This prospectus is filed pursuant to Rule 424(b)(3)
of the Securities Act of 1933.
PROSPECTUS SUPPLEMENT
TO
PROSPECTUS DATED AUGUST 7, 1997
DecisionOne Corporation
9 3/4% Senior Subordinated Notes
Due 2007
Attached is the Company's Quarterly Report on Form 10-Q for the period
ended December 31, 1997.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1997
-----------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE
ACT OF 1934
For the transition period ended ___________________
DecisionOne Holdings Corp.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Commission File Number 0-28090
-------
Delaware 13-3435409
- --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
DecisionOne Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Commission File Number 333-28411
---------
Delaware 23-2328680
- --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
50 East Swedesford Road, Frazer, Pennsylvania 19355
----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code (610) 296-6000
--------------
Indicate by check mark whether registrants (1) have filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrants were
required to file such reports), and (2) have been subject of such filing
requirements for the past 90 days. Yes X No
--- ---
As of December 31, 1997, 12,589,313 shares of DecisionOne Holdings Corp. common
stock were outstanding and one share of DecisionOne Corporation was outstanding.
DecisionOne Corporation meets the requirements set forth in General Instruction
H(l) of Form 10-Q and is therefore filing this form with the reduced disclosure
format.
<PAGE>
DecisionOne Holdings Corp. and Subsidiaries
and
DecisionOne Corporation and Subsidiaries
FORM 10-Q February 12, 1997
Contents
--------
Page No.
--------
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements of
DecisionOne Holdings Corp. and Subsidiaries
Condensed Consolidated Balance Sheets -
December 31, 1997 and June 30, 1997
(unaudited) 2
Condensed Consolidated Statements of Operations -
Three and Six Months Ended
December 31, 1997 and 1996 (unaudited) 3
Condensed Consolidated Statements of
Cash Flows - Six Months Ended
December 31, 1997 and 1996 (unaudited) 4
Notes to Condensed Consolidated Financial
Statements (unaudited) 5
Condensed Consolidated Financial Statements
of DecisionOne Corporation:
Condensed Consolidated Balance Sheets -
December 31, 1997 and June 30, 1997
(unaudited) 9
Condensed Consolidated Statements of Operations -
Three and Six Months Ended
December 31, 1997 and 1996 (unaudited) 10
Condensed Consolidated Statements of Cash Flows -
Six Months Ended
December 31, 1997 and 1996 (unaudited) 11
Notes to Condensed Consolidated
Financial Statements (unaudited) 12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations -
Three and Six Months Ended
December 31, 1997 and 1996 15
Part II: Other Information 27
<PAGE>
DecisionOne Holdings Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(In Thousands, Except Share Amounts)
December 31, June 30,
ASSETS 1997 1997
----------- --------
Current Assets:
Cash and cash equivalents ................... $ 8,595 $ 10,877
Accounts receivable, net of allowances
of $10,973 and $14,869 .................... 131,925 127,462
Consumable parts, net of allowances of
$13,567 and $15,976 ....................... 28,734 29,052
Other ....................................... 24,318 9,778
-------- --------
Total current assets ...................... 193,572 177,169
Repairable Parts, Net of Accumulated
Amoritization of $158,530 and $156,468 ...... 212,807 205,366
Intangibles, Net of Accumulated Amoritization
of $55,462 and $42,632 ...................... 184,155 191,366
Property, Plant and Equipment, Net of
Accumulated Depreciation of $45,525
and $36,305 ................................. 32,041 34,227
Other ......................................... 25,531 14,977
-------- --------
Total Assets .................................. $648,106 $623,105
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term debt ........... $ 12,099 $ 4,788
Accounts payable and accrued expenses ....... 94,569 96,516
Deferred revenues ........................... 54,402 56,600
Other ....................................... 1,209 11,513
-------- --------
Total current liabilities ................. 162,279 169,417
Revolving Credit Loan and Long-term Debt ...... 727,051 232,721
Other Liabilities ............................. 4,376 6,079
Shareholders' Equity (Deficit):
Preferred stock, no par value; authorized
5,000,000 shares; none outstanding
Common stock, $.01 par value, authorized
100,000,000 shares; issued and
outstanding 12,589,313 and 27,817,832
shares .................................... 126 278
Additional paid-in capital .................. (133,376) 258,331
Accumulated deficit ......................... (110,777) (42,432)
Other ....................................... (1,573) (1,289)
-------- --------
Total Shareholders' Equity (Deficit) ...... (245,600) 214,888
-------- --------
Total Liabilities and Shareholders'
Equity (Deficit) ........................ $648,106 $623,105
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
<PAGE>
DecisionOne Holdings Corp. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ..................................... $200,075 $191,253 $402,339 $367,679
Cost of Revenues ............................. 153,306 143,611 310,751 278,616
-------- -------- -------- --------
Gross Profit ................................. 46,769 47,642 91,588 89,063
Operating Expenses:
Selling, general and administrative
expenses.................................. 32,301 29,802 59,223 53,631
Merger expenses ............................ -- -- 69,046 --
Amortization of intangibles ................ 6,625 5,552 13,146 10,471
-------- -------- -------- --------
Total Operating Expenses ................ 38,926 35,354 141,415 64,102
-------- -------- -------- --------
Operating Income (Loss) ...................... 7,843 12,288 (49,827) 24,961
Interest Expense, Net of Interest Income ..... 18,420 3,747 30,153 7,015
-------- -------- -------- --------
Income (Loss) Before Income Taxes ............ (10,577) 8,541 (79,980) 17,946
Provision (Benefit) for Income Taxes ......... 141 3,587 (11,635) 7,537
-------- -------- -------- --------
Net Income (Loss) ............................ $(10,718) $ 4,954 $(68,345) $ 10,409
======== ======== ======== ========
Pro forma Information:
Pro forma Net Loss ...................... $(10,718) $(12,935)
Pro forma Net Loss Per Common Share ..... $ (0.86) $ (1.03)
Pro forma Weighted Average Number of
Common Shares Outstanding ................... 12,512 12,506
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE>
DecisionOne Holdings Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Six months ended
December 31,
-------------------------
1997 1996
--------- --------
<S> <C> <C>
Operating Activities:
Net income (loss) .................................................... $ (68,345) $ 10,409
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Amortization of repairable parts ................................. 38,789 29,286
Amortization of intangibles ...................................... 13,146 10,471
Depreciation ..................................................... 7,822 6,243
Changes in assets and liabilities,
net of effects of business acquisitions ........................ (23,067) (35,422)
--------- --------
Net cash provided by (used in) operating activities .............. (31,655) 20,987
Investing Activities:
Business acquisitions ................................................ (6,269) (30,940)
Capital expenditures, net of retirements ............................. (5,336) (3,832)
Repairable spare parts purchases, net ................................ (41,459) (35,988)
--------- --------
Net cash used in investing activities ............................ (53,064) (70,760)
Financing Activities:
Proceeds from issuance of common stock ............................... 228,622 311
Cash paid to redeem common stock ..................................... (609,391) --
Cash paid to cancel common stock warrants ............................ (12,158) --
Issuance of common stock warrants .................................... 1,880 --
Net proceeds from borrowings ......................................... 473,883 50,253
Net principal payments under capital leases .......................... (115) (686)
Other, net ........................................................... (284) (17)
--------- --------
Net cash provided by financing activities ........................ 82,437 49,861
--------- --------
Net change in cash and cash equivalents ................................... (2,282) 88
--------- --------
Cash and cash equivalents, beginning of period ............................ 10,877 8,221
--------- --------
Cash and cash equivalents, end of period .................................. $ 8,595 $ 8,309
========= ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(For the three and six month periods ended December 31, 1997 and 1996)
(UNAUDITED)
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
DecisionOne Holdings Corp. and Subsidiaries (the "Company") have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
and, therefore, do not include all information and footnotes necessary for
presentation of financial position, results of operations and cash flows
required by generally accepted accounting principles. The June 30, 1997 balance
sheet was derived from the Company's audited consolidated financial statements.
