<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
----------------------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------- ---------------
Commission File Number 0-28090
-----------
DECISIONONE HOLDINGS CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3435409
--------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Commission File Number 333-28411
-------------
DECISIONONE CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2328680
- -------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
50 East Swedesford Road, Frazer, Pennsylvania 19355
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code (610) 296-6000
------------------
Indicate by check mark whether registrants (1) have filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrants were
required to file such reports), and (2) have been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of April 30, 1999, 12,564,485 shares of DecisionOne Holdings Corp. common
stock were outstanding and one share of DecisionOne Corporation common stock was
outstanding.
DecisionOne Corporation meets the requirements set forth in General Instruction
H(1) (a) and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
<PAGE> 2
<TABLE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES AND
DECISIONONE CORPORATION AND SUBSIDIARIES
FORM 10-Q MAY 17, 1999
CONTENTS
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<CAPTION>
Page No.
--------
PART I FINANCIAL INFORMATION
<S> <C> <C> <C>
Item 1. Condensed Consolidated Financial Statements of
DecisionOne Holdings Corp. and Subsidiaries:
Condensed Consolidated Balance Sheets -
March 31, 1999 and June 30, 1998
(unaudited) 2
Condensed Consolidated Statements of Operations
and Comprehensive Income (Loss) - Three and Nine Months
Ended March 31, 1999 and 1998 (unaudited) 3
Condensed Consolidated Statements of
Cash Flows - Nine Months Ended
March 31, 1999 and 1998 (unaudited) 4
Notes to Condensed Consolidated Financial
Statements (unaudited) 5
Condensed Consolidated Financial Statements
of DecisionOne Corporation and Subsidiaries:
Condensed Consolidated Balance Sheets -
March 31, 1999 and June 30, 1998
(unaudited) 10
Condensed Consolidated Statements of Operations
and Comprehensive Income (Loss) - Three and Nine Months
Ended March 31, 1999 and 1998 (unaudited) 11
Condensed Consolidated Statements of
Cash Flows - Nine Months Ended
March 31, 1999 and 1998 (unaudited) 12
Notes to Condensed Consolidated
Financial Statements (unaudited) 13
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations - Three and Nine Months Ended
March 31, 1999 and 1998. 18
Item 3. Quantitative and Qualitative Disclosure
About Market Risk. 31
PART II OTHER INFORMATION 32
</TABLE>
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<TABLE>
<CAPTION>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In Thousands, Except Number of Shares)
MARCH 31, JUNE 30,
ASSETS 1999 1998
--------- ----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 35,148 $ 6,415
Accounts receivable, net of allowances of $19,514 and $22,572 109,412 114,082
Consumable parts, net of allowances of $10,328 and $9,271 20,093 23,097
Prepaid expenses and other assets 25,437 28,106
-------- --------
Total current assets 190,090 171,700
Repairable parts, net of accumulated amortization of $155,803 and $135,277 141,327 142,446
Property and equipment, net of accumulated depreciation
of $37,445 and $39,829 31,227 29,095
Intangibles, net of accumulated amortization of $77,700 and $60,827 134,848 154,029
Other assets 27,593 44,717
--------- ---------
Total Assets $ 525,085 $ 541,987
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Current portion of debt $ 787,024 $ 13,311
Accounts payable and accrued expenses 106,793 101,851
Deferred revenues 37,593 40,758
Income taxes and other liabilities 8,499 10,925
-------- --------
Total current liabilities 939,909 166,845
Debt 833 731,012
Other Liabilities 7,574 5,736
Shareholders' Deficit:
Preferred stock, $.01 par value; authorized 15,000,000 shares;
none outstanding -- --
Common stock, $.01 par value; authorized 30,000,000 shares;
issued and outstanding 12,564,485 and 12,584,219 shares 126 126
Additional paid-in capital 242,181 242,181
Accumulated deficit (662,317) (601,195)
Accumulated other comprehensive loss (3,221) (2,718)
-------- --------
Total shareholders' deficit (423,231) (361,606)
--------- ---------
Total Liabilities and Shareholders' Deficit $ 525,085 $ 541,987
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
<PAGE> 4
<TABLE>
<CAPTION>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $176,005 $200,910 $557,066 $603,249
Cost of Revenues 143,471 153,163 442,732 463,914
-------- -------- -------- --------
Gross Profit 32,534 47,747 114,334 139,335
Operating Expenses:
Selling, general and administrative expenses 30,152 35,263 97,883 94,486
Amortization of intangibles 6,715 6,861 20,220 20,007
Merger expenses -- -- -- 69,046
-------- -------- -------- --------
Total operating expenses 36,867 42,124 118,103 183,539
-------- -------- -------- --------
Operating Income (Loss) (4,333) 5,623 (3,769) (44,204)
Interest Expense, Net of Interest Income 20,148 18,554 57,353 48,707
-------- -------- -------- --------
Loss Before Income Taxes (24,481) (12,931) (61,122) (92,911)
Benefit for Income Taxes -- (1,937) -- (13,572)
-------- -------- -------- --------
Net Loss $(24,481) $(10,994) $(61,122) $(79,339)
-------- -------- -------- --------
Other Comprehensive Income (Loss), Net of Tax:
Foreign Currency Translation Adjustments 84 130 (244) (154)
Pension Liability Adjustment -- -- (259) --
-------- -------- -------- --------
Comprehensive Loss $(24,397) $(10,864) $(61,625) $(79,493)
======== ======== ======== ========
Basic Loss per Common Share $ (1.95) $ -- $ (4.86) $ --
Weighted Average Number of Common Shares
Outstanding 12,573 -- 12,581 --
Pro Forma Information - See Note 2:
- ------------------------------------
Pro Forma Net Loss $ -- $(10,994) $ -- $(24,185)
Pro Forma Net Loss Per Common Share $ -- $ (0.87) $ -- $ (1.93)
Pro Forma Weighted Average Number of
Common Shares Outstanding -- 12,585 -- 12,532
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE> 5
<TABLE>
<CAPTION>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
MARCH 31,
------------------------------------
1999 1998
-------- ---------
<S> <C> <C>
Operating Activities:
Net loss $(61,122) $(79,339)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Amortization of repairable parts 62,103 59,955
Amortization of intangibles 20,220 20,007
Depreciation 10,615 11,785
Changes in assets and liabilities, net of effects of acquisitions 25,659 (23,818)
-------- --------
Net cash provided by (used in) operating activities 57,475 (11,410)
Investing Activities:
Capital expenditures (14,729) (7,039)
Repairable spare parts purchases, net (60,852) (61,830)
Acquisitions of companies and contracts (2,793) (9,369)
Proceeds from sales of assets 14,108 --
-------- --------
Net cash used in investing activities (64,266) (78,238)
Financing Activities:
Proceeds from issuance of common stock in connection
with recapitalization -- 226,583
Redemption of common stock in connection with recapitalization -- (609,654)
Redemption of common stock warrants in connection with
recapitalization -- (12,149)
Issuance of common stock warrants -- 1,880
Net proceeds from borrowings 36,140 482,910
Other, net (616) (1,709)
-------- --------
Net cash provided by financing activities 35,524 87,861
-------- --------
Net change in cash and cash equivalents 28,733 (1,787)
Cash and cash equivalents, beginning of period 6,415 10,877
-------- --------
Cash and cash equivalents, end of period $ 35,148 $ 9,090
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE> 6
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE THREE AND NINE MONTH PERIODS ENDED
MARCH 31, 1999 AND 1998
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
DecisionOne Holdings Corp. and Subsidiaries (the "Company") have been prepared
pursuant to the rules and regulations of the United States Securities and
Exchange Commission and, therefore, do not include all information and footnotes
necessary for presentation of financial position, results of operations and cash
flows required by generally accepted accounting principles. The June 30, 1998
balance sheet was derived from the Company's audited consolidated financial
statements. The information furnished reflects all adjustments (consisting of
normal recurring adjustments) which are, in the opinion of management, necessary
for a fair summary of the financial position, results of operations and cash
flows. The results of operations for the three and nine month periods ended
March 31, 1999 and 1998 are not necessarily indicative of operating results to
be expected for the full fiscal year. The financial statements should be read in
conjunction with the audited consolidated financial statements of the Company
and notes thereto filed with the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1998.
Certain reclassifications have been made in order to conform with the March 31,
1999 presentation.
NOTE 2: 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. ("DLJMB").
The merger, which was recorded as a recapitalization for accounting purposes as
of the consummation date, occurred pursuant to an Agreement and Plan of Merger
between the Company and Quaker dated May 4, 1997, as amended (the "Merger
Agreement").
In accordance with the terms of the Merger Agreement, which was formally
approved by the Company's shareholders on August 7, 1997, Quaker merged with and
into the Company, and the holders of approximately 94.7% of shares of Company
common stock outstanding immediately prior to the merger received $23 in cash in
exchange for each of these shares. Holders of approximately 5.3% of shares of
Company common stock outstanding immediately prior to the merger retained such
shares in the merged Company, as determined based upon shareholder elections and
stock proration factors specified in the Merger Agreement. Immediately following
the merger, continuing shareholders owned approximately 11.9% of shares of
outstanding Company common stock. The aggregate value of the merger transaction
was approximately $940 million, including refinancing of the Company's revolving
credit facility.
5
<PAGE> 7
In connection with the merger, the Company raised $85 million through the public
issuance of senior discount debentures (the "11 1/2% Notes"), in addition to
publicly issued senior subordinated notes for approximately $150 million (the "9
3/4% Notes"). The Company also entered into a new syndicated credit facility
(the "New Credit Facility") providing for term loans of $470 million and
revolving loans of up to $105 million. The proceeds of the senior discount
notes, senior subordinated notes, the initial borrowings under the New Credit
Facility and the purchase of approximately $225 million of Company common stock
by Quaker were used to finance the payments of cash to cash-electing
shareholders, to pay the holders of stock options and stock warrants canceled or
converted, as applicable, in connection with the merger, to repay the Company's
existing revolving credit facility and to pay expenses incurred in connection
with the merger.
As a result of the merger, the Company incurred various expenses, totaling
approximately $69.0 million on a pre-tax basis, in connection with consummating
the transaction. These costs consisted primarily of compensation costs,
underwriting discounts and commissions, professional and advisory fees and other
expenses. In addition to these expenses, the Company also incurred approximately
$22.3 million of capitalized debt issuance costs associated with the merger
financing. These costs are being charged to interest expense over the terms of
the related debt instruments.
The following summarized unaudited pro forma information for the nine month
period ended March 31, 1998, 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 results of operations which actually
would have resulted had the merger occurred as of July 1, 1997 or which may
result in the future. Historical earnings per share data is not presented
because it would not be meaningful.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
NINE MONTHS ENDED
MARCH 31,
PRO FORMA INCOME STATEMENT INFORMATION: 1998
----
<S> <C>
Revenues ...................................................... $603,249
Operating Income .............................................. 24,842
Loss from Continuing Operations Before Income Tax Benefit...... (28,975)
Net Loss ...................................................... (24,185)
Net Loss per Common Share ..................................... $ (1.93)
Weighted Average Shares of Common Stock Outstanding ........... 12,532
</TABLE>
The pro forma net loss for the nine month period ended March 31, 1998, reflects
(1) a net increase in interest expense of approximately $5.1 million
attributable to additional financing incurred in connection with the merger, net
of the repayment of the Company's existing revolving credit facility, (2) the
elimination of the non-recurring merger expenses of approximately $69.0 million
and (3) the elimination of the net tax benefit related to these adjustments of
approximately $8.8 million, including the effect of valuation allowances against
certain deferred tax assets.
6
<PAGE> 8
Pro forma weighted average common shares outstanding includes 12,499,979 shares
outstanding immediately subsequent to the merger on August 7, 1997, in addition
to shares subsequently issued and outstanding.
NOTE 3: RESTRUCTURING PLAN
The Company has continued to experience declining trends in revenues, earnings
and EBITDA for the three and nine-month periods ended March 31, 1999 compared to
the corresponding periods ended March 31, 1998. The declining trends principally
result from lower sales of new service contracts, contracted base erosion, and
minimal growth from acquisitions.
