<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
DECISIONONE HOLDINGS CORP.
(exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-28090 13-3435409
(State or other jurisdiction of (Commission file #) (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
DECISIONONE CORPORATION
(exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 333-28411 23-2328680
(State or other jurisdiction of (Commission file #) (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
50 EAST SWEDESFORD ROAD
FRAZER, PENNSYLVANIA 19355
(610) 296-6000
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF THE
PRINCIPAL EXECUTIVE OFFICES OF REGISTRANTS)
SECURITIES REGISTERED PURSUANT TO THE SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ----------------------------------------------------- ----------------------------------------
<S> <C>
DECISIONONE HOLDINGS CORP.:
9 3/4 SENIOR SUBORDINATED NOTES DUE 2007 NONE
DECISIONONE CORPORATION:
11 1/2 SENIOR DISCOUNT DEBENTURES DUE 2009 NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF
THE ACT:
DECISIONONE HOLDINGS CORP.:
COMMON STOCK, $.01 PAR VALUE NONE
</TABLE>
Indicate by check mark whether DecisionOne Holdings Corp. (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [CHECK] No_______
Indicate by check mark whether DecisionOne Corporation (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes__________ No [CHECK]
The aggregate market value of the voting stock of DecisionOne Holdings
Corp. held by non-affiliates, based upon the closing price of Common Stock on
September 11, 1997, as reported by the Nasdaq National Market System, was
approximately $44,170,728. In making such calculation, registrant is not making
a determination of the affiliate or non-affiliate status of any holders of
shares of Common Stock. All of the voting stock of DecisionOne Corporation is
held by DecisionOne Holdings Corp.
At September 11, 1997, 12,499,978 shares of DecisionOne Holdings Corp.
common stock were outstanding and one share of DecisionOne Corporation common
stock was outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [CHECKED BOX]
DecisionOne Corporation meets the conditions set forth in General
Instruction I(1) of Form 10-K and is therefore filing this form with the reduced
disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of DecisionOne Holdings Corp.'s Proxy Statement prepared in
connection with its 1997 Annual Meeting of Stockholders (Part III)
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<PAGE> 2
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This amendment to the Registrant's Form 10-K for the fiscal year ended June
30, 1997 (the "1997 Form 10-K") amends and modifies the financial statements and
supplementary data for DecisionOne Holdings Corp. and DecisionOne Corporation
listed in Item 14 which are attached hereto and made a part hereof.
<PAGE> 3
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in Frazer, Pennsylvania
on October 8, 1997.
DECISIONONE CORPORATION
By: /s/ THOMAS J. FITZPATRICK
------------------------------------
Thomas J. Fitzpatrick
Vice President and
Chief Financial Officer
<PAGE> 4
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENT OF DECISIONONE HOLDINGS CORP.:
<TABLE>
<S> <C>
Independent Auditors' Report...................................................... F-2
Consolidated Balance Sheets as of June 30, 1997 and 1996.......................... F-3
Consolidated Statements of Operations for the Years Ended June 30, 1997, 1996 and
1995........................................................................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended June 30, 1997,
1996 and 1995.................................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1997, 1997 and
1995........................................................................... F-6
Notes to Consolidated Financial Statements........................................ F-7
CONSOLIDATED FINANCIAL STATEMENTS OF DECISIONONE CORPORATION:
Independent Auditors' Report...................................................... F-26
Consolidated Balance Sheets as of June 30, 1997 and 1996.......................... F-27
Consolidated Statements of Operations for the Years Ended June 30, 1997, 1996 and
1995........................................................................... F-28
Consolidated Statements of Shareholders' Equity for the Years Ended June 30, 1997,
1996 and 1995.................................................................. F-29
Consolidated Statements of Cash Flows for the Years Ended June 30, 1997, 1997 and
1995........................................................................... F-30
Notes to Consolidated Financial Statements........................................ F-31
FINANCIAL STATEMENT SCHEDULES:
Schedule I -- Condensed Financial Information of Registrant (DecisionOne Holdings
Corp. only).................................................................... S-1
Schedule II -- Valuation and Qualifying Accounts.................................. S-5
</TABLE>
F-1
<PAGE> 5
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of DecisionOne Holdings Corp.:
We have audited the accompanying consolidated balance sheets of DecisionOne
Holdings Corp. and subsidiaries (the "Company") as of June 30, 1997 and 1996,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended June 30, 1997. Our
audits also included the financial statement schedules listed in the Index at
Item 14. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of DecisionOne Holdings Corp. and
subsidiaries as of June 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997 in conformity with generally accepted accounting principles. Also, in our
opinion, the financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
August 15, 1997
F-2
<PAGE> 6
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1996
(IN THOUSANDS, EXCEPT NUMBER OF SHARES OF COMMON STOCK)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 10,877 $ 8,221
Accounts receivable, net of allowances of $14,869 and $9,580......... 127,462 92,650
Consumable parts, net of allowances of $17,889 and $19,537........... 34,518 29,770
Prepaid expenses and other assets.................................... 4,542 5,112
Deferred tax asset................................................... 5,236 8,018
-------- --------
Total current assets......................................... 182,635 143,771
REPAIRABLE PARTS, Net of accumulated amortization of $154,555 and
$105,462............................................................. 199,900 154,970
PROPERTY AND EQUIPMENT................................................. 34,227 32,430
INTANGIBLES............................................................ 191,366 164,659
OTHER ASSETS........................................................... 14,977 18,680
-------- --------
TOTAL ASSETS........................................................... $623,105 $514,510
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.................................... $ 4,788 $ 2,321
Accounts payable and accrued expenses................................ 95,516 89,564
Deferred revenues.................................................... 56,600 38,485
Income taxes and other liabilities................................... 4,664 479
-------- --------
Total current liabilities.................................... 161,568 130,849
REVOLVING CREDIT LOAN AND LONG-TERM DEBT............................... 232,721 188,582
OTHER LIABILITIES...................................................... 13,928 14,286
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; authorized 5,000,000 shares; none
outstanding
Common stock, $.01 par value; authorized 100,000,000 shares; issued
and outstanding 27,817,832 shares in 1997 and 27,340,288 shares in
1996.............................................................. 278 273
Additional paid-in capital........................................... 258,331 255,262
Accumulated deficit.................................................. (42,432) (73,516)
Other................................................................ (1,289) (1,226)
-------- --------
Total shareholders' equity................................... 214,888 180,793
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $623,105 $514,510
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 7
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES................................................... $785,950 $540,191 $163,020
COST OF REVENUES........................................... 581,860 402,316 113,483
-------- -------- --------
GROSS PROFIT............................................... 204,090 137,875 49,537
OPERATING EXPENSES:
Selling, general and administrative expenses............. 112,870 72,829 21,982
Amortization of intangibles.............................. 23,470 15,673 6,776
-------- -------- --------
OPERATING INCOME........................................... 67,750 49,373 20,779
INTEREST EXPENSE, Net of interest income of $197 in 1997,
$239 in 1996 and $53 in 1995............................. 14,698 14,714 2,468
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(BENEFIT), DISCONTINUED OPERATIONS AND EXTRAORDINARY
ITEM..................................................... 53,052 34,659 18,311
PROVISION (BENEFIT) FOR INCOME TAXES....................... 21,968 13,870 (23,104)
-------- -------- --------
INCOME BEFORE DISCONTINUED OPERATIONS AND EXTRAORDINARY
ITEM..................................................... 31,084 20,789 41,415
DISCONTINUED OPERATIONS -- Income from operations of
discontinued products division........................... 1,113
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM........................... 31,084 20,789 42,528
EXTRAORDINARY ITEM, NET OF TAX BENEFIT OF $1,284........... 1,927
-------- -------- --------
NET INCOME................................................. $ 31,084 $ 18,862 $ 42,528
======== ======== ========
PRO FORMA INFORMATION (UNAUDITED):
Net income before interest expense adjustment............ $ 31,084
Interest expense adjustment, net of tax.................. (31,267)
--------
Pro forma net loss....................................... $ (183)
========
Pro forma loss per share................................. $ (.01)
========
Pro forma weighted average number of common and common
equivalent shares outstanding......................... 14,200
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 8
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT NUMBER OF SHARES OF COMMON STOCK)
<TABLE>
<CAPTION>
COMMON STOCK FOREIGN TOTAL
------------------- ADDITIONAL CURRENCY PENSION SHAREHOLDERS'
NUMBER OF PAID-IN ACCUMULATED TRANSLATION LIABILITY (DEFICIENCY)
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT ADJUSTMENT EQUITY
---------- ------ ---------- ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1994................ 8,920,348 $ 89 $108,358 $(134,906) $ 457 $ (1,625) $ (27,627)
Net income.......................... 42,528 42,528
Adjustment to pension liability..... (80) (80)
Foreign currency translation
adjustment........................ 223 223
Accrued dividends on Series A and B
Redeemable Preferred Stock........ (375) (375)
Exercise of stock options........... 15,000 8 8
----------- ---- -------- --------- ---- ------- --------
BALANCE, JUNE 30, 1995................ 8,935,348 89 107,991 (92,378) 680 (1,705) 14,677
Net income.......................... 18,862 18,862
Adjustment to pension liability..... (143) (143)
Common Stock issued:
Exercise of preemptive rights..... 384,502 4 1,526 1,530
Public offering................... 6,300,000 63 106,250 106,313
Exercise of stock options......... 329,850 3 300 303
Exercise of warrants.............. 118,664 1 598 599
Conversion of Redeemable Preferred
Stock........................... 11,271,924 113 37,529 37,642
Stock issuance costs................ (1,573) (1,573)
Issuance of warrants................ 126 126
Issuance of warrants attached to
Subordinated Debentures........... 3,400 3,400
Foreign currency translation
adjustment........................ (58) (58)
Accrued dividends on Redeemable
Preferred Stock................... (885) (885)
----------- ---- -------- --------- ---- ------- --------
BALANCE, JUNE 30, 1996................ 27,340,288 273 255,262 (73,516) 622 (1,848) 180,793
Net income.......................... 31,084 31,084
Adjustment to pension liability..... (25) (25)
Tax benefit -- disqualifying stock
disposition....................... 2,635 2,635
Foreign currency translation
adjustment........................ (38) (38)
Exercise of stock options........... 477,544 5 434 439
----------- ---- -------- --------- ---- ------- --------
BALANCE, JUNE 30, 1997................ 27,817,832 $278 $258,331 $ (42,432) $ 584 $ (1,873) $ 214,888
=========== ==== ======== ========= ==== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 9
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................... $ 31,084 $ 18,862 $ 42,528
Adjustments to reconcile net income to net cash provided
by operating activities:
Income from discontinued operations................... (1,113)
Depreciation.......................................... 13,549 8,309 1,779
Amortization of repairable parts...................... 63,870 37,869 7,688
Amortization of intangibles........................... 23,470 15,673 6,775
Provision for losses on accounts receivable........... 7,849 3,434 1,930
Provision for consumable parts obsolescence........... 2,554 1,171 1,995
Extraordinary item.................................... 1,927
Changes in operating assets and liabilities, net of
effects from companies acquired, which provided
(used) cash:
Accounts receivable................................. (38,365) (1,900) (8,836)
Consumable parts.................................... (6,038) (1,248) 931
Accounts payable and accrued expenses............... 3,885 256 (1,171)
Deferred revenues................................... (25,427) (33,928) 6,811
Net changes in other assets and liabilities......... 12,543 1,469 (20,902)
--------- --------- --------
Net cash provided by operating activities........ 88,974 51,894 38,415
--------- --------- --------
INVESTING ACTIVITIES:
Capital expenditures..................................... (10,540) (7,278) (2,786)
Repairable spare parts purchases, net.................... (86,446) (63,514) (12,154)
Acquisitions of companies and contracts.................. (32,258) (275,562) (39,331)
--------- --------- --------
Net cash used in investing activities............ (129,244) (346,354) (54,271)
--------- --------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock................ 31,392
Proceeds from issuance of subordinated debentures........ 30,000
Proceeds from issuance of common stock................... 439 106,313
Payment of subordinated debentures....................... (30,000)
Net proceeds from borrowings............................. 43,625 165,711 17,537
Principal payments under capital leases.................. (1,075) (3,423)
Other.................................................... (63) 29
--------- --------- --------
Net cash provided by financing activities........ 42,926 300,022 17,537
--------- --------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................. 2,656 5,562 1,681
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............... 8,221 2,659 978
--------- --------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR..................... $ 10,877 $ 8,221 $ 2,659
========= ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid during the year for:
Interest.............................................. $ 15,640 $ 14,838 $ 2,065
Income taxes.......................................... 8,381 5,344 1,009
Noncash investing/financing activities:
Issuance of seller notes in connection with
acquisitions........................................ 2,224 587 2,866
Issuance of seller notes in exchange for repairable
parts............................................... 1,855
Repairable parts received in lieu of cash for accounts
receivable.......................................... 1,124
Accretion of accrued dividends........................ 885 375
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 10
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1. NATURE OF BUSINESS
DecisionOne Holdings Corp. and its wholly-owned subsidiaries (the
"Company") are providers of multivendor computer maintenance and technology
support services. The Company offers its customers a single-source, independent
(i.e., not affiliated with an original equipment manufacturer, or "OEM")
solution for computer maintenance and technology support requirements, including
hardware maintenance services, software support, end-user/help desk services,
network support and other technology support services. These services are
provided by the Company across a broad range of computing environments,
including mainframes, midrange and distributed systems, workgroups, personal
computers ("PCs") and related peripherals. In addition, the Company provides
outsourcing services for OEMs, software publishers, system integrators and other
independent service organizations. The Company delivers its services through an
extensive field service organization of approximately 4,000 field technicians in
over 150 service locations throughout North America and through strategic
alliances in selected international markets.