The information furnished reflects all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair summary of the financial position, results of operations and cash flows.
The results of operations for the three and six month periods ended December 31,
1997 and 1996 are not necessarily indicative of operating results to be expected
for the full fiscal year. The financial statements should be read in conjunction
with the audited historical consolidated financial statements of the Company and
notes thereto filed with the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1997, as amended.
Certain reclassifications have been made in order to conform with the December
31, 1997 presentation.
Note 2: Recent Accounting Pronouncement
In February, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128, which supersedes Accounting Principles Board Opinion No. 15, Earnings Per
Share, generally requires a dual presentation of basic and diluted net income
(loss) per share as well as disclosures including a reconciliation of the
computation of basic net income (loss) per share to diluted net income (loss)
per share. Basic net income (loss) per share excludes the dilutive impact of
common stock equivalents and is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding for the period.
Diluted net income per share includes the effect of potential dilution from the
exercise of outstanding common stock equivalents into common stock, using the
treasury stock method at the average market price of the Company's common stock
for the period.
The Company has adopted SFAS 128, as required, for the fiscal quarter ending
December 31, 1997. Pro forma basic loss per share of $0.86 and $1.03 is
presented in the accompanying Condensed Consolidated Statements of Operations
for the three and six month periods ended
5
<PAGE>
December 31, 1997, respectively. In accordance with SFAS 128, pro forma diluted
loss per share for these periods is not presented, as these amounts would be
anti-dilutive.
The pro forma per share information has been prepared to reflect the Company's
recapitalization and merger with Quaker Holding Co. ("Quaker") and related
transactions as if these had occurred on July 1, 1997 (see Note 3). Historical
per share information is not presented as this would not be meaningful.
Note 3: Merger, Recapitalization and Pro Forma Information
On August 7, 1997, the Company consummated a merger with Quaker Holding Co.
("Quaker"), an affiliate of DLJ Merchant Banking Partners II, L.P. The merger,
which was recorded as a recapitalization for accounting purposes as of the
consummation date, occurred pursuant to an Agreement and Plan of Merger between
the Company and Quaker dated May 4, 1997, as amended (the "Merger Agreement").
In accordance with the terms of the Merger Agreement, which was formally
approved by the Company's shareholders on August 7, 1997, Quaker merged with and
into the Company, and the holders of approximately 94.7% of shares of Company
common stock outstanding immediately prior to the merger received $23 in cash in
exchange for each of these shares. Holders of approximately 5.3% of shares of
Company common stock outstanding immediately prior to the merger retained such
shares in the merged Company, as determined based upon shareholder elections and
stock proration factors specified in the Merger Agreement. Immediately following
the merger, continuing shareholders owned approximately 11.9% of shares of
outstanding Company common stock. The aggregate value of the merger transaction
was approximately $940 million, including refinancing of the Company's revolving
credit facility.
In connection with the merger, the Company raised $85 million through the public
issuance of discount debentures, in addition to publicly issued subordinated
notes for approximately $150 million. The Company also entered into a new
syndicated credit facility (the "New Credit Facility") providing for term loans
of $470 million and revolving loans of up to $105 million. The proceeds of the
discount notes, subordinated notes, the initial borrowings under the new credit
facility and the purchase of approximately $225 million of Company common stock
by Quaker were used to finance the payments of cash to cash-electing
shareholders, to pay the holders of stock options and stock warrants canceled or
converted, as applicable, in connection with the merger, to repay the Company's
existing revolving credit facility and to pay expenses incurred in connection
with the merger.
As a result of the merger, the Company incurred various expenses, totaling
approximately $69.0 million on a pre-tax basis, in connection with consummating
the merger. These costs consisted primarily of compensation costs, professional
and advisory fees and other expenses. In addition to these expenses, the Company
also incurred approximately $22.3 million of capitalized debt issuance costs
associated with the merger financing. These costs are amortized to expense over
the terms of the related debt instruments.
6
<PAGE>
The following summarized unaudited pro forma information as of June 30, 1997 and
for the six month period ended December 31, 1997, assumes that the merger had
occurred on July 1, 1997. The pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of the financial
condition or of the results of operations which actually would have resulted had
the merger occurred as of July 1, 1997 or which may result in the future.
(In Thousands)
Pro Forma Balance Sheet Information: June 30, 1997
--------------
Total Assets ............................................ $652,085
Long Term Indebtedness (including current portion)....... 724,500
Other Liabilities ....................................... 170,708
Shareholders' (Deficit) ................................. (243,123)
(In Thousands except Per
Share Amounts)
Six Months Ended
December 31,
Pro Forma Income Statement Information: 1997
------------------------
Revenues ......................................... $402,339
Operating Income.................................. 19,219
Loss from Continuing Operations before Income Tax
Benefit ........................................ (16,044)
Net Loss ......................................... (12,935)
Loss per Common Share............................. $(1.03)
Weighted Average Shares of Common Stock
Outstanding .................................... 12,506
The pro forma net loss for the six month period ended December 31, 1997
reflects (1) a net increase in interest expense of approximately $5.1
million attributable to additional financing incurred in connection with
the merger, net of the repayment of the Company's existing revolving credit
facility; (2) the elimination of the non-recurring merger expenses of
approximately $69.0 million and (3) the eliminaton of the net tax benefit
related to these adjustments of approximately $8.6 million, including the
effect of valuation allowances against certain deferred tax assets (see
Note 5).
Pro forma weighted average common shares outstanding includes 12,499,979
common stock shares outstanding immediately subsequent to the merger on
August 7, 1997, in addition to shares subsequently issued and outstanding.
7
<PAGE>
Note 4: Debt Covenants
The New Credit Facility contains various terms and covenants which, among other
things, place certain restrictions on the Company's ability to pay dividends and
incur additional indebtedness, and which require the Company to meet certain
minimum financial performance measurements. In January, 1998, the Company sought
and obtained an amendment to the New Credit Facility, to exclude certain
consulting charges related to the Company's ongoing service delivery
re-engineering program from the calculation of certain financial performance
measurements. The Company is in compliance with its covenants under the amended
New Credit Facility as of December 31, 1997. The Company has also notified the
New Credit Facility lenders that it will seek additional amendments to the New
Credit Facility to reduce financial performance covenants, to be effective on or
before March 31, 1998.
Note 5: Income Taxes
The Company expects that the merger will result in significant additional tax
loss carryforwards and carrybacks arising in fiscal 1998, due largely to $69.0
million of non-recurring expenses incurred in consummating the merger (see Note
3). Net anticipated tax benefits and corresponding net deferred tax assets of
approximately $11.6 million, primarily attributable to the merger, have been
fully reflected in the six month period ended December 31, 1997. The anticipated
net deferred tax assets have been reduced significantly, due primarily to
management's projections of additional tax losses and the length of the period
during which the anticipated tax benefits are expected to be realized.