As previously announced, on January 28, 1999, the Company initiated a corporate
restructuring plan ("Restructuring Plan") intended to restore revenue growth and
improve financial performance. The Restructuring Plan included the following key
components: (i) focusing on all aspects of the Company's operations - from sales
through service delivery - on providing information technology support services
to three customer groups: large corporate customers (also known as "enterprise
accounts"), medium sized accounts (also known as the "middle market"), and
alliance customers (including OEMs, software publishers, systems integrators,
distributors and resellers, etc.); (ii) a cost-reduction program designed to
reduce the Company's cost structure by $40 million annually upon full
implementation, including a reduction in force of more than 500 employees; and
(iii) financial structure changes, including an additional $7.3 million
investment in the form of senior unsecured notes in DecisionOne Corporation by
DLJMB, and the Company's agreement with its lenders to waive financial covenants
in the Company's credit agreement through July 29, 1999.
In connection with the above corporate restructuring plan, involuntary and
voluntary workforce reductions exceeded 800 employees during the third quarter
of fiscal 1999. As a result, the Company realized labor cost savings in excess
of $5 million during the third quarter. The workforce reductions will decrease
employment costs in excess of $30 million annually. The Company is on schedule
to achieve its $40 million annual cost reduction target.
NOTE 4: DEBT
During the three months ended March 31, 1998, the Company sought and obtained
amendments to the New Credit Facility to revise certain financial performance
measurements. The amended New Credit Facility contains various terms and
covenants which, among other things, place certain restrictions on the Company's
ability to pay dividends and incur additional indebtedness, and which require
the Company to meet certain minimum financial performance measurements,
including Adjusted EBITDA targets which increase over time. As of December 31,
1998, the Company obtained a waiver of certain financial covenants in the
amended New Credit Facility until January 28, 1999 and on January 27, 1999, the
Company entered into a Waiver of Financial Covenants (the "Waiver Agreement")
pursuant to which the Company's senior lenders agreed to waive financial
covenants in the amended New Credit Facility through July 29, 1999. These
waivers cover the quarters ending December 31, 1998, March 31, 1999 and June 30,
1999.
7
<PAGE> 9
Without these waivers, the Company would not be in compliance with certain
financial covenants under the amended New Credit Facility. The Waiver Agreement
requires the Company, among other things, to meet certain additional financial
covenants as of March 31, 1999, limits the additional borrowings available to
the Company under its revolver to $10 million, and generally, requires that
interest payments on loans must be made monthly. In connection with the Waiver
Agreement, the Company incurred waiver fees of approximately $4.3 million, which
are being amortized as interest expense through July 1999.
On January 27, 1999, the Company's principal shareholder, DLJMB, and certain of
its affiliates, purchased $7.3 million of unsecured 14% Senior Notes (the "14%
Notes") due 2006 in DecisionOne Corporation. The proceeds of the 14% Notes were
used for general corporate purposes.
The Company met the required March 31, 1999 financial covenants contained in the
Waiver Agreement. The Company anticipates that it will engage in discussions
with its lenders regarding additional amendments, waivers or a restructuring of
the amended New Credit Facility by July 29, 1999. However, the Company has not
engaged in any such discussions and does not have any agreement with any lenders
participating in the amended New Credit Facility with respect to any amendments,
waivers, or restructuring beyond July 29, 1999. If the Company is unable to
obtain amendments, waivers or a restructuring beyond July 29, 1999, amounts
outstanding under the amended New Credit Facility could be declared due and
payable because of the resulting defaults. The Company has therefore classified
all amounts outstanding under the amended New Credit Facility as current as of
March 31, 1999. If amounts outstanding under the amended New Credit Facility are
declared to be due and payable because of a default, holders of the 11 1/2%
Notes, the 9 3/4% Notes and the 14% Notes would be permitted to declare such
notes to be immediately due and payable. The Company has therefore classified
all amounts outstanding under the 11 1/2% Notes, the 9 3/4% Notes and the 14%
Notes as current as of March 31, 1999. In addition, if amounts outstanding under
the amended New Credit Facility are declared to be due and payable because of a
default, or if the lenders under the amended New Credit Facility deliver a
notice to the trustee for the 9 3/4% Notes that a default exists under the
amended New Credit Facility, the Company will be prohibited from making the
August 1, 1999 interest payment or any other payments on its 9 3/4% Notes.
In connection with any further amendments, waivers or a restructuring of the
amended New Credit Facility, the Company could be required to restructure its
operations, sell assets, and/or issue additional capital or debt securities. Any
issuance of equity securities would likely be highly dilutive to existing
shareholders. Furthermore, any increase in the Company's debt service
requirements or any further reduction in amounts available for borrowings under
the amended New Credit Facility could significantly affect the Company's ability
to fund capital expenditures, acquisitions, and working capital. Management
believes that it can be successful in obtaining additional amendments, waivers
or a restructuring of the amended New Credit Facility. However, there can be no
assurance that the amended New Credit Facility will be renegotiated on terms
acceptable to the Company. Currently, the Company does not have in place any
alternative sources of liquidity if the Company cannot reach agreement in
respect of the amended New Credit Facility beyond July 29, 1999.
On August 1, 1999, interest payments of approximately $7.3 million and $0.5
million will become due on the Company's 9 3/4% Notes and 14% Notes,
respectively. In connection with any further amendments, waivers or
restructuring of the amended New Credit Facility, the lenders may seek to
prohibit the Company from borrowing under the amended New Credit Facility, and
from using its cash balances or operating cash flow, to make the August 1, 1999
interest payments. Unless the Company can obtain alternative sources of funds,
it will be unable to make these interest payments. The Company does not
currently have any alternative sources of funds available to it. If the Company
fails to make these interest payments, the holders of the 9 3/4% Notes and 14%
Notes would be permitted to declare such notes to be immediately due and
payable. In addition, an event of default would arise under the amended New
Credit Facility, giving those lenders the right to declare amounts outstanding
under the amended New Credit Facility to be immediately due and payable.
If the Company is unable to obtain the necessary funds to make the August 1,
1999 interest payments, or is prohibited from making these payments, the Company
may engage in discussions with holders of the 9 3/4% Notes and 14% Notes
regarding alternatives for restructuring the Company's obligations under these
notes. If any such holders or the lenders under the amended New Credit Facility
were to take any actions to declare the Company's obligations to be immediately
due and payable, it would be necessary for the Company to consider all available
alternatives.
