<PAGE> 1
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 are the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1997, as amended, and the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1997.
<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.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
This amendment to the 1997 Form 10-K amends and modifies the 1997 Form 10-K
to reflect the filing of Exhibits 10.3, 10.21 and 10.22.
<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
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 September 30, 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 Identification Number)
of incorporation or organization)
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 Identification Number)
of incorporation or organization)
50 East Swedesford Road, Frazer, Pennsylvania 19355
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code (610) 296-6000
Indicate by check mark whether registrants (1) have filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrants were
required to file such reports), and (2) have been subject of such filing
requirements for the past 90 days. Yes [ ] No [X]
As of October 22, 1997, 12,503,326 shares of DecisionOne Holdings Corp. common
stock were outstanding and one share of DecisionOne Corporation was
outstanding.
DecisionOne Corporation meets the conditions set forth in General Instruction
H(1) of form 10-Q and is therefore filing this form with the reduced disclosure
format.
<PAGE> 55
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
AND
DECISIONONE CORPORATION AND SUBSIDIARIES
FORM 10-Q NOVEMBER 14, 1997
CONTENTS
--------
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
of DecisionOne Holdings Corp:
Condensed Consolidated Balance Sheets -
September 30, 1997 and June 30, 1997
(unaudited) 2
Condensed Consolidated Statements of
Operations - Three Months Ended
September 30, 1997 and 1996 (unaudited) 3
Condensed Consolidated Statements of
Cash Flows - Three Months Ended
September 30, 1997 and 1996 (unaudited) 4
Notes to Condensed Consolidated Financial
Statements (unaudited) 5
Condensed Consolidated Financial Statements
of DecisionOne Corporation:
Condensed Consolidated Balance Sheets -
September 30, 1997 and June 30, 1997
(unaudited) 9
Condensed Consolidated Statements of
Operations - Three Months Ended September 30,
1997 and 1996 (unaudited) 10
Condensed Consolidated Statements of
Cash Flows - Three Months Ended September 30,
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 15
PART II. OTHER INFORMATION 26
<PAGE> 56
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
ASSETS 1997 1997
------------ ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 10,811 $ 10,877
Accounts receivable, net of allowances of $10,854 and $14,869 140,034 127,462
Consumable parts, net of allowances of $13,941 and $15,976 27,944 29,052
Other 17,547 9,778
--------- ---------
Total current assets 196,336 177,169
Repairable Parts, Net of Accumulated Amortization of $156,288 and $156,468 207,875 205,366
Intangibles, Net of Accumulated Amortization of $49,049 and $42,632 184,329 191,366
Property and Equipment, Net of Accumulated Depreciation
of $42,249 and $36,305 33,378 34,227
Other 40,563 14,977
--------- ---------
Total Assets $ 662,481 $ 623,105
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Current portion of long-term debt $ 9,987 $ 4,788
Accounts payable and accrued expenses 97,194 96,516
Deferred revenues 58,251 56,600
Other 8,774 11,513
--------- ---------
Total current liabilities 174,206 169,417
Revolving Credit Loan and Long-term Debt 717,843 232,721
Other Liabilities 5,077 6,079
Shareholders' Equity (Deficiency):
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 12,499,978 and 27,817,832 shares 125 278
Additional paid-in capital (133,422) 258,331
Accumulated deficit (100,059) (42,432)
Other (1,289) (1,289)
--------- ---------
Total Shareholders' Equity (Deficiency) (234,645) 214,888
--------- ---------
Total Liabilities and Shareholders' Equity (Deficiency) $ 662,481 $ 623,105
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 57
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1996
--------- ----------
<S> <C> <C>
Revenues $ 202,264 $ 176,426
Cost of Revenues 157,445 134,565
--------- ---------
Gross Profit 44,819 41,861
Operating Expenses:
Selling, general and administrative expenses 26,922 24,269
Merger expenses 69,046 --
Amortization of intangibles 6,521 4,919
--------- ---------
Total operating expenses 102,489 29,188
--------- ---------
Operating Income (Loss) (57,670) 12,673
Interest expense, Net of Interest Income 11,733 3,268
--------- ---------
Income (Loss) Before Income Taxes (69,403) 9,405
Provision (Benefit) for Income Taxes (11,776) 3,950
--------- ---------
Net Income (Loss) $ (57,627) $ 5,455
========= =========
Pro forma Information:
Pro forma Net Income $ 1,237
Pro forma Net Income Per Common Share $ 0.09
Pro forma Weighted Average Number of Common Shares
and Equivalent Shares Outstanding 14,200
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 58
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
--------- --------
<S> <C> <C>
Operating Activities:
Net income (loss) $ (57,627) $ 5,455
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Amortization of repairable parts 18,425 14,195
Amortization of intangibles 6,521 4,919
Depreciation 3,987 2,997
Changes in assets and liabilities, net of effects of business acquisitions (24,707) (20,843)
--------- --------
Net cash provided by (used in) operating activities (53,401) 6,723
Investing Activities:
Business acquistions -- (1,566)
Capital expenditures, net of retirements (3,138) (2,055)
Repairable spare parts purchases, net (20,526) (17,035)
--------- --------
Net cash used in investing activities (23,664) (20,656)
Financing Activities:
Proceeds from issuance of common stock 228,622 97
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 468,071 15,035
Net principal payments under capital leases (25) (394)
--------- --------
Net cash provided by financing activities 76,999 14,738
Effect of exchange rates on cash -- 2
--------- --------
Net change in cash and cash equivalents (66) 807
Cash and cash equivalents beginning of period 10,877 8,221
--------- --------
Cash and cash equivalents end of period $ 10,811 $ 9,028
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 59
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 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-month periods ended September 30, 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 to the June 30, 1997 balances in order
to conform with the September 30, 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, 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 net income (loss) per share, which will
approximate the Company's currently-reported pro forma net income per
common 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 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' pro forma net income (loss) per share information will be
required to be restated on a comparable basis.
Assuming that SFAS 128 had been implemented, supplemental pro forma basic
net income per share would have been $0.10 for the three month period ended
September 30, 1997. Under SFAS 128, supplemental pro forma diluted earnings per
share would not have differed from pro forma earnings per common share for the
period presented in the accompanying unaudited condensed consolidated
statements of operations.
5
<PAGE> 60
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 (the
"Merger Agreement") between the Company and Quaker dated May 4, 1997.
In accordance with the terms of the Merger Agreement, which was formally
approved by the Company's shareholders on August 7, 1997, Quaker merged with and
into the Company, and the holders of approximately 94.7% of shares of Company
common stock outstanding immediately prior to the merger received $23 in cash in
exchange for each of there 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 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, 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 also incurred
approximately $22.3 million of capitalized debt issuance costs associated with
the merger financing. The capitalized debt issuance 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 three month period ended September 30, 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.
6
<PAGE> 61
<TABLE>
<CAPTION>
(IN THOUSANDS)
PRO FORMA BALANCE SHEET INFORMATION: JUNE 30, 1997
-------------
<S> <C>
Total Assets ............................................. $ 652,085
Long Term Indebtedness (including current portion) ....... 724,500
Other Liabilities ........................................ 170,708
Shareholders (deficiency) ................................ (243,123)
</TABLE>
<TABLE>
<CAPTION>
IN THOUSANDS EXCEPT PER
SHARE AMOUNTS
THREE MONTHS ENDED
SEPTEMBER 30,
PRO FORMA INCOME STATEMENT INFORMATION: 1997
---------
<S> <C>
Revenues ........................................................... $ 202,264
Operating Income ................................................... 11,376
Loss from Continuing Operations before Income Tax Benefit .......... (5,467)
Net Income ......................................................... 1,237
Net income per Common Share ........................................ $ 0.09
Weighted Average Common and Common Equivalent Shares outstanding ... 14,200
</TABLE>
The pro forma net income for the three-month period ended September 30, 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 million
and (3) the net tax expense related to these adjustments of approximately $5.1
million, calculated at an effective rate of approximately 123%, including the
effects of valuation allowances against certain deferred tax assets (see Note
4).
Pro forma weighted average common and common equivalent shares outstanding
includes 12,499,978 common stock 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.
NOTE 4: 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
7
<PAGE> 62
expenses incurred in consummating the Merger (see Note 3). Net anticipated tax
benefits and corresponding net deferred tax assets of approximately $11.3
million attributable to the Merger have been fully reflected in the three-month
period ended September 30, 1997. For financial reporting purposes, the
anticipated net deferred tax assets have been limited due primarily to
the length of the period during which the anticipated tax benefits are expected
to be realized.
The Company expects that its tax provision in future periods will reflect
effective tax rates significantly greater than enacted statutory tax rates and
the effective tax rate of 41.4% for fiscal 1997. Quarterly effective tax rates
in excess of 100% are currently anticipated during fiscal 1998, principally as a
result of unrecognized tax benefits on newly-arising net deferred tax assets,
due primarily to the length of the period during which associated tax benefits
are expected to be realized. Future effective tax rates may be subject to
significant volatility as a result of 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> 63
DECISIONONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
ASSETS 1997 1997
------------ ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 6,651 $ 10,877
Accounts receivable, net of allowances of $10,854 and $14,869 139,534 127,462
Consumable parts, net of allowances of $13,941 and $15,976 27,944 29,052
Other 17,973 9,778
--------- ---------
Total current assets 192,102 177,169
Repairable Parts, Net of Accumulated Amortization of $156,288 and $156,468 207,875 205,366
Intangibles, Net of Accumulated Amortization of $49,049 and $42,632 184,329 191,366
Property and Equipment, Net of Accumulated Depreciation
of $42,249 and $36,305 33,378 34,227
Loan receivable from parent company 59,100 --
Other 46,908 14,977
--------- ---------
Total Assets $ 723,692 $ 623,105
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIENCY)
Current Liabilities:
Current portion of long-term debt $ 9,987 $ 4,788
Accounts payable and accrued expenses 93,673 96,516
Deferred revenues 58,251 56,600
Other 12,723 11,513
--------- ---------
Total current liabilities 174,634 169,417
Revolving Credit Loan and Long-term Debt 632,543 232,721
Other Liabilities 5,077 6,079
Shareholder's Equity (Deficiency):
Common stock, no par value; one share authorized, issued
and outstanding in 1997 and 1996 -- --
Additional paid-in capital 12,276 258,609
Accumulated deficit (99,549) (42,432)
Other (1,289) (1,289)
--------- ---------
Total Shareholder's Equity (Deficiency) (88,562) 214,888
--------- ---------
Total Liabilities and Shareholder's Equity (Deficiency) $ 723,692 $ 623,105
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
9
<PAGE> 64
DECISIONONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenues $ 202,264 $ 176,426
Cost of Revenues 157,445 134,565
--------- ---------
Gross Profit 44,819 41,861
Operating Expenses:
Selling, general and administrative expenses 26,922 24,269
Merger expenses 69,046 --
Amortization of intangibles 6,521 4,919
--------- ---------
Total operating expenses 102,489 29,188
--------- ---------
Operating Income (Loss) (57,670) 12,673
Interest expense, Net of Interest Income 9,909 3,268
--------- ---------
Income (Loss) Before Income Taxes (67,579) 9,405
Provision (Benefit) for Income Taxes (10,462) 3,950
--------- ---------
Net Income (Loss) $ (57,117) $ 5,455
========= =========
Pro forma Information:
Pro forma Net Loss $ (824)
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
10
<PAGE> 65
DECISIONONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
--------- --------
<S> <C> <C>
Operating Activities:
Net income (loss) $ (57,117) $ 5,455
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Amortization of repairable parts 18,425 14,195
Amortization of intangibles 6,521 4,919
Depreciation 3,987 2,997
Changes in assets and liabilities, net of effects of business acquisitions (35,726) (20,843)
--------- --------
Net cash provided by (used in) operating activities (63,910) 6,723
Investing Activities:
Business acquistions -- (1,566)
Capital expenditures, net of retirements (3,138) (2,055)
Repairable spare parts purchases, net (20,526) (17,035)
--------- --------
Net cash used in investing activities (23,664) (20,656)
Financing Activities:
Capital contributions 302 97
Payment of dividend to parent company (244,000) --
Loan made to parent company (59,100) --
Net proceeds from borrowings 385,962 15,035
Net proceeds (payments) under capital lease obligations 184 (394)
--------- --------
Net cash provided by financing activities 83,348 14,738
Effect of exchange rates on cash -- 2
--------- --------
Net change in cash and cash equivalents (4,226) 807
Cash and cash equivalents beginning of period 10,877 8,221
--------- --------
Cash and cash equivalents end of period $ 6,651 $ 9,028
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
11
<PAGE> 66
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE THREE-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997
(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 three month periods ended September 30, 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 to the June 30, 1997 balances in order
to conform with the September 30, 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 (the
"Merger Agreement") between the Company, Holdings and Quaker dated May 4, 1997,
as amended.
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.
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
12
<PAGE> 67
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 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 the 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,
aggregating $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. The capitalized debt issuance
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 three-month period ended September 30, 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.
<TABLE>
<CAPTION>
(IN THOUSANDS)
PRO FORMA BALANCE SHEET INFORMATION: JUNE 30, 1997
-------------
<S> <C>
Total Assets .............................................. $ 707,785
Long Term Indebtedness (including current portion) ........ 641,376
Other Liabilities ......................................... 170,708
Shareholders (deficiency) .................................... (104,299)
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
THREE MONTHS ENDED
SEPTEMBER 30,
PRO FORMA INCOME STATEMENT INFORMATION: 1997
---------
<S> <C>
Revenues .................................................. $ 202,264
Operating Income .......................................... 11,376
Loss from Continuing Operations before Income
Tax benefit .......................................... (2,124)
Net Loss .................................................. $ (824)
</TABLE>
The pro forma net loss for the three-month period ended September 30, 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)
13
<PAGE> 68
the elimination of the non-recurring merger expenses of approximately $69
million and (3) the net tax expense related to these adjustments of
approximately $9.2 million, at an effective rate of approximately 61%,
including the effect of valuation allowances against certain deferred tax
assets (see Note 3).
NOTE 3: 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 (see Note 3). Net
anticipated tax benefits and corresponding net deferred tax assets of
approximately $11.3 million attributable to the Merger have been fully
reflected in the three-month period ended September 30, 1997. For financial
reporting purposes, the anticipated net deferred tax assets have been limited
due primarily to the length of the period during which the anticipated tax
benefits are expected to be realized.
The Company expects that its tax provision in future periods will
reflect effective tax rates significantly greater than enacted statutory tax
rates and the effective tax rate of 41.4% for fiscal 1997. Quarterly effective
tax rates in excess of 50% are currently anticipated during fiscal 1998,
principally as a result of unrecognized tax benefits on newly-arising net
deferred tax assets, due primarily to the length of the period during which
associated tax benefits are expected to be realized. Future effective tax
rates may be subject to significant volatility as a result of 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> 69
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 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" or "anticipates," "intends" or the negative of any thereof, or other
variations thereon or comparable terminology, or by discussions of strategy or
intentions. Given these uncertainties, prospective investors are cautioned not
to place undue reliance on such forward looking
15
<PAGE> 70
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.
COMPANY HISTORY
Founded in 1969, the Company began operations as a provider of key
punch machines under the tradename "Decision Data." During the 1980s, its
operations expanded to include the sale of midrange computer hardware and
related maintenance services. During fiscal 1993, the Company decided to focus
on providing computer maintenance and support services and sold its computer
hardware products business.
Since the beginning of fiscal 1993, the Company established a major
presence in the computer maintenance and technology support services industry
through the acquisition and integration of assets and contracts of over 36
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 ("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
16
<PAGE> 71
revenues includes time and material billings for services as needed, principally
maintenance and repair, provided by the Company.
Furthermore, the Company derives additional revenues from the repair of
hardware and components at the Company's logistics services and depot repair
facilities. Pricing of the Company's services is based on various factors
including equipment failure rates, cost of repairable parts and labor expenses.
The Company customizes its contracts to the individual customer based generally
on the nature of the customer's requirements, the term of the contract and the
services that are provided.
The Company experiences reductions in revenue when customers replace
equipment being serviced with new equipment covered under a manufacturer's
warranty, discontinue the use of equipment being serviced due to obsolescence,
choose to use a competitor's services or move technical support services
in-house. The Company must more than offset this revenue "reduction" to grow its
revenues and seeks revenue growth from two principal sources: internally
generated sales from its direct and indirect sales force and the acquisition of
contracts and assets of other service providers. While the Company historically
has been able to offset the erosion of contract - based revenue and maintain
revenue growth through acquisitions and new contracts, notwithstanding the
reduction in contract based revenue, there can be no assurance it will continue
to do so in the future, and any failure to consummate acquisitions, enter into
new contracts or add additional services and equipment to existing contracts
could have a material adverse effect on the Company's profitability.
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 accompanying unaudited Consolidated
Financial Statements of DecisionOne Holdings Corp. and DecisionOne Corporation
and their respective subsidiaries as of and for the three months ended
September 30, 1997, included herein, reflect transactions related to the
consummation of the Merger.
In accordance with the terms of the Merger Agreement, which was
approved by the Company's shareholders on August 7, 1997, Quaker merged with and
into the Company, and
17
<PAGE> 72
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 three months ended September 30, 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"). The capitalized debt
issuance costs are amortized to expense over the terms of the related debt
instruments (see "Liquidity and Capital Resources").
As a result of the foregoing, including increased debt service
requirements resulting from the Merger Financing, the Company has recorded a net
loss of approximately $57.6 million for the three months ended September 30,
1997. Because this loss results primarily from the one - time charge incurred in
connection with the merger, and this charge has been funded entirely through the
proceeds of the Merger Financing, the Company does not expect this loss to
materially impact its liquidity, ongoing operations or market position. For a
discussion of the consequences of the incurrence of indebtedness in connection
with the Merger Financing, see "Liquidity and Capital Resources."
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 fiscal quarters ended September 30, 1997 and September 30,
1996. These results of operations include the acquisition of Memorex Telex from
November 15, 1996.
The following table sets forth, for the three month periods ended
September 30, 1997 and 1996, respectively, certain consolidated operating data
of the Company and of DecisionOne Corporation:
18
<PAGE> 73
<TABLE>
<CAPTION>
DECISIONONE DECISIONONE
HOLDINGS CORP. CORPORATION
------------------------ ------------------------
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 202,264 $ 176,426 $ 202,264 $ 176,426
Gross Profit 44,819 41,861 44,819 41,861
Operating Income excluding
Merger expenses 11,376 12,673 11,376 12,673
Operating Income (Loss) (57,670) 12,673 (57,670) 12,673
Net Income (Loss) $ (57,627) $ 5,455 $ (57,117) $ 5,455
========= ========= ========= =========
OTHER DATA:
EBITDA (1) $ 40,309 $ 34,784 $ 40,309 $ 34,784
Less: Amortization of
repairable parts (18,425) (14,195) (18,425) (14,195)
--------- --------- --------- ---------
Adjusted EBITDA (1) 21,884 20,589 21,884 20,589
Net cash provided (used) by
operating activities (53,401) 6,723 (63,910) 6,723
Net cash used in investing
activities (23,664) (20,656) (23,664) (20,656)
Net cash provided by financing
activities 76,999 14,738 83,348 14,738
</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, and non-recurring charges for
Merger expenses. "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 $44.8 million and $41.9 million
for the three months ended September 30, 1997 and 1996, respectively. Excluding
pre-tax charges for Merger expenses during the three months ended September 30,
1997, operating income was $11.4 million and $12.7 million for the three
months ended September 30, 1997 and 1996, respectively. Adjusted EBITDA was
$21.9
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<PAGE> 74
million and $20.6 million for the three months ended September 30, 1997 and
1996, respectively.
First Quarter of Fiscal 1998 Compared to First Quarter of Fiscal 1997
Revenues: Revenues increased by $25.9 million, or 14.7%, to $202.3
million for the three months ended September 30, 1997 from $176.4 million for
the three months ended September 30, 1996. This increase is attributable
primarily to the acquisition of the service contracts of several complementary
businesses, principally those of Memorex Telex on November 15, 1996.
Revenues for the quarter ended September 30, 1997 reflected a decline
of $10.9 million in comparison to the previous quarter, due primarily to a
decline in per-incident and other revenues. Per-incident and other revenues are
subject to periodic fluctuation, depending upon customer demand for the types
and levels of such services.
Gross Profit: Gross profit increased by $2.9 million, or 7.0%, from
$41.9 million for the three months ended September 30, 1996 to $44.8 million for
the three months ended September 30, 1997. This increase is also due primarily
to the acquisition of the service contracts of several complementary businesses,
principally those of Memorex Telex.
Gross profit as a percentage of revenues decreased from 23.7% for the
three months ended September 30, 1996 to 22.2% for the three months ended
September 30, 1997. This reduction is principally attributable to the
aforementioned decline in per-incident and other revenues during the quarter
ended September 30, 1997 versus the previous quarter without a proportionate
reduction in related cost of revenues. While the Company generally can reduce
its cost structure in response to declines in these revenues, these cost
structure reductions typically trail the revenue declines.
Selling, General and Administrative Expenses: Selling, general
and administrative expenses increased by $2.6 million, or 10.7%, to $26.9
million for the three months ended September 30, 1997 from $24.3 million for the
three months ended September 30, 1996. This increase is primarily attributable
to the acquisition of the service contracts of several complementary businesses,
principally Memorex Telex, as noted above. Also, during the quarter ended
September 30, 1997, the Company incurred approximately $1.0 million of
incremental expenditures for information systems and related re-engineering
initiatives. See "Liquidity and Capital Resources" for additional information
with respect to these expenditures.
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. See
"Merger and Recapitalization" for additional information with respect to these
Merger expenses.
Amortization of Intangibles: Amortization of intangible assets
increased by $1.6 million, or 32.7%, from $4.9 million for the three months
ended September 30, 1996 to $6.5 million for the three months ended September
30, 1997. This increase was attributable principally to the amortization of
intangibles resulting from the Memorex Telex acquisition in November, 1996.
20
<PAGE> 75
Interest Expense: The Company's interest expense, net of interest
income, increased to $11.7 million for the three months ended September 30, 1997
from $3.3 million for the three months ended September 30, 1996, an increase of
254.5%. As more fully described in Note 3 to the Company's unaudited Condensed
Consolidated Financial Statements for the three months ended September 30, 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 $527.8 million for the three
months ended September 30, 1997, as compared to approximately $198.5 million for
the three months ended September 30, 1996, 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 first quarter of fiscal
1998.
Consolidated interest expense, net of interest income, for DecisionOne
Corporation increased to $9.9 million for the three months ended September 30,
1997 from $3.3 million for the three months ended September 30, 1996, an
increase of 200.0%. This increase was similarly attributable to
significantly-increased average borrowings as a result of the Merger, as
described above. The increase in consolidated net interest expense for
DecisionOne Corporation during the three months ended September 30, 1997 was
lower than the aforementioned increase for the Company, primarily due to
interest incurred with respect to approximately $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 (see Note 3 to the Company's accompanying unaudited
condensed consolidated financial statements). Net anticipated tax benefits and
corresponding net deferred tax assets of approximately $11.3 million
attributable to the Merger have been fully reflected in the three-month period
ended September 30, 1997. For financial reporting purposes, the anticipated
net deferred tax assets have been limited due primarily to the length of the
period during which the anticipated tax benefits are expected to be realized.
The Company expects that its tax provision in future periods will
reflect effective tax rates significantly greater than enacted statutory tax
rates and the effective tax rate of 41.4% for fiscal 1997. Quarterly effective
tax rates in excess of 100% (in excess of 50% for DecisionOne Corporation and
Subsidiaries) are currently anticipated during fiscal 1998, principally as a
result of unrecognized tax benefits on newly-arising net deferred tax assets,
due primarily to the length of the period during which associated tax benefits
are expected to be realized. Future effective tax rates may be subject to
significant volatility as a result of 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.
21
<PAGE> 76
LIMITATION ON USE OF NET OPERATING LOSS CARRYFORWARDS AND OTHER TAX CREDITS
As of June 30, 1997, the Company had tax loss carryforwards 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 minimum tax credits of approximately $1.5 million as of June
30, 1997, with no applicable expiration period. These carryforwards and credits
may be utilized, as applicable, to reduce future taxable income. 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 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 three months ended September 30, 1997,
partially offset by anticipated taxable income from continuing operations during
fiscal 1998 (excluding Merger expenses) will result in 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.
For financial reporting purposes, the anticipated tax benefit
associated with these carryforwards is limited due primarily to the length of
the period during which the anticipated tax benefit is expected to be realized.
See Note 4 to the Company's unaudited Condensed Consolidated Financial
Statements for the three months ended September 30, 1997.
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, 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 revolving credit facility. To finance
future acquisitions, the Company may require additional funding which may be
provided in the form of additional debt, equity financing or a combination
thereof.
The Company incurred substantial indebtedness in connection with the
Merger. As of September 30, 1997, the Company had outstanding approximately
$727.8 million of long-term indebtedness, as compared to approximately $237.5
million as of June 30, 1997. (See
22
<PAGE> 77
Note 2 to the Company's unaudited Condensed Consolidated Financial Statements
for the three months ended September 30, 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 a new syndicated
credit facility providing for term loans of $470 million and revolving loans of
up to $105 million. The proceeds of the 11-1/2% Notes (which were issued with
attached warrants), 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 three months ended
September 30, 1997 for additional information.
The Company has budgeted approximately $10 million in incremental
expenditures for information systems and related re-engineering initiatives to
be incurred in fiscal 1998. The initiatives to be funded include the following:
(i) enhancements to the Company's service entitlement process which will further
ensure that customers are billed for all work performed; (ii) improvements to
the Company's dispatch system and field engineer data collection and technical
support tools which are designed to increase productivity; (iii) enhancements to
the Company's help desk and central dispatch systems to provide an integrated
support solution to the customer base, and (iv) improvements to the Company's
field inventory tracking system which will facilitate increased transfer of
inventory among field locations and reduce purchases of repairable parts. There
can be no assurance that these amounts will be so expended by the Company, nor
when these amounts will be so expended. The Company incurred approximately
$1.3 million of these incremental expenditures during the three months
ended September 30, 1997.
The Company anticipates that its operating cash flow, together with
borrowings under the new credit facility, will be sufficient to meet its
anticipated future operating expenses, capital expenditures and to service its
debt requirements as they become due. However, the Company's ability to make
scheduled payments of principal of, to pay interest on or to refinance its
indebtedness and to satisfy its other debt obligations will depend upon its
future operating performance, which will be affected by general economic,
financial, competitive, legislative, regulatory, business and other factors
beyond its control.
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),
23
<PAGE> 78
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 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 three months ended September 30, 1997 was approximately $15.6
million, as compared to $6.7 million for the three months ended September 30,
1996. These funds, together with borrowings under the Company's new credit
facility, provided the required capital to fund repairable part purchases and
capital expenditures of approximately $23.7 million during the three months
ended September 30, 1997.
The Company maintains a significant inventory of consumable and
repairable parts. Consumable parts are expensed as they are used in the
operations of the business. Repairable parts are recorded at cost at the time of
their acquisition and are generally amortized over three to five years. The
Company maintains a high level of parts due to the wide range of products
serviced, ranging from mainframe to personal computers. At September 30, 1997,
24
<PAGE> 79
the Company had no material commitments for purchases of spare parts or for
other capital expenditures.
The Company provides for obsolescence when accounting for consumable
parts and reviews obsolescence as it applies to its repairable parts. The
Company believes it has provided adequate reserves for obsolescence for
consumable parts. The Company believes that accumulated amortization on
repairable parts renders the need for an obsolescence reserve with respect to
repairable parts unnecessary.
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.
25
<PAGE> 80
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
DECISIONONE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
On August 7, 1997 a special meeting of shareholders
of DecisionOne Holdings Corp. was held to
consider and vote on a proposal to approve and adopt
an Agreement and Plan of Merger, dated as of May 4,
1997, as amended, among DecisionOne Holdings Corp.
and Subsidiaries and Quaker Holding Co., an
affiliate of DLJ Merchant Banking Partners II, L.P.
21,204,312 shares were voted in favor of approving
the Agreement, 561,304 shares voted against approval
and 1,700 shares abstained.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(A) EXHIBITS:
Number Description of Documents
10.1 Employment Agreement,
dated as of August 7, 1997
between DecisionOne
Holdings Corp.,
DecisionOne Corporation
and Kenneth Draeger
10.2 Employment Agreement,
dated as of August 7, 1997
among DecisionOne Holdings
Corp., DecisionOne
Corporation and Stephen J.
Felice
27 Financial data schedules
(B) REPORTS ON FORM 8-K:
None.
26
<PAGE> 81
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: November 14, 1997
DecisionOne Corporation
/s/ Thomas J. Fitzpatrick
-------------------------------------
Thomas J. Fitzpatrick
Duly Authorized and Chief Financial Officer
DATE: November 14, 1997
<PAGE> 82
EXECUTION COPY
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of August 7, 1997 among
DecisionOne Holdings Corp., a Delaware corporation ("HOLDINGS"), DecisionOne
Corporation, a Delaware corporation (the "COMPANY"), and Stephen J. Felice
("EXECUTIVE").
WHEREAS, each of Holdings and the Company desires to employ
Executive as President and Chief Operating Officer;
WHEREAS, Holdings, the Company and Executive desire to enter
into an agreement (the "AGREEMENT") embodying the terms of such employment;
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein and for other good and valuable consideration, the
parties agree as follows:
1. Employment Term. Executive's employment by the Company and
Holdings shall be for a period which shall commence on the date hereof and
shall terminate on the second anniversary of the date hereof (the "INITIAL
TERM"); provided that the employment term shall be automatically extended upon
the terms hereof for successive one year periods unless not later than six
months prior to the date of automatic extension, Holdings, the Company or
Executive shall have given notice to the contrary. The period commencing as
of the date hereof and ending on the scheduled expiration (the "EXPIRATION
DATE") pursuant to the foregoing provisions of Executive's employment hereunder
is referred to as the "EMPLOYMENT TERM". Notwithstanding the foregoing, the
Employment Term shall terminate in any and all events upon the termination of
Executive's employment hereunder.
2. Positions. During the Employment Term, Executive shall
serve as President and Chief Operating Officer of the Company and Holdings.
Executive shall report directly to the Chief Executive Officer of Holdings and
shall have such duties and authority commensurate with such position as shall
be determined from time to time by the Board of Directors of Holdings (the
"BOARD") and the Chief Executive Officer. Executive shall devote
substantially all of his business time and best efforts to the performance of
his duties hereunder and shall not engage in any other business, profession or
occupation for compensation or otherwise. Notwithstanding the foregoing,
Executive may serve on boards of directors (with the prior approval of the
Chief Executive Officer of the Company), participate in civic associations,
charities and similar activities so long as such activities do not materially
detract from his ability to carry out
<PAGE> 83
his duties hereunder.
3. Base Salary. During the Employment Term, the Company
shall pay Executive a base salary (the "BASE SALARY") at the annual rate of
$250,000, payable in arrears, in accordance with the usual payment practices of
the Company. Executive's Base Salary shall be subject to periodic review by
the Compensation Committee of Holdings, not less frequently than annually, and
shall be adjusted on or before each anniversary date of this Agreement in order
to place Executive in at least the 40th percentile for base cash compensation
received by the highest paid executives in Holdings' industry. Holdings'
industry peer group and the classification of compensation for purposes of
computing such comparison and establishing such increases in Base Salary shall
be as specified on Exhibit A attached to this Agreement (as such data shall be
updated from time to time, the "PEER GROUP COMPARISON"). Any such adjusted
rate will thereafter be the Base Salary for all purposes of this Agreement. In
no event shall Executive's Base Salary in any year be adjusted below the Base
Salary for the prior year.
4. Annual Cash Bonus. The Company shall pay Executive, for
each fiscal year of his employment, beginning with the fiscal year ending in
1998, a cash bonus (the "BONUS") in an amount established by the Board based
upon the achievement of certain levels of performance. If for any fiscal year
the target levels are achieved, then Executive's cash bonus for such fiscal
year shall be in an amount which would place Executive in at least the 75th
percentile for total cash compensation (less base compensation) received by the
highest paid executives indicated by the Peer Group Comparison. In no event
shall Executive's target Bonus for any fiscal year be less than 100% of Base
Salary. The timing of the payment of the Bonus shall be in accordance with the
Company's normal procedures.
5. To the extent a Change of Control (as defined in the
Investors' Agreement dated as of August 7, 1997, among the Company, DLJ
Merchant Banking II, L.P. ("DLJMBII"), DLJ Merchant Banking Partners II-A,
L.P., DLJ Offshore Partners II, C.V., DLJ Diversified Partners, L.P., DLJ
Diversified Partners-A, L.P., DLJ Millenium Partners, L.P., DLJ Millenium
Partners-A, L.P., DLJMB Funding II, Inc., UK Investment Plan 1997 Partners, DLJ
EAB Partners, L.P., DLJ First ESC, LLC, and certain other shareholders listed
on the signature pages thereto) event occurs on or before Executive's
employment terminates or at any time thereafter if prior to the termination of
Executive's employment, the Company, Holdings, DLJMBII, any affiliates of
DLJMBII, or any authorized representative of such parties engages in
substantive discussions concerning the possible change of control and DLJMBII
generates an internal rate of return on its original investment in excess of
40% per annum, Executive will be paid a special bonus (the "SPECIAL BONUS") by
Holdings. The Special Bonus will be paid in cash within 10 days of the Special
Bonus event occurring. If the internal rate of return is in excess of 40%, the
Special Bonus shall be $2.5 million. For each 1% increase above 40%, Executive
shall receive an additional $250,000 but in no event shall the Special
2
<PAGE> 84
Bonus exceed $7.5 million. The Special Bonus, together with any special bonus
awarded to Mr. Draeger, shall be taken into account in calculating internal
rate of return.
6. Employee Benefits. (a) During the Employment Term,
Executive shall be entitled to participate on a basis no less favorable than
other senior executives of the Company and Holdings in all retirement, welfare
benefit, incentive compensation, perquisite and other plans and arrangements of
the Company applicable to senior executives of the Company and Holdings, as in
effect from time to time.
(b) Executive shall be entitled to participate in the
Management Stock Incentive Plan of Holdings (the "MSIP").
(c) Executive shall have the use of a Company automobile and
shall be reimbursed for (i) the reasonable costs of one country club
membership, (ii) the establishment and use of telephone lines in Pennsylvania
and Executive's automobile, (iii) an annual physical examination for Executive
and his spouse and (iv) first class air travel.
(d) Executive shall be entitled to five weeks of vacation for
each 12 month period that Executive is employed hereunder.
(e) Executive shall be entitled to reimbursement for
reasonable tax planning and estate planning services.
7. Business Expenses. During the Employment Term, the
Company shall reimburse such of Executive's travel, entertainment and other
business expenses as are reasonably and necessarily incurred by Executive
during the Employment Term in the performance of his duties hereunder, in
accordance with the Company's policies as in effect from time to time.
8. Termination. Upon a termination of the Employment Term
prior to its scheduled expiration, Executive shall be entitled to the payments
described in this Section 8.
(a) For Cause by the Company; by Executive without Good
Reason. The Employment Term may be terminated prior to the Expiration Date by
the Company and Holdings for Cause or by Executive without Good Reason (each as
defined below).
If the Employment Term is terminated by the Company or
Holdings for Cause or by Executive without Good Reason, Executive shall be
entitled to receive his Base Salary through the date of termination, any Bonus
that has been earned in accordance with Section 4 for a prior fiscal year but
not yet paid and any unreimbursed business expenses, payable promptly following
the later of the date of such termination
3
<PAGE> 85
and the date on which the appropriate documentation is provided.
All other benefits following termination of the Employment
Term pursuant to this Section 8(a) shall be determined in accordance with the
plans, policies and practices of the Company.
(b) Death or Disability (as defined below). The Employment
Term shall terminate prior to the Expiration Date upon Executive's death or
Disability. If the Employment Term is terminated prior to the Expiration Date
by reason of death or Disability, Executive or Executive's estate, as
applicable, shall receive (i) the amounts described under Section 8(a), (ii)
continued payment of Base Salary through the first anniversary of the date of
death or the first anniversary of the date of termination based upon
Disability, (iii) continued participation by Executive's family in all health,
medical and dental plans of the Company, or comparable coverage, for such one
year period and (iv) the Bonus that would have been payable to Executive for
the year of termination pursuant to paragraph 4 hereof (if the target is met)
pro-rated to the date of termination and payable upon termination. Such
amounts shall be in addition to any proceeds otherwise payable to Executive or
his estate, as the case may be, on account of any life or disability insurance
policy provided as a benefit to Executive hereunder.
All other benefits following termination of the Employment Term
pursuant to this Section 8(b) shall be determined in accordance with the plans,
policies and practices of the Company.
(c) By the Company without Cause; by Executive with Good
Reason; Election by the Company not to Renew. The Employment Term may be
terminated prior to the Expiration Date by the Company or Holdings without
Cause or by Executive with Good Reason.
If the Employment Term is terminated prior to the Expiration
Date by the Company or Holdings without Cause or by Executive with Good Reason
or the Company elects (other than for Cause) not to extend the Employment Term
for an additional one year period in accordance with Section 1, subject to
Executive's continued compliance with the covenants (other than an inadvertent
breach) set forth in Section 9, Executive shall receive (i) the amounts
described under Section 8(a), (ii) continued payment of Executive's Base Salary
for an eighteen (fifteen in the case of a termination for Good Reason) month
period at the rate in effect for the year of termination, payable in eighteen
(fifteen in the case of a termination for Good Reason) monthly installments,
(iii) continued participation by Executive's family in all health, medical and
dental plans of the Company, or comparable coverage, for such eighteen (or
fifteen) month period or, if earlier, until Executive is covered by comparable
programs of a subsequent employer and (iv) payment in an amount equal to 1 1/2
(1 1/4 in the case of a termination for Good Reason) times the Bonus Executive
would have received (assuming for this purpose that
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the target was met) had Executive remained employed hereunder for the entire
year, payable in eighteen (fifteen in the case of a termination for Good
Reason) monthly installments; provided that if Executive obtains employment
prior to the payment of all such monthly installments of Base Salary and Bonus,
Executive shall only receive one-half of the amount of each remaining
installment.
All other benefits following termination of the Employment Term
pursuant to this Section 8(c) shall be determined in accordance with the plans,
policies and practices of the Company.
(d) Definitions. For purposes of this Section 8, the
following terms shall have the following meanings:
(i) "CAUSE" shall mean:
(A) Executive's willful and continued failure substantially
to perform his duties under the Agreement (other than as a result of total or
partial incapacity due to physical or mental illness);
(B) the conviction of Executive or the plea of guilty by
Executive for a felony under the laws of the United States or any state thereof
or any other jurisdiction in which the Company or Holdings conducts business;
(C) Executive's repeatedly being under the influence of
illegal drugs or alcohol while performing his duties hereunder; or
(D) Executive's breach (other than an inadvertent breach) of
the provisions of Section 9;
provided that, in the case of any action or omission described in clause (A) or
(D) above (a "DEFICIENCY"), the Company must first provide Executive 30 days
written notice of the Deficiency and the opportunity to cure such Deficiency.
For purposes of this definition, no act or failure to act shall be deemed
"willful" unless effected by Executive not in good faith and without a
reasonable belief that such action or failure to act was in or not opposed to
the Company's or Holdings' best interests.
(ii) "GOOD REASON" shall mean the happening of any of the
following events followed within six months by a Notice of Termination by
Executive:
(A) Mr. Kenneth Draeger is replaced as Chief Executive
Officer of the Company and Executive is not promoted to such position;
(B) there is an adverse change to Executive's title or a
material adverse
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change in Executive's responsibilities or duties; or
(C) the Company's current principal place of business in
Pennsylvania is relocated more than 35 miles from its current site;
provided that, in the case of clause (B), Executive must first provide the
Company 30 days written notice of the change and the opportunity to cure.
(iii) "DISABILITY" shall mean Executive's inability, as a
result of physical or mental illness, to perform the duties of the position(s)
specified in Section 2 for a period of three consecutive months or for periods
aggregating more than six months during any 24 month period. Any question as
to the existence of the Disability of Executive as to which Executive and the
Company cannot agree shall be determined in writing by a qualified independent
physician selected by the Company and reasonably acceptable to Executive. The
determination of Disability made in writing to the Company and Executive shall
be final and conclusive for all purposes of the Agreement.
(e) Notice of Termination. Any purported termination of the
Employment Term prior to its scheduled expiration by the Company or Holdings or
by Executive shall be communicated by written notice of termination to the
other party hereto. For purposes of this Agreement, a "NOTICE OF TERMINATION"
shall mean a notice which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination under the
provision so indicated.
9. Non-Competition/Confidential Information. (a) Executive
acknowledges and recognizes the highly competitive nature of the businesses of
the Company, Holdings and their affiliates and accordingly agrees that during
the Employment Term and through the first anniversary of the date of
termination of employment, Executive will not directly or indirectly accept an
engagement with any person or entity, a substantial business of which is
multivendor computer maintenance business or any other line of business of the
Company or Holdings or any of their affiliates accounting for 10% or more of
the Company's or Holding's gross revenues (each a "COMPETITIVE BUSINESS")
(including without limitation by performing or soliciting the performance of
services for any person who is a customer or client of the Company or any of
its affiliates), whether such engagement is as an officer, director,
proprietor, employee, partner, investor (other than as a holder of less than 1%
of the outstanding capital stock of a publicly traded corporation), consultant,
advisor, agent, sales representative or other participant, in any geographic
area in which Holdings, the Company or any of their affiliates conducted any
such competing line of business. Notwithstanding the foregoing, Executive may
accept an engagement with a division of a business so long as a substantial
business of such division is not a Competitive Business.
(b) During the Employment Term and through the second
anniversary of
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the date of termination of employment, Executive will not induce, or cause any
person or entity to induce, any employee of Holdings, the Company or any of
their affiliates to engage in any activity in which Executive is prohibited to
engage by paragraph (a) above or to terminate his employment with Holdings, the
Company or any of their affiliates, and will not employ or offer employment, or
cause any person or entity to employ or offer employment, to any person who was
employed by Holdings, the Company or any of their affiliates unless such person
shall have ceased to be employed by Holdings, the Company or any of their
affiliates for a period of at least 12 months.
(c) Executive will not at any time (whether during or after
his employment with Holdings and the Company) disclose or use for his own
benefit or purposes or the benefit or purposes of any other person, firm,
partnership, joint venture, association, corporation or other business
organization, entity or enterprise other than Holdings, the Company and any of
their affiliates, any trade secrets, information, data, or other confidential
information relating to customers, development programs, costs, marketing,
trading, investment, sales activities, promotion, credit and financial data,
manufacturing processes, financing methods, plans, or the business and affairs
of Holdings or the Company generally, or of any of their affiliates, provided
that the foregoing shall not apply to information which is not unique to
Holdings or the Company or which is generally known to the industry or the
public other than as a result of Executive's breach of this covenant.
Executive agrees that upon termination of his employment with Holdings and the
Company for any reason, he will return immediately all memoranda, books,
papers, plans, information, letters and other data, and all copies thereof or
therefrom, in any way relating to the business of Holdings, the Company and
their affiliates, except that he may retain personal notes, notebooks and
diaries. Executive further agrees that he will not retain or use for his
account at any time any trade names, trademark or other proprietary business
designation used or owned in connection with the business of Holdings, the
Company or their affiliates.
10. Specific Performance and Other Remedies. Executive
acknowledges and agrees that Holdings and the Company have no adequate remedy
at law for a breach or threatened breach of any of the provisions of Section 9
and, in recognition of this fact, Executive agrees that, in the event of such a
breach or threatened breach, in addition to any remedies at law, Holdings
and/or the Company, without posting any bond and without notice to the
Executive, shall be entitled to obtain equitable relief in the form of specific
performance, temporary restraining order, temporary or permanent injunction or
any other equitable remedy which may then be available. Nothing in this
Agreement shall be construed as prohibiting Holdings or the Company from
pursuing any other remedies at law or in equity that it may have or any other
rights that they may have under any other agreement.
11. Miscellaneous.
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(a) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania
without reference to principles of conflict of laws.
(b) Entire Agreement/Amendments. This Agreement, any
purchase agreement to be entered into on the date hereof regarding the purchase
of shares of the Company, the MSIP to be adopted by Holdings and any award
agreements entered into under the MSIP, and the provisions of any employee plan
or arrangement maintained from time to time by the Company or Holdings in which
Executive participates contain the entire understanding of the parties with
respect to the employment of Executive by Holdings and the Company and
supersede any prior agreements between the Company, Holdings (and their
predecessors) and Executive. There are no restrictions, agreements, promises,
warranties, covenants or undertakings between the parties with respect to the
subject matter herein other than those expressly set forth herein and therein.
No provision in this Agreement may be amended unless such amendment is agreed
to in writing.
(c) No Waiver. The failure of a party to insist upon strict
adherence to any term of this Agreement on any occasion shall not be considered
a waiver of such party's rights or deprive such party of the right thereafter
to insist upon strict adherence to that term or any other term of this
Agreement. No waiver by either party of any breach by the other party of any
condition or provision contained in this Agreement to be performed by such
other party shall be deemed a waiver of a similar or dissimilar condition or
provision at the same or any prior or subsequent time. Any waiver must be in
writing and signed by the Executive or Holdings or the Company, as the case may
be.
(d) Severability. It is expressly understood and agreed that
although Executive, Holdings and the Company consider the restrictions
contained in Section 9 to be reasonable, if a final judicial determination is
made by a court of competent jurisdiction that the time or territory
restriction in Section 9 or any other restriction contained in Section 9 is an
unenforceable restriction against Executive, such provision shall not be
rendered void but shall be deemed amended to apply to such maximum time and
territory, if applicable, or otherwise to such maximum extent as such court may
judicially determine or indicate to be enforceable. Alternatively, if any
court of competent jurisdiction finds that any restriction contained in Section
9 is unenforceable, and such restriction cannot be amended so as to make it
enforceable, such finding shall not affect the enforceability of any of the
other restrictions contained herein. In the event that any one or more of the
other provisions of this Agreement shall be or become invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions of this Agreement shall not be affected thereby.
(e) Assignment. This Agreement shall not be assignable by any
party without the consent of the other parties.
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(f) Mitigation. Except as set forth in Section 8(c),
Executive shall not be required to mitigate the amount of any payment or
benefit to be provided pursuant to Section 8 by seeking other employment or
otherwise.
(g) Successors. This Agreement shall inure to the benefit of
and be binding upon the personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees of the
parties hereto. The Executive shall be entitled to select (and change, to the
extent permitted under any applicable law) a beneficiary or beneficiaries to
receive any compensation or benefit payable hereunder following the Executive'
death by giving Holdings or the Company written notice thereof. In the event
of the Executive's death or a judicial determination of his incompetence,
reference in this Agreement to the Executive shall be deemed, where
appropriate, to refer to his beneficiary, estate or other legal representative.
(h) Communications. For the purpose of this Agreement,
notices and all other communications provided for in this Agreement shall be in
writing and shall be deemed to have been duly given when faxed or delivered or
two business days after being mailed by United States registered or certified
mail, return receipt requested, postage prepaid, addressed (A) to the Executive
at his address then appearing in the personnel records of the Company, (B) to
Holdings at Holding's then current headquarters, with a copy to Holding's
Secretary, (C) to the Company at the Company's then current headquarters, with
a copy to the Company's Secretary and (D) to DLJMBII at DLJMBII's then current
headquarters with a copy to Peter Grauer or (E) to such other address as any
party may have furnished to the others in writing in accordance herewith, with
such notice of change of address being effective only upon receipt.
(i) Withholding Taxes. Holdings and/or the Company, as
applicable, may withhold from any and all amounts payable under this Agreement
such federal, state, local and any other applicable taxes as may be required to
be withheld pursuant to any applicable law or regulation.
(j) Survivorship. The respective rights and obligations of
the parties hereunder shall survive any termination of Executive's employment
to the extent necessary to the agreed preservation of such rights and
obligations.
(k) Representations. Each party represents and warrants to
the others that he or it is fully authorized and empowered to enter into this
Agreement and that the performance of his or its obligations under this
Agreement will not violate any agreement between him or it and any other person
or entity.
(l) Fees and Expenses. In the event of a dispute by
Holdings, the Company or Executive as to the validity or enforceability of, or
liability under, any
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provision of this Agreement and with respect to any claims arising in
connection with Executive's employment with Holdings and the Company, each
party shall pay its own legal fees and expenses incurred in connection with
such dispute or claim.
(m) Counterparts. This Agreement may be signed in
counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
(n) Headings. The headings of the sections contained in this
Agreement are for convenience only and shall not be deemed to control or affect
the meaning or construction of any provision of this Agreement. Any reference
to the Executive in the masculine gender herein is for convenience and is not
intended to express any preference by the Company for executives of any gender.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
---------------------------------------
Stephen J. Felice
DECISIONONE HOLDINGS CORP.
By:
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Name:
Title:
DECISIONONE CORPORATION
By:
-----------------------------------
Name:
Title:
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