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, the Company's principal operating subsidiary, Decision Servcom,
Inc., was merged into BABSS, which had changed its name to DecisionOne
Corporation. As a result, DecisionOne Corporation is the principal operating
subsidiary of the Company.
The Company's wholly owned, direct international subsidiaries are not
significant to the Company's consolidated financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation -- The consolidated financial statements include the accounts
of DecisionOne Holdings Corp. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Pro Forma Information (Unaudited) -- The pro forma information included in
the accompanying statement of operations and in Note 3 has been prepared to
reflect the Company's recapitalization and merger with Quaker Holding Co.
("Quaker") and related transactions as if these had occurred on July 1, 1996.
Historical earnings per share data for the fiscal years ended June 30, 1997,
1996 and 1995 is not presented as this would not be meaningful.
Cash and Cash Equivalents -- Cash and cash equivalents are highly liquid
investments with remaining maturities of three months or less at the time of
purchase. Cash equivalents, consisting primarily of repurchase agreements with
banks, are stated at cost, which approximates fair market value.
Consumable Parts and Repairable Parts -- In order to provide maintenance
and repair services to its customers, the Company is required to maintain
significant levels of computer parts. These parts are classified as consumable
parts or as repairable parts. Consumable parts, which are utilized during the
repair process, are stated at cost, principally determined using the weighted
average method, less an accumulated allowance for obsolescence and shrinkage.
Consumable parts are reflected in cost of revenues during the period utilized.
Repairable (rotable) parts, which can be refurbished and reused, are stated
at original cost less accumulated amortization. Amortization of repairable parts
is reflected in cost of revenues. Costs of refurbishing repairable parts are
also included in cost of revenues as these costs are incurred. Amortization of
repairable parts is based principally on the composite group method, using
straight-line composite rates.
F-7
<PAGE> 11
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Repairable parts generally have an economic life which corresponds to the normal
life cycle of the related products, currently estimated to be three to five
years.
As consumable and repairable parts are retired, the weighted average gross
amounts at which such parts have been carried are removed from the respective
assets accounts, and charged to the accumulated allowance or accumulated
amortization accounts, as applicable. Periodic revisions to amortization and
allowance estimates are required, based upon the evaluation of several factors,
including changes in product life cycles, usage levels and technology changes.
Changes in these estimates are reflected on a prospective basis unless such
changes result from an extraordinary retirement or from other events or
circumstances which indicate that impairment may exist. Impairment is recognized
when the net carrying value of the parts exceeds the estimated current and
anticipated undiscounted net cash flows. Measurement of the amount of
impairment, if any, is calculated based upon the difference between carrying
value and fair value.
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. 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.
Business and Contract Acquisitions -- Business and contract acquisitions
have been accounted for as purchase transactions, with the purchase price of
each acquisition allocated to the assets acquired and liabilities assumed based
upon their respective estimated fair values at the dates of acquisition.
Consistent with the Company's parts retirement accounting methods, the gross
value of parts acquired is generally stated at weighted average cost. Fair value
adjustments, if any, are reflected as adjustments to the respective accumulated
amortization or allowance accounts. The excess of the purchase price over
identified net assets acquired is amortized, on a straight-line basis, over the
expected period of future benefit (see Note 6).
Typical contract acquisitions are comprised primarily of customer
maintenance and support contracts of complementary entities, along with the
accompanying consumable and repairable parts required to support these contracts
and other identifiable intangibles, such as noncompete agreements. Liabilities
assumed in business and contract acquisitions consist primarily of prepaid
amounts related to multi-period customer maintenance and support contracts.
These liabilities are recorded as deferred revenues at acquisition dates and are
recognized as revenues when earned in accordance with the terms of the
respective contracts.
Intangible Assets -- Intangible assets are comprised of excess purchase
price over the fair value of net assets acquired, acquired customer lists and
other intangible assets, including the fair value of contractual profit
participation rights and amounts assigned to noncompete agreements.
Intangible assets, which arise principally from acquisitions, are generally
amortized on a straight-line basis over their respective estimated useful lives
(see Note 6). The Company evaluates the carrying value of intangible assets
whenever events or changes in circumstances indicate that these carrying values
may not be recoverable within the amortization period. Impairment is recognized
when the net carrying value of the intangible asset exceeds the estimated
current and anticipated discounted future net cash flows. Measurement of the
amount of impairment, if any, is calculated based upon the difference between
carrying value and fair value.
Revenue -- The Company enters into maintenance contracts whereby it
services various manufacturers' equipment. Revenues from these contracts are
recognized ratably over the terms of such contracts. Prepaid revenues from
multi-period contracts are recorded as deferred revenues and are recognized
ratably over the term of the contracts.
F-8
<PAGE> 12
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues derived from the maintenance of equipment not under contract are
recognized as the service is performed. Revenues derived from other technology
support services are recognized as the service is performed or ratably over the
term of the contract.
Foreign Currency Translation -- Gains and losses resulting from foreign
currency translation are accumulated as a separate component of shareholders'
equity. 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.
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 -- As more fully described in Note
8, under its revolving borrowing facility the Company incurs interest at
variable rates based upon market conditions (i.e., based upon the prime
rate or LIBOR). Rates applicable to other debt instruments, which consist
primarily of short-term notes payable in connection with certain
acquisitions, are comparable to those of similar instruments currently
available to the Company. 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.
Discontinued Operations -- During fiscal 1993, in connection with the sale
of its products division, the Company established estimated liabilities relating
to the settlement of the remaining assets and liabilities of this division. 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 $1,113,000 for the change in estimate.
Stock-Based Compensation -- Effective July 1, 1996, the Company adopted the
provisions of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No.
123 encourages, but does not require, companies to record compensation cost for
stock-based compensation plans at fair value. The Company has elected to
continue to account for stock-based compensation in accordance with Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, as permitted by SFAS 123. Compensation
expense for stock options is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock (see Note 11).
Derivative Financial Instruments -- Derivative financial instruments, which
constitute interest rate swap agreements (see Note 8), are periodically used by
the Company in the management of its variable interest rate exposure. Amounts to
be paid or received under interest rate swap agreements are recognized as
interest expense or interest income during the period in which these accrue.
Gains realized, if any, on the early termination of interest rate swap contracts
are deferred, to be recognized upon the termination of the related asset or
liability or expiration of the original term of the swap contract, whichever is
earlier. The Company does not hold any derivative financial instruments for
trading purposes.
F-9
<PAGE> 13
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Recent Accounting Pronouncement -- In February 1997, the Financial
Accounting Standards Board issued SFAS No. 128, Earnings Per Share. SFAS No.
128, which supersedes APB No. 15, Earnings Per Share, requires a dual
presentation of basic and diluted earnings per share as well as disclosures
including a reconciliation of the computation of basic earnings per share to
diluted earnings per share. Basic earnings per share excludes the dilutive
impact of common stock equivalents and is computed by dividing net income by the
weighted average number of shares of common stock outstanding for the period.
Diluted earnings per share, which will approximate the Company's currently
reported pro forma earnings (loss) per share, includes the effect of potential
dilution from the exercise of outstanding common stock equivalents into common
stock, using the treasury stock method at the average market price of the
Company's common stock for the period.
SFAS No. 128 is effective for interim and annual financial reporting
periods ending after December 15, 1997, and early adoption is not permitted.
When adopted by the Company, as required, for the fiscal quarter ending December
31, 1997, all prior quarters' earnings (loss) per share information will be
required to be restated on a comparable basis.
Assuming that SFAS No. 128 had been implemented, supplemental pro forma
basic loss per share and supplemental pro forma diluted loss per share would not
have differed from the pro forma loss per share presented in the accompanying
consolidated statements of operations for the fiscal year ended June 30, 1997.
Reclassifications -- Certain reclassifications have been made to the 1996
balances in order to conform with the 1997 presentation.
3. MERGER, RECAPITALIZATION AND PRO FORMA INFORMATION
On August 7, 1997, the Company consummated a merger with Quaker Holding Co.
("Quaker"), an affiliate of DLJ Merchant Banking Partners II. The merger, which
will be recorded as a recapitalization for accounting purposes as of the
consummation date, occurred pursuant to an Agreement and Plan of Merger (the
"Merger Agreement") between the Company and Quaker dated May 4, 1997. The
accompanying historical consolidated financial statements do not include any
adjustments with respect to the consummation of the merger.
In accordance with the terms of the Merger Agreement, which was formally
approved by the Company's shareholders on August 7, 1997, Quaker merged with and
into the Company, and the holders of approximately 94.7% of shares of Company
common stock outstanding immediately prior to the merger received $23 in cash in
exchange for each of these shares. Holders of approximately 5.3% of shares of
Company common stock outstanding immediately prior to the merger retained such
shares in the merged Company, as determined based upon shareholder elections and
stock proration factors specified in the Merger Agreement. Immediately following
the merger, continuing shareholders owned approximately 11.9% of shares of
outstanding Company common stock. The aggregate value of the merger transaction
was approximately $940 million, including refinancing of the Company's revolving
credit facility (see Note 8).
In connection with the merger, the Company raised $85 million through the
public issuance of discount debentures, in addition to publicly issued
subordinated notes for approximately $150 million. The Company also entered into
a new syndicated credit facility providing for term loans of $470 million and
revolving loans of up to $105 million. The proceeds of the discount notes,
subordinated notes, the initial borrowings under the new credit facility and the
purchase of approximately $225 million of Company common stock by Quaker have
been used to finance the payments of cash to cash-electing shareholders, to pay
the holders of stock options and stock warrants canceled or converted, as
applicable, in connection with the merger, to repay the Company's existing
revolving credit facility and to pay expenses incurred in connection with the
merger.
As a result of the merger, the Company incurred various expenses,
aggregating approximately $71 million on a pretax basis (approximately $64
million after related tax benefit), subject to adjustment, in connection with
consummating the transaction. These costs consisted primarily of compensation
costs, underwriting
F-10
<PAGE> 14
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
discounts and commissions, professional and advisory fees and other expenses.
The Company will report this one-time charge during the first quarter of fiscal
1998. In addition to these expenses, the Company also incurred approximately
$22.3 million of capitalized debt issuance costs associated with the merger
financing. These costs will be charged to expense over the terms of the related
debt instruments.
The following summarized unaudited pro forma information as of and for the
year ended June 30, 1997 assumes that the merger had occurred on July 1, 1996.
The pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of the financial condition or of the results of
operations which actually would have resulted had the merger occurred as of July
1, 1996 or which may result in the future.
<TABLE>
<CAPTION>
(UNAUDITED)
(IN THOUSANDS
EXCEPT PER SHARE
AMOUNTS)
<S> <C>
PRO FORMA BALANCE SHEET INFORMATION:
Total assets.................................................................. $652,085
Long term indebtedness (including current portion)............................ 724,500
Other liabilities............................................................. 170,708
Shareholders' (deficit)....................................................... (243,123)
PRO FORMA INCOME STATEMENT INFORMATION:
Revenues...................................................................... $785,950
Operating income.............................................................. 67,750
Loss from continuing operations before income tax benefit..................... (312)
Net loss...................................................................... (183)
Loss per common share......................................................... $ (0.01)
Weighted average common and common equivalent shares outstanding.............. 14,200
</TABLE>
The pro forma net loss reflects a net increase in interest expense of
approximately $53.4 million ($31.3 million after related pro forma tax effect),
attributable to additional financing incurred in connection with the merger, net
of repayment of the Company's existing revolving credit facility. Pro forma
weighted average common and common equivalent shares outstanding include
12,499,978 shares outstanding immediately subsequent to the merger on August 7,
1997 and dilutive common stock warrants and stock options (convertible into
281,960 and 1,418,530 shares of common stock, respectively) issued in connection
with or immediately subsequent to the merger.
4. BUSINESS AND CONTRACT ACQUISITIONS
During the years ended June 30, 1997, 1996 and 1995, the Company acquired
certain net assets of other service companies as follows (in thousands):
<TABLE>
<CAPTION>
EXCESS
CONSIDERATION PURCHASE
----------------------------------------------------------- PRICE OVER
TOTAL FAIR VALUE
NUMBER OF PURCHASE OTHER OF NET ASSETS
YEARS ENDED ACQUISITIONS CASH NOTES PRICE INTANGIBLES ACQUIRED
- -------------------------------- ------------ -------- -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Significant business acquisitions:
June 30, 1995................. 1 $ 27,413 $ 2,094 $ 29,507 $15,600 $ 7,394
June 30, 1996................. 1 250,549 250,549 72,581 60,533
Nonsignificant business or maintenance contract acquisitions:
June 30, 1995................. 5 9,327 255 9,582 4,577 8,680
June 30, 1996................. 5 14,853 578 15,431 6,522 6,318
June 30, 1997................. 9 31,749 2,224 33,973 231 47,200
</TABLE>
F-11
<PAGE> 15
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On August 31, 1994, the Company purchased certain net assets and
liabilities of IDEA/Servcom, Inc. for approximately $29,500,000. This
acquisition was funded by cash and the issuance of a $2,600,000 noninterest-
bearing note to the seller. See seller notes payable section of Note 8. The
excess of asset purchase price over the fair value of net assets acquired at the
date of purchase was approximately $7,400,000.
On October 20, 1995, the Company acquired all of the outstanding common
stock of BABSS, a subsidiary of Bell Atlantic Corporation ("BAC") for
approximately $250,549,000. The acquisition was funded with the proceeds from
the issuance of $30,000,000 of Series C preferred stock, $30,000,000 of
subordinated debentures and the balance from additional bank borrowings (see
Notes 8 and 13). The excess of asset purchase price over the fair value of net
assets acquired at the date of purchase was initially recorded as approximately
$58,796,000. Subsequent to the acquisition, the Company recorded a net
adjustment increasing the initial amount by $1,737,000 and adjusted other
balance sheet accounts principally by the same amount. This resulted from the
adjustment and reclassification of certain tax accruals offset by favorable
negotiations on certain leased facilities (see Note 7). As part of the
acquisition, the Company purchased from BAC contractual profit participation
rights whereby the Company will receive a fixed percentage of the annual
operating profits (3.2% or 3.5%, depending upon the level of profits) earned by
a former foreign affiliate of BAC which provides computer maintenance and
technology support services in Europe. The estimated value of the discounted
estimated future cash flows over a twenty-year period from the acquisition date
from these contractual profit participation rights is $25,000,000.
Included in nonsignificant maintenance contract acquisitions is the
acquisition of substantially all of the contracts and related assets, including
spare parts of the U.S. computer service business of Memorex Telex Corporation
and certain of its affiliates (collectively, "Memorex Telex"). Memorex Telex had
filed a petition in bankruptcy in the United States Bankruptcy Court (the
"Court") in the District of Delaware on October 15, 1996; the Court approved the
sale to the Company on November 1, 1996. The adjusted purchase price was $52.7
million, comprised of the assumption of certain liabilities under contracts of
the service business, which were valued at $28.3 million, and base cash
consideration of approximately $24.4 million, after certain purchase price
adjustments, excluding transaction and closing costs.
The estimated fair market values of certain assets acquired, as well as
liabilities assumed, are subject to further adjustment as additional information
becomes available to the Company. During the third quarter of fiscal 1997, the
Company recorded an adjustment increasing the deferred revenues assumed in the
Memorex Telex acquisition by approximately $2,300,000, to revise the estimated
fair value of certain contract liabilities of the business assumed by the
Company.
The 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, 1996 and 1995 assumes that the 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,
---------------------
1996 1995
-------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Revenues....................................................... $697,676 $679,284
Income from continuing operations before extraordinary item.... 31,080 20,153
Net income..................................................... 29,153 21,266
</TABLE>
F-12
<PAGE> 16
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and buildings............................................. $ 6,318 $ 2,055
Equipment...................................................... 16,248 13,858
Computer hardware and software................................. 35,030 27,277
Furniture and fixtures......................................... 8,308 8,051
Leasehold improvements......................................... 4,628 4,125
-------- --------
70,532 55,366
Accumulated depreciation and amortization...................... (36,305) (22,936)
-------- --------
$ 34,227 $ 32,430
======== ========
</TABLE>
The principal lives (in years) used in determining depreciation and
amortization rates of various assets are: buildings (20-40); equipment (3-10);
computer hardware and software (3-5); furniture and fixtures (5-10) and
leasehold improvements (term of related leases).
Depreciation and amortization expense was approximately $13,549,000,
$8,309,000 and $1,779,000 for the fiscal years ended 1997, 1996 and 1995,
respectively.
6. INTANGIBLES
Intangibles consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Excess purchase price over fair value of net assets acquired... $130,548 $ 82,355
Customer lists................................................. 64,688 64,758
Contractual profit participation rights........................ 25,000 25,000
Noncompete agreements.......................................... 4,631 4,500
Other intangibles.............................................. 9,131 7,671
-------- --------
233,998 184,284
Accumulated amortization....................................... (42,632) (19,625)
-------- --------
$191,366 $164,659
======== ========
</TABLE>
The periods (in years) used in determining the amortization rates of
intangible assets are: excess purchase price over fair value of net assets
acquired (4-20); customer lists (3-8); contractual profit participation rights
(20); noncompete agreements (3-5) and other (1-6).
Amortization expense relating to intangibles was approximately $23,470,000,
$15,673,000 and $6,775,000, for the fiscal years ended 1997, 1996 and 1995,
respectively.
F-13
<PAGE> 17
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable................................................. $55,723 $53,347
Compensation and benefits........................................ 22,706 22,115
Interest......................................................... 563 1,505
Unused leases.................................................... 878 3,485
Pension accrual.................................................. 1,371 1,258
Accrued accounting and legal fees................................ 1,435 1,073
Non-income taxes and other....................................... 12,840 6,781
------ ------
$95,516 $89,564
====== ======
</TABLE>
Prior to 1994, the Company received $2,600,000 in tax bills (primarily
interest) from the Internal Revenue Service ("IRS") related to claims for tax
and interest for the years 1981 through 1987. The Company paid approximately
$500,000 of the claims upon receipt of the bills. Although the Company disputed
the tax bills, an IRS mandated payment of $828,000 was made in 1996. As of June
30, 1996, the Company had an accrued liability of $1,883,000 related to this
assessment. During fiscal 1997, the Company paid $1,729,000 in full settlement
of these tax and interest bills.
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 $11,000,000 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 $3,500,000
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 $4,000,000 was provided for severance and termination benefits of
approximately 210 employees in the field, operations support, sales and
administration. Approximately $3,000,000 was provided in connection with the
exit plan for write-downs of spare parts and equipment at two California
facilities which will not be utilized in future operations. The provision for
various other charges of approximately $500,000 consisted of costs to complete
the exit plan. As of June 30, 1996, the Company had settled all of these
liabilities, except for the lease liabilities on idle facilities for which
payments were scheduled to continue through 1999 (see Note 15). At June 30, 1997
and 1996 remaining amounts due under these leases were $0 and $1,200,000,
respectively.
As a result of successful negotiations of unutilized leased facilities,
during 1996, the Company recorded a reduction of approximately $975,000 to both
the provisions for leased facilities and excess purchase price over fair value
of net assets acquired.
F-14
<PAGE> 18
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. REVOLVING CREDIT LOAN AND LONG-TERM DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revolving credit loans......................................... $231,671 $186,400
Seller noninterest-bearing notes payable....................... 2,922 2,118
Seller note payable -- purchase of spare parts................. 1,608
Capitalized lease obligations, payable in varying installments
at interest rates ranging from 7.25% to 13.01% at June 30,
1997......................................................... 1,308 2,385
------- -------
237,509 190,903
Less current portion........................................... 4,788 2,321
------- -------
$232,721 $188,582
======= =======
</TABLE>
REVOLVING CREDIT LOANS
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 $230,000,000 and a revolving credit facility of up to a
maximum of $30,000,000. The 1995 Term Loan provided for 19 equal quarterly
principal payments of $10,000,000 to be due and payable on the last day of each
calendar quarter commencing December 31, 1995 with a final payment due on
September 30, 2000. Loans under the revolving credit facility were to mature on
September 30, 2000. Interest on the 1995 Term Loan and the revolving credit
facility were at varying rates based, at the Company's option, on the Eurodollar
rate or the Alternative Base Rate (NationsBanc prime rate), plus the Applicable
Margins. Margins were based on the ratio of Total Funded Debt to EBITDA; the
Eurodollar Margin ranged from 1.75% to 2.5%, while the Alternative Base Rate
Margin ranged from 0.5% to 1.25%.
In April 1996, the Company completed an initial public offering (see Note
13). The Company used a portion of the proceeds to repay approximately $70
million of the 1995 Term Loan.
Also in April 1996, the Company converted the 1995 Term Loan and the
existing $30 million Revolving Credit Facility into a $225 million variable
rate, unsecured revolving credit facility ("the 1996 Revolving Credit
Facility"). During fiscal 1997, the 1996 Revolving Credit Facility commitment
was increased to $300 million, in connection with the acquisition of certain
contracts and assets. The 1996 Revolving Credit Facility 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, 1997, the applicable
rate was LIBOR plus .75% or approximately 6.5%. The 1996 Revolving Credit
Facility enables the Company to borrow up to $300 million in the form of
revolving credit loans with a maturity date of April 26, 2001 and with interest
periods determined principally on a quarterly basis. To offset the variable rate
characteristics of the borrowings, the Company entered into interest rate swap
agreements with two banks resulting in fixed interest rates of 5.4% on $40.0
million notional principal amount through December 1997 and 5.5% on another
$40.0 million notional principal amount through December 1998.
During fiscal 1997, the Company terminated these swap agreements, resulting
in an insignificant gain which has been deferred to the first quarter of fiscal
1998.
Under the terms of the 1996 Revolving Credit Facility, the Company may use
up to $25,000,000 for letters of credit, subject to the limitation of
$300,000,000 in total credit. As of June 30, 1997, letters of credit in the face
amount of $3,067,000 were outstanding.
F-15
<PAGE> 19
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 DecisionOne
Corporation. Repayment of the debt is guaranteed by the Company and its other
subsidiaries except for its Canadian subsidiary.
The Company's debt agreements and other agreements to which it is a party
contain certain covenants restricting the payment of dividends on, or
repurchases of, Company common stock.
The Company had average borrowings of $221,069,000 and $172,065,000 during
1997 and 1996, respectively, at an average interest rate of 6.4% and 8.69%,
respectively. Maximum borrowings during 1997 and 1996 were $243,350,000 and
$268,748,000, respectively.
Subsequent to June 30, 1997, in connection with the Company's merger with
Quaker (see Note 3), the 1996 Revolving Credit Facility was repaid in full,
including all interest due thereon. This refinancing was accomplished, in part,
through the issuance of certain new debt instruments, consisting of senior
discount notes, senior subordinated notes and a term loan/revolving credit
facility which, in the aggregate, provide financing of approximately $810
million, subject to certain conditions. The new revolving credit facility
provides the Company with $105 million of available financing, subject to a
borrowing base, for working capital purposes subsequent to the merger.
The Company's Canadian subsidiary has available a $1.5 million (Canadian)
revolving line of credit agreement with a local financial institution. At June
30, 1997, approximately $471,000 (in U.S. dollars) was outstanding under this
agreement. There were no amounts outstanding at June 30, 1996.
SELLER NOTES PAYABLE
In connection with certain acquisitions (see Note 4), the Company issued
noninterest-bearing notes, the principal of which is primarily due upon
settlement of contingent portions of the acquisition purchase price within a
specified period subsequent to closing, generally not exceeding one year from
the acquisition date. Contingencies typically pertain to actual amounts of
monthly maintenance contract revenues acquired and prepaid contract liabilities
assumed in comparison to amounts estimated in acquisition agreements. The
Company imputes interest, based upon market rates, for long-term,
non-interest-bearing obligations.
During 1997, the Company issued a secured note payable to the seller for
the purchase of repairable parts in the original amount of $1,854,000. The note
accrues interest at an interest rate of approximately 8%, and requires quarterly
payments of principal and interest of approximately $273,000 until maturity in
December 1998.
SUBORDINATED DEBENTURES
In connection with the BABSS acquisition (see Note 4) on October 20, 1995,
the Company issued and sold to its principal shareholders, an aggregate
$30,000,000 principal amount of 10.101% Debentures (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, the Company issued
468,750 Common Stock Purchase Warrants (the "Warrants"). Each Warrant initially
entitled the owner to buy one share of 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
F-16
<PAGE> 20
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$0.10 per share. The Warrants were exercisable from October 20, 1997 until
October 20, 2001, provided that if the Company 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 $3,400,000 which was being amortized over the term of
the Affiliate Notes. Upon consummation of its 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 $30,000,000 of the
proceeds to retire the Affiliate Notes. As a result, in 1996 the Company
recorded an extraordinary loss in the amount of $3,211,000, net of taxes of
$1,284,000, due to the acceleration of the amortization of original issue
discount. In connection with the Company's merger with Quaker in August 1997
(see Note 3), the Warrants were converted into cash, with warrant holders
receiving an amount equal to $23 less the exercise price for each Warrant.
In connection with previous credit agreements, the Company issued warrants
to purchase shares of the Company's common stock. At June 30, 1997, warrants to
purchase 134,478 shares at an exercise price of $5.90 per share remained
outstanding. In connection with the Company's merger with Quaker, these warrants
were also converted into cash, with warrant holders receiving an amount equal to
$23 less the exercise price for each warrant.
9. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------
1997 1996 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................ $10,909 $ 2,892 $ 16,065
State.............................................. 3,616 1,595 4,599
Foreign............................................ 1,080 548 (1,272)
Deferred:
Federal............................................ 6,460 8,945 (29,897)
State.............................................. 16 641 (3,617)
Foreign............................................ (113) (499)
Benefit of operating loss carryforwards:
Federal............................................ (7,729)
State.............................................. (1,253)
Foreign............................................ (252)
------- ------- --------
Provision (benefit) for income taxes................. $21,968 $13,870 $(23,104)
======= ======= ========
</TABLE>
F-17
<PAGE> 21
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Gross deferred tax assets:
Accounts receivable............................................ $ 4,771 $ 1,341
Inventory...................................................... 2,195 2,586
Accrued expenses............................................... 7,000 6,378
Unused leases.................................................. 390
Fixed assets................................................... 299
Intangibles.................................................... 6,196 5,670
Operating loss carryforwards................................... 4,868 14,252
Tax credit carryforwards....................................... 1,670 1,170
------- -------
Gross deferred tax assets........................................ 27,090 31,696
Gross deferred tax liabilities:
Repairable spare parts......................................... (8,918) (7,273)
Fixed assets................................................... (108)
------- -------
Gross deferred tax liabilities................................... (9,026) (7,273)
------- -------
Net deferred tax asset........................................... $18,064 $24,423
======= =======
</TABLE>
Net operating loss and minimum tax credit carryforwards available at June
30, 1997 expire in the following years:
<TABLE>
<CAPTION>
YEAR OF
EXPIRATION
AMOUNT ----------
--------------
(IN THOUSANDS)
<S> <C> <C>
Federal operating losses............................... $ 12,877 2006-2008
State operating losses................................. 8,669 1998-2008
Investment tax credit.................................. 134 2004
Minimum tax credit..................................... 1,536 INDEFINITE
</TABLE>
As a result of the Company's initial public offering in April, 1996, an
"ownership change" occurred pursuant to Section 382 of the Internal Revenue
Code. Accordingly, for Federal income tax purposes, net operating loss and tax
credit carryforwards arising prior to the ownership change are limited during
any future period to the Section 382 "limitation amount" of approximately $20.0
million per annum. In addition, the Company's merger with Quaker on August 7,
1997 (see Note 3) represents another such "ownership change" pursuant to Section
382. The Company estimates that the limitation on the use of tax loss
carryforwards and other credits, for Federal income tax purposes, in any
post-merger period will be reduced to approximately $9.0 million per annum.
F-18
<PAGE> 22
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the provision (benefit) for income taxes, computed
by applying the statutory federal income tax rate of 35% for 1997, 1996 and 1995
to income before income taxes, and the actual provision (benefit) for income
taxes follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ------
<S> <C> <C> <C>
Federal income tax provision at statutory tax rate........... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax provision...... 5.0 4.6 3.5
Foreign income taxes......................................... 0.4 (6.9)
Unused lease credit.......................................... (0.1)
Benefit of operating loss carryforward....................... (0.8) (49.1)
Change in valuation allowance................................ (1.4) (108.9)
Other........................................................ 1.0 2.6 0.3
---- ---- ------
Actual income tax provision (benefit) effective tax rate..... 41.4% 40.0% (126.2)%
==== ==== ======
</TABLE>
The Company has recorded a deferred tax asset of $4,868,000 reflecting the
benefit of federal and state net operating loss carryforwards, which expire in
varying amounts between 1998 and 2008. Realization depends on generating
sufficient taxable income before expiration of the loss carryforwards. Although
realization is not assured, management believes it is more likely than not that
all of the deferred tax asset will ultimately be realized.
The valuation allowance for deferred tax assets as of July 1, 1994 was
$44,160,000. The net changes in the valuation allowance for the years ended June
30, 1996 and 1995 were decreases of $686,000 and $43,474,000, respectively. Of
these amounts, $252,000 and $8,982,000 resulted from the realization of net
operating loss carryforwards. The remaining decreases of $434,000 and
$34,492,000 for 1996 and 1995, respectively, resulted from the Company's
expected future taxable income.
10. OTHER LIABILITIES
Other (noncurrent) liabilities consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accrued severance and unutilized lease losses.................... $ 4,532 $ 2,227
Other noncurrent liabilities..................................... 9,396 12,059
------- -------
$ 13,928 $ 14,286
======= =======
</TABLE>
As more fully described in Note 15, accrued severance and unutilized lease
losses represent remaining liabilities for estimated future employee severance
costs and for lease/contract losses associated with duplicate facilities to be
closed. These liabilities were recorded by the Company in connection with the
Memorex Telex and BABSS acquisitions in November 1996 and October 1995,
respectively.
Other noncurrent liabilities include deferred operating lease liabilities
related to scheduled rent increases, recorded in accordance with the provisions
of SFAS No. 13, Accounting for Leases. Also included in other noncurrent
liabilities are provisions relating to various tax matters.
11. STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN
Under the 1988 Stock Option and Restricted Stock Purchase Plan, the name of
which was subsequently changed to DecisionOne Stock Option and Restricted Stock
Purchase Plan (the "Plan"), the Company, at the discretion of the Board of
Directors, may issue restricted stock, incentive stock options and non-qualified
F-19
<PAGE> 23
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options for shares of the Company's common stock. Vesting of the restricted
stock and stock options is at the discretion of the Board of Directors and
generally occurs at a rate of 25% per year.
During 1994, the Board of Directors amended the Plan increasing the total
number of shares issuable to approximately 2,350,000. Additionally, in November
1995 the Board of Directors amended the Plan increasing the total number of
shares issuable to approximately 3,350,000, and in December 1996 to 5,350,000.
The price of the incentive stock options issued to employees under the Plan
is not less than 100% of the fair market value of the common shares at the date
of issuance. The option price for nonqualified options is determined by the
Board of Directors at the time of grant and may be less than the fair market
value of the common shares at the time of grant. However, no such options were
granted at prices less then 100% of the fair value of common shares at the date
of issuance.
Options expire through February 2007. Restricted shares which are not
vested upon an employee's termination are subject to a repurchase right of the
Company at a price equal to the amount paid by the employee.
Presented below is the activity in the Plan for the years ended June 30,
1997, 1996 and 1995:
<TABLE>
<CAPTION>
OPTIONS PRICE RANGE
--------- ---------------
<S> <C> <C>
Balance, June 30, 1994................................. 1,943,595 $.50 - $100.00
Options exercised.................................... (15,000) $.50
Options granted...................................... 410,000 $1.25 - $6.00
Options cancelled.................................... (75,275) $.50 - $100.00
---------
Balance, June 30, 1995................................. 2,263,320 $.50 - $6.00
Options exercised.................................... (329,850) $.50 - $6.00
Options granted...................................... 803,000 $8.00 - $27.50
Options cancelled.................................... (125,000) $1.25 - $8.00
---------
Balance, June 30, 1996................................. 2,611,470 $.50 - $27.50
Options exercised.................................... (477,544) $.50 - $8.00
Options granted...................................... 1,254,000 $14.00 - $22.13
Options cancelled.................................... (532,579) $1.25 - $27.50
---------
Balance, June 30, 1997................................. 2,855,347 $.50 - $26.75
=========
</TABLE>
In connection with the Company's merger with Quaker on August 7, 1997 (see
Note 3), all vested and unvested options then outstanding under the Plan were
cancelled, and the holders of these options received the right to receive cash
payments equal to the excess, if any, of $23.00 over the exercise price of each
option. Certain option holders were afforded the opportunity to convert these
options into options to purchase common stock of the merged Company, in lieu of
cash payments.
Pursuant to the 1997 Management Incentive Plan approved subsequent to the
Merger, the Company granted 1,179,000 options at a weighted average exercise
price of approximately $20.61 with a weighted average fair market value of
$11.23.
Because the Company accounts for the Plan under APB No. 25, no compensation
cost has been recognized for stock options. Had compensation expense for the
Plan been determined based on the fair value at the grant dates under the
provisions of SFAS No. 123, the Company's pro forma net loss and pro forma loss
F-20
<PAGE> 24
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
per share (see Note 3) would have been increased to the following adjusted pro
forma amounts (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Pro forma net loss -- as reported.......................................... $ (183)
Pro forma net loss -- as adjusted.......................................... $(2,741)
Pro forma loss per share -- as reported.................................... $ (0.01)
Pro forma loss per share -- as adjusted.................................... $ (0.19)
</TABLE>
The fair value of options was estimated using the Black-Scholes option
pricing model based on the following assumptions:
<TABLE>
<CAPTION>
EXPECTED LIVES
RISK-FREE INTEREST RATE EXPECTED VOLATILITY (YRS)
------------------------ -------------------- ---------------
<S> <C> <C> <C>
Grants issued in 1996... 5.85%-6.85% 26.9% 10
Grants issued in 1997... 6.47% 26.5% 10
</TABLE>
12. LEASE COMMITMENTS
The Company conducts its operations primarily from leased warehouses and
office facilities and uses certain computer, data processing and other equipment
under operating lease agreements expiring on various dates through 2005. The
future minimum lease payments for operating leases having initial or remaining
noncancelable terms in excess of one year for the five years succeeding June 30,
1997 and thereafter are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................... $18,415
1999............................................................... 15,224
2000............................................................... 11,406
2001............................................................... 5,815
2002............................................................... 2,879
Thereafter......................................................... 4,757
-------
$58,496
=======
</TABLE>
Rental expense amounted to approximately $17,367,000, $13,149,000 and
$5,878,000, for the fiscal years ended 1997, 1996 and 1995, respectively.
13. SHAREHOLDERS' EQUITY
During fiscal 1994 and 1996, the Company issued three classes of redeemable
preferred stock (Series A, Series B and Series C preferred stock; collectively,
the "Preferred Stock"), aggregating 376,416 preferred stock shares, in exchange
for cash or in settlement of certain debt obligations. The Preferred Stock,
which was valued at $100 per share, accrued dividends at rates ranging between
$4 per share per annum and $6 per share per annum, to be paid as declared by the
Company's Board of Directors. Additionally, the Preferred Stock was to be
automatically converted into Company common stock if the Company were to
complete a public offering of common stock which met certain specified criteria.
On February 9, 1996, the Company amended its Certificate of Incorporation
to increase the number of authorized shares of common stock to 100,000,000
shares and to authorize 5,000,000 shares of Preferred Stock.
F-21
<PAGE> 25
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In April 1996, the Company completed a public offering of 6,300,000 shares
of common stock at $18.00 per share (the "Offering"). Prior to the Offering,
there was no public market for the Company's common stock. The common stock is
listed on the Nasdaq National Market under the symbol "DOCI".
The net proceeds of the offering, after deducting applicable issuance costs
and expenses were $104,740,000. The proceeds were used to repay approximately
$70,000,000 of the 1995 Term Loan, $30,000,000 in Affiliate Notes, approximately
$1,446,000 in accrued and declared dividends to holders of the Preferred Stock
and for other general corporate purposes. In connection with the offering, the
Preferred Stock was automatically converted into 11,271,924 shares of common
stock.
During the year ended June 30, 1996, certain shareholders exercised their
preemptive right to subscribe for and purchase additional shares of common stock
or other securities so issued at the same price as originally issued on certain
occasions from 1992 through 1995. On December 4, 1995, the following securities
were purchased: (a) 382,578 shares of common stock at a price of $4 per share;
(b) 999 shares of Series A Preferred Stock, at a price of $100 per share; (c)
1,776 shares of Series B Preferred Stock, at a price of $100 per share; (d)
1,924 shares of common stock at a price of $.50 per share; (e) 311,141 shares of
Series C Preferred Stock, at a price of $100 per share; and (f) 17,407 Common
Stock Purchase Warrants at a price of $7.25333 per warrant which entitles the
holder to purchase 17,407 shares of common stock at an exercise price of $.10
per share. The 17,407 Common Stock Purchase Warrants were exercised in 1996.
In consideration of his service as a director and Chairman of the Board,
the Company, in a prior year, granted an individual warrants to purchase an
aggregate of 66,667 shares of common stock at an exercise price of $4.00 per
share. In connection with the Company's merger with Quaker in August 1997 (see
Note 3), these warrants were converted into cash, with the holder receiving an
amount equal to $23 less the exercise price.
As more fully described in Note 3, the Company merged with Quaker on August
7, 1997. In accordance with the terms of the Merger Agreement, which was
formally approved by the Company's shareholders on August 7, 1997, Quaker merged
with and into the Company, and the holders of approximately 94.7% of shares of
Company common stock outstanding immediately prior to the merger received $23 in
cash in exchange for these shares. Holders of approximately 5.3% of shares of
Company common stock outstanding immediately prior to the merger retained such
shares in the merged Company, as determined based upon shareholder elections and
stock proration factors specified in the Merger Agreement. Immediately following
the merger, continuing shareholders owned approximately 11.9% of shares of
outstanding Company common stock. The aggregate value of the merger transaction
was approximately $940 million, including refinancing of the Company's revolving
credit facility (see Note 8).
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.
F-22
<PAGE> 26
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pension expense for the defined benefit pension plan was computed as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------
1997 1996 1995
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest cost.............................................. $ 521 $ 495 $ 482
Actual return on plan assets............................... (409) (449) (312)
Net amortization and deferral.............................. 9 72 (42)
----- ----- -----
Periodic pension costs..................................... $ 121 $ 118 $ 128
===== ===== =====
</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 1997, 1996 and 1995.
The following table sets forth the funded status of the frozen pension plan
as of May 1, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated benefits (100% vested)............................... $ 7,290 $ 7,116
Fair value of plan assets........................................ 6,128 5,800
------- -------
Unfunded projected benefit obligation.................. 1,162 1,316
Unrecognized net loss............................................ 1,873 1,848
Unrecognized net transition obligation........................... 470 504
Adjustment to recognized minimum liability....................... (2,343) (2,352)
------- -------
Accrued pension costs............................................ $ 1,162 $ 1,316
======= =======
</TABLE>
15. EMPLOYEE SEVERANCE AND UNUTILIZED LEASE COSTS
During the second quarter of fiscal 1997, in connection with the Memorex
Telex acquisition (see Note 4), the Company recorded a $3.4 million pre-tax
charge for estimated future employee severance costs, and a $0.9 million pre-tax
charge for unutilized lease/contract losses ("exit costs"), primarily associated
with duplicate facilities to be closed. The $3.4 million charge, recorded in
accordance with SFAS No. 112, Employers' Accounting for Postemployment Benefits,
reflects the actuarially determined benefit costs for the separation of
employees who are entitled to benefits under pre-existing separation pay plans.
These costs are included in selling, general and administrative expenses in the
accompanying consolidated statement of operations for the year ended June 30,
1997.
In the second quarter of fiscal 1996, in connection with the acquisition of
BABSS, the Company recorded pre-tax charges for exit costs of $6.9 million, and
estimated future employee severance costs of $0.1 million. During the fourth
quarter of fiscal 1996, the Company reversed $3.4 million of these employee
severance and exit cost liabilities. The reversal was primarily the result of
the Company's ability to utilize and sublease various facilities identified in
the original $7.0 million combined liability. Such information was unknown to
the Company when the original liability was recorded.
See Note 10 for further information regarding accrued severance and
unutilized lease losses.
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 four waste disposal sites that have been identified by the United
States Environmental Protection Agency as Superfund sites. In addition, the
Company received a notice several years ago that it may be a potentially
responsible party with respect to a fifth, related site, but
F-23
<PAGE> 27
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
has not received any other communication with respect to that site. Under
applicable law, all parties responsible for disposal of hazardous substances at
those sites are jointly and severally liable for clean-up costs. The Company
originally estimated that its share of the costs of the clean-up of one of these
sites would be approximately $500,000 which is provided for in liabilities
related to the discontinued products division in the accompanying consolidated
balance sheets as of June 30, 1997 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 potential additional liability, if any, for the cost
of clean-up of these sites will not be material to the consolidated financial
position, results of operations or liquidity of the Company.
The Company is also party to various legal proceedings incidental to its
business. Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company. In the opinion of
management, these actions can be successfully defended or resolved without a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
During the fourth quarter of fiscal 1997, the Company received $2.0 million
in full settlement of a claim against its former insurance carrier, related to
unreimbursed losses. This settlement was reflected as a reduction of selling,
general and administrative costs in the accompanying statement of operations.
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, 1997, 1996 and 1995 were approximately
$472,000, $1,512,000 and $1,972,000, respectively. Accounts payable to Genicom
amounted to approximately $30,000 and $14,000 as of June 30, 1997 and 1996,
respectively.
During the year ended June 30, 1996, the Company paid approximately
$125,000 for expense reimbursements to certain shareholders for services
rendered in connection with an acquisition in 1988. The amount was accrued for
in prior years.
In connection with the Company's financing of the BABSS acquisition on
October 20, 1995, the Company issued subordinated debentures and redeemable
preferred stock to certain related parties (see Notes 8 and 13).
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly financial information
for the fiscal years ended 1997 and 1996:
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------
MARCH
SEPTEMBER 30, DECEMBER 31,(1) 31, JUNE 30,
------------- --------------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1997
Revenues................................. $ 176,426 $ 191,253 $205,070 $213,201
Gross profit............................. 41,861 48,221 54,698 59,310
Net income............................... 5,455 4,954 9,507 11,168
Pro forma net income (loss) (Note 3)..... (2,306) (2,813) 1,787 3,149
Pro forma earnings (loss) per share (Note
3)..................................... (0.16) (0.20) 0.13 0.22
</TABLE>
F-24
<PAGE> 28
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------
MARCH
SEPTEMBER 30, DECEMBER 31, 31, JUNE 30,(2)
------------- --------------- -------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996
Revenues................................. $ 46,791 $ 149,703 $172,673 $ 171,024
Gross profit............................. 15,524 38,224 42,711 41,416
Income before extraordinary item......... 4,386 638 5,842 9,923
Net income............................... 4,386 638 5,842 7,996
</TABLE>
- ---------------
(1) Net income for the second quarter of 1997 includes a $3.4 million pre-tax
charge for estimated future employee severance costs, and a $.9 million
pre-tax charge for unutilized lease/contract losses, primarily associated
with duplicate facilities to be closed in connection with the Memorex Telex
acquisition (see Note 15).
(2) Net income for the fourth quarter of 1996 includes (a) a $3.4 million
reversal of the previously recorded restructuring charge for unutilized
leases (Note 15); and (b) a $1.5 million adjustment related to recoveries of
previously reserved receivables.
* * * * * *
F-25
<PAGE> 29
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, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended June 30, 1997. Our audits also
included the related financial statement schedule listed in the Index at Item
14. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of DecisionOne Corporation and
subsidiaries as of June 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997 in conformity with generally accepted accounting principles. Also, in our
opinion, the financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
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
August 15, 1997
F-26
<PAGE> 30
DECISIONONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 10,877 $ 8,221
Accounts receivable, net of allowances of $14,869 and $9,580......... 127,462 92,650
Consumable parts, net of allowances of $17,889 and $19,537........... 34,518 29,770
Prepaid expenses and other assets.................................... 4,542 5,112
Deferred tax asset................................................... 5,236 8,018
-------- --------
Total current assets......................................... 182,635 143,771
REPAIRABLE PARTS, Net of accumulated amortization of $154,555 and
$105,462............................................................. 199,900 154,970
PROPERTY AND EQUIPMENT................................................. 34,227 32,430
INTANGIBLES............................................................ 191,366 164,659
OTHER ASSETS........................................................... 14,977 18,680
-------- --------
TOTAL ASSETS........................................................... $623,105 $514,510
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.................................... $ 4,788 $ 2,321
Accounts payable and accrued expenses................................ 95,516 89,564
Deferred revenues.................................................... 56,600 38,485
Income taxes and other liabilities................................... 4,664 479
-------- --------
Total current liabilities.................................... 161,568 130,849
REVOLVING CREDIT LOAN AND LONG-TERM DEBT............................... 232,721 188,582
OTHER LIABILITIES...................................................... 13,928 14,286
SHAREHOLDER'S EQUITY:
Common stock, no par value; one share authorized, issued and
outstanding in 1997 and 1996...................................... -- --
Additional paid-in capital........................................... 258,609 255,535
Accumulated deficit.................................................. (42,432) (73,516)
Other................................................................ (1,289) (1,226)
-------- --------
Total shareholder's equity................................... 214,888 180,793
-------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY............................. $623,105 $514,510
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE> 31
DECISIONONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES................................................... $785,950 $540,191 $163,020
COST OF REVENUES........................................... 581,860 402,316 113,483
-------- -------- --------
GROSS PROFIT............................................... 204,090 137,875 49,537
OPERATING EXPENSES:
Selling, general and administrative expenses............. 112,870 72,829 21,982
Amortization of intangibles.............................. 23,470 15,673 6,776
-------- -------- --------
OPERATING INCOME........................................... 67,750 49,373 20,779
INTEREST EXPENSE, Net of interest income of $197 in 1997,
$239 in 1996 and $53 in 1995............................. 14,698 14,714 2,468
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(BENEFIT), DISCONTINUED OPERATIONS AND EXTRAORDINARY
ITEM..................................................... 53,052 34,659 18,311
PROVISION (BENEFIT) FOR INCOME TAXES....................... 21,968 13,870 (23,104)
-------- -------- --------
INCOME BEFORE DISCONTINUED OPERATIONS AND EXTRAORDINARY
ITEM..................................................... 31,084 20,789 41,415
DISCONTINUED OPERATIONS -- Income from operations of
discontinued products division........................... 1,113
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM........................... 31,084 20,789 42,528
EXTRAORDINARY ITEM, NET OF TAX BENEFIT OF $1,284........... 1,927
-------- -------- --------
NET INCOME................................................. $ 31,084 $ 18,862 $ 42,528
======== ======== ========
PRO FORMA INFORMATION (UNAUDITED):
Net income before interest expense adjustment............ $ 31,084
Interest expense adjustment, net of tax.................. (25,358)
--------
Pro forma net income..................................... $ 5,726
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE> 32
DECISIONONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT NUMBER OF SHARES OF COMMON STOCK)
<TABLE>
<CAPTION>
FOREIGN TOTAL
ADDITIONAL CURRENCY PENSION SHAREHOLDER'S
PAID-IN ACCUMULATED TRANSLATION LIABILITY (DEFICIENCY)
CAPITAL DEFICIT ADJUSTMENT ADJUSTMENT EQUITY
---------- ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1994...................................... $114,883 $(134,906) $ 457 $ (1,625) $ (21,191)
Net income................................................ 42,528 42,528
Adjustment to pension liability........................... (80) (80)
Foreign currency translation adjustment................... 223 223
Contributed capital....................................... 8 8
-------- --------- ---- ------- --------
BALANCE, JUNE 30, 1995...................................... 114,891 (92,378) 680 (1,705) 21,488
Net income................................................ 18,862 18,862
Adjustment to pension liability........................... (143) (143)
Contributed capital....................................... 142,090 142,090
Foreign currency translation adjustment................... (58) (58)
Dividends declared........................................ (1,446) (1,446)
-------- --------- ---- ------- --------
BALANCE, JUNE 30, 1996...................................... 255,535 (73,516) 622 (1,848) 180,793
Net income................................................ 31,084 31,084
Adjustment to pension liability........................... (25) (25)
Foreign currency translation adjustment................... (38) (38)
Contributed capital....................................... 3,074 3,074
-------- --------- ---- ------- --------
BALANCE, JUNE 30, 1997...................................... $258,609 $ (42,432) $ 584 $ (1,873) $ 214,888
======== ========= ==== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE> 33
DECISIONONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................... $ 31,084 $ 18,862 $ 42,528
Adjustments to reconcile net income to net cash provided
by operating activities:
Income from discontinued operations................... (1,113)
Depreciation.......................................... 13,549 8,309 1,779
Amortization of repairable parts...................... 63,870 37,869 7,688
Amortization of intangibles........................... 23,470 15,673 6,775
Provision for losses on accounts receivable........... 7,849 3,434 1,930
Provision for consumable parts obsolescence........... 2,554 1,171 1,995
Extraordinary item.................................... 1,927
Changes in operating assets and liabilities, net of
effects from companies acquired, which provided
(used) cash:
Accounts receivable................................. (38,365) (1,900) (8,836)
Consumable parts.................................... (6,038) (1,248) 931
Accounts payable and accrued expenses............... 3,885 256 (1,171)
Deferred revenues................................... (25,427) (33,928) 6,811
Net changes in other assets and liabilities......... 12,543 1,469 (20,902)
--------- --------- --------
Net cash provided by operating activities........ 88,974 51,894 38,415
--------- --------- --------
INVESTING ACTIVITIES:
Capital expenditures..................................... (10,540) (7,278) (2,786)
Repairable spare parts purchases, net.................... (86,446) (63,514) (12,154)
Acquisitions of companies and contracts.................. (32,258) (275,562) (39,331)
--------- --------- --------
Net cash used in investing activities............ (129,244) (346,354) (54,271)
--------- --------- --------
FINANCING ACTIVITIES:
Capital contributions.................................... 439 142,090
Proceeds from issuance of subordinated debentures........ 30,000
Payment of dividends..................................... (1,446)
Payment of subordinated debentures....................... (30,000)
Net proceeds from borrowings............................. 43,625 162,772 17,537
Principal payments under capital leases.................. (1,075) (3,423)
Other.................................................... (63) 29
--------- --------- --------
Net cash provided by financing activities........ 42,926 300,022 17,537
--------- --------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................. 2,656 5,562 1,681
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............... 8,221 2,659 978
--------- --------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR..................... $ 10,877 $ 8,221 $ 2,659
========= ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid during the year for:
Interest.............................................. $ 15,640 $ 14,838 $ 2,065
Income taxes.......................................... 8,381 5,344 1,009
Noncash investing/financing activities:
Issuance of seller notes in connection with
acquisitions........................................ 2,224 587 2,866
Issuance of seller notes in exchange for repairable
parts............................................... 1,855
Repairable parts received in lieu of cash for accounts
receivable.......................................... 1,124
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE> 34
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1. NATURE OF BUSINESS
DecisionOne Corporation (a wholly-owned subsidiary of DecisionOne Holdings
Corp., herein called "Holdings") and its wholly-owned subsidiaries (the
"Company") are providers of multivendor computer maintenance and technology
support services. The Company offers its customers a single-source, independent
(i.e., not affiliated with an original equipment manufacturer, or "OEM")
solution for computer maintenance and technology support requirements, including
hardware maintenance services, software support, end-user/ help desk services,
network support and other technology support services. These services are
provided by the Company across a broad range of computing environments,
including mainframes, midrange and distributed systems, workgroups, personal
computers ("PCs") and related peripherals. In addition, the Company provides
outsourcing services for OEMs, software publishers, system integrators and other
independent service organizations. The Company delivers its services through an
extensive field service organization of approximately 4,000 field technicians in
over 150 service locations throughout North America and through strategic
alliances in selected international markets.
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, Holding's principal operating subsidiary, Decision Servcom, Inc.,
was merged into BABSS, which had changed its name to DecisionOne Corporation. As
a result, DecisionOne Corporation is the principal operating subsidiary of the
Holdings.
On May 29, 1997, Holdings completed a restructuring of the legal
organization of its subsidiaries (the "Corporate Reorganization"). The Corporate
Reorganization involved Holdings' contribution to DecisionOne Corporation of
ownership interests in its subsidiaries, all of which were under Holdings'
control (the "Contributed Subsidiaries"). The Corporate Reorganization has been
accounted for in a manner similar to a pooling of interests. Accordingly, the
Company's consolidated financial statements include the accounts of the
Contributed Subsidiaries for all periods presented.
The Company's wholly owned, direct international subsidiaries are not
significant to the Company's consolidated financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation -- The consolidated financial statements include the accounts
of DecisionOne Corporation and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Pro Forma Information (Unaudited) -- The pro forma information included in
the accompanying statement of operations and in Note 3 has been prepared to
reflect the Company's and Holding's recapitalization and merger with Quaker
Holding Co. ("Quaker") and related transactions as if these had occurred on July
1, 1996.
Cash and Cash Equivalents -- Cash and cash equivalents are highly liquid
investments with remaining maturities of three months or less at the time of
purchase. Cash equivalents, consisting primarily of repurchase agreements with
banks, are stated at cost, which approximates fair market value.
Consumable Parts and Repairable Parts -- In order to provide maintenance
and repair services to its customers, the Company is required to maintain
significant levels of computer parts. These parts are classified as consumable
parts or as repairable parts. Consumable parts, which are utilized during the
repair process, are
F-31
<PAGE> 35
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stated at cost, principally determined using the weighted average method, less
an accumulated allowance for obsolescence and shrinkage. Consumable parts are
reflected in cost of revenues during the period utilized.
Repairable (rotable) parts, which can be refurbished and reused, are stated
at original cost less accumulated amortization. Amortization of repairable parts
is reflected in cost of revenues. Costs of refurbishing repairable parts are
also included in cost of revenues as these costs are incurred. Amortization of
repairable parts is based principally on the composite group method, using
straight-line composite rates. Repairable parts generally have an economic life
which corresponds to the normal life cycle of the related products, currently
estimated to be three to five years.
As consumable and repairable parts are retired, the weighted average gross
amounts at which such parts have been carried are removed from the respective
assets accounts, and charged to the accumulated allowance or accumulated
amortization accounts, as applicable. Periodic revisions to amortization and
allowance estimates are required, based upon the evaluation of several factors,
including changes in product life cycles, usage levels and technology changes.
Changes in these estimates are reflected on a prospective basis unless such
changes result from an extraordinary retirement or from other events or
circumstances which indicate that impairment may exist. Impairment is recognized
when the net carrying value of the parts exceeds the estimated current and
anticipated undiscounted net cash flows. Measurement of the amount of
impairment, if any, is calculated based upon the difference between carrying
value and fair value.
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. 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.
Business and Contract Acquisitions -- Business and contract acquisitions
have been accounted for as purchase transactions, with the purchase price of
each acquisition allocated to the assets acquired and liabilities assumed based
upon their respective estimated fair values at the dates of acquisition.
Consistent with the Company's parts retirement accounting methods, the gross
value of parts acquired is generally stated at weighted average cost. Fair value
adjustments, if any, are reflected as adjustments to the respective accumulated
amortization or allowance accounts. The excess of the purchase price over
identified net assets acquired is amortized, on a straight-line basis, over the
expected period of future benefit (see Note 6).
Typical contract acquisitions are comprised primarily of customer
maintenance and support contracts of complementary entities, along with the
accompanying consumable and repairable parts required to support these contracts
and other identifiable intangibles, such as noncompete agreements. Liabilities
assumed in business and contract acquisitions consist primarily of prepaid
amounts related to multi-period customer maintenance and support contracts.
These liabilities are recorded as deferred revenues at acquisition dates and are
recognized as revenues when earned in accordance with the terms of the
respective contracts.
Intangible Assets -- Intangible assets are comprised of excess purchase
price over the fair value of net assets acquired, acquired customer lists and
other intangible assets, including the fair value of contractual profit
participation rights and amounts assigned to noncompete agreements.
Intangible assets, which arise principally from acquisitions, are generally
amortized on a straight-line basis over their respective estimated useful lives
(see Note 6). The Company evaluates the carrying value of intangible assets
whenever events or changes in circumstances indicate that these carrying values
may not be recoverable within the amortization period. Impairment is recognized
when the net carrying value of the intangible asset exceeds the estimated
current and anticipated discounted future net cash flows. Measurement of the
amount of impairment, if any, is calculated based upon the difference between
carrying value and fair value.
F-32
<PAGE> 36
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue -- The Company enters into maintenance contracts whereby it
services various manufacturers' equipment. Revenues from these contracts are
recognized ratably over the terms of such contracts. Prepaid revenues from
multi-period contracts are recorded as deferred revenues and are recognized
ratably over the term of the contracts.
Revenues derived from the maintenance of equipment not under contract are
recognized as the service is performed. Revenues derived from other technology
support services are recognized as the service is performed or ratably over the
term of the contract.
Foreign Currency Translation -- Gains and losses resulting from foreign
currency translation are accumulated as a separate component of shareholders'
equity. 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.
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 -- As more fully described in Note
8, under its revolving borrowing facility the Company incurs interest at
variable rates based upon market conditions (i.e., based upon the prime
rate or LIBOR). Rates applicable to other debt instruments, which consist
primarily of short-term notes payable in connection with certain
acquisitions, are comparable to those of similar instruments currently
available to the Company. 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.
Discontinued Operations -- During fiscal 1993, in connection with the sale
of its products division, the Company established estimated liabilities relating
to the settlement of the remaining assets and liabilities of this division. 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 $1,113,000 for the change in estimate.
Derivative Financial Instruments -- Derivative financial instruments, which
constitute interest rate swap agreements (see Note 8), are periodically used by
the Company in the management of its variable interest rate exposure. Amounts to
be paid or received under interest rate swap agreements are recognized as
interest expense or interest income during the period in which these accrue.
Gains realized, if any, on the early termination of interest rate swap contracts
are deferred, to be recognized upon the termination of the related asset or
liability or expiration of the original term of the swap contract, whichever is
earlier. The Company does not hold any derivative financial instruments for
trading purposes.
Reclassifications -- Certain reclassifications have been made to the 1996
balances in order to conform with the 1997 presentation.
F-33
<PAGE> 37
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. MERGER, RECAPITALIZATION AND PRO FORMA INFORMATION
On August 7, 1997, the Company and Holdings consummated a merger with
Quaker Holding Co. ("Quaker"), an affiliate of DLJ Merchant Banking Partners II.
The merger, which will be recorded as a recapitalization for accounting purposes
as of the consummation date, occurred pursuant to an Agreement and Plan of
Merger (the "Merger Agreement") by and among the Company, Holdings and Quaker
dated May 4, 1997. The accompanying historical consolidated financial statements
do not include any adjustments with respect to the consummation of the merger.
In accordance with the terms of the Merger Agreement, which was formally
approved by the Company's shareholders on August 7, 1997, Quaker merged with and
into Holdings, and the holders of approximately 94.7% of shares of Holdings
common stock outstanding immediately prior to the merger received $23 in cash in
exchange for each of these shares. Holders of approximately 5.3% of shares of
Holdings common stock outstanding immediately prior to the merger retained such
shares in the merged Holdings, as determined based upon shareholder elections
and stock proration factors specified in the Merger Agreement. Immediately
following the merger, continuing shareholders owned approximately 11.9% of
shares of outstanding Holdings common stock. The aggregate value of the merger
transaction was approximately $940 million, including refinancing of the
Company's revolving credit facility (see Note 8).
In connection with the merger, Holdings raised $85 million through the
public issuance of discount debentures, and the Company issued publicly held
subordinated notes for approximately $150 million. The Company also entered into
a new syndicated credit facility providing for term loans of $470 million and
revolving loans of up to $105 million. The proceeds of the discount notes,
subordinated notes and the initial borrowings under the new credit facility
along with a loan of approximately $59.1 million from the Company to Holdings
and the purchase of approximately $225 million of Holdings common stock by
Quaker have been used to finance the payments of cash to cash-electing Holdings
shareholders, to pay the holders of Holdings stock options and stock warrants
canceled or converted, as applicable, in connection with the merger, to repay
the Company's existing revolving credit facility and to pay expenses incurred in
connection with the merger.
As a result of the merger, the Company and Holdings incurred various
expenses, aggregating approximately $71 million on a pretax basis (approximately
$64 million after related tax benefit), subject to adjustment, in connection
with consummating the transaction. These costs consisted primarily of
compensation costs, underwriting discounts and commissions, professional and
advisory fees and other expenses. The Company will report this one-time charge
during the first quarter of fiscal 1998. In addition to these expenses, the
Company and Holdings also incurred approximately $22.3 million of capitalized
debt issuance costs associated with the merger financing. These costs will be
charged to expense over the terms of the related debt instruments.
The following summarized unaudited pro forma information of the Company as
of and for the year ended June 30, 1997 assumes that the merger had occurred on
July 1, 1996. The pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the financial condition or of the
results of operations which actually would have resulted had the merger occurred
as of July 1, 1996 or which may result in the future.
F-34
<PAGE> 38
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
(UNAUDITED)
(IN THOUSANDS)
<S> <C>
PRO FORMA BALANCE SHEET INFORMATION:
Total assets................................................................... $707,785
Long term indebtedness (including current portion)............................. 641,376
Other liabilities.............................................................. 170,708
Shareholders' (deficit)........................................................ (104,299)
PRO FORMA INCOME STATEMENT INFORMATION:
Revenues....................................................................... $785,950
Operating income............................................................... 67,750
Income from continuing operations before income taxes.......................... 9,772
Net income..................................................................... 5,726
</TABLE>
The pro forma net loss reflects a net increase in interest expense of
approximately $43.3 million ($25.4 million after related pro forma tax effect),
attributable to additional financing incurred in connection with the merger, net
of repayment of the Company's existing revolving credit facility.
4. BUSINESS AND CONTRACT ACQUISITIONS
During the years ended June 30, 1997, 1996 and 1995, the Company acquired
certain net assets of other service companies as follows (in thousands):
<TABLE>
<CAPTION>
EXCESS
CONSIDERATION PURCHASE
--------------------------------------------------------- PRICE OVER
TOTAL FAIR VALUE
NUMBER OF PURCHASE OTHER OF NET ASSETS
YEARS ENDED ACQUISITIONS CASH NOTES PRICE INTANGIBLES ACQUIRED
- ---------------------------------- ------------ -------- ------ -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Significant business acquisitions:
June 30, 1995................... 1 $ 27,413 $2,094 $ 29,507 $15,600 $ 7,394
June 30, 1996................... 1 250,549 250,549 72,581 60,533
Nonsignificant business or maintenance contract acquisitions:
June 30, 1995................... 5 9,327 255 9,582 4,577 8,680
June 30, 1996................... 5 14,853 578 15,431 6,522 6,318
June 30, 1997................... 9 31,749 2,224 33,973 231 47,200
</TABLE>
On August 31, 1994, the Company purchased certain net assets and
liabilities of IDEA/Servcom, Inc. for approximately $29,500,000. This
acquisition was funded by cash and the issuance of a $2,600,000 noninterest-
bearing note to the seller. See seller notes payable section of Note 8. The
excess of asset purchase price over the fair value of net assets acquired at the
date of purchase was approximately $7,400,000.
On October 20, 1995, the Company acquired all of the outstanding common
stock of BABSS, a subsidiary of Bell Atlantic Corporation ("BAC") for
approximately $250,549,000. The acquisition was funded with the proceeds from
the issuance of $30,000,000 of Series C preferred stock, $30,000,000 of
subordinated debentures and the balance from additional bank borrowings (see
Notes 8 and 13). The excess of asset purchase price over the fair value of net
assets acquired at the date of purchase was initially recorded as approximately
$58,796,000. Subsequent to the acquisition, the Company recorded a net
adjustment increasing the initial amount by $1,737,000 and adjusted other
balance sheet accounts principally by the same amount. This resulted from the
adjustment and reclassification of certain tax accruals offset by favorable
negotiations on certain leased facilities (see Note 7). 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
F-35
<PAGE> 39
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BAC which provides computer maintenance and technology support services in
Europe. The estimated value of the discounted estimated future cash flows over a
twenty-year period from these contractual profit participation rights is
$25,000,000.
Included in nonsignificant maintenance contract acquisitions is the
acquisition of substantially all of the contracts and related assets, including
spare parts of the U.S. computer service business of Memorex Telex Corporation
and certain of its affiliates (collectively, "Memorex Telex"). Memorex Telex had
filed a petition in bankruptcy in the United States Bankruptcy Court (the
"Court") in the District of Delaware on October 15, 1996; the Court approved the
sale to the Company on November 1, 1996. The adjusted purchase price was $52.7
million, comprised of the assumption of certain liabilities under contracts of
the service business, which were valued at $28.3 million, and base cash
consideration of approximately $24.4 million, after certain purchase price
adjustments, excluding transaction and closing costs.
The estimated fair market values of certain assets acquired, as well as
liabilities assumed, are subject to further adjustment as additional information
becomes available to the Company. During the third quarter of fiscal 1997, the
Company recorded an adjustment increasing the deferred revenues assumed in the
Memorex Telex acquisition by approximately $2,300,000, to revise the estimated
fair value of certain contract liabilities of the business assumed by the
Company.
The 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, 1996 and 1995 assumes that the 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,
---------------------
1996 1995
-------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Revenues....................................................... $697,676 $679,284
Income from continuing operations before extraordinary item.... 31,080 20,153
Net income..................................................... 29,153 21,266
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and buildings............................................. $ 6,318 $ 2,055
Equipment...................................................... 16,248 13,858
Computer hardware and software................................. 35,030 27,277
Furniture and fixtures......................................... 8,308 8,051
Leasehold improvements......................................... 4,628 4,125
-------- --------
70,532 55,366
Accumulated depreciation and amortization...................... (36,305) (22,936)
-------- --------
$ 34,227 $ 32,430
======== ========
</TABLE>
F-36
<PAGE> 40
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The principal lives (in years) used in determining depreciation and
amortization rates of various assets are: buildings (20-40); equipment (3-10);
computer hardware and software (3-5); furniture and fixtures (5-10) and
leasehold improvements (term of related leases).
Depreciation and amortization expense was approximately $13,549,000,
$8,309,000 and $1,779,000 for the fiscal years ended 1997, 1996 and 1995,
respectively.
6. INTANGIBLES
Intangibles consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Excess purchase price over fair value of net assets acquired... $130,548 $ 82,355
Customer lists................................................. 64,688 64,758
Contractual profit participation rights........................ 25,000 25,000
Noncompete agreements.......................................... 4,631 4,500
Other intangibles.............................................. 9,131 7,671
-------- --------
233,998 184,284
Accumulated amortization....................................... (42,632) (19,625)
-------- --------
$191,366 $164,659
======== ========
</TABLE>
The periods (in years) used in determining the amortization rates of
intangible assets are: excess purchase price over fair value of net assets
acquired (4-20); customer lists (3-8); contractual profit participation rights
(20); noncompete agreements (3-5) and other (1-6).
Amortization expense relating to intangibles was approximately $23,470,000,
$15,673,000 and $6,775,000, for the fiscal years ended 1997, 1996 and 1995,
respectively.
7. ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable................................................. $55,723 $53,347
Compensation and benefits........................................ 22,706 22,115
Interest......................................................... 563 1,505
Unused leases.................................................... 878 3,485
Pension accrual.................................................. 1,371 1,258
Accrued accounting and legal fees................................ 1,435 1,073
Non-income taxes and other....................................... 12,840 6,781
------ ------
$95,516 $89,564
====== ======
</TABLE>
Prior to 1994, the Company received $2,600,000 in tax bills (primarily
interest) from the Internal Revenue Service ("IRS") related to claims for tax
and interest for the years 1981 through 1987. The Company paid approximately
$500,000 of the claims upon receipt of the bills. Although the Company disputed
the tax bills, an IRS mandated payment of $828,000 was made in 1996. As of June
30, 1996, the
F-37
<PAGE> 41
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company had an accrued liability of $1,883,000 related to this assessment.
During fiscal 1997, the Company paid $1,729,000 in full settlement of these tax
and interest bills.
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 $11,000,000 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 $3,500,000
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 $4,000,000 was provided for severance and termination benefits of
approximately 210 employees in the field, operations support, sales and
administration. Approximately $3,000,000 was provided in connection with the
exit plan for write-downs of spare parts and equipment at two California
facilities which will not be utilized in future operations. The provision for
various other charges of approximately $500,000 consisted of costs to complete
the exit plan. As of June 30, 1996, the Company had settled all of these
liabilities, except for the lease liabilities on idle facilities for which
payments were scheduled to continue through 1999 (see Note 15). At June 30, 1997
and 1996 remaining amounts due under these leases were $0 and $1,200,000,
respectively.
As a result of successful negotiations of unutilized leased facilities,
during 1996, the Company recorded a reduction of approximately $975,000 to both
the provisions for leased facilities and excess purchase price over fair value
of net assets acquired.
8. REVOLVING CREDIT LOAN AND LONG-TERM DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revolving credit loans......................................... $231,671 $186,400
Seller noninterest-bearing notes payable....................... 2,922 2,118
Seller note payable -- purchase of spare parts................. 1,608
Capitalized lease obligations, payable in varying installments
at interest rates ranging from 7.25% to 13.01% at June 30,
1997......................................................... 1,308 2,385
------- -------
237,509 190,903
Less current portion........................................... 4,788 2,321
------- -------
$232,721 $188,582
======= =======
</TABLE>
REVOLVING CREDIT LOANS
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 $230,000,000 and a revolving credit facility of up to a
maximum of $30,000,000. The 1995 Term Loan provided for 19 equal quarterly
principal payments of $10,000,000 to be due and payable on the last day of each
calendar quarter commencing December 31, 1995 with a final payment due on
September 30, 2000. Loans under the revolving credit facility were to mature on
September 30, 2000. Interest on the 1995 Term Loan and the revolving credit
facility were at varying rates based, at the Company's option, on the Eurodollar
rate or the Alternative Base Rate (NationsBanc prime rate), plus the Applicable
Margins. Margins were based on the ratio of Total Funded Debt to EBITDA; the
Eurodollar Margin ranged from 1.75% to 2.5%, while the Alternative Base Rate
Margin ranged from 0.5% to 1.25%.
F-38
<PAGE> 42
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In April 1996, the Company completed an initial public offering. The
Company used a portion of the proceeds to repay approximately $70 million of the
1995 Term Loan.
Also in April 1996, the Company converted the 1995 Term Loan and the
existing $30 million Revolving Credit Facility into a $225 million variable
rate, unsecured revolving credit facility ("the 1996 Revolving Credit
Facility"). During fiscal 1997, the 1996 Revolving Credit Facility commitment
was increased to $300 million, in connection with the acquisition of certain
contracts and assets. The 1996 Revolving Credit Facility 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, 1997, the applicable
rate was LIBOR plus .75% or approximately 6.5%. The 1996 Revolving Credit
Facility enables the Company to borrow up to $300 million in the form of
revolving credit loans with a maturity date of April 26, 2001 and with interest
periods determined principally on a quarterly basis. To offset the variable rate
characteristics of the borrowings, the Company entered into interest rate swap
agreements with two banks resulting in fixed interest rates of 5.4% on $40.0
million notional principal amount through December 1997 and 5.5% on another
$40.0 million notional principal amount through December 1998.
During fiscal 1997, the Company terminated these swap agreements, resulting
in an insignificant gain which has been deferred to the first quarter of fiscal
1998.
Under the terms of the 1996 Revolving Credit Facility, the Company may use
up to $25,000,000 for letters of credit, subject to the limitation of
$300,000,000 in total credit. As of June 30, 1997, letters of credit in the face
amount of $3,067,000 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 DecisionOne
Corporation. Repayment of the debt is guaranteed by the Company, Holdings and
the Company's other subsidiaries except for its Canadian subsidiary.
The Company's debt agreements and other agreements to which it is a party
contain certain covenants restricting the payment of dividends on, or
repurchases of, Holdings common stock.
The Company had average borrowings of $221,069,000 and $172,065,000 during
1997 and 1996, respectively, at an average interest rate of 6.4% and 8.69%,
respectively. Maximum borrowings during 1997 and 1996 were $243,350,000 and
$268,748,000, respectively.
Subsequent to June 30, 1997, in connection with the Company's and Holdings'
merger with Quaker (see Note 3), the 1996 Revolving Credit Facility was repaid
in full, including all interest due thereon. This refinancing was accomplished,
in part, through the issuance of certain new debt instruments, consisting of
senior discount notes, senior subordinated notes and a term loan/revolving
credit facility which, in the aggregate, provide financing of approximately $810
million (including financing obtained by Holdings), subject to certain
conditions. The new revolving credit facility provides the Company with $105
million of available financing, subject to a borrowing base, for working capital
purposes subsequent to the merger.
The Company's Canadian subsidiary has available a $1.5 million (Canadian)
revolving line of credit agreement with a local financial institution. At June
30, 1997, approximately $471,000 (in U.S. dollars) was outstanding under this
agreement. There were no amounts outstanding at June 30, 1996.
SELLER NOTES PAYABLE
In connection with certain acquisitions (see Note 4), the Company issued
noninterest-bearing notes, the principal of which is primarily due upon
settlement of contingent portions of the acquisition purchase price within a
specified period subsequent to closing, generally not exceeding one year from
the acquisition date.
F-39
<PAGE> 43
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Contingencies typically pertain to actual amounts of monthly maintenance
contract revenues acquired and prepaid contract liabilities assumed in
comparison to amounts estimated in acquisition agreements. The Company imputes
interest, based upon market rates, for long-term, non-interest-bearing
obligations.
During 1997, the Company issued a secured note payable to the seller for
the purchase of repairable parts in the original amount of $1,854,000. The note
accrues interest at an interest rate of approximately 8%, and requires quarterly
payments of principal and interest of approximately $273,000 until maturity in
December 1998.
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
$30,000,000 principal amount of 10.101% Debentures (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 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 $3,400,000
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 $30,000,000 of the proceeds to retire the
Affiliate Notes. As a result, in 1996 the Company recorded an extraordinary loss
in the amount of $3,211,000, net of taxes of $1,284,000, due to the acceleration
of the amortization of original issue discount.
F-40
<PAGE> 44
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------
1997 1996 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................ $10,909 $ 2,892 $ 16,065
State.............................................. 3,616 1,595 4,599
Foreign............................................ 1,080 548 (1,272)
Deferred:
Federal............................................ 6,460 8,945 (29,897)
State.............................................. 16 641 (3,617)
Foreign............................................ (113) (499)
Benefit of operating loss carryforwards:
Federal............................................ (7,729)
State.............................................. (1,253)
Foreign............................................ (252)
------- ------- --------
Provision (benefit) for income taxes................. $21,968 $13,870 $(23,104)
======= ======= ========
</TABLE>
The tax effects of temporary differences consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Gross deferred tax assets:
Accounts receivable............................................ $ 4,771 $ 1,341
Inventory...................................................... 2,195 2,586
Accrued expenses............................................... 7,000 6,378
Unused leases.................................................. 390
Fixed assets................................................... 299
Intangibles.................................................... 6,196 5,670
Operating loss carryforwards................................... 4,868 14,252
Tax credit carryforwards....................................... 1,670 1,170
------- -------
Gross deferred tax assets........................................ 27,090 31,696
Gross deferred tax liabilities:
Repairable spare parts......................................... (8,918) (7,273)
Fixed assets................................................... (108)
------- -------
Gross deferred tax liabilities................................... (9,026) (7,273)
------- -------
Net deferred tax asset........................................... $18,064 $24,423
======= =======
</TABLE>
F-41
<PAGE> 45
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net operating loss and minimum tax credit carryforwards available at June
30, 1997 expire in the following years:
<TABLE>
<CAPTION>
YEAR OF
EXPIRATION
AMOUNT ----------
--------------
(IN THOUSANDS)
<S> <C> <C>
Federal operating losses............................... $ 12,877 2006-2008
State operating losses................................. 8,669 1998-2008
Investment tax credit.................................. 134 2004
Minimum tax credit..................................... 1,536 INDEFINITE
</TABLE>
As a result of the Company's initial public offering in April, 1996, an
"ownership change" occurred pursuant to Section 382 of the Internal Revenue
Code. Accordingly, for Federal income tax purposes, net operating loss and tax
credit carryforwards arising prior to the ownership change are limited during
any future period to the Section 382 "limitation amount" of approximately $20.0
million per annum. In addition, the Company's merger with Quaker on August 7,
1997 (see Note 3) represents another such "ownership change" pursuant to Section
382. The Company estimates that the limitation on the use of tax loss
carryforwards and other credits, for Federal income tax purposes, in any
post-merger period will be reduced to approximately $9.0 million per annum.
A reconciliation between the provision (benefit) for income taxes, computed
by applying the statutory federal income tax rate of 35% for 1997, 1996 and 1995
to income before income taxes, and the actual provision (benefit) for income
taxes follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ------
<S> <C> <C> <C>
Federal income tax provision at statutory tax rate........... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax provision...... 5.0 4.6 3.5
Foreign income taxes......................................... 0.4 (6.9)
Unused lease credit.......................................... (0.1)
Benefit of operating loss carryforward....................... (0.8) (49.1)
Change in valuation allowance................................ (1.4) (108.9)
Other........................................................ 1.0 2.6 0.3
---- ---- ------
Actual income tax provision (benefit) effective tax rate..... 41.4% 40.0% (126.2)%
==== ==== ======
</TABLE>
The Company has recorded a deferred tax asset of $4,868,000 reflecting the
benefit of federal and state net operating loss carryforwards, which expire in
varying amounts between 1998 and 2008. Realization depends on generating
sufficient taxable income before expiration of the loss carryforwards. Although
realization is not assured, management believes it is more likely than not that
all of the deferred tax asset will be realized.
The valuation allowance for deferred tax assets as of July 1, 1994 was
$44,160,000. The net changes in the valuation allowance for the years ended June
30, 1996 and 1995 were decreases of $686,000 and $43,474,000, respectively. Of
these amounts, $252,000 and $8,982,000 resulted from the realization of net
operating loss carryforwards. The remaining decrease of $434,000 and $34,492,000
for 1996 and 1995, respectively, resulted from the Company's expected future
taxable income.
F-42
<PAGE> 46
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. OTHER LIABILITIES
Other (noncurrent) liabilities consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accrued severance and unutilized lease losses.................... $ 4,532 $ 2,227
Other noncurrent liabilities..................................... 9,396 12,059
------- -------
$ 13,928 $ 14,286
======= =======
</TABLE>
As more fully described in Note 15, accrued severance and unutilized lease
losses represent remaining liabilities for estimated future employee severance
costs and for lease/contract losses associated with duplicate facilities to be
closed. These liabilities were recorded by the Company in connection with the
Memorex Telex and BABSS acquisitions in November 1996 and October 1995,
respectively.
Other noncurrent liabilities include deferred operating lease liabilities
related to scheduled rent increases, recorded in accordance with the provisions
of SFAS No. 13, Accounting for Leases. Also included in other noncurrent
liabilities are provisions relating to various tax matters.
11. 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,
1997 and thereafter are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................... $18,415
1999............................................................... 15,224
2000............................................................... 11,406
2001............................................................... 5,815
2002............................................................... 2,879
Thereafter......................................................... 4,757
-------
$58,496
=======
</TABLE>
Rental expense amounted to approximately $17,367,000, $13,149,000 and
$5,878,000, for the fiscal years ended 1997, 1996 and 1995, respectively.
12. 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.
F-43
<PAGE> 47
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pension expense for the defined benefit pension plan was computed as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------
1997 1996 1995
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest cost.............................................. $ 521 $ 495 $ 482
Actual return on plan assets............................... (409) (449) (312)
Net amortization and deferral.............................. 9 72 (42)
----- ----- -----
Periodic pension costs..................................... $ 121 $ 118 $ 128
===== ===== =====
</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 1997, 1996 and 1995.
The following table sets forth the funded status of the frozen pension plan
as of May 1, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated benefits (100% vested)............................... $ 7,290 $ 7,116
Fair value of plan assets........................................ 6,128 5,800
------- -------
Unfunded projected benefit obligation.................. 1,162 1,316
Unrecognized net loss............................................ 1,873 1,848
Unrecognized net transition obligation........................... 470 504
Adjustment to recognized minimum liability....................... (2,343) (2,352)
------- -------
Accrued pension costs............................................ $ 1,162 $ 1,316
======= =======
</TABLE>
13. EMPLOYEE SEVERANCE AND UNUTILIZED LEASE COSTS
During the second quarter of fiscal 1997, in connection with the Memorex
Telex acquisition (see Note 4), the Company recorded a $3.4 million pre-tax
charge for estimated future employee severance costs, and a $0.9 million pre-tax
charge for unutilized lease/contract losses ("exit costs"), primarily associated
with duplicate facilities to be closed. The $3.4 million charge, recorded in
accordance with SFAS No. 112, Employers' Accounting for Postemployment Benefits,
reflects the actuarially determined benefit costs for the separation of
employees who are entitled to benefits under pre-existing separation pay plans.
These costs are included in selling, general and administrative expenses in the
accompanying consolidated statement of operations for the year ended June 30,
1997.
In the second quarter of fiscal 1996, in connection with the acquisition of
BABSS, the Company recorded pre-tax charges for exit costs of $6.9 million, and
estimated future employee severance costs of $0.1 million. During the fourth
quarter of fiscal 1996, the Company reversed $3.4 million of these employee
severance and exit cost liabilities. The reversal was primarily the result of
the Company's ability to utilize and sublease various facilities identified in
the original $7.0 million combined liability. Such information was unknown to
the Company when the original liability was recorded.
See Note 10 for further information regarding accrued severance and
unutilized lease losses.
14. COMMITMENTS AND CONTINGENT LIABILITIES
The Company, or certain businesses as to which it is alleged that the
Company is a successor, have been identified as potentially responsible parties
in respect to four waste disposal sites that have been identified by the United
States Environmental Protection Agency as Superfund sites. In addition, the
Company received a notice several years ago that it may be a potentially
responsible party with respect to a fifth, related site, but
F-44
<PAGE> 48
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
has not received any other communication with respect to that site. Under
applicable law, all parties responsible for disposal of hazardous substances at
those sites are jointly and severally liable for clean-up costs. The Company
originally estimated that its share of the costs of the clean-up of one of these
sites would be approximately $500,000 which is provided for in liabilities
related to the discontinued products division in the accompanying consolidated
balance sheets as of June 30, 1997 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 potential additional liability, if any, for the cost
of clean-up of these sites will not be material to the consolidated financial
position, results of operations or liquidity of the Company.
The Company is also party to various legal proceedings incidental to its
business. Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company. In the opinion of
management, these actions can be successfully defended or resolved without a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
During the fourth quarter of fiscal 1997, the Company received $2.0 million
in full settlement of a claim against its former insurance carrier, related to
unreimbursed losses. This settlement was reflected as a reduction of selling,
general and administrative costs in the accompanying statement of operations.
15. 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, 1997, 1996 and 1995 were approximately
$472,000, $1,512,000 and $1,972,000, respectively. Accounts payable to Genicom
amounted to approximately $30,000 and $14,000 as of June 30, 1997 and 1996,
respectively.
During the year ended June 30, 1996, the Company paid approximately
$125,000 for expense reimbursements to certain shareholders for services
rendered in connection with an acquisition in 1988. The amount was accrued for
in prior years.
F-45
<PAGE> 49
SCHEDULE I
DECISIONONE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(PARENT COMPANY ONLY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Investment in equity of subsidiaries................................. $214,888 $180,793
-------- --------
Total assets........................................................... $214,888 $180,793
======== ========
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value; authorized 5,000,000 shares; none
outstanding
Common stock, $.01 par value -- authorized, 100,000,000 shares;
issued and outstanding 27,817,832 shares in 1997 and 27,340,288
shares in 1996.................................................... $ 278 $ 273
Additional paid-in capital........................................... 258,331 255,262
Accumulated deficit.................................................. (42,432) (73,516)
Foreign currency translation adjustment.............................. 584 622
Pension liability adjustment......................................... (1,873) (1,848)
-------- --------
Total shareholders' equity............................................. $214,888 $180,793
======== ========
</TABLE>
See note to condensed financial information.
S-1
<PAGE> 50
SCHEDULE I
DECISIONONE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF OPERATIONS
(PARENT COMPANY ONLY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Equity in net income of subsidiaries....................... $ 31,084 $ 18,862 $ 42,528
-------- -------- --------
Net income................................................. $ 31,084 $ 18,862 $ 42,528
======== ======== ========
</TABLE>
See note to condensed financial information.
S-2
<PAGE> 51
SCHEDULE I
DECISIONONE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF CASH FLOWS
(PARENT COMPANY ONLY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------------------
1997 1996 1995
-------- --------- -------
<S> <C> <C> <C>
Operating Activities:
Net income.................................................. $ 31,084 $ 18,862 $42,528
Adjustment to reconcile net income to net cash provided by
operating activities..................................... (31,084) (17,416) (42,528)
-------- --------- --------
Net cash provided by operating activities.............. -- 1,446 --
-------- --------- --------
Investing Activities -- contribution to capital of
subsidiaries................................................ (439) (142,090) --
-------- --------- --------
Financing Activities:
Proceeds from issuance of preferred stock 31,392
Proceeds from issuance of common stock and warrants......... 439 110,698
Dividends paid on preferred stock........................... (1,446)
-------- --------- --------
Net cash provided by financing activities.............. 439 140,644 --
-------- --------- --------
Net Change in Cash.......................................... $ -- $ $ --
======== ========= ========
</TABLE>
See note to condensed financial information.
S-3
<PAGE> 52
SCHEDULE 1
DECISIONONE HOLDINGS CORP.
NOTE TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements include the accounts of
DecisionOne Holdings Corp. (the Parent) and on an equity basis its subsidiaries
and should be read in conjunction with the consolidated financial statements of
DecisionOne Holdings Corp. and Subsidiaries (the "Company") and the notes
thereto.
S-4
<PAGE> 53
SCHEDULE II
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
DECISIONONE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-------------------------
BALANCE AT CHARGES TO CHARGES TO BALANCE AT
BEGINNING OF CORP. AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ------------------------------ ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended June 30, 1995:
Accounts Receivable --
Allowance for uncollectable
accounts................. $ 1,461 $1,930 $ 3,225 $ 6,616
Consumable parts --
Allowance for
Obsolescence............. $ 8,370 $1,995 $ 1,423(b) $ 11,788
Year Ended June 30, 1996:
Allowance for uncollectable
accounts.................... $ 6,616 $ 3,434 $ (470)(a) $ 9,580
Consumable parts --
Allowance for
Obsolescence............. $ 11,788 $1,171 $ 10,193(b) $ (3,615) $ 19,537
Year Ended June 30, 1997:
Accounts Receivable --
Allowance for Uncollectable
Accounts.................... $ 9,580 $7,848 $ 1,593(b) $ (4,152)(a) $ 14,869
Consumable parts --
Allowance for Obsolescence.... $ 19,537 $2,554 $ 3,849(b) $ (8,051) $ 17,889
</TABLE>
- ---------------
(a) Amount primarily represents net recoveries (write-offs) during the year.
(b) Amount primarily represents allowance recorded as a result of acquisitions
during the year.
S-5
<PAGE> 54
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------------------------------------------------------------------------- ----
<C> <S> <C>
23 Consent of Deloitte & Touche LLP
</TABLE>
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-03267, 333-19095, 333-33043, 333-33045 on Form S-8 and 333-33057, 333-33061
on Form S-3 of DecisionOne Holdings Corp. of our reports dated August 15, 1997
appearing in this Annual Report on Form 10-K/A1 of DecisionOne Holdings
Corp. and DecisionOne Corporation for the year ended June 30, 1997.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
October 8, 1997