8
<PAGE> 10
NOTE 5: EMPLOYEE SEVERANCE
During the quarter ended December 31, 1998, the Company recorded a $3.5 million
charge, included in selling, general and administrative expenses, for estimated
future severance costs in accordance with SFAS No. 112, Employers' Accounting
for Postemployment Benefits ("SFAS No. 112"), which reflects the actuarially
determined benefit costs for the separation of employees who are entitled to
benefits under pre-existing separation pay plans, including employees separated
under the Restructuring Plan (see Note 3 above). During the quarter ended March
31, 1999, the Company revised its estimate for future severance costs and
recorded an additional $1.0 million charge.
NOTE 6: COMPREHENSIVE INCOME (LOSS)
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, which established standards for reporting and
disclosure of comprehensive income, effective July 1, 1998. Total comprehensive
income (loss) for the three months ended March 31, 1999 and 1998 was ($24.4)
million and ($10.9) million, respectively. Total comprehensive income (loss) for
the nine months ended March 31, 1999 and 1998 was ($61.6) million and ($79.5)
million, respectively. Total comprehensive income (loss) includes net income
(loss), foreign currency translation gains (losses) and pension liability
adjustments for the periods presented.
NOTE 7: INCOME TAXES
The ultimate realization of net deferred tax assets is dependent upon the
generation of future taxable income during the periods in which the temporary
differences become deductible. Net deferred tax assets as of March 31, 1999 were
approximately $25.4 million and are included in other assets in the accompanying
balance sheet.
During the three and nine month periods ended March 31, 1999, the Company
recorded additional net deferred tax assets of approximately $9.8 million and
$23.2 million, respectively, principally due to the accumulation of additional
temporary differences. The Company recorded a corresponding increase to the
valuation allowance, due principally to the length of the period during which
the anticipated tax benefits are expected to be realized.
9
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<TABLE>
DecisionOne Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(In Thousands)
<CAPTION>
March 31, June 30,
ASSETS 1999 1998
--------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 33,975 $ 5,205
Accounts receivable, net of allowances of $19,514 and $22,572 109,412 114,082
Consumable parts, net of allowances of $10,328 and $9,271 20,093 23,097
Prepaid expenses and other assets 22,391 27,797
--------- ---------
Total current assets 185,871 170,181
Repairable parts, net of accumulated amortization of $155,803 and $135,277 141,327 142,446
Property and equipment, net of accumulated depreciation
of $37,445 and $39,829 31,227 29,095
Intangibles, net of accumulated amortization of $77,700 and $60,827 134,848 154,029
Parent company loan receivable 73,420 69,867
Other assets 26,603 40,821
--------- ---------
Total Assets $ 593,296 $ 606,439
========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current Liabilities:
Current portion of debt $ 686,446 $ 13,311
Accounts payable and accrued expenses 106,293 101,351
Deferred revenues 37,593 40,758
Income taxes and other liabilities 8,499 10,925
--------- ---------
Total current liabilities 838,831 166,345
Debt 833 638,766
Other Liabilities 7,574 5,796
Shareholder's Deficit:
Common stock, no par value; one share authorized, issued
and outstanding -- --
Additional paid-in capital 12,323 12,323
Accumulated deficit (263,044) (214,073)
Accumulated other comprehensive loss (3,221) (2,718)
--------- ---------
Total shareholder's deficit (253,942) (204,468)
--------- ---------
Total Liabilities and Shareholder's Deficit $ 593,296 $ 606,439
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
10
<PAGE> 12
<TABLE>
DecisionOne Corporation and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
(In Thousands)
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------- -----------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 176,005 $ 200,910 $ 557,066 $ 603,249
Cost of Revenues 143,471 153,163 442,732 463,914
--------- --------- --------- ---------
Gross Profit 32,534 47,747 114,334 139,335
Operating Expenses:
Selling, general and administrative expenses 30,152 35,263 97,883 94,486
Amortization of intangibles 6,715 6,861 20,220 20,007
Merger expenses -- -- -- 69,046
--------- --------- --------- ---------
Total operating expenses 36,867 42,124 118,103 183,539
--------- --------- --------- ---------
Operating Income (Loss) (4,333) 5,623 (3,769) (44,204)
Interest Expense, Net of Interest Income 16,019 14,021 45,202 37,825
--------- --------- --------- ---------
Loss Before Income Taxes (20,352) (8,398) (48,971) (82,029)
Benefit for Income Taxes -- (365) -- (10,254)
--------- --------- --------- ---------
Net Loss $ (20,352) $ (8,033) $ (48,971) $ (71,775)
========= ========= ========= =========
Other Comprehensive Income (Loss), Net of Tax :
Foreign Currency Translation Adjustments 84 130 (244) (154)
Pension Liability Adjustment -- -- (259) --
--------- --------- --------- ---------
Comprehensive Loss $ (20,268) $ (7,903) $ (49,474) $ (71,929)
========= ========= ========= =========
Pro Forma Information - See Note 2:
Pro Forma Net Loss $ -- $ (8,033) $ -- $ (15,773)
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
11
<PAGE> 13
<TABLE>
DecisionOne Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
<CAPTION>
Nine months ended
March 31,
------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Operating Activities:
Net loss $ (48,971) $ (71,775)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Amortization of repairable parts 62,103 59,955
Amortization of intangibles 20,220 20,007
Depreciation 10,615 11,785
Changes in assets and liabilities, net of effects of acquisitions 13,480 (32,576)
--------- ---------
Net cash provided by (used in) operating activities 57,447 (12,604)
Investing Activities:
Capital expenditures (14,729) (7,039)
Repairable spare parts purchases, net (60,852) (61,830)
Acquisitions of companies and contracts (2,793) (9,369)
Proceeds from sales of assets 14,108 --
--------- ---------
Net cash used in investing activities (64,266) (78,238)
Financing Activities:
Capital contributions -- 349
Payment of dividends to Parent -- (244,000)
Loan from (made to) Parent 65 (71,189)
Net proceeds from borrowings 36,140 403,187
Other, net (616) (486)
--------- ---------
Net cash provided by financing activities 35,589 87,861
--------- ---------
Net change in cash and cash equivalents 28,770 (2,981)
Cash and cash equivalents, beginning of period 5,205 10,877
--------- ---------
Cash and cash equivalents, end of period $ 33,975 $ 7,896
========= =========
</TABLE>
12
<PAGE> 14
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE THREE AND NINE MONTH PERIODS ENDED
MARCH 31, 1999 AND 1998
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
DecisionOne Corporation (a wholly-owned subsidiary of DecisionOne Holdings
Corp., herein called "Holdings") and Subsidiaries (the "Company") have been
prepared pursuant to the rules and regulations of the United States Securities
and Exchange Commission and, therefore, do not include all information and
footnotes necessary for presentation of financial position, results of
operations and cash flows required by generally accepted accounting principles.
The June 30, 1998 balance sheet was derived from the Company's audited
consolidated financial statements. The information furnished reflects all
adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair summary of the financial position,
results of operations and cash flows. The results of operations for the three
and nine month periods ended March 31, 1999 and 1998 are not necessarily
indicative of the operating results to be expected for the full fiscal year. The
financial statements should be read in conjunction with the audited consolidated
financial statements of the Company and notes thereto filed with the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1998.
Certain reclassifications have been made in order to conform with the March 31,
1999 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.
("DLJMB"). The merger, which was recorded as a recapitalization for accounting
purposes as of the consummation date, occurred pursuant to an Agreement and Plan
of Merger between the Company, Holdings and Quaker dated May 4, 1997, as amended
(the "Merger Agreement").
In accordance with the terms of the Merger Agreement, which was formally
approved by Holdings' shareholders on August 7, 1997, Quaker merged with and
into Holdings, and the holders of approximately 94.7% of shares of Holdings'
common stock outstanding immediately prior to the merger received $23 in cash in
exchange for each of these shares. Holders of approximately 5.3% of shares of
Holdings' common stock outstanding immediately prior to the merger retained such
shares in the merged Company, as determined based upon shareholder elections and
stock proration factors specified in the Merger Agreement. Immediately following
the merger, continuing shareholders owned approximately 11.9% of shares of
outstanding Holdings' common stock. The aggregate value of the merger
transaction was approximately $940 million, including refinancing of the
Company's revolving credit facility.
13
<PAGE> 15
In connection with the merger, Holdings raised $85 million through the public
issuance of senior discount debentures (the "11 1/2% Notes"), in addition to
publicly issued senior subordinated notes for approximately $150 million (the "9
3/4 % Notes") by the Company. The Company also entered into a new syndicated
credit facility (the "New Credit Facility") providing for term loans of $470
million and revolving loans of up to $105 million. The proceeds of the senior
discount notes, senior subordinated notes, the initial borrowings under the New
Credit Facility and the purchase of approximately $225 million of Company common
stock by Quaker were used to finance the payments of cash to cash-electing
shareholders, to pay the holders of stock options and stock warrants canceled or
converted, as applicable, in connection with the merger, to repay the Company's
existing revolving credit facility and to pay expenses incurred in connection
with the merger.
As a result of the merger, the Company incurred various expenses, totaling
approximately $69.0 million on a pre-tax basis, in connection with consummating
the transaction. These costs consisted primarily of compensation costs,
underwriting discounts and commissions, professional and advisory fees and other
expenses. In addition to these expenses, the Company and Holdings also incurred
approximately $22.3 million of capitalized debt issuance costs (of which
approximately $18.9 million were incurred by the Company) associated with the
merger financing. These costs are being charged to interest expense over the
terms of the related debt instruments.
The following summarized unaudited pro forma information for the nine month
period ended March 31, 1998, 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 results of operations which actually
would have resulted had the merger occurred as of July 1, 1997 or which may
result in the future. Historical earnings per share data is not presented
because it would not be meaningful.
<TABLE>
<CAPTION>
(IN THOUSANDS)
NINE MONTHS ENDED
MARCH 31,
PRO FORMA INCOME STATEMENT INFORMATION: 1998
----
<S> <C>
Revenues................................................................... $603,249
Operating Income........................................................... 24,842
Loss from Continuing Operations Before Income Tax Benefit.................. (16,574)
Net Loss................................................................... (15,773)
</TABLE>
The pro forma net loss for the nine month period ended March 31, 1998, reflects
(1) a net increase in interest expense of approximately $3.6 million
attributable to additional financing incurred in connection with the merger, net
of the repayment of the Company's existing revolving credit facility, (2) the
elimination of the non-recurring merger expenses of approximately $69.0 million
and (3) the elimination of the net tax benefit related to these adjustments of
approximately $9.5 million, including the effect of valuation allowances against
certain deferred tax assets.
14
<PAGE> 16
NOTE 3: RESTRUCTURING PLAN
The Company has continued to experience declining trends in revenues, earnings
and EBITDA for the three and nine-month periods ended March 31, 1999 compared to
the corresponding periods ended March 31, 1998. The declining trends principally
result from lower sales of new service contracts, contracted base erosion, and
minimal growth from acquisitions.
As previously announced, on January 28, 1999, the Company initiated a corporate
restructuring plan ("Restructuring Plan") intended to restore revenue growth and
improve financial performance. The Restructuring Plan included the following key
components: (i) focusing on all aspects of the Company's operations - from sales
through service delivery - on providing information technology support services
to three customer groups: large corporate customers (also known as "enterprise
accounts"), medium sized accounts (also known as the "middle market"), and
alliance customers (including OEMs, software publishers, systems integrators,
distributors and resellers, etc.); (ii) a cost-reduction program designed to
reduce the Company's cost structure by $40 million annually upon full
implementation, including a reduction in force of more than 500 employees; and
(iii) financial structure changes, including an additional $7.3 million
investment in the form of senior unsecured notes in DecisionOne Corporation by
DLJMB, and the Company's agreement with its lenders to waive financial covenants
in the Company's credit agreement through July 29, 1999.
In connection with the above corporate restructuring plan, involuntary and
voluntary workforce reductions exceeded 800 employees during the third quarter
of fiscal 1999. As a result, the Company realized labor cost savings in excess
of $5 million during the third quarter. The workforce reductions will decrease
employment costs in excess of $30 million annually. The Company is on schedule
to achieve its $40 million annual cost reduction target.
NOTE 4: DEBT
During the three months ended March 31, 1998, the Company sought and obtained
amendments to the New Credit Facility to revise certain financial performance
measurements. The amended New Credit Facility contains various terms and
covenants which, among other things, place certain restrictions on the Company's
ability to pay dividends and incur additional indebtedness, and which require
the Company to meet certain minimum financial performance measurements,
including Adjusted EBITDA targets which increase over time. As of December 31,
1998, the Company obtained a waiver of certain financial covenants in the
amended New Credit Facility until January 28, 1999 and on January 27, 1999, the
Company entered into a Waiver of Financial Covenants (the "Waiver Agreement")
pursuant to which the Company's senior lenders agreed to waive financial
covenants in the amended New Credit Facility through July 29, 1999. These
waivers cover the quarters ending December 31, 1998, March 31, 1999 and June 30,
1999. Without these waivers, the Company would not be in compliance with certain
financial covenants under the amended New Credit Facility. The Waiver Agreement
requires the
15
<PAGE> 17
Company, among other things, to meet certain additional financial covenants as
of March 31, 1999, limits the additional borrowings available to the Company
under its revolver to $10 million, and generally, requires that interest
payments on loans must be made monthly. In connection with the Waiver Agreement,
the Company incurred waiver fees of approximately $4.3 million, which are being
amortized as interest expense through July 1999.
On January 27, 1999, Holdings' principal shareholder, DLJMB, and certain of its
affiliates, purchased $7.3 million of unsecured 14% Senior Notes (the "14%
Notes") due 2006 in DecisionOne Corporation. The proceeds of the 14% Notes were
used for general corporate purposes.
The Company met the required March 31, 1999 financial covenants contained in the
Waiver Agreement. The Company anticipates that it will engage in discussions
with its lenders regarding additional amendments, waivers or a restructuring of
the amended New Credit Facility by July 29, 1999. However, the Company has not
engaged in any such discussions and does not have any agreement with any lenders
participating in the amended New Credit Facility with respect to any amendments,
waivers, or restructuring beyond July 29, 1999. If the Company is unable to
obtain amendments, waivers or a restructuring beyond July 29, 1999, amounts
outstanding under the amended New Credit Facility could be declared due and
payable because of the resulting defaults. The Company has therefore classified
all amounts outstanding under the amended New Credit Facility as current as of
March 31, 1999. If amounts outstanding under the amended New Credit Facility are
declared to be due and payable because of a default, holders of the 9 3/4% Notes
and the 14% Notes would be permitted to declare such notes to be immediately due
and payable. The Company has therefore classified all amounts outstanding under
the 9 3/4% Notes and the 14% Notes as current as of March 31, 1999. In addition,
if amounts outstanding under the amended New Credit Facility are declared to be
due and payable because of a default, or if the lenders under the amended New
Credit Facility deliver a notice to the trustee for the 9 3/4% Notes that a
default exists under the amended New Credit Facility, the Company will be
prohibited from making the August 1, 1999 interest payment or any other payments
on its 9 3/4% Notes.
In connection with any further amendments, waivers or a restructuring of
the amended New Credit Facility, the Company could be required to restructure
its operations, sell assets, and/or issue additional capital or debt securities.
Any issuance of equity securities would likely be highly dilutive to existing
shareholders. Furthermore, any increase in the Company's debt service
requirements or any further reduction in amounts available for borrowings under
the amended New Credit Facility could significantly affect the Company's ability
to fund capital expenditures, acquisitions, and working capital. Management
believes that it can be successful in obtaining additional amendments, waivers
or a restructuring of the amended New Credit Facility.
However, there can be no assurance that the amended New Credit Facility will be
renegotiated on terms acceptable to the Company. Currently, the Company does not
have in place any alternative sources of liquidity if the Company cannot reach
agreement in respect of the amended New Credit Facility beyond July 29, 1999.
On August 1, 1999, interest payments of approximately $7.3 million and $0.5
million will become due on the Company's 9 3/4% Notes and 14% Notes,
respectively. In connection with any further amendments, waivers or
restructuring of the amended New Credit Facility, the lenders may seek to
prohibit the Company from borrowing under the amended New Credit Facility, and
from using its cash balances or operating cash flow, to make the August 1, 1999
interest payments. Unless the Company can obtain alternative sources of funds,
it will be unable to make these interest payments. The Company does not
currently have any alternative sources of funds available to it. If the Company
fails to make these interest payments, the holders of the 9 3/4% Notes and 14%
Notes would be permitted to declare such notes to be immediately due and
payable. In addition, an event of default would arise under the amended New
Credit Facility, giving those lenders the right to declare amounts outstanding
under the amended New Credit Facility to be immediately due and payable.
If the Company is unable to obtain the necessary funds to make the August 1,
1999 interest payments, or is prohibited from making these payments, the Company
may engage in discussions with holders of the 9 3/4% Notes and 14% Notes
regarding alternatives for restructuring the Company's obligations under these
notes. If any such holders or the lenders under the amended New Credit Facility
were to take any actions to declare the Company's obligations to be immediately
due and payable, it would be necessary for the Company to consider all available
alternatives.
16
<PAGE> 18
NOTE 5: EMPLOYEE SEVERANCE
During the quarter ended December 31, 1998, the Company recorded a $3.5 million
charge, included in selling, general and administrative expenses, for estimated
future severance costs in accordance with SFAS No. 112, Employers' Accounting
for Postemployment Benefits ("SFAS No. 112"), which reflects the actuarially
determined benefit costs for the separation of employees who are entitled to
benefits under pre-existing separation pay plans, including employees separated
under the Restructuring Plan (see Note 3 above). During the quarter ended March
31, 1999, the Company revised its estimate for future severance costs and
recorded an additional $1.0 million charge.
NOTE 6: COMPREHENSIVE INCOME (LOSS)
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, which established standards for reporting and
disclosure of comprehensive income, effective July 1, 1998. Total comprehensive
income (loss) for the three months ended March 31, 1999 and 1998 was ($20.3)
million and ($7.9) million, respectively. Total comprehensive income (loss) for
the nine months ended March 31, 1999 and 1998 was ($49.5) million and ($71.9)
million, respectively. Total comprehensive income (loss) includes net income
(loss), foreign currency translation gains (losses) and pension liability
adjustments for the periods presented.
NOTE 7: INCOME TAXES
The ultimate realization of net deferred tax assets is dependent upon the
generation of future taxable income during the periods in which the temporary
differences become deductible. Net deferred tax assets as of March 31, 1999 were
approximately $24.4 million and are included in other assets in the accompanying
balance sheet.
During the three and nine month periods ended March 31, 1999, the Company
recorded additional net deferred tax assets of approximately $8.1 million and
$18.3 million, respectively, principally due to the accumulation of additional
temporary differences. The Company recorded a corresponding increase to the
valuation allowance, due principally to the length of the period during which
the anticipated tax benefits are expected to be realized.
17
<PAGE> 19
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 1999 AND 1998
The following discussion should be read in conjunction with the audited
Consolidated Financial Statements of DecisionOne Holdings Corp. and
Subsidiaries, the audited Consolidated Financial Statements of DecisionOne
Corporation and Subsidiaries, and the respective Notes thereto, filed with these
registrants' Annual Report on Form 10-K for the fiscal year ended June 30, 1998.
Item 2, and 3 are presented with respect to both registrants noted above. (As
used within Item 2, and 3, the term "Company" refers to DecisionOne Holdings
Corp. and its wholly-owned subsidiaries, including DecisionOne Corporation, and
the term "Holdings" refers to DecisionOne Holdings Corp.)
The information herein contains forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 that involve a
number of risks and uncertainties. A number of factors could cause actual
results, performance, achievements of the Company, or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward looking statements. These factors include,
but are not limited to, the significant indebtedness of the Company; the
Company's ability to renegotiate the amended New Credit Facility; the ability of
the Company to achieve the Restructuring Plan; the ability to attract and retain
qualified personnel; 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 cash needs of the Company; inflation; changes in
costs of goods and services; economic conditions in general and in the Company's
specific market areas; demographic changes; changes in or failure to comply with
federal, state and/or local government regulations; liability and other claims
asserted against the Company; changes in operating strategy or development
plans; labor disturbances; changes in the Company's acquisition and capital
expenditure plans; and other factors referenced in "Risk Factors" in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1998. In
addition, such forward looking statements are necessarily dependent upon
assumptions, estimates and dates that may be incorrect or imprecise and involve
known and unknown risks, uncertainties and other factors. Accordingly, any
forward looking statements included herein do not purport to be predictions of
future events or circumstances and may not be realized. Forward looking
statements can be identified by, among other things, the use of forward-looking
terminology such as "believes", "expects", "may", "will", "should", "seeks",
"pro forma", "anticipates", "intends" or the negative of any thereof, or other
variations thereon or comparable terminology, or by discussions of strategy or
intentions. Given these uncertainties, readers are cautioned not to place undue
reliance on such forward looking statements. The Company disclaims any
obligations to update any such factors or to publicly announce the results of
any revisions to any of the forward looking statements contained herein to
reflect future events or developments.
18
<PAGE> 20
BUSINESS OVERVIEW
Founded in 1969, the Company began operations as a provider of key
punch machines under the tradename "Decision Data". During the 1980s, its
operations expanded to include the sale of midrange computer hardware and
related maintenance services. During fiscal 1993, the Company decided to focus
on providing computer maintenance and support services and sold its computer
hardware products business.
Since the beginning of fiscal 1993, the Company has established a major
presence in the computer maintenance and technology support services industry
through the acquisition and integration of assets and contracts of over 40
complementary businesses. Significant acquisitions included IDEA Servcom, Inc.
("Servcom"), certain assets and liabilities of which were acquired in August
1994 for cash consideration of approximately $29.5 million, and Bell Atlantic
Business Systems Services, Inc. ("BABSS"), which was acquired in October 1995
for cash consideration of approximately $250.0 million. In addition, certain
assets of the U.S. computer service business of Memorex Telex were acquired in
November 1996 for cash consideration of approximately $24.4 million, after
certain purchase price adjustments. These acquisitions were accounted for as
purchase transactions.
The Company's primary source of revenues is contracted services for
multivendor computer maintenance and technology support services, including
hardware support, end-user and software support, network support and other
support services. Approximately 91% of the Company's revenues during the three
and nine month periods ended March 31, 1999 were derived from contracts covering
a broad spectrum of computer services. These contracts typically have a
stipulated monthly fee over a fixed initial term (typically one year) and
continue thereafter unless canceled by either party. Such contracts generally
provide that customers may eliminate certain equipment and services from the
contract upon notice to the Company. In addition, the Company enters into
per-incident arrangements with its customers. Per-incident contracts can cover a
range of bundled services for computer maintenance or support services or for a
specific service, such as network support or equipment relocation services.
Another form of per-incident service revenues includes time and material
billings for services as needed, principally maintenance and repair, provided by
the Company. Furthermore, the Company derives additional revenues from the
repair of hardware and components at the Company's logistics services and depot
repair facilities.
Pricing of the Company's services is based on various factors
including equipment failure rates, cost of 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.
19
<PAGE> 21
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. Any failure to consummate acquisitions, enter into
new contracts or add additional services and equipment to existing contracts, or
any increase in erosion could have a material adverse effect on the Company's
profitability. The Company did not complete any acquisitions during the second
and third quarters of fiscal 1999 and it expects to be unable to finance
acquisitions pending renegotiation of its amended New Credit Facility (See
"Liquidity and Capital Resources").
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.
("DLJMB"). 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 among the Company and Quaker dated May 4, 1997, as amended (the
"Merger Agreement").
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 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
was approximately $940 million, including refinancing of DecisionOne
Corporation's revolving credit facility.
The Company incurred various expenses, aggregating approximately $69.0
million on a pre-tax basis, in connection with consummating the Merger. These
costs consisted primarily of compensation costs, underwriting discounts and
commissions, professional and advisory fees and other expenses. This one-time
charge is reflected in the accompanying unaudited Condensed Consolidated
Statements of Operations and Comprehensive Income (Loss) of the Company and of
DecisionOne Corporation and Subsidiaries for the nine months ended March 31,
1998. In addition to these expenses, the Company also incurred $22.3 million of
capitalized debt issuance costs associated with the merger financing. These
costs are being charged to interest expense over the terms of the related debt
instruments (see "Liquidity and Capital Resources").
20
<PAGE> 22
RESULTS OF OPERATIONS
The following discussion of results of operations is presented with
respect to the Company and with respect to DecisionOne Corporation and
Subsidiaries for the three and nine month periods ended March 31, 1999 and 1998.
The following tables set forth, for the three and nine month periods
ended March 31, 1999 and 1998, respectively, certain operating data of the
Company and of DecisionOne Corporation and Subsidiaries:
<TABLE>
<CAPTION>
DECISIONONE HOLDINGS CORP. DECISIONONE CORPORATION
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues $176,005 $200,910 $176,005 $200,910
Gross Profit 32,534 47,747 32,534 47,747
Operating Income (Loss) (4,333) 5,623 (4,333) 5,623
Net Loss (2) $(24,481) $(10,994) $(20,352) $(8,033)
========= ========= ========= ========
OTHER DATA:
EBITDA (1) (2) $28,386 $40,333 $28,386 $40,333
Less: Amortization of repairable parts (22,446) (21,167) (22,446) (21,167)
-------- -------- -------- --------
Adjusted EBITDA (1)(2) 5,940 19,166 5,940 19,166
Net cash provided by operating
activities 16,541 16,962 16,528 16,951
Net cash used in investing activities (20,350) (25,174) (20,350) (25,174)
Net cash provided by financing activities 3,778 8,707 11,334 8,707
</TABLE>
<TABLE>
<CAPTION>
DECISIONONE HOLDINGS CORP. DECISIONONE CORPORATION
NINE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues $557,066 $603,249 $557,066 $603,249
Gross Profit 114,334 139,335 114,334 139,335
Operating Loss (3,769) (44,204) (3,769) (44,204)
Net Loss (2) $(61,122) $(79,339) $(48,971) $(71,775)
========= ========= ========= =========
OTHER DATA:
EBITDA (1) (2) $92,929 $121,469 $92,929 $121,469
Less: Amortization of repairable parts (62,103) (59,955) (62,103) (59,955)
-------- -------- -------- --------
Adjusted EBITDA (1)(2) 30,826 61,514 30,826 61,514
Net cash provided by (used in)
operating activities 57,475 (11,410) 57,447 (12,604)
Net cash used in investing activities (64,266) (78,238) (64,266) (78,238)
Net cash provided by financing activities 35,524 87,861 35,589 87,861
</TABLE>
21
<PAGE> 23
(1) "EBITDA" represents income (loss) from continuing operations before interest
expense, interest income, income taxes (benefit), depreciation, amortization of
intangibles, amortization of repairable parts, amortization of discounts and
capitalized expenditures related to indebtedness, merger expenses (approximately
$69.0 million for the nine month period ended March 31, 1998), and incremental
charges related to the Company's ongoing service delivery re-engineering program
(approximately $0.1 million and $2.7 million for the three month periods ended
March 31, 1999 and 1998, respectively, and approximately $3.8 million and $4.9
million for the nine month periods ended March 31, 1999 and 1998, respectively.)
"Adjusted EBITDA" represents EBITDA reduced by the amortization of repairable
parts. Adjusted EBITDA is presented because it is relevant to certain covenants
contained in debt agreements entered into by the Company in connection with the
Merger, and because the Company believes that Adjusted EBITDA is a more
consistent indicator of the Company's ability to meet its debt service, capital
expenditure and working capital requirements.
(2) Net loss, EBITDA and Adjusted EBITDA for the three month period ended March
31, 1999 includes $1.0 million for employee severance charges, which were
determined under a pre-existing separation pay plan and $1.2 million for
Restructuring Plan related consulting fees. Net loss and EBITDA for the nine
month period ended March 31, 1999 includes $4.5 million for employee severance
charges, which were determined under a pre-existing separation pay plan and $1.9
million for Restructuring Plan related consulting fees.
Overview and Restructuring Plan
The Company has continued to experience declining trends in revenues,
earnings and EBITDA for the three and nine-month periods ended March 31, 1999
compared to the corresponding periods ended March 31, 1998. The declining trends
principally result from lower sales of new service contracts, contracted base
erosion, and minimal acquisition growth.
As previously announced, on January 28, 1999, the Company initiated a
corporate restructuring plan ("Restructuring Plan") intended to restore revenue
growth and improve financial performance. The Restructuring Plan included the
following key components: (i) focusing on all aspects of the Company's
operations - from sales through service delivery - on providing information
technology support services to three customer groups: large corporate customers
(also known as "enterprise accounts"), medium sized accounts (also known as the
"middle market"), and alliance customers (including OEMs, software publishers,
systems integrators, distributors and resellers, etc.); (ii) a cost-reduction
program designed to reduce the Company's cost structure by $40 million annually
upon full implementation, including a reduction in force of more than 500
employees; and (iii) financial structure changes, including DLJMB's additional
$7.3 million investment in the form of senior unsecured notes in DecisionOne
Corporation, and the Company's agreement with its lenders to waive financial
covenants in the Company's credit agreement through July 29, 1999 (see
"Liquidity and Capital Resources" for additional details).
In connection with the above corporate restructuring plan, involuntary
and voluntary workforce reductions exceeded 800 employees during the third
quarter of fiscal 1999. As a result, the Company realized labor cost savings in
excess of $5 million during the third quarter. The workforce reductions will
decrease employment costs in excess of $30 million annually. The Company is on
schedule to achieve its $40 million annual cost reduction target.
Notwithstanding the Restructuring Plan, the Company currently believes it is
likely that its revenues will decline further in the next fiscal quarter
compared to the third quarter ended March 31, 1999 and to the comparable
quarter ended June 1999.
22
<PAGE> 24
Operating income (loss) was ($4.3) million and $5.6 million for the
three months ended March 31, 1999 and 1998, respectively. Operating loss for the
three months ended March 31, 1999 included $1.0 million for employee severance
charges and $1.3 million for Restructuring Plan and re-engineering related
consulting fees. Operating income for the three months ended March 31, 1998
included $2.7 million for incremental re-engineering consulting fees. Excluding
these charges, operating income (loss) was ($2.0) million and $8.3 million for
the three months ended March 31, 1999 and 1998, respectively.
Operating loss was ($3.8) million and ($44.2) million for the nine
months ended March 31, 1999 and 1998, respectively. Operating loss for the nine
months ended March 31, 1999 included $4.5 million for employee severance charges
and $5.7 million for incremental re-engineering and Restructuring Plan related
consulting fees. