
Revenues................................................... $679,284 $697,676
Income from continuing operations before extraordinary
item...................................................... 20,153 31,080
Net income................................................. 21,266 29,153
</TABLE>
5. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1995 1996
--------- ---------
<S> <C> <C>
Trade receivables ........................ $33,843 $ 99,762
Other .................................... 531 2,468
--------- ---------
34,374 102,230
Less allowance for uncollectible
accounts................................. (6,616) (9,580)
--------- ---------
$27,758 $ 92,650
========= =========
</TABLE>
6. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Consumable parts.......................... $ 15,243 $ 40,564
Finished goods............................ 569 360
---------- ----------
15,812 40,924
Less allowance for uncollectible
accounts................................. (11,788) (10,794)
---------- ----------
$ 4,024 $ 30,130
========== ==========
</TABLE>
F-11
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Land and buildings........................ $ 2,055
Equipment................................. $ 5,682 13,858
Computer hardware and software............ 8,359 27,277
Furniture and fixtures.................... 4,306 8,051
Leasehold improvements.................... 1,450 4,125
---------- ----------
19,797 55,366
Accumulated depreciation and
amortization............................. (15,368) (22,936)
---------- ----------
$ 4,429 $ 32,430
========== ==========
</TABLE>
The principal lives (in years) used in determining depreciation and
amortization rates of various assets are: buildings (40); equipment (3-10);
computer hardware and software (3-5); furniture and fixtures (5-10) and
leasehold improvements (term of related leases).
Depreciation and amortization expense was approximately $1,781, $1,778,
and $8,309, for the fiscal years ended 1994, 1995 and 1996.
8. INTANGIBLES
Intangibles consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1995 1996
--------- ----------
<S> <C> <C>
Goodwill................................ $16,074 $ 82,355
Customer contracts...................... 20,248 64,758
Contractual profit participation
rights................................. 25,000
Noncompete agreement.................... 3,000 4,500
Other intangibles....................... 2,250 7,671
Tradename............................... 1,500 --
--------- ----------
43,072 184,284
Accumulated amortization................ (8,504) (19,625)
--------- ----------
$34,568 $164,659
========= ==========
</TABLE>
Based upon the results of an impairment evaluation for the years ended
June 30, 1994 and 1995, management determined that customer contracts should
be written down $2,932 and $70, respectively. There were no write-downs of
intangibles in 1996.
Amortization expenses relating to intangibles were approximately $2,448,
$6,706 and, $15,673 for the fiscal years ended 1994, 1995 and 1996.
F-12
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
9. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1995 1996
--------- ---------
<S> <C> <C>
Compensation and benefits ........ $11,046 $22,115
Interest.......................... 2,246 1,505
Unused leases..................... 857 3,485
Pension accrual................... 1,262 1,258
Accrued accounting and legal
fees............................. 920 1,073
Other accrued expenses............ 5,442 6,781
--------- ---------
$21,773 $36,217
========= =========
</TABLE>
Prior to 1994, the Company received $2,600 in tax bills (primarily
interest) from the Internal Revenue Service ("IRS") related to claims for tax
and interest for the years ended 1981 through 1987. The Company paid
approximately $500 of the claims upon receipt of the bills. As the Company
disputes the tax bills, no payments were made in 1994 nor 1995. In 1996, an
IRS mandated payment of $828 was made. As of June 30, 1995 and 1996, the
Company has an accrued liability of $2,500 and $1,883, respectively.
Subsequent to June 30, 1996, the Company provided the IRS with a letter of
credit in the amount of $1,768 to collateralize the outstanding balance.
In connection with the acquisition of BABSS, which has been accounted for
using the purchase method of accounting (see Note 4), the Company recorded
approximately $11,000 in liabilities resulting from planned actions with
respect to BABSS, which included the costs to exit certain leased facilities
and to involuntarily terminate employees. The provision of approximately
$3,500 for the costs to exit certain leased facilities principally relates to
future lease payments on a warehouse in California which has been made idle.
Approximately $4,000 was provided for severance and termination benefits of
approximately 210 employees in the field, operations support, sales and
administration. Approximately $3,000 was provided in connection with the exit
plan for write-downs of inventory and equipment at two California facilities
which will not be utilized in future operations. The provision for various
other charges of approximately $500 consisted of costs to complete the exit
plan. As of June 30, 1996, the Company has settled all of these liabilities,
except for the lease liabilities on idle facilities approximating $1,200 for
which payments will continue through 1999.
As a result of successful negotiations of unutilized leased facilities,
during 1996, the Company recorded a reduction of approximately $975 to both
the provisions for leased facilities and goodwill.
F-13
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
10. REVOLVING CREDIT LOAN AND LONG-TERM DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1995 1996
--------- ----------
<S> <C> <C>
Revolving credit loan............................................ $186,400
Bank debt........................................................ $21,000
Promissory note, noninterest-bearing, due August 31, 1998 ....... 2,256 3,485
Seller noninterest-bearing notes payable......................... 2,122 2,118
Capitalized lease obligations, payable in varying installments
amounting to $1,413 and $972 in 1997 and 1998, respectively, at
interest rates ranging from 7.25% to 13.01% at June 30, 1996,
net of interest of approximately $6 and $187 in 1995 and 1996,
respectively.................................................... 193 2,385
--------- ----------
25,571 190,903
Less current portion............................................. 19,414 2,321
--------- ----------
$ 6,157 $188,582
========= ==========
</TABLE>
BANK DEBT AND REVOLVING CREDIT LOAN
On October 20, 1995, in connection with the BABSS acquisition (see Note 4)
the Company entered into a Credit Agreement which provided for a term loan
(the "1995 Term Loan") of $230,000 and a revolving credit facility of up to a
maximum of $30,000. The 1995 Term Loan provided for 19 equal quarterly
principal payments of $10,000 to be due and payable on the last day of each
calendar quarter commencing December 31, 1995 with a final payment due on
September 30, 2000. Loans under the revolving credit facility were to mature
on September 30, 2000. Interest on the 1995 Term Loan and the revolving
credit facility were at varying rates based, at the Company's option, on the
Eurodollar rate or the Alternative Base Rate (NationsBank prime rate), plus
the Applicable Margins. Margins were based on the ratio of Total Funded Debt
to EBITDA; the Eurodollar Margin ranged from 1.75% to 2.5%, while the
Alternative Base Rate Margin ranged from 0.5% to 1.25%.
In April 1996, Holdings completed an initial public offering. Holdings
contributed the proceeds of the offering to the Company. The Company used a
portion of the proceeds to repay approximately $70,000 of the 1995 Term Loan.
Also in April 1996, the Company converted the 1995 Term Loan and the
existing $30,000 Revolving Credit Facility into a $225,000 variable rate,
unsecured revolving credit facility ("the 1996 Revolving Credit Facility").
The 1996 Revolving Credit Facility is at floating interest rates, based
either on the LIBOR or prime rate, in either case plus an Applicable Margin,
at the Company's option. As of June 30, 1996, the applicable rate was LIBOR
plus .75% or 6.32%. The 1996 Revolving Credit Facility enables the Company to
borrow up to $225,000 in the form of revolving credit loans with a maturity
date of April 26, 2001 and with interest periods determined principally on a
quarterly basis. To offset the variable rate characteristics of the
borrowings, the Company has entered into interest rate swap agreements with
two banks resulting in fixed interest rates of 5.4% on $40,000 notional
principal amount through December 1997 and 5.5% on another $40,000 notional
principal amount through December 1998, thereby leaving approximately
$100,000 subject to floating rates under the 1996 Revolving Credit Facility.
Under the swap agreements, the Company receives interest payments at a
floating rate based on the pricing of the three-month LIBOR and pays interest
on the same notional amounts at an average fixed
F-14
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
10. REVOLVING CREDIT LOAN AND LONG-TERM DEBT (CONTINUED)
rate of 5.45%. The floating rate is 5.44% for the three-month period ended
June 30, 1996. For the three-month period ending September 30, 1996, the
floating rate is 5.57%. The agreements convert a portion of the Company's
debt obligation from a floating rate to a fixed rate basis. The fair value of
the interest rate swap agreements generally reflects the estimated amount
that the Company would receive or pay to terminate the agreements. As of June
30, 1996, the Company would receive approximately $1,100 to terminate the
swap agreements.
The Company attempts to minimize its credit exposure by entering into
interest rate swap agreements only with major financial institutions.
Although the Company may be exposed to losses in the event of nonperformance
by counterparties, the Company does not expect such losses, if any, to be
significant.
Under the terms of the 1996 Revolving Credit Facility, the Company may use
up to $25,000 for letters of credit, subject to the limitation of $225,000 in
total credit. As of June 30, 1996, letters of credit in the face amount of
$3,498 were outstanding.
The loan agreement relating to the 1996 Revolving Credit Facility contains
various terms and covenants which provide for certain restrictions on the
Company's indebtedness, liens, investments, disposition of assets and mergers
and acquisitions and require the Company, among other things, to maintain
minimum levels of consolidated net worth and certain minimum financial
ratios.
The borrower under the 1996 Revolving Credit Facility is the Company.
Repayment of the debt is guaranteed by Holdings and the Company's other
subsidiaries except for its Canadian subsidiary. The Canadian subsidiary is
not significant to the Company's consolidated financial statements.
The Company had average borrowings of $24,379 and $172,065 during 1995 and
1996, respectively, at an average interest rate of 10.34% and 8.69%,
respectively. Maximum borrowings during 1995 and 1996 were $32,648 and
$268,748, respectively.
SELLER NOTES PAYABLE
In connection with various acquisitions, the Company issued
noninterest-bearing notes, the principal of which is payable monthly,
primarily based upon a percentage of monthly maintenance contract revenues
billed during the previous month (ranging from 12.5% to 30.0%). Aggregate
maturities of these notes are as follows: 1997-$908; 1998-$647, 1999-$475,
and 2000-$88. As of June 30, 1996, the notes are presented at their estimated
net present value based on imputed interest rates ranging from 7.25% to
11.00%.
PROMISSORY NOTE
As part of the August 31, 1994 acquisition of certain assets and
liabilities of IDEA/Servcom, Inc., the Company issued a $2,600
noninterest-bearing note which was due in annual installments of $650 over
four years. The liability was reflected on the Company's books, net of a $506
discount calculated at the Company's then incremental borrowing rate of
9.50%. The loan was scheduled to mature on August 31, 1998. During the year
ended June 30, 1996, the Company prepaid the entire outstanding loan balance.
The resulting gain from prepayment was not material.
SUBORDINATED DEBENTURES
In connection with the BABSS acquisition (see Note 4) on October 20, 1995,
the Company issued and sold to Holdings' principal shareholders, an aggregate
$30,000 principal amount of 10.101% debentures
F-15
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
10. REVOLVING CREDIT LOAN AND LONG-TERM DEBT (CONTINUED)
(the "Affiliate Notes") due on October 20, 2001. The Affiliate Notes were
subordinated to the 1995 Term Loan and the revolving credit facility.
Interest on the Affiliate Notes was payable semiannually on the last business
day of June and December of each year commencing on December 31, 1995.
In connection with the issuance of the debentures, Holdings issued 468,750
Common Stock Purchase Warrants (the "Warrants"). Each Warrant initially
entitled the owner to buy one share of Holdings' Common Stock for $0.10. The
number of shares that can be purchased per Warrant steps up over 24 months in
conjunction with the increasing conversion privilege applicable to the
Preferred Stock such that, at the end of 24 months, each Warrant entitled the
holder to buy approximately 1.21 shares of Common Stock at a price of $0.10
per share. The Warrants were exercisable from October 20, 1997 until October
20, 2001, provided that if Holdings had a public offering of its Common Stock
meeting certain requirements before October 20, 1997, the Warrants became
exercisable at the time of the public offering and the number of shares that
could be purchased on exercise was fixed at that time and no longer increased
in steps. The Warrants also became exercisable upon retirement of the
debentures. Each Warrant had an assigned value of $7.25333 which resulted in
an original issue discount of $3,400 which was being amortized over the term
of the Affiliate Notes. Upon consummation of Holdings' initial public
offering in April 1996, the Company was required to pay up to the total
amount outstanding under the Affiliate Notes and, accordingly, the Company
used $30,000 of the proceeds to retire the Affiliate Notes. As a result, the
Company recorded an extraordinary loss in the amount of $3,211, net of taxes
of $1,284, due to the acceleration of the amortization of original issue
discount.
1994 DEBT RESTRUCTURING
On January 27, 1994, the Company amended its then current Credit Agreement
to provide an $11,000 term loan and an $8,000 Revolving Credit Facility. The
term loan provided for 29 equal monthly payments of $350 beginning January
31, 1994 through May 31, 1996. Interest was at the "Base Rate" (the higher of
the bank's base rate or 1/2 percent above the Federal Funds Effective Rate)
plus 1-1/2 percent. The Revolving Credit Facility was due on demand and bore
interest at the Base Rate plus 1-1/2 percent. The loans were collateralized
by all of the Company's assets. The proceeds of the term loan were used to
extinguish certain subordinated notes. The term loan was prepaid in June
1994. There were no borrowings under the Revolving Credit Facility through
June 30, 1994.
Also, on January 27, 1994, the Company and Holdings agreed with certain
noteholders to restructure its equity capitalization and subordinated debt.
The noteholders forgave debt approximating $46,698 of principal and interest
in exchange for cash and equity interest in Holdings which resulted in a net
gain of approximately $20,031 which was recorded as additional paid-in
capital of the Company.
11. INCOME TAXES
The Company is a wholly owned subsidiary of Holdings and is included in
Holdings' consolidated tax returns. The Company participates in a tax sharing
arrangement with Holdings whereby consolidated income tax expense or benefit
is allocated to the Company based on the proportion of the Company's taxable
income or loss to Holding's consolidated total.
F-16
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
11. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-----------------------------
1994 1995 1996
--------- ---------- --------
<S> <C> <C> <C>
Current:
Federal................................. $ 2,485 $ 16,065 $ 2,892
State................................... 760 4,599 1,595
Foreign................................. (1,272) (548)
Deferred:
Federal................................. (29,897) 8,945
State................................... (3,617) 641
Foreign................................. (499)
Benefit of operating loss carryforwards:
Federal................................. (1,861) (7,729)
State................................... (360) (1,253)
Foreign................................. -- -- (252)
--------- ---------- --------
Provision (benefit) for income taxes ... $ 1,024 $ 23,104 $13,870
========= ========== ========
</TABLE>
The tax effects of temporary differences consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE
30,
-------------------
1995 1996
--------- ---------
<S> <C> <C>
Gross deferred tax assets:
Accounts receivable..................................... $ 1,443 $ 1,341
Inventory............................................. 3,299 2,586
Accrued expenses...................................... 3,761 6,378
Unused leases......................................... 1,353
Fixed assets.......................................... 100 299
Goodwill and other intangibles........................ 598 5,670
Operating loss carryforwards.......................... 25,482 14,252
Minimum tax carryforward.............................. 632 1,170
Gross deferred tax asset.............................. 36,668 31,696
Net valuation allowance............................... (686)
Gross deferred tax liabilities--repairable spare
parts................................................. (2,468) (7,273)
--------- ---------
Net deferred tax asset................................ $33,514 $24,423
========= =========
</TABLE>
The change in the valuation allowance from 1995 to 1996 is principally due
to the utilization of foreign net operating loss carryforwards.
F-17
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
11. INCOME TAXES (CONTINUED)
Net operating loss and minimum tax credit carryforwards available at June
30, 1996 expire in the following years:
<TABLE>
<CAPTION>
YEAR OF
AMOUNT EXPIRATION
-------- ------------
<S> <C> <C>
Federal operating
losses.................. 38,136 2002-2009
State operating losses . 15,223 1997-2009
Minimum tax credit ...... 1,170 INDEFINITE
</TABLE>
As a result of the Parent's initial public offering, an "ownership change"
occurred pursuant to Section 382 of the Internal Revenue Code. Accordingly,
net operating loss and tax credit carryforwards of the Company and its Parent
are limited during any future period to approximately $20,000 per annum.
A reconciliation between the provision (benefit) for income taxes,
computed by applying the statutory federal income tax rate of 34% for 1994,
35% for 1995 and 35% for 1996 to income before income taxes, and the actual
provision (benefit) for income taxes follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- --------- -------
<S> <C> <C> <C>
Federal income tax provision at statutory tax rate ..... 34.0% 35.0% 35.0%
State income taxes, net of federal income tax provision . 4.5 3.5 4.6
Foreign income taxes .................................... (6.9)
Unused lease credit ..................................... (18.1) (0.1)
Write-off of intangibles ................................ 12.6
Benefit of operating loss carryforward .................. (19.9) (49.1) (0.8)
Change in valuation allowance ........................... (108.9) (1.4)
Other ................................................... (3.9) (0.3) 2.6
-------- --------- -------
Actual income tax provision (benefit) effective tax rate 9.2% 126.2% 40.0%
======== ========= =======
</TABLE>
12. OTHER LIABILITIES
Other liabilities consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------
1995 1996
--------- --------
<S> <C> <C>
Accrued rent, unused facilities and deferred revenues $ 2,334 $ 4,237
Other noncurrent liabilities .......................... 10,049 10,049
--------- --------
$12,383 $14,286
========= ========
</TABLE>
Other noncurrent liabilities include provisions for possible liabilities
relating to various tax matters.
F-18
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
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
2005. 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, 1996 and thereafter are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997......... 20,477
1998......... 16,080
1999......... 13,300
2000......... 10,811
2001......... 4,621
Thereafter .. 12,150
--------
77,439
========
</TABLE>
On December 29, 1993, the Company entered into a settlement agreement to
terminate an existing lease on an unused facility, resulting in a payment to
the lessor amounting to $1,000. The payment was structured in the form of
cash and a $250 five-year, noninterest-bearing note payable. The settlement
resulted in a credit of approximately $8,000 recorded in the consolidated
statement of operations net of the provision of $1,599 for additional unused
leases for the year ended June 30, 1994. The outstanding balance of the $250
five-year, noninterest-bearing note payable was repaid in full during the
year ended June 30, 1995.
Rental expense, exclusive of unused rental expense and credits under all
noncancelable operating leases, amounted to approximately $5,128, $5,878 and
$13,149 for the fiscal years ended 1994, 1995 and 1996, respectively.
14. RETIREMENT PLANS
The Company maintains a 401(k) plan for its employees which is funded
through the contributions of its participants. A similar plan exists for
former employees of an acquired company for which eligibility and additional
contributions were frozen in September 1988.
In addition, the Company assumed the liability of the defined benefit
pension plan applicable to employees of a company acquired in 1986. The
eligibility and benefits were frozen as of the date of the acquisition.
Pension expense for the defined benefit pension plan was computed as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Interest cost................. $ 461 $ 482 $ 495
Actual return on plan assets . (271) (312) (449)
Net amortization and
deferral..................... (72) (42) (72)
------- ------- -------
Periodic pension costs........ $ 118 $ 128 $ 118
======= ======= =======
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.5% and the expected long-term rate of
return on assets was 8.5% for 1994, 1995 and 1996.
F-19
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
14. RETIREMENT PLANS (CONTINUED)
The following table sets forth the funded status of the frozen pension
plan as of May 1, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
--------- --------
<S> <C> <C>
Accumulated benefits (100% vested) ........ $ 6,757 $7,116
Fair value of plan assets.................. 5,432 5,800
--------- --------
Unfunded projected benefit obligation .... 1,325 1,316
Unrecognized net loss...................... 1,705 1,848
Unrecognized net transition obligation .... 536 504
Adjustment to recognized minimum
liability................................. (2,241) 2,352
--------- --------
Accrued pension costs..................... $ 1,325 $1,316
========= ========
</TABLE>
15. EMPLOYEE SEVERANCE AND UNUTILIZED LEASE COSTS
In the second quarter of fiscal year 1996, in connection with the BABSS
acquisition, the Company recorded a $7,000 charge for $6,900 of leases of
duplicate facilities (the former headquarters, several large repair depots,
and numerous field offices of the Company) and $100 of severance of former
employees of the Company. Such amounts were based on management estimates.
In the fourth quarter of fiscal year 1996, the Company reversed $3,400 of
the charge. The reversal was the result of the Company's ability to utilize
and sublease various facilities identified in the original charge. Such
information was unknown to the Company when the original charge was recorded.
16. COMMITMENTS AND CONTINGENT LIABILITIES
The Company, or certain businesses as to which it is alleged that the
Company is a successor, have been identified as potentially responsible
parties in respect to three waste disposal sites that have been identified by
the United States Environmental Protection Agency as Superfund sites. In
addition, the Company received a notice several years ago that it may be a
potentially responsible party with respect to a fourth related site, but has
not received any other communication with respect to that site. Under
applicable law, all parties responsible for disposal of hazardous substances
at those sites are jointly and severally liable for clean-up costs. The
Company originally estimated that its share of the costs of the clean-up of
one of these sites would be approximately $500 which is provided for in
liabilities related to the discontinued products division in the accompanying
consolidated balance sheets as of June 30, 1995 and 1996. Complete
information as to the scope of required clean-up at these sites is not yet
available and, therefore, management's evaluation may be affected as further
information becomes available. However, in light of information currently
available to management, including information regarding assessments of the
sites to date and the nature of involvement of the Company's predecessor at
the sites, it is management's opinion that the Company's share, if any, of
the cost of clean-up of these sites will not be material to the consolidated
financial position, results of operations or liquidity of the Company.
The Company is also party to various legal proceedings incidental to its
business. Certain claims, suits and complaints arising in the ordinary course
of business have been filed or are pending against the Company. In the
opinion of management, these actions can be successfully defended or resolved
without a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
F-20
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
17. RELATED PARTY TRANSACTIONS
Prior to 1994, the Company entered into an agreement to purchase printer
products from Genicom Corporation (Genicom). The Company and Genicom are
under common ownership. The initial term of the agreement is for five years
with an option to extend based on mutual agreement of the parties. Purchases
from Genicom for the years ended June 30, 1994, 1995 and 1996 were
approximately $1,421, $1,972 and $1,512, respectively. Accounts payable to
Genicom amounted to approximately $42 and $14 as of June 30, 1995 and 1996,
respectively.
During the year ended June 30, 1996, the Company entered into a contract
with a related party for cleaning services. The approximate annual value of
the contract approximates $150.
During the year ended June 30, 1996, the Company paid approximately $125
for expense reimbursements to certain shareholders for services rendered in
connection with an acquisition in prior years. The amount was accrued for in
prior years.
F-21
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1997
---------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ....................................... $ 8,221 $ 12,886
Accounts receivable, net of allowances of $9,580 and $11,727 .... 92,650 136,401
Inventories, net of allowances of $19,537 and $19,928 ........... 30,130 35,186
Other ........................................................... 12,770 7,637
---------- -----------
Total current assets ........................................... 143,771 192,110
Repairable Parts, Net of Accumulated Amortization of $105,462 and
$144,158 .......................................................... 154,970 195,656
Intangibles, Net of Accumulated Amortization of $19,625 and $36,164 164,659 197,675
Property, Plant and Equipment, Net of Accumulated Depreciation of
$22,936 and $36,530 ............................................... 32,430 33,283
Other .............................................................. 18,680 22,953
---------- -----------
Total Assets ....................................................... $514,510 $641,677
========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Current portion of long-term debt ............................... $ 2,321 $ 4,756
Accounts payable and accrued expenses ........................... 89,564 101,156
Deferred revenues ............................................... 38,485 72,096
Other ........................................................... 479 3,691
---------- -----------
Total current liabilities ...................................... 130,849 182,059
Revolving Credit Loan and Long-term Debt ........................... 188,582 241,915
Other Liabilities .................................................. 14,286 16,608
Shareholder's Equity:
Common stock, no par value, one share authorized, issued and
outstanding in 1996 and 1997 .................................... -- --
Additional paid-in capital ...................................... 255,535 255,969
Accumulated deficit ............................................. (73,516) (53,600)
Other ........................................................... (1,226) (1,274)
---------- -----------
Total Shareholder's Equity ..................................... 180,793 201,095
---------- -----------
Total Liabilities and Shareholder's Equity ......................... $514,510 $641,677
========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-22
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues ................................. $172,673 $205,070 $369,167 $572,749
Cost of Revenues ......................... 129,962 150,372 272,708 427,969
---------- ---------- ---------- ----------
Gross Profit ............................. 42,711 54,698 96,459 144,780
Operating Expenses:
Selling, general and administrative
expenses ............................. 22,303 28,228 56,519 82,878
Amortization of intangibles ........... 4,872 6,390 10,617 16,861
---------- ---------- ---------- ----------
Total Operating Expenses ............ 27,175 34,618 67,136 99,739
Operating Income ......................... 15,536 20,080 29,323 45,041
---------- ---------- ---------- ----------
Interest Expense, Net of Interest Income 5,801 3,689 11,220 10,704
---------- ---------- ---------- ----------
Income Before Income Taxes ............... 9,735 16,931 18,103 34,337
Provision for Income Taxes ............... 3,893 6,884 7,237 14,421
---------- ---------- ---------- ----------
Net Income ............................... $ 5,842 $ 9,507 $ 10,866 $ 19,916
========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-23
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Operating Activities:
Net income.............................................................. $ 10,866 $ 19,916
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of property and equipment................. 5,611 9,836
Amortization of intangibles............................................. 10,617 16,861
Amortization of repairable parts........................................ 23,017 45,642
Changes in assets and liabilities, net of effects of business
acquisitions........................................................... (14,622) (34,601)
----------- -----------
Net cash provided by operating activities.............................. 35,489 57,654
----------- -----------
Investing Activities:
Business acquisitions................................................... (273,725) (34,433)
Capital expenditures, net of retirements................................ (3,331) (6,093)
Repairable parts purchases.............................................. (31,715) (64,803)
----------- -----------
Net cash used in investing activities.................................. (308,771) (105,329)
----------- -----------
Financing Activities:
Capital contribution.................................................... 36,549 434
Proceeds from issuance of subordinated debentures ...................... 26,600 --
Proceeds from borrowings................................................ 260,945 52,915
Payments on borrowings.................................................. (48,062) ---
Principal payments under capital leases................................. -- (961)
----------- -----------
Net cash provided by financing activities.............................. 276,032 52,388
----------- -----------
Effect of exchange rates on cash......................................... (20) (48)
----------- -----------
Net change in cash and cash equivalents................................... 2,730 4,665
Cash and cash equivalents beginning of period............................. 2,659 8,221
----------- -----------
Cash and cash equivalents end of period................................... $ 5,389 $ 12,886
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-24
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
DecisionOne Corporation (a wholly-owned subsidiary of DecisionOne Holdings
Corp.) and Subsidiaries (the "Company") have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission and,
therefore, do not include all information and footnotes necessary for
presentation of financial position, results of operations and cash flows
required by generally accepted accounting principles. The June 30, 1996
balance sheet was derived from the Company's audited consolidated financial
statements. The information furnished reflects all adjustments (consisting of
normal recurring adjustments) which are, in the opinion of management,
necessary for a fair summary of the financial position, results of operations
and cash flows. The results of operations for the three and nine month
periods ended March 31, 1996 and 1997 are not necessarily indicative of the
operating results to be expected for the full fiscal year.
On May 29, 1997, DecisionOne Holding Corp. ("The Parent") completed a
restructuring of the legal organization of its subsidiaries (the "Corporate
Reorganization"). The Corporate Reorganization involved the Parent's
contribution to the Company of ownership interests in its subsidiaries, all
of which were under the Parent's 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 all
periods presented.
NOTE 2: BUSINESS ACQUISITION
On November 15, 1996, the Company acquired substantially all of the assets
of the U.S. computer service business (the "Business") of Memorex Telex
Corporation and certain of its affiliates (collectively, "Memorex Telex").
Memorex Telex had filed a petition in bankruptcy in the United States
Bankruptcy Court in the District of Delaware on October 15, 1996; the Court
approved the sale to the Company on November 1, 1996. The base purchase price
was $52,500, comprised of the assumption of certain liabilities under
contracts of the Business (the "Deferred Revenues"), which were estimated at
closing to be $26,015, and base cash consideration of $26,485, excluding
transaction and closing costs. The purchase price is subject to further
adjustment based upon the actual amount of Deferred Revenues, the amount of
revenues of the Business for the two calendar months prior to closing, and
the actual amount of inventory. The estimated fair market values of certain
assets acquired, as well as liabilities assumed, are also subject to further
adjustment as additional information becomes available to the Company. During
the third quarter of fiscal 1997, the estimated Deferred Revenue liability
was increased by approximately $2,300.
The primary source of funds used for the acquisition was the Company's
revolving credit facility, which was increased from $225,000 to $300,000 on
November 13, 1996.
NOTE 3: EMPLOYEE SEVERANCE AND EXIT COSTS
In the second quarter of fiscal 1997, in connection with the Memorex Telex
acquisition, the Company recorded a $3,400 pre-tax charge for estimated
future employee severance costs, and a $0.9 million pre-tax charge for
unutilized lease/contract losses ("exit costs"), primarily associated with
duplicate facilities to be closed. The $3,400 charge, recorded in accordance
with Statement of Financial Accounting Standards No. 112 ("SFAS 112"),
Employers' Accounting for Postemployment Benefits, reflects the
actuarially-determined benefit costs for the separation of employees who are
entitled to benefits under pre-existing separation pay plans. These costs are
included in selling, general and administrative expenses in the accompanying
unaudited condensed consolidated statement of operations for the nine month
period ended March 31, 1997. For further information regarding the Memorex
Telex acquisition, see Note 2.
F-25
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 3: EMPLOYEE SEVERANCE AND EXIT COSTS (CONTINUED)
In the second quarter of fiscal 1996, in connection with the acquisition
of Bell Atlantic Business Systems Services ("BABSS"), the Company recorded
pre-tax charges for exit costs of $6,900, and estimated future employee
severance costs of $100. During the fourth quarter of fiscal 1996, the
Company reversed $3,400 of these employee severance and exit cost
liabilities. The reversal was primarily the result of the Company's ability
to utilize and sublease various facilities identified in the original $7,000
combined liability. Such information was unknown to the Company when the
original liability was recorded.
NOTE 4: SUBSEQUENT EVENT
On May 4, 1997, the Company and Quaker Holding Co. ("Quaker") an affiliate
of DLJ Merchant Banking Partners II, L.P. and affiliated funds and other
entities, entered into a definitive Agreement and Plan of Merger (the "Merger
Agreement"). Under the terms of the Merger Agreement, Quaker will merge with
and into the Company, and, subject to the following sentence, the holders of
each share of the Company's common stock can elect to receive $23 in cash for
such share or to retain such share in the merged Company. In any event,
holders will be required to retain 5.3% of the Company's common stock
outstanding immediately prior to the merger. In addition, the Company and
Quaker entered into a voting agreement with certain partnerships affiliated
with Welsh, Carson, Anderson & Stowe and J.H. Whitney & Co., pursuant to
which these partnerships, subject to certain conditions, have agreed to vote
in favor of the merger 8,345,349 of the 14,837,501 shares of Company common
stock owned by them, exclusive of warrants to purchase 468,750 shares of
common stock at $0.10 per share. The 8,345,349 shares represent approximately
30% of the Company's common stock outstanding on April 21, 1997.
The proposed merger, which will be recorded as a recapitalization for
accounting purposes, is subject to a number of conditions, including
regulatory approvals and approval by Company stockholders. The transaction is
estimated to have an aggregate value of approximately $957,000, including
refinancing of the Company's existing revolving credit facility. The Company
expects the merger to close by September, 1997.
As a result of the proposed merger, the Company and Quaker will incur
various costs, currently estimated to range between $95,000 and $105,000, on
a pretax basis, in connection with consummating the transaction. These costs
consist primarily of professional fees, registration costs, compensation
costs and other expenses. Although the exact timing, nature and amount of
these merger transaction costs are subject to change, the Company expects
that a one-time pre-tax charge for these costs of approximately $76 million
($69 million after tax) will be recorded in the quarter during which the
merger is consummated.
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder
of DecisionOne Corporation (formerly Bell Atlantic Business Systems Services,
Inc.):
We have audited the accompanying consolidated balance sheets of
DecisionOne Corporation (formerly, Bell Atlantic Business Systems Services,
Inc.) and subsidiary (the "Company") as of December 31, 1994 and October 20,
1995, and the related consolidated statements of operations, stockholder's
equity and of cash flows for the years ended December 31, 1993 and 1994 and
the period from January 1, 1995 to October 20, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of DecisionOne Corporation and
subsidiary as of December 31, 1994 and October 20, 1995, and the results of
their operations and their cash flows for the years ended December 31, 1993
and 1994 and the period from January 1, 1995 to October 20, 1995 in
conformity with generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, the
Company changed its method of accounting for income taxes and postemployment
benefits as of January 1, 1993.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
December 29, 1995
F-27
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC BUSINESS
SYSTEMS SERVICES, INC.) AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents.................................... $ 6,456 --
Accounts receivable, net.................................... 50,743 66,426
Inventories, net............................................ 28,620 24,371
Deferred tax asset--current................................. 6,910 --
Prepaid expenses and other assets........................... 2,754 2,990
-------------- -------------
Total current assets...................................... 95,483 93,787
Repairable parts, net........................................ 91,012 91,486
Property and equipment, net.................................. 24,925 28,352
Intangibles, net............................................. 52,345 50,747
Deferred tax asset, net...................................... 12,814 1,062
Other assets................................................. 1,005 499
-------------- -------------
Total assets................................................. $ 277,584 $ 265,933
============== =============
Liabilities and Stockholder's Equity
Current Liabilities:
Accounts payable............................................ $ 24,767 $ 26,260
Accrued expenses............................................ 20,160 18,384
Deferred revenues........................................... 14,582 29,231
Current capitalized lease obligations....................... 1,627 1,525
Income taxes payable........................................ 1,548 --
Due to Bell Atlantic affiliates............................. 39,579 --
-------------- -------------
Total current liabilities................................. 102,263 75,400
Noncurrent capitalized lease obligations..................... 3,128 1,880
Due to Bell Atlantic affiliates.............................. 773 862
Other liabilities............................................ 23,377 1,293
Commitments and contingent liabilities
Stockholder's equity:
Common stock, no par value; one share authorized, issued
and outstanding in 1994 and 1995........................... -- --
Additional paid-in capital.................................. 276,619 314,262
Accumulated deficit......................................... (127,730) (127,134)
Foreign currency translation adjustment..................... (846) (630)
-------------- -------------
Total stockholder's equity................................ 148,043 186,498
-------------- -------------
Total liabilities and stockholder's equity................... $ 277,584 $ 265,933
============== =============
</TABLE>
See notes to consolidated financial statements.
F-28
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER PERIOD
31, JANUARY 1 TO
--------------------- OCTOBER 20,
1993 1994 1995
---------- ---------- --------------
<S> <C> <C> <C>
Revenues:
Service................................................... $375,977 $457,675 $388,203
Other..................................................... 27,405 28,418 24,283
---------- ---------- --------------
403,382 486,093 412,486
---------- ---------- --------------
Cost of revenues:
Service................................................... 304,334 369,596 316,964
Other..................................................... 21,856 21,281 20,348
---------- ---------- --------------
326,190 390,877 337,312
---------- ---------- --------------
Gross profit............................................... 77,192 95,216 75,174
Operating expenses:
Selling, general and administrative expenses.............. 71,096 74,627 69,980
Amortization of intangibles............................... 4,383 3,884 1,652
---------- ---------- --------------
Operating income........................................... 1,713 16,705 3,542
Interest expense........................................... (3,341) (2,203) (1,855)
Interest income............................................ 206 54 218
---------- ---------- --------------
Income (loss) before income taxes and cumulative effect of
accounting change......................................... (1,422) 14,556 1,905
Provision for income taxes................................. 132 6,595 1,309
---------- ---------- --------------
Income (loss) before cumulative effect of accounting
change.................................................... (1,554) 7,961 596
Cumulative effect of accounting change..................... 1,881
---------- ---------- --------------
Net income.............................................. $ 327 $ 7,961 $ 596
========== ========== ==============
</TABLE>
See notes to consolidated financial statements.
F-29
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND PERIOD JANUARY 1 TO
OCTOBER 20, 1995
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
CUMULATIVE
COMMON STOCK FOREIGN
-------------------- ADDITIONAL CURRENCY TOTAL
NUMBER OF PAID-IN ACCUMULATED TRANSLATION STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT EQUITY
----------- -------- ------------ ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 ... 1 $0 $295,419 $(136,018) $(312) $159,089
Net income ............... 327 327
Foreign currency
translation adjustment .. (215) (215)
Distributions to BAC ..... (1,900) (1,900)
----------- -------- ------------ ------------- ------------- ---------------
Balance, December 31, 1993 . 1 0 293,519 (135,691) (527) 157,301
Net income ............... 7,961 7,961
Foreign currency
translation adjustment .. (319) (319)
Distributions to BAC ..... (16,900) (16,900)
----------- -------- ------------ ------------- ------------- ---------------
Balance, December 31, 1994 . 1 0 276,619 (127,730) (846) 148,043
Net income ............... 596 596
Foreign currency
translation adjustment .. 216 216
Distributions to BAC ..... (800) (800)
Contributed capital ...... 38,443 38,443
----------- -------- ------------ ------------- ------------- ---------------
Balance, October 20, 1995 .. 1 $0 $314,262 $(127,134) $(630) $186,498
=========== ======== ============ ============= ============= ===============
</TABLE>
See notes to consolidated financial statements.
F-30
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER PERIOD
31, JANUARY 1,
--------------------- TO OCTOBER 20,
1993 1994 1995
---------- ---------- --------------
<S> <C> <C> <C>
Operating activities:
Net income ............................................... $ 327 $ 7,961 $ 596
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of property and
equipment............................................ 7,572 8,499 7,171
Amortization of intangibles........................... 4,383 3,884 1,652
Amortization of repairable parts...................... 43,443 43,450 28,767
Loss on fixed asset retirements ...................... 259 215 165
Provision for accounts receivable .................... 1,213 810 810
Provision for inventory obsolescence ................. 5,351 4,802 6,365
Changes in operating assets and liabilities, net of
effects from contributed capital, which provided
(used) cash:
Accounts receivable ............................. (9,448) (7,660) (18,305)
Inventories ..................................... (4,321) (3,800) (2,116)
Accounts payable ................................ 5,673 7,755 1,493
Accrued expenses ................................ 3,734 3,391 2,953
Deferred revenues ............................... 5,154 (757) 14,649
Net changes in income taxes, deferred taxes,
other assets and liabilities .................. (2,865) (189) 4,415
---------- ---------- --------------
Net cash provided by operating activities ..... 60,475 68,361 48,615
---------- ---------- --------------
Investing activities:
Capital expenditures ..................................... (8,336) (9,585) (10,763)
Repairable parts purchases ............................... (29,833) (45,907) (29,241)
Proceeds from sale of fixed assets ....................... 124 -- --
---------- ---------- --------------
Net cash used in investing activities ............. (38,045) (55,492) (40,004)
---------- ---------- --------------
Financing activities:
Distributions to shareholder ............................. (1,900) (16,900) (3,475)
Net borrowings (repayments) on affiliated debt ........... (19,029) 7,544 (10,242)
Additions to capital lease obligations ................... 1,825 2,283
Payments on capital lease obligations .................... (1,309) (1,357) (1,350)
---------- ---------- --------------
Net cash used in financing activities ............. (20,413) (8,430) (15,067)
---------- ---------- --------------
Net increase (decrease) in cash and cash equivalents ....... 2,017 4,439 (6,456)
Cash and cash equivalents, beginning of year ................ -- 2,017 6,456
---------- ---------- --------------
Cash and cash equivalents, end of year ...................... $ 2,017 $ 6,456 --
========== ========== ==============
Supplemental disclosures of cash flow information:
Net cash paid during the year for:
Interest ............................................... $ 3,409 $ 2,307 $ 1,986
Income taxes ........................................... 1,598 8,366 5,237
Noncash investing and financing activities:
Assets and liabilities contributed to capital by
stockholder:
Accounts receivable .................................... $ 1,812
Accounts payable ....................................... (4,729)
Notes payable .......................................... (29,248)
Income tax payable ..................................... 1,675
Deferred taxes ......................................... 17,079
Employee related liabilities ........................... (27,707)
--------------
$(41,118)
==============
</TABLE>
See notes to consolidated financial statements.
F-31
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(IN THOUSANDS)
1. NATURE OF BUSINESS
The consolidated financial statements include the accounts of DecisionOne
Corporation (formerly, Bell Atlantic Business Systems Services, Inc.
("BABSS")) and its wholly-owned subsidiary, Sorbus Canada Ltd. (the
"Company"). Prior to the acquisition discussed below, BABSS had been wholly
owned by Bell Atlantic Business Systems, Inc., a subsidiary of Bell Atlantic
Enterprises International, Inc., and, ultimately by Bell Atlantic Corporation
("BAC"). The Company is a provider of multivendor computer maintenance
service and technology support services.
On September 19, 1995, BAC entered into a stock purchase agreement (the
"Agreement") to sell all of the outstanding common stock of BABSS to Decision
Servcom, Inc. ("Operating Co."), an independent provider of computer
maintenance services in the mid-range computer market, for a cash purchase
price of approximately $250,000. In connection with the acquisition, the
Company's name was changed from BABSS to DecisionOne Corporation, and
Operating Co. was merged into it.
The Company's wholly-owned international subsidiary is not significant to
the Company's financial statements.
2. BASIS OF PRESENTATION
The Company was acquired effective October 20, 1995, through a transaction
accounted for using the purchase method of accounting. The accounts of the
Company do not reflect the allocation of the purchase price.
BAC's retention of certain of the Company's liabilities, and net of
certain assets (including cash and cash equivalents), has been accounted for
as a contribution of capital in the Company's accompanying consolidated
statements of stockholder's equity for the period ended October 20, 1995. See
Note 4.
Obligations arising out of employee benefit and pension plans accrued
prior to October 20, 1995, as well as certain claims and causes of action
related to the Company's actions or omissions that occurred prior to October
20, 1995 have been retained by BAC. Therefore, no accruals for the
aforementioned have been made in the Company's accompanying consolidated
balance sheet as of October 20, 1995.
3. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION -- The consolidated financial statements include the
accounts of BABSS and its wholly owned subsidiary. All intercompany balances
and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS -- Cash and cash equivalents are highly liquid
investments with remaining maturities of three months or less at the time of
purchase.
INVENTORIES -- Inventories are stated at the lower of cost or market, cost
being determined using the weighted average method. Inventories consist of
consumable replacement parts which are charged to operations when used.
Inventories are stated net of a provision for obsolescence of $21,718,
$22,742 and $23,852 at December 31, 1993 and 1994 and October 20, 1995,
respectively.
REPAIRABLE PARTS -- Repairable parts are required in order to meet the
requirements of the contracts with the Company's maintenance customers. These
parts are primarily purchased from equipment manufacturers or other third
parties. As these parts are purchased, they are capitalized at cost and
amortized using the straight-line method over five years, the estimated
useful life of these repairable parts.
F-32
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(IN THOUSANDS)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
When a repairable part is used in providing maintenance services to a
customer's equipment, the defective part taken from the equipment is
exchanged for the repairable part taken from the Company's inventory.
Repairable parts are repaired by the Company based upon anticipated need and
generally have an economic life that extends beyond the normal life cycle of
the applicable product. Costs of refurbishing parts are charged to operations
as incurred. Repairable parts are stated at cost, less accumulated
amortization of $68,803 and $74,411 as of December 31, 1994 and October 20,
1995, respectively. Repairable parts amortization expense for the years ended
December 31, 1993 and 1994 and the period ended October 20, 1995 was $43,443,
$43,450 and $28,767, respectively.
No such impairment writedowns were required in the years ended December
31, 1993, or 1994, or in the period ended October 20, 1995.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation is provided for using the straight-line method over the
estimated useful lives of the depreciable assets. Capitalized equipment
leases and leasehold improvements are amortized over the shorter of the
related lease terms or asset lives. Maintenance and repairs are charged to
expense as incurred; renewals and betterments are capitalized. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is charged to operations.
INTANGIBLE ASSETS -- Intangible assets are comprised of excess purchase
price over net assets acquired ("goodwill") and the fair value of acquired
customer contracts.
Goodwill is being amortized on a straight-line basis over a life of 25 to
40 years. Other intangibles are being amortized on a straight-line basis,
with lives between 2 to 18 years.
CARRYING VALUE OF LONG-TERM ASSETS -- The Company evaluates the carrying
value of long-term assets, property and equipment, repairable parts and
intangible assets, based upon current and anticipated undiscounted cash
flows, and recognizes an impairment when such estimated cash flows will be
less than the carrying value of the asset. Measurement of the amount of
impairment, if any, is based upon the difference between carrying value and
fair value.
SERVICE REVENUE -- The Company enters into maintenance contracts whereby
it services various manufacturers' equipment. Revenues from these contracts
are recorded as deferred revenues and are recognized ratably over the term of
the contract. Revenues derived from the maintenance of equipment not under
contract are recognized as the service is performed.
FOREIGN CURRENCY TRANSLATION -- Gains and losses resulting from foreign
currency translation are accumulated in a separate component of shareholder's
equity titled, "Cumulative Foreign Currency Translation Adjustment". Gains
and losses resulting from foreign currency transactions are not significant
and are included in operations.
CREDIT RISK -- Concentration of credit risk with respect to trade
receivables is limited due to the large number of customers comprising the
Company's customer base and their dispersion across many industries.
INCOME TAXES -- The Company is included in the consolidated federal tax
return of BAC. Calculation of the Company's income taxes on a separate return
basis would not result in any change to the amounts reflected in the
consolidated financial statements. Effective January 1, 1993, the Company
changed its policy of accounting for income taxes to conform to Statement of
Financial Accounting Standards
F-33
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(IN THOUSANDS)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
("SFAS") No. 109, Accounting for Income Taxes. The Company previously
followed Accounting Principles Board Opinion No. 11, "Accounting for Income
Taxes." SFAS No. 109 requires, among other things, the accrual of deferred
tax liabilities for future taxable amounts, deferred tax assets for future
deductions and operating loss carryforwards, and a valuation allowance to
reduce deferred tax assets to the amounts that are more likely than not to be
realized. The cumulative effect of adopting SFAS No. 109 as of January 1,
1993 resulted in a non-cash increase to net income of $1,881 for the initial
adjustment of deferred tax balances to reflect the tax rates in effect at
adoption.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The following disclosure of the
estimated fair value of financial instruments was made in accordance with the
requirements of SFAS No. 107, Disclosures about Fair Value of Financial
Instruments. The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies.
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, AND ACCOUNTS PAYABLE --
The carrying amount of these items are a reasonable estimate of their fair
value.
NOTES PAYABLE -- Rates currently available to the Company for debt with
similar terms and remaining maturities are used to estimate the fair value
for debt issues, accordingly, the carrying amount of debt is a reasonable
estimate of its fair value.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
PENSION PLAN -- Substantially all of the Company's employees participated
in a noncontributory defined benefit pension plan sponsored by BAC for the
years ended December 31, 1993 and 1994 and for the period ended October 20,
1995. Amounts contributed by the Company to the pension plan were determined
by BAC based principally on the aggregate cost actuarial method, and are
subject to applicable federal income tax regulations. The obligation of the
pension plan which has been terminated as of October 20, 1995, will be
assumed by BAC.
POSTEMPLOYMENT BENEFITS -- Effective January 1, 1993, the Company adopted
the provisions of SFAS No. 112, Employers' Accounting for Postemployment
Benefits. SFAS No. 112 establishes accrual accounting standards for
employer-provided benefits which cover former or inactive employees after
employment, but before retirement. The adoption of SFAS No. 112 on January 1,
1993 did not have a material effect on the Company's consolidated financial
position or results of operations.
The Company's employees, if eligible, are provided post employment
benefits under plans administered by BAC for the years ended December 31,
1993 and 1994 and for the period ended October 20, 1995. Amounts contributed
by the Company to the benefit plans were determined by BAC based on an
actuarial methodology. BAC has assumed all such liabilities accrued as of
October 20, 1995.
4. CONTRIBUTED CAPITAL
Effective October 20, 1995, in accordance with the Agreement between BAC
and Operating Co., the Company accounted for BAC's retention of liabilities,
net of certain assets, as a contribution of capital.
F-34
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(IN THOUSANDS)
4. CONTRIBUTED CAPITAL (CONTINUED)
Amounts contributed to capital were as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash .................................. $ (2,675)
Accounts receivable.................... (1,812)
Accounts payable and accrued expenses 4,729
Income taxes payable................... (1,675)
Notes payable to affiliates............ 29,248
Deferred taxes......................... (17,079)
Employee related liabilities........... 27,707
----------
Net amount contributed to capital ..... $ 38,443
==========
</TABLE>
5. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Trade receivables......................... $51,513 $68,136
Due from affiliates....................... 1,655 1,362
Other..................................... 847 697
-------------- -------------
54,015 70,195
Less allowance for uncollectible
accounts................................. (3,272) (3,769)
-------------- -------------
$50,743 $66,426
============== =============
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Land and buildings........................ $ 2,419 $ 2,509
Equipment, furniture and fixtures ........ 48,008 54,722
Leasehold improvements.................... 3,964 4,721
Other..................................... 11,461 10,854
-------------- -------------
65,852 72,806
Accumulated depreciation and
amortization............................. (40,927) (44,454)
-------------- -------------
$ 24,925 $ 28,352
============== =============
</TABLE>
The principal lives (in years) used in determining depreciation rates of
various assets are: buildings (40); computers and equipment (5); furniture
and fixtures (10); office machines (10); and leasehold improvements (term of
related leases).
Depreciation expense was $7,572 and $8,499, for the years ended December
31, 1993 and 1994, respectively, and $7,171 for the period ended October 20,
1995.
F-35
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(IN THOUSANDS)
7. INTANGIBLES
Intangibles consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Customer contracts....... $ 8,500 $ 8,500
Goodwill................. 59,141 59,214
-------------- -------------
67,641 67,714
Accumulated
amortization............ (15,296) (16,967)
-------------- -------------
$ 52,345 $ 50,747
============== =============
</TABLE>
The Company periodically evaluates the fair value of goodwill and other
intangible assets and recognizes an impairment when it is probable that
estimated future undiscounted cash flows will be less than the carrying value
of the asset. No writedowns of goodwill or other intangible assets were made
in 1993, 1994 or 1995.
Amortization expense relating to intangibles was approximately $4,383 and
$3,884 for the years ended December 31, 1993 and 1994, respectively, and
$1,652 for the period ended October 20, 1995.
8. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Compensation and
benefits................. $ 6,642 $ 7,272
Bonuses................... 5,109 2,790
Other accrued expenses ... 8,409 8,322
-------------- -------------
$20,160 $18,384
============== =============
</TABLE>
9. INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
PERIOD
YEARS ENDED JANUARY 1
DECEMBER 31, TO
------------------- OCTOBER 20,
1993 1994 1995
--------- --------- ------------
<S> <C> <C> <C>
Continuing operations:
Current:
Federal..................................... $ 2,820 $ 7,243 $ 390
State....................................... 126 727 (110)
Foreign..................................... 552 1,026 653
--------- --------- -------------
3,498 8,996 933
--------- --------- -------------
Deferred:
Federal..................................... (3,119) (2,078) 707
State....................................... (7) 1,455 225
Foreign..................................... (240) (323) (331)
--------- --------- -------------
(3,366) (946) 601
--------- --------- -------------
Benefit of net operating loss carryforwards:
State....................................... -- (1,455) (225)
--------- --------- -------------
Provision for income taxes (benefit) ......... $ 132 $ 6,595 $1,309
========= ========= =============
</TABLE>
F-36
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(IN THOUSANDS)
9. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax asset were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Deferred tax assets (liabilities):
Current:
Accounts receivable ............... $ 1,934 --
Inventory ......................... 5,186 --
Accrued expenses ................... (489) --
Other .............................. 279 --
Deferred state taxes ............... 1,395 --
--------------
Gross deferred tax asset--current . 8,305 --
Less valuation allowance............... (1,395) --
--------------
Net deferred tax assets--current .. 6,910 --
--------------
Non-current:
Property and equipment ........... 2,646 1,062
Repairable parts ................... 2,211 --
Employee benefits ................. 8,100 --
Deferred state taxes .............. 1,777 --
Other ............................. (143) --
State net operating loss
carryforwards .................... 5,163 --
-------------- -------------
Gross deferred tax
asset--noncurrent ............... 19,754 1,062
Less valuation allowance............... (6,940) --
-------------- -------------
Net deferred tax
asset--noncurrent ............... 12,814 1,062
-------------- -------------
Net deferred tax asset................. $19,724 $1,062
============== =============
</TABLE>
The net deferred tax asset as of December 31, 1994 in essence represents
an intercompany receivable from BAC, resulting from the future benefit of the
inclusion of the Company's temporary differences in the consolidated U.S.
federal tax return of BAC.
The October 20, 1995 deferred tax asset related to foreign operations.
A reconciliation between the provision (benefit) for income taxes,
computed by applying the statutory income tax rate to income before income
taxes, and the actual provision for income taxes follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- ------- -------
<S> <C> <C> <C>
Federal income tax provision (benefit) at statutory tax
rate....................................................... (35.0)% 35.0% 35.0%
State income taxes, net of federal income tax benefit ..... 5.4 3.2 (3.7)
Foreign income tax rate differential ....................... 5.1 1.2 6.6
Nondeductible expenses ..................................... 6.8 1.8 9.7
Amortization of goodwill.................................... 33.8 4.1 21.7
Other ...................................................... (6.9) -- (0.6)
--------- ------- -------
Actual income tax provision effective tax rate ............. 9.2% 45.3% 68.7%
========= ======= =======
</TABLE>
F-37
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(IN THOUSANDS)
10. LEASE COMMITMENTS
The Company leases certain computer equipment under noncancellable capital
leases. The Company conducts its operations primarily from leased warehouses
and office facilities and uses certain computer, data processing and other
equipment under operating lease agreements expiring at various dates during
the next six years.
Future minimum payments under noncancellable capital leases and operating
leases as of October 20, 1995 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
October 21, 1995 to December 31, 1995 .. $ 364 $ 3,639
1996.................................... 1,669 15,308
1997.................................... 1,261 13,456
1998.................................... 400 10,885
1999.................................... 58 8,343
2000.................................... 55 4,588
Thereafter.............................. -- 11
--------- -----------
Total minimum lease payments............ 3,807 $56,230
Less amount representing interest ...... 402
---------
Present value of minimum lease
payments............................... 3,405
Less current obligations................ 1,525
---------
Noncurrent obligations.................. $1,880
=========
</TABLE>
Rental expense for operating leases was $12,609 and $14,145 for the years
ended December 31, 1993 and 1994 and $12,749 for the period ended October 20,
1995.
11. BENEFIT PLANS
Substantially all of the Company's employees were covered under a
noncontributory pension benefit plan sponsored by BAC, which plan was
terminated on October 20, 1995 (see Note 3). The pension benefit formula used
in the determination of pension cost is based on the greater of a flat dollar
amount per year of service or a stated percentage of adjusted career average
income. BAC's objective in funding the plan is to accumulate funds at a
relatively stable rate over participants' working lives so that benefits are
fully funded at retirement. Plan assets consist principally of investments in
corporate equity securities, U.S. Government and corporate debt securities
and real estate.
SFAS No. 87 requires a comparison of the actuarial present value of
projected benefit obligations with the fair value of plan assets, the
disclosure of the components of net periodic pension costs and a
reconciliation of the funded status of the plan with amounts recorded on the
balance sheet. Such disclosures are not presented for the Company because the
structure of the plan does not allow for determination of this information on
an individual company basis.
F-38
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(IN THOUSANDS)
11. BENEFIT PLANS (CONTINUED)
The Company recognized pension expense of $3,243 and $4,202 for the years
ended December 31, 1993 and 1994 and $4,846 for the period ended October 20,
1995.
The assumptions used in the actuarial computations by BAC for
determination of the above pension expense were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Discount rate ................................... 7.25% 8.25% 7.25%
Expected long-term rate of return on plan
assets.......................................... 8.25 8.25 8.25
Future compensation growth rate ................. 5.25 5.25 4.75
</TABLE>
Substantially all of the Company's employees participate in a savings plan
provided by BAC which provides opportunities for eligible employees to save
for retirement on a tax deferred basis. The Company recognized contribution
expense of $1,482 and $1,531 for the years ended December 31, 1993 and 1994
and $1,602 for the period ended October 20, 1995.
Under the Agreement, Operating Co. assumed no liabilities of the Company
relating to employee benefit programs.
12. OTHER LIABILITIES
Other liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Other postemployment benefit liabilities $19,120 $ --
Accrued pension cost ..................... 3,220 --
Other noncurrent liabilities ............. 1,037 1,293
-------------- -------------
$23,377 $1,293
============== =============
</TABLE>
Effective October 20, 1995, employee related liabilities (including other
postemployment benefit liabilities and accrued pension costs) were
contributed to capital by BAC. (see Note 4).
13. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a defendant in a number of lawsuits in the ordinary course
of business, including actions alleging wrongful termination of employment
and breach of contract. In several of the alleged wrongful termination cases,
the plaintiffs are seeking punitive damages. The Company believes it has
meritorious defenses to all of the claims and is vigorously defending the
lawsuits. Although the ultimate outcome of these lawsuits cannot be predicted
with certainty, the Company's management, after consultation with legal
counsel, does not expect that such lawsuits will have a material adverse
effect on the Company's financial condition, results of operation or
liquidity.
F-39
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(IN THOUSANDS)
14. RELATED PARTY TRANSACTIONS
The Company engages in various activities with Bell Atlantic affiliated
companies. Amounts due from the affiliated companies consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Bell Atlantic Network Services, Inc. $ 797 $ 806
Bell Atlantic Network Integration ... 252 281
New Jersey Bell ...................... 65 70
Bell of Pennsylvania ................. 35 62
C&P Telephone Company--Maryland ..... 96 35
Other ................................ 410 108
-------------- -------------
Total due from affiliates .......... $1,655 $1,362
============== =============
</TABLE>
Amounts due to the affiliated companies consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Bell Atlantic Enterprises International ...... $ 3,856 $ 309
Bell Atlantic Professional Services........... 110 297
Bell Atlantic Customer Services
International................................ 239
Other......................................... 340 159
-------------- -------------
Total accounts payable affiliates........... 4,545 765
-------------- -------------
Notes payable--FSI............................ 39,579
Notes payable--BAP............................ 773 862
-------------- -------------
Total notes payable affiliates.............. 40,352 862
-------------- -------------
Total due to affiliates..................... $44,897 $1,627
============== =============
</TABLE>
The Company engages in various activities with affiliated companies. The
amount due to Bell Atlantic Financial Services, Inc. ("FSI") at December 31,
1994 is represented by a promissory note for the aggregate unpaid principal
balance plus interest on demand. The interest rates charged are based on the
weighted average cost of FSI's outstanding borrowings during the month. The
weighted average interest rate for 1994 and 1995 was approximately 5.8%.
The amount due to Bell Atlantic Properties ("BAP") is also represented by
a promissory note for the aggregate unpaid principal balance plus interest.
Interest is payable monthly on the unpaid principal at the rate of 9.88% per
annum.
Effective October 20, 1995, notes payable excluding interest of $29,248
due to FSI, and $4,650 of accounts payable due to affiliates were contributed
to capital by BAC. See Note 4.
F-40
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(IN THOUSANDS)
14. RELATED PARTY TRANSACTIONS (CONTINUED)
Transactions with affiliated companies had the following impact on the
results of operations:
<TABLE>
<CAPTION>
PERIOD
JANUARY 1 TO
YEARS ENDED OCTOBER 20,
DECEMBER 31, 1993 1995
------------------- --------------
1993 1994 1995
--------- --------- --------------
<S> <C> <C> <C>
Revenues....................................... $17,347 $13,971 $10,270
--------- --------- --------------
Total operating and other expenses:
Rent expense ................................ $ 5,329 $ 3,176 $ 2,626
Other service and general and administrative
expenses.................................... 11,957 14,191 8,153
Interest expense............................. 3,035 1,823 1,512
--------- --------- --------------
$20,321 $19,190 $12,291
========= ========= ==============
</TABLE>
F-41
<PAGE>
==============================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, DLJSC OR ANY OTHER PERSON. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SENIOR
SUBORDINATED NOTES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
---------------
TABLE OF CONTENTS
PAGE
----
Available Information.................................................. 2
Prospectus Summary..................................................... 3
Risk Factors........................................................... 17
The Merger and Merger Financing........................................ 26
Use of Proceeds........................................................ 29
Capitalization......................................................... 30
Unaudited Condensed Consolidated Pro
Forma Financial Data.................................................. 31
Selected Consolidated Financial Data .................................. 40
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................................ 43
Business............................................................... 53
Management............................................................. 63
Executive Compensation................................................. 65
Security Ownership of Certain Beneficial
Owners and Management of Holdings .................................... 68
Certain Relationships and Related
Transactions.......................................................... 71
Description of New Credit Facility .................................... 72
Description of the Senior Subordinated
Notes................................................................. 74
Plan of Distribution................................................... 105
Legal Matters.......................................................... 106
Experts................................................................ 106
Index to Consolidated Financial
Statements ........................................................... F-1
==============================================================================
==============================================================================
$150,000,000
[DECISIONONE CORPORATION LOGO]
DECISIONONE
DECISIONONE CORPORATION
9 3/4% SENIOR SUBORDINATED
NOTES DUE 2007
------------
PROSPECTUS
------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
JULY 30, 1997
==============================================================================