The Company expects that its tax provision (benefit) in future periods will
reflect effective tax rates which vary significantly from enacted statutory tax
rates and from the Company's effective tax rate of 41.4% for fiscal 1997,
principally as a result of additional unrecognized tax benefits on newly-arising
net deferred tax assets. Future effective tax rates may also be subject to
volatility as a result of valuation allowances which arise from differences
between management's projections of future taxable income, newly-arising net
deferred tax assets and reversals of net deferred tax assets and corresponding
actual results.
8
<PAGE>
DecisionOne Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 7,412 $ 10,877
Accounts receivable, net of allowances of $10,973 and $14,869 131,425 127,462
Consumable parts, net of allowances of $13,567 and $15,976 28,734 29,052
Other 23,577 9,778
-------- --------
Total current assets 191,148 177,169
Repairable Parts, Net of Accumulated Amortization of $158,530 and
$156,468 212,807 205,366
Intangibles, Net of Accumulated Amortization of $55,462 and $42,632 184,155 191,366
Property, Plant and Equipment, Net of Accumulated Depreciation
of $45,525 and $36,305 32,041 34,227
Loan receivable from parent company 59,100 --
Other 33,917 14,977
-------- --------
Total Assets $713,168 $623,105
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term debt $ 12,099 $ 4,788
Accounts payable and accrued expenses 94,069 96,516
Deferred revenues 54,402 56,600
Other 5,158 11,513
-------- --------
Total current liabilities 165,728 169,417
Revolving Credit Loan and Long-term Debt 638,488 232,721
Other Liabilities 4,376 6,079
Shareholder's Equity (Deficit):
Common stock, no par value; one share authorized, issued
and outstanding in 1997 and 1996 -- --
Additional paid-in capital 12,323 258,609
Accumulated deficit (106,174) (42,432)
Other (1,573) (1,289)
-------- --------
Total Shareholder's Equity (Deficit) (95,424) 214,888
-------- --------
Total Liabilities and Shareholder's Equity (Deficit) $713,168 $623,105
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
9
<PAGE>
DecisionOne Corporation And Subsidiaries
Condensed Consolidated Statements Of Operations
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $200,075 $191,253 $402,339 $367,679
Cost of Revenues 153,306 143,611 310,751 278,616
-------- -------- -------- --------
Gross Profit 46,769 47,642 91,588 89,063
Operating Expenses:
Selling, general and administrative expenses 32,301 29,802 59,223 53,631
Merger expenses -- -- 69,046 --
Amortization of intangibles 6,625 5,552 13,146 10,471
-------- -------- -------- --------
Total Operating Expenses 38,926 35,354 141,415 64,102
-------- -------- -------- --------
Operating Income (Loss) 7,843 12,288 (49,827) 24,961
Interest Expense, Net of Interest Income 13,895 3,747 23,804 7,015
-------- -------- -------- --------
Income (Loss) Before Income Taxes (6,052) 8,541 (73,631) 17,946
Provision (Benefit) for Income Taxes 573 3,587 (9,889) 7,537
-------- -------- -------- --------
Net Income (Loss) $ (6,625) $ 4,954 $(63,742) $ 10,409
======== ======== ======== ========
Pro forma Information:
Pro forma Net Loss $ (6,625) $ (7,645)
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
10
<PAGE>
DecisionOne Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Six months ended
December 31,
----------------------------
1997 1996
---------- ---------
<S> <C> <C>
Operating Activities:
Net income (loss) $ (63,742) $ 10,409
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Amortization of repairable parts 38,789 29,286
Amortization of intangibles 13,146 10,471
Depreciation 7,822 6,243
Changes in assets and liabilities, net of effects of business
acquisitions (37,426) (35,422)
--------- -------
Net cash provided by (used in) operating activities (41,411) 20,987
Investing Activities:
Business acquisitions (6,269) (30,940)
Capital expenditures, net of retirements (5,536) (3,832)
Repairable spare parts purchases, net (41,459) (35,988)
--------- -------
Net cash used in investing activities (53,064) (70,760)
Financing Activities:
Capital contributions 349 311
Payment of dividend to parent company (244,000) --
Loan made to parent company (59,100) --
Net proceeds from borrowings 394,160 50,253
Net payments under capital lease obligations (115) (686)
Other, net (284) (17)
--------- -------
Net cash provided by financing activities 91,010 49,861
--------- -------
Net change in cash and cash equivalents (3,465) 88
Cash and cash equivalents, beginning of period 10,877 8,221
--------- -------
Cash and cash equivalents, end of period $ 7,412 $ 8,309
========= =======
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
11
<PAGE>
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three and six month periods ended December 31, 1997 and 1996
(UNAUDITED)
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
DecisionOne Corporation (a wholly-owned subsidiary of DecisionOne Holdings
Corp.; "Holdings") and Subsidiaries (the "Company") have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission and,
therefore, do not include all information and footnotes necessary for
presentation of financial position, results of operations and cash flows
required by generally accepted accounting principles. The June 30, 1997 balance
sheet was derived from the Company's audited financial statements. The
information furnished reflects all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
summary of the financial position, results of operations and cash flows. The
results of operations for the six month periods ended December 31, 1997 and 1996
are not necessarily indicative of the operating results to be expected for the
full fiscal year. The financial statements should be reviewed in conjunction
with the audited financial statements of the Company and roles thereto filed
with the Company's Annual Report on form 10-K for the fiscal year ended June 30,
1997, as amended.
Certain reclassifications have been made in order to conform with the December
31, 1997 presentation.
Note 2. Merger, Recapitalization and Pro Forma Information
On August 7, 1997, the Company and Holdings consummated a merger with Quaker
Holding Co. ("Quaker"), an affiliate of DLJ Merchant Banking Partners II, L.P.
The merger, which was recorded as a recapitalization for accounting purposes as
of the consummation date, occurred pursuant to an Agreement and Plan of Merger
between the Company, Holdings and Quaker dated May 4, 1997, as amended (the
"Merger Agreement").
In accordance with the terms of the Merger Agreement, which was formally
approved by Holdings' shareholders on August 7, 1997, Quaker merged with and
into Holdings, and the holders of approximately 94.7% of shares of Holdings'
common stock outstanding immediately prior to the merger received $23 in cash in
exchange for each of these shares. Holders of approximately 5.3% of shares of
Holdings' common stock outstanding immediately prior to the merger retained such
shares in the merged Company, as determined based upon shareholder elections and
stock proration factors specified in the Merger Agreement. Immediately following
the merger, continuing shareholders owned approximately 11.9% of shares of
outstanding Holdings' common stock. The aggregate value of the merger
transaction was approximately $940 million, including refinancing of DecisionOne
Corporation's revolving credit facility.
12
<PAGE>
In connection with the merger, Holdings raised $85 million through the public
issuance of discount debentures, in addition to subordinated notes for
approximately $150 million issued publicly by the Company. The Company also
entered into a new syndicated credit facility (the "New Credit Facility")
providing for term loans of $470 million and revolving loans of up to $105
million. The proceeds of the discount notes, subordinated notes, the initial
borrowings under the new credit facility along with a loan of approximately
$59.1 million from the Company to Holdings and the purchase of approximately
$225 million of Company common stock by Quaker have been used to finance the
payments of cash to cash-electing shareholders, to pay the holders of stock
options and stock warrants canceled or converted, as applicable, in connection
with the merger, to repay DecisionOne Corporation's existing revolving credit
facility and to pay expenses incurred in connection with the merger.
As a result of the merger, the Company and Holdings incurred various expenses,
totaling $69 million on a pre-tax basis, in connection with consummating the
merger. These costs consisted primarily of compensation costs, professional and
advisory fees and other expenses. In addition to these expenses, the Company and
Holdings also incurred approximately $22.3 million of capitalized debt issuance
costs (of which approximately $18.9 million were incurred by the Company)
associated with the merger financing. These costs are amortized to expense over
the terms of the related debt instruments.
The following summarized unaudited pro forma information as of June 30, 1997 and
for the six month period ended December 31, 1997 assumes that the merger had
occurred on July 1, 1997. The pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of the financial
condition or of the results of operations which actually would have resulted had
the merger occurred as of July 1, 1997 or which may result in the future.
(In Thousands)
June 30, 1997
--------------
Pro Forma Balance Sheet Information:
Total Assets ................................................ $707,785
Long Term Indebtedness (including current portion) .......... 641,376
Other Liabilities ........................................... 170,708
Shareholder's (Deficit) ..................................... (104,299)
(In Thousands)
Six Months Ended
December 31,
1997
----------------
Pro Forma Income Statement Information:
Revenues..................................................... $402,339
Operating Income ............................................ 19,219
Loss from Continuing Operations before Income
Tax Benefit ............................................... (8,176)
Net Loss .................................................... (7,645)
13
<PAGE>
The pro forma net loss for the six month period ended December 31, 1997
reflects (1) a net increase in interest expense of approximately $3.6 million
attributable to additional financing incurred in connection with the merger, net
of the repayment of the Company's existing revolving credit facility, (2) the
elimination of the non-recurring merger expenses of approximately $69 million
and (3) the elimination of the net tax benefit related to these adjustments of
approximately $9.4 million, including the effect of valuation allowances against
certain deferred tax assets (see Note 4).
Note 3: Debt Covenants
The New Credit Facility contains various terms and covenants which, among other
things, place certain restrictions on the Company's ability to pay dividends and
incur additional indebtedness, and which require the Company to meet certain
minimum financial performance measurements. In January, 1998, the Company sought
and obtained an amendment to the New Credit Facility, to exclude certain
consulting charges related to the Company's ongoing service delivery
re-engineering program from the calculation of certain financial performance
measurements. The Company is in compliance with its covenants under the amended
New Credit Facility as of December 31, 1997. The Company has also notified the
New Credit Facility lenders that it will seek additional amendments to the New
Credit Facility to reduce financial performance covenants, to be effective on or
before March 31, 1998.
Note 4: Income Taxes
The Company expects that the merger will result in significant additional tax
loss carryforwards and carrybacks arising in fiscal 1998, due largely to $69.0
million of non-recurring expenses incurred in consummating the merger (see Note
2). Net anticipated tax benefits and corresponding net deferred tax assets of
approximately $9.9 million, primarily attributable to the merger, have been
fully reflected in the six month period ended December 31, 1997. The anticipated
net deferred tax assets have been reduced significantly, due primarily to
management's projections of additional tax losses and the length of the period
during which the anticipated tax benefits are expected to be realized.
The Company expects that its tax provision (benefit) in future periods will
reflect effective tax rates which vary significantly from enacted statutory tax
rates and from the Company's effective tax rate of 41.4% for fiscal 1997,
principally as a result of additional unrecognized tax benefits on newly-arising
net deferred tax assets. Future effective tax rates may also be subject to
volatility as a result of valuation allowances which arise from differences
between management's projections of future taxable income, newly-arising net
deferred tax assets and reversals of net deferred tax assets and corresponding
actual results.
14
<PAGE>
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Three and Six Months Ended December 31, 1997
The following discussion should be read in conjunction with the audited
Consolidated Financial Statements of DecisionOne Holdings Corp. and
Subsidiaries, the audited Consolidated Financial Statements of DecisionOne
Corporation and Subsidiaries, and the respective Notes thereto, filed with these
registrants' Annual Report on Form 10-K for the year ended June 30, 1997, as
amended. Item 2 is presented with respect to both registrants noted above. (As
used within this Item 2, the term "Company" refers to DecisionOne Holdings Corp.
and its wholly-owned subsidiaries, including DecisionOne Corporation, and the
term "Holdings" refers to DecisionOne Holdings Corp.)
The information herein contains forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 that involve a
number of risks and uncertainties. A number of factors could cause actual
results, performance, achievements of the Company, or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward looking statements. These factors include,
but are not limited to, the competitive environment in the computer maintenance
and technology support services industry in general and in the Company's
specific market areas; changes in prevailing interest rates and the availability
of and terms of financing to fund the anticipated growth of the Company's
business; inflation; changes in costs of goods and services; economic conditions
in general and in the Company's specific market areas; demographic changes;
changes in or failure to comply with federal, state and/or local government
regulations; liability and other claims asserted against the Company; changes in
operating strategy or development plans; the ability to attract and retain
qualified personnel; the significant indebtedness of the Company; labor
disturbances; changes in the Company's acquisition and capital expenditure
plans; and other factors referenced in "Risk Factors" in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1997, as amended. In
addition, such forward looking statements are necessarily dependent upon
assumptions, estimates and dates that may be incorrect or imprecise and involve
known and unknown risks, uncertainties and other factors. Accordingly, any
forward looking statements included herein do not purport to be predictions of
future events or circumstances and may not be realized. Forward looking
statements can be identified by, among other things, the use of forward-looking
terminology such as "believes", "expects", "may", "will", "should", "seeks",
"pro forma", "anticipates", "intends" or the negative of any thereof, or other
variations thereon or comparable terminology, or by discussions of strategy or
intentions. Given these uncertainties, prospective investors are cautioned not
to place undue reliance on such forward looking statements. The Company
disclaims any obligations to update any such factors or to publicly announce the
results of any revisions to any of the forward looking statements contained
herein to reflect future events or developments.
15
<PAGE>
Business Overview
Founded in 1969, the Company began operations as a provider of key punch
machines under the tradename "Decision Data." During the 1980s, its operations
expanded to include the sale of midrange computer hardware and related
maintenance services. During fiscal 1993, the Company decided to focus on
providing computer maintenance and support services and sold its computer
hardware products business.
Since the beginning of fiscal 1993, the Company has established a major
presence in the computer maintenance and technology support services industry
through the acquisition and integration of assets and contracts of over 38
complementary businesses. The most significant of these were IDEA Servcom, Inc.
("Servcom"), certain assets and liabilities of which were acquired in August
1994 for cash consideration of $29.5 million, and Bell Atlantic Business Systems
Services, Inc. ("BABSS") which was acquired in October 1995 for cash
consideration of approximately $250.0 million. In addition, certain assets of
the U.S. computer service business of Memorex Telex Corporation and certain of
its affiliates (collectively, "Memorex Telex") were acquired in November 1996
for cash consideration of approximately $24.4 million, after certain purchase
price adjustments. These acquisitions were accounted for as purchase
transactions.
At the time of its acquisition by the Company, BABSS was among the largest
independent, multivendor service organizations servicing end-user organizations
and OEMs. Prior to the acquisition of BABSS, the Company had higher gross
margins than BABSS principally because approximately 30% of the Company's
revenues in fiscal 1995 were attributable to higher margin contracts involving
systems that can be serviced by a limited number of service providers
("proprietary systems"), whereas BABSS had limited revenues from proprietary
systems.
The Company's primary source of revenues is contracted services for
multivendor computer maintenance and technology support services, including
hardware support, end-user and software support, network support and other
support services. Approximately 85% of the Company's revenues are derived from
maintenance contracts covering a broad spectrum of computer hardware. These
contracts typically have a stipulated monthly fee over a fixed initial term
(typically one year) and continue thereafter unless canceled by either party.
Such contracts generally provide that customers may eliminate certain equipment
and services from the contract upon notice to the Company. In addition, the
Company enters into per-incident arrangements with its customers. Per-incident
contracts can cover a range of bundled services for computer maintenance or
support services or for a specific service, such as network support or equipment
relocation services. Another form of per-incident service revenues includes time
and material billings for services as needed, principally maintenance and
repair, provided by the Company.
Furthermore, the Company derives additional revenues from the repair of
hardware and components at the Company's logistics services and depot repair
facilities. Pricing of the Company's services is based on various factors
including equipment failure rates, cost of
16
<PAGE>
repairable parts and labor expenses. The Company customizes its contracts to the
individual customer based generally on the nature of the customer's
requirements, the term of the contract and the services that are provided.
The Company provides computer maintenance and technology support services across
a wide range of computing environments, including larger mainframe-based
platforms, midrange systems and client/server platforms. Reflecting a general
industry trend toward more flexible, less-centralized computing environments,
the Company's customer service base includes an increasing number of
decentralized structures and non-mainframe data centers. The Company continually
evaluates its service offerings, labor and parts requirements in response to
these industry trends.
The Company experiences reductions in revenue when customers replace equipment
being serviced with new equipment covered under a manufacturer's warranty,
discontinue the use of equipment being serviced due to obsolescence, choose to
use a competitor's services or move technical support services in-house. The
Company must more than offset this revenue "reduction" to grow its revenues and
seeks revenue growth from two principal sources: internally generated sales from
its direct and indirect sales force and the acquisition of contracts and assets
of other service providers. While the Company historically has typically been
able to offset the erosion of contract-based revenue and maintain revenue growth
through acquisitions and new contracts, notwithstanding the reduction in
contract-based revenue, there can be no assurance it will continue to do so in
the future, and any failure to consummate acquisitions, enter into new contracts
or add additional services and equipment to existing contracts could have a
material adverse effect on the Company's profitability.
Cost of revenues is comprised principally of personnel-related costs
(including fringe benefits), consumable parts cost recognition, amortization and
repair costs for repairable parts, and facilities costs and related expenses.
The acquisition of contracts and assets has generally provided the Company
with an opportunity to realize economies of scale because the Company generally
does not increase its costs related to facilities, personnel and consumable and
repairable parts in the same proportion as increases in acquired revenues.
Merger and Recapitalization
On August 7, 1997, the Company consummated a merger with Quaker Holding Co.
("Quaker"), an affiliate of DLJ Merchant Banking Partners II, L.P. (the
"Merger"). The Merger, which has been recorded as a recapitalization as of the
consummation date for accounting purposes, occurred pursuant to an Agreement and
Plan of Merger between the Company and Quaker dated May 4, 1997, as amended (the
"Merger Agreement"). The respective unaudited Consolidated Financial Statements
of DecisionOne Holdings Corp. and DecisionOne Corporation and their respective
subsidiaries as of and for the six months ended December 31, 1997, included
herein, reflect transactions related to the consummation of the Merger.
17
<PAGE>
In accordance with the terms of the Merger Agreement, which was approved by the
Company's shareholders on August 7, 1997, Quaker merged with and into the
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 these shares. Holders of approximately 5.3% of shares of Holdings
common stock outstanding immediately prior to the Merger retained such shares in
the merged Company, as determined based upon shareholder elections and stock
proration factors specified in the Merger Agreement. The aggregate value of the
Merger transaction was approximately $940 million, including refinancing of
DecisionOne Corporation's revolving credit facility.
The Company incurred various expenses, aggregating $69.0 million on a
pretax basis, in connection with consummating the Merger transaction. These
costs consisted primarily of compensation costs, professional and advisory fees
and other expenses. This one-time charge is reflected in the accompanying
unaudited consolidated statements of operations of the Company and of
DecisionOne Corporation for the six months ended December 31, 1997. In addition
to these expenses, the Company also incurred $22.3 million of capitalized debt
issuance costs associated with financing incurred in connection with the Merger
(the "Merger Financing"). These costs are amortized to expense over the terms of
the related debt instruments (see "Liquidity and Capital Resources").
Results of Operations
The following discussion of consolidated results of operations is presented
with respect to the Company and with respect to DecisionOne Corporation for the
three and six month periods ended December 31, 1997 and December 31, 1996. These
results of operations include the acquisition of Memorex Telex from November 15,
1996.
The following tables set forth, for the three and six month periods ended
December 31, 1997 and 1996, respectively, certain consolidated operating data of
the Company and of DecisionOne Corporation:
<TABLE>
<CAPTION>
DecisionOne Holdings Corp. DecisionOne Corporation
Three Months Ended Three Months Ended
December 31, December 31,
-------------------------- -----------------------
1997 1996 1997 1996
-------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues: $200,075 $191,253 $200,075 $191,253
Gross Profit 46,769 47,642 46,769 47,642
Operating Income excluding Merger expenses 7,843 12,288 7,843 12,288
Operating Income 7,843 12,288 7,843 12,288
Net Income (loss) $(10,718) $ 4,954 $ (6,625) $ 4,954
======== ======== ======== ========
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Other Data:
EBITDA(1) $ 40,128 $ 40,477 $ 40,128 $ 40,477
Less: Amortization of repairable parts (20,364) (15,091) (20,364) (15,091)
-------- -------- -------- --------
Adjusted EBITDA(1) 19,764 25,386 19,764 25,386
Net cash provided by operating activities 21,746 14,264 22,499 14,264
Net cash used in investing activities (29,400) (50,104) (29,400) (50,104)
Net cash provided by financing activities 5,438 35,121 7,662 35,121
</TABLE>
<TABLE>
<CAPTION>
DecisionOne Holdings Corp. DecisionOne Corporation
Six Months Ended Six Months Ended
December 31, December 31,
-------------------------- -----------------------
1997 1996 1997 1996
-------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Statements of Operations Data:
Revenues: $402,339 $367,679 $402,339 $367,679
Gross Profit: 91,588 89,063 91,588 89,063
Operating Income excluding Merger expenses 19,219 24,961 19,219 24,961
Operating Income (loss) (49,827) 24,961 (49,827) 24,961
Net Income (loss) $(68,345) $ 10,409 $(63,742) $ 10,409
======== ======== ======== ========
Other Data:
EBITDA(1) $ 81,137 $ 75,261 $ 81,137 $ 75,261
Less: Amortization of repairable parts (38,789) (29,286) (38,789) (29,286)
-------- -------- -------- --------
Adjusted EBITDA(1) 42,348 45,975 42,348 45,975
Net cash provided (used) by operating activities (31,655) 20.987 (41,411) 20,987
Net cash used in investing activities (53,064) (70,760) (53,064) (70,760)
Net cash provided by financing activities 82,437 49,861 91,010 49,861
</TABLE>
- ----------
(1) "EBITDA" represents income (loss) from continuing operations before interest
expense, interest income, income taxes, depreciation, amortization of
intangibles, amortization of repairable parts, amortization of discounts and
capitalized expenditures related to indebtedness, non-recurring charges for
employee severance costs and unutilized leases (approximately $4.3 million for
the six month period ending December 31, 1996), Merger expenses and certain
consulting charges related to the Company's ongoing service delivery
re-engineering program (approximately $1.5 million and $2.2 million for the
three and six month periods ended December 31, 1997, respectively.) "Adjusted
EBITDA" represents EBITDA reduced by the amortization of repairable parts.
Adjusted EBITDA is presented because it is relevant to certain covenants
contained in debt agreements entered into by the Company in connection with the
Merger, and because the Company believes that Adjusted EBITDA is a more
consistent indicator of the Company's ability to meet its debt service, capital
expenditure and working capital requirements than EBITDA.
Overview
The Company reported gross profit of $46.8 million and $47.6 million for the
three months ended December 31, 1997 and 1996, respectively. Excluding pre-tax
charges for non-recurring employee severance and unutilized lease costs of
approximately $4.3 million incurred in connection with an acquisition during the
three months ended December 31, 1996,
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<PAGE>
income (loss) from continuing operations before income taxes was ($10.6) million
and $12.8 million for the three months ended December 31, 1997 and 1996,
respectively. Adjusted EBITDA was $19.8 million and $25.4 million for the three
months ended December 31, 1997 and 1996, respectively.
Gross profit for the six month periods ended December 31, 1997 and 1996 was
$91.6 million and $89.1 million, respectively. Excluding pre-tax charges of
approximately $4.3 million for employee severance and unutilized lease costs in
the six months ended December 31, 1996, and excluding approximately $69.0
million of non-recurring Merger expenses in the six months ended December 31,
1997, income (loss) from continuing operations before income taxes was ($10.9)
million and $22.2 million for the six months ended December 31, 1997 and 1996,
respectively. Adjusted EBITDA was $42.3 million and $46.0 million for the six
months ended December 31, 1997 and 1996, respectively. For the reasons described
below, the Company expects Adjusted EBITDA in the second half of fiscal 1998 to
be consistent with levels achieved in the first half of 1998.
Three and Six Month Periods Ended December 31, 1997 Compared to Three and
Six Month Periods Ended December 31, 1996
Revenues: Revenues increased by $8.8 million, or 4.6%, to $200.1 million for the
three months ended December 31, 1997 from $191.3 million for the three months
ended December 31, 1996. Revenues increased by $34.6 million, or 9.4%, to $402.3
million for the six months ended December 31, 1997 from $367.7 million for the
six months ended December 31, 1996. These increases are attributable primarily
to the inclusion of revenues for service contracts acquired from Memorex Telex
on November 15, 1996 for an additional 1.5 months and 4.5 months for the three
and six months ended December 31, 1997, respectively. Excluding these Memorex
Telex-related increases, revenues declined in both comparable periods. Revenue
reductions resulted primarily from lower per-incident and other non-contract
revenues, which are subject to periodic fluctuation depending on customer demand
for such services. Reductions in contract-based revenues, primarily due to lower
sales of new contracts, also contributed to the comparable period declines.
While the Company has taken actions which it expects will improve sales growth
from current levels, revenues are expected to be lower relative to comparable
fiscal 1997 periods.
Gross Profit: Gross profit decreased by $0.8 million, or 1.7%, from $47.6
million for the three months ended December 31, 1996 to $46.8 million for the
three months ended December 31, 1997. This decrease is principally attributable
to the aforementioned decline in per-incident and other revenues during the
quarter ended December 31, 1997 without a proportionate reduction in related
cost of revenues during this period. While the Company can somewhat reduce its
cost structure in response to declines in these revenues, these reductions
typically trail the revenue declines and are generally not proportionate due to
the fixed nature of much of the Company's cost structure. This decrease was
substantially offset by the increase in gross profit for the quarter ended
December 31, 1997 versus the quarter ended December 31, 1996 attributable to the
inclusion of gross profit from service contracts of Memorex Telex for an
additional 1.5 months in the three month period ended December 31, 1997.
20
<PAGE>
Gross profit increased to $91.6 million for the six months ended December
31, 1997 from $89.1 million for the six months ended December 31, 1996, an
increase of $2.5 million, or 2.8%. This increase is primarily attributable to
the inclusion of gross profit from Memorex Telex service contracts for an
additional 4.5 months in the six months ended December 31, 1997. Excluding this
increase, gross profits declined for the six month period ended December 31,
1997 compared to the six month period ended December 31, 1996 as a result of the
aforementioned revenue declines without a proportionate decrease in costs.
As a percentage of revenues, gross profit decreased from 24.9% for three months
ended December 31, 1996 to 23.4% for the three months ended December 31, 1997.
Gross profit as a percentage of revenues similarly declined from 24.2% for the
six months ended December 31, 1996 to 22.8% for the six months ended December
31, 1997. These decreases are attributable to the factors previously noted for
the three and six month periods ended December 31, 1997. The Company has
initiated re-engineering initiatives to improve the service delivery process,
reduce associated costs and improve gross profit margins. The timing and impact
of these initiatives is difficult to predict and gross profit margins are
expected to be lower relative to comparable fiscal 1997 periods.
Selling, General and Administrative Expenses: Selling, general and
administrative (SG&A) expenses increased by $2.5 million, or 8.4%, to $32.3
million for the three months ended December 31, 1997 from $29.8 million for the
three months ended December 31, 1996. Included in SG&A expenses for the quarter
ended December 31, 1996 were non-recurring employee severance and unutilized
lease costs of approximately $4.3 million. Included in SG&A expenses for the
quarter ended December 31, 1997 were incremental consulting fees incurred in
connection with the Company's re-engineering efforts of approximately $1.5
million (see "Liquidity and Capital Resources" for additional information with
respect to these expenditures). Excluding these costs, SG&A expenses increased
by $5.3 million, or 20.8%, from $25.5 million for the three months ended
December 31, 1996 to $30.8 million for the three months ended December 31, 1997.
This increase is primarily attributable to the full-quarter effect of the
acquisition of Memorex Telex service contracts and to the development of new
information systems for the Company's central dispatch and service contract
administration processes, in the three months ended December 31, 1997.
SG&A expenses increased by $5.6 million, or 10.4%, to $59.2 million for the six
months ended December 31, 1997 from $53.6 million for the six months ended
December 31, 1996. Included in SG&A expenses for the six months ended December
31, 1996 were non-recurring employee severance and unutilized lease costs of
approximately $4.3 million. Included in SG&A expenses for the six months ended
December 31, 1997 were incremental consulting fees incurred in connection with
the Company's re-engineering efforts of approximately $2.2 million. Excluding
these costs, SG&A expenses increased by $7.7 million, or 15.6%, from $49.3
million for the six months ended December 31, 1996 to $57.0 million for the six
months ended December 31, 1997. This increase is primarily attributable to the
six month effect of the acquisition of Memorex Telex service contracts and to
the development of new information systems for the Company's central dispatch
and service contract administration processes, in the six month period ended
December 31, 1997.
21
<PAGE>
Merger Expenses: In connection with the Merger, which was consummated on
August 7, 1997, the Company incurred a one-time pre-tax charge of $69.0 million,
comprised of expenses directly related to the Merger transaction. These
non-recurring expenses are reflected in the Company's Statement of Operations
for the six months ended December 31, 1997. See "Merger and Recapitalization"
for additional information with respect to these Merger expenses.
Amortization of Intangibles: Amortization of intangible assets increased by
$1.0 million, or 17.9%, from $5.6 million for the three months ended December
31, 1996 to $6.6 million for the three months ended December 31, 1997.
Amortization of intangible assets increased by $2.6 million, or 24.8%, from
$10.5 million for the six month period ended December 31, 1996 to $13.1 million
for the six month period ended December 31, 1997. These increases were
attributable principally to the amortization of intangibles resulting from the
acquisition of the service contracts of several complementary businesses,
principally the Memorex Telex acquisition in November, 1996.
Interest Expense: The Company's interest expense, net of interest income,
increased to $18.4 million for the three months ended December 31, 1997 from
$3.7 million for the three months ended December 31, 1996, an incease of $14.7
million, or 397.3%. Net interest expense increased by $23.2 million, or 331.4%,
from $7.0 million for the six months ended December 31, 1996 to $30.2 million
for the six months ended December 31, 1997. As more fully described in Note 3 to
the Company's unaudited Condensed Consolidated Financial Statements for the six
months ended December 31, 1997, this increase is due to the Company's
significantly-increased average borrowings as a result of the Merger, which was
consummated on August 7, 1997. These increased average borrowings of
approximately $733.8 million and $650.0 million for the three and six month
periods ended December 31, 1997, respectively, as compared to approximately
$223.5 million and $216.0 for the three and six month periods ended December 31,
1996, respectively, coupled with higher average debt interest rates (9.0% and
6.4% for the respective periods), resulted in the significant increase in net
interest expense during the three and six months ended December 31, 1997.
Consolidated interest expense, net of interest income, for DecisionOne
Corporation increased to $13.9 million for the three months ended December 31,
1997 from $3.7 million for the three months ended December 31, 1996, an increase
of 275.7%. Consolidated interest expense, net of interest income, for
DecisionOne Corporation increased to $23.8 million for the six months ended
December 31, 1997 from $7.0 million for the three months ended December 31,
1996, an increase of 240.0%. This increase was similarly attributable to
significantly-increased average borrowings and to higher interest rates as a
result of the Merger, as described above. Average borrowings for DecisionOne
Corporation, on a consolidated basis, were $646.9 million and $578.4 million for
the three and six month periods ended December 31, 1997, respectively, as
compared to $223.5 million and $216.0 million for the three and six month
periods ended December 31, 1996.
The increases in consolidated net interest expense for DecisionOne
Corporation during the three and six month periods ended December 31, 1997 were
lower than the aforementioned increases for the Company, primarily due to
interest incurred with respect to approximately
22
<PAGE>
$85.0 million of 11-1/2% Senior Discount Debentures issued by Holdings in
connection with the Merger (see "Liquidity and Capital Resources").
Income Taxes: The Company expects that the Merger will result in
significant additional tax loss carryforwards arising in fiscal 1998, due
principally to $69.0 million of non-recurring expenses incurred in consummating
the merger. Net anticipated tax benefits and corresponding net deferred tax
assets of approximately $11.6 million ($9.9 million for DecisionOne Corporation,
on a consolidated basis), primarily attributable to the merger, have been fully
reflected in the six month period ended December 31, 1997. The anticipated net
deferred tax assets have been reduced significantly, for financial reporting
purposes, due primarily to management's projections of future taxable income and
the length of the period during which the anticipated tax benefits are expected
to be realized.
The Company expects that its tax provision (benefit) in future periods will
reflect effective tax rates which vary significantly from enacted statutory tax
rates and from the Company's effective tax rate of 41.4% for fiscal 1997,
principally as a result of additional unrecognized tax benefits on newly-arising
net deferred tax assets. Future effective tax rates may also be subject to
volatility as a result of valuation allowance changes which arise from
differences between management's projections of future taxable income,
newly-arising net deferred tax assets and reversals of net deferred tax assets
and corresponding actual results.
As of June 30, 1997, the Company had tax loss carryforwards and carrybacks
of approximately $12.9 million and $8.7 million for Federal and state income tax
purposes, respectively, which are scheduled to expire between 1998 and 2008. The
Company also had alternative minimum tax credits of approximately $1.5 million
as of June 30, 1997, with no applicable expiration period. These carryforwards,
carrybacks and credits may be utilized, as applicable, to reduce future income
taxes. The Company's initial public offering in April, 1996 resulted in an
"ownership change" pursuant to Section 382 of the Code, which in turn resulted
in the usage, for U.S. federal income tax purposes, of these carryforwards and
credits during any future period being limited to approximately $20 million per
annum.
In addition, the Company's Merger in August, 1997 represents another
"ownership change" under Section 382 of the Code, and the Company, therefore,
estimates that, for U.S. federal income tax purposes, the limitation on its use
of the pre-existing carryforwards as well as a limited amount of certain
carryforwards arising during fiscal 1998 will be reduced to approximately $9.0
million per annum for any post-Merger period. The Company anticipates that
expenses incurred in connection with the Merger during the six months ended
December 31, 1997, in addition to anticipated losses from continuing operations
during fiscal 1998 (excluding Merger expenses) will result in a tax loss
carryback and additional tax loss carryforwards arising in fiscal 1998. The
Company expects that a significant portion of the tax loss carryforward arising
in fiscal 1998 will not be subject to future limitation pursuant to Section 382.
23
<PAGE>
Liquidity and Capital Resources
Financing and Leverage
Current (Post-Merger): The Company's principal sources of liquidity are
cash flow from operations and borrowings under its new $105 million revolving
credit facility (the "New Credit Facility"), which was entered into in
connection with the Merger. The Company's principal uses of cash are debt
service requirements, capital expenditures, purchases of repairable parts,
acquisitions, and working capital. The Company expects that ongoing requirements
for debt service, capital expenditures, repairable parts and working capital
will be funded from operating cash flow and borrowing under the New Credit
Facility. To finance future acquisitions, the Company may require additional
funding which may be provided in the form of additional debt, equity financing
or a combination thereof.
The Company incurred substantial indebtedness in connection with the
Merger. As of December 31, 1997, the Company had outstanding approximately
$739.2 million of long-term indebtedness, as compared to approximately $237.5
million as of June 30, 1997. (See Note 3 to the Company's unaudited Condensed
Consolidated Financial Statements for the six months ended December 31, 1997.)
The Company's significant debt service obligations could, under certain
circumstances, have material consequences to security holders of the Company.
See "Risk Factors", included in the Company's Annual Report on Form 10-K for the
year ended June 30, 1997, as amended.
In connection with the Merger, Holdings raised $85 million of 11-1/2%
Senior Discount Debentures due 2008 (the "11-1/2% Notes"), and DecisionOne
Corporation issued $150 million of 9-3/4% Senior Subordinated Notes due 2007
(the "9-3/4% Notes"). DecisionOne Corporation also entered into the New Credit
Facility, which provides for term loans of $470 million and revolving loans of
up to $105 million. The proceeds of the 11-1/2% Notes (which were issued with
attached warrants), the 9-3/4% Notes, the initial borrowings under the New
Credit Facility and the purchase of approximately $225 million of Holdings
common stock by Quaker have been used to finance the payments of cash to
cash-electing shareholders, to pay the holders of stock options and stock
warrants canceled or converted, as applicable, in connection with the Merger, to
repay DecisionOne Corporation's existing revolving credit facility and to pay
expenses incurred in connection with the Merger. (See Note 3 to the Company's
unaudited Condensed Consolidated Financial Statements for the six months ended
December 31, 1997 for additional information).
The New Credit Facility contains various terms and covenants which, among
other things, place certain restrictions on the Company's ability to pay
dividends and incur additional indebtedness, and which require the Company to
meet certain minimum financial performance measurements. In January, 1998, the
Company sought and obtained an amendment to the New Credit Facility, providing
approval from the primary lender to exclude certain consulting charges related
to the Company's ongoing service delivery re-engineering program from the
calculation of certain financial performance measurements. The Company
24
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is in compliance with its covenants under the amended New Credit Facility as of
December 31, 1997. The Company has also notified the New Credit Facility lenders
that it will seek additional amendments to the New Credit Facility to reduce
financial performance covenants, to be effective on or before March 31, 1998.
The Company currently expects to spend approximately $12 million in
certain consulting charges related to the Company's ongoing service
delivery re-engineering program in fiscal 1998. The initiatives to be funded
include improvements to the Company's dispatch system and field engineer data
collection and technical support tools which, combined with related process
re-engineering strategies, are designed to increase productivity. There can be
no assurance that these amounts will be so expended by the Company, nor when
these amounts will be so expended. As noted in "Results of Operations" above,
the Company incurred approximately $2.2 million of consulting fees in connection
with these re-engineering initiatives during the six months ended December 31,
1997 ($1.5 million during the three months ended December 31, 1997).
The Company anticipates that its operating cash flow, together with
borrowings under the New Credit Facility (including expected future covenant
amendments) will be sufficient to meet its anticipated future operating
expenses, capital expenditures and to service its debt requirements as they
become due.
Historical: Until its initial public offering in April 1996, the Company's
principal sources of capital had been borrowings from banks (primarily to
finance acquisitions), private placements of equity and debt securities with
principal stockholders and cash flow generated by operations. In April 1996, the
Company (i) completed an initial public offering, which raised approximately
$106 million and (ii) refinanced its bank debt, each of which is more fully
discussed below.
The Company has historically relied on banks as the primary source of funds
required for larger acquisitions, such as the August 1994 acquisition of certain
assets and liabilities of Servcom and the October 1995 acquisition of BABSS.
Since July 1993, the Company's smaller acquisitions have been funded primarily
through a combination of seller financing, cash and the assumption of
liabilities under acquired prepaid service contracts.
In April 1996, the Company completed an initial public offering (the
Offering), raising $106 million through the issuance of 6.3 million shares of
common stock. Subsequent to the Offering, the Company converted its
then-existing term loan as well as its $30 million revolving credit facility
into a $225 million variable rate, unsecured revolving credit facility (the
"Facility). During November 1996, in connection with the acquisition of certain
assets of the U.S. computer service business of Memorex Telex, the Company's
lender approved a $75 million increase to the Facility, raising the total loan
commitment to $300 million.
The commitments under the Facility were scheduled to terminate on April 26,
2001. The interest rate applicable to the Facility varied, at the Company's
option, based upon LIBOR (plus an applicable margin not to exceed 1%) or the
prime rate. As of June 30, 1997, the interest rate
25
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applicable to loans under the Facility was LIBOR plus .75%, or an effective rate
of approximately 6.5%, and available borrowings under the Facility were $65.7
million.
The borrower under the Facility was DecisionOne Corporation. The
obligations of DecisionOne Corporation thereunder were guaranteed by the Company
and certain subsidiaries, except for its Canadian subsidiary. In connection with
the Merger in August, 1997, all indebtedness outstanding under the Facility was
repaid.
Financial Condition:
Cash flow from operating activities, exclusive of non-recurring Merger
expenses, for the six months ended December 31, 1997 was approximately $37.3
million, as compared to $21.0 million for the six months ended December 31,
1996. These funds, together with borrowings under the New Credit Facility,
provided the required capital to fund repairable part purchases and capital
expenditures of approximately $46.8 million during the six months ended December
31, 1997, as well as the acquisition of the service contracts and certain assets
of complementary businesses for $6.3 million during this period.
The Company, or certain businesses as to which it is alleged that the
Company is a successor, have been identified as potentially responsible parties
in respect of four waste disposal sites that have been identified by the U.S.
Environmental Protection Agency as Superfund sites. In addition, the Company
received a notice several years ago that it may be a potentially responsible
party in respect of a fifth site, but has not received any other communication
in respect of that site. The Company has estimated that its share of the costs
of the cleanup of one of the sites will be approximately $500,000, which has
been provided for in liabilities related to the discontinued products division
in the Company's financial statements. Complete information as to the scope of
required cleanup at these sites is not yet available and, therefore,
management's evaluation may be affected as further information becomes
available. However, in light of information currently available to management,
including information regarding assessments of the sites to date and the nature
of involvement of the Company's predecessor at the sites, it is management's
opinion that the Company's potential additional liability, if any, for the cost
of cleanup of these sites will not be material to the consolidated financial
position, results of operations or liquidity of the Company.
26
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DecisionOne Holdings Corp. and Subsidiaries
DecisionOne Corporation and Subsidiaries
Part II - Other Information
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on December 9, 1997.
At the meeting, the stockholders of the Company (i) approved the DecisionOne
Holdings Corp. 1997 Management Incentive Plan, with 8,943,228 votes for
approval, 143,026 votes against and 41 votes withheld, and (ii) elected the
following persons to the Board of Directors of the Company:
Votes For Votes Withheld
--------- --------------
Kenneth Draeger 9,516,586 9,470
Peter T. Grauer 9,516,586 9,470
Thomas G. Greig 9,516,586 9,470
Lawrence M. v.D. Schloss 9,516,586 9,470
Kirk B. Wortman 9,516,586 9,470
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Number Description of Document
- ------ -----------------------
10.1 Lease for Bloomington, Minnesota call center
10.2 Amendment No. 2, dated as of January 12, 1998, to Credit Agreement
by and among DecisionOne Corporation, various financial
institutions, DLJ Capital Funding Inc. (as Syndication Agent),
NationsBank of Texas, N.A. (as Administrative Agent) and
BankBoston, N.A. (as Documentation Agent)
27 Financial data schedules
(b) Reports on Form 8-K
None.
27
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
DecisionOne Holdings Corp.
/s/ Thomas J. Fitzpatrick
-------------------------------------------
Thomas J. Fitzpatrick
Duly Authorized and Chief Financial Officer
Date: February 12, 1998
DecisionOne Corporation
/s/ Thomas J. Fitzpatrick
-------------------------------------------
Thomas J. Fitzpatrick
Duly Authorized and Chief Financial Officer
Date: February 12, 1998
28
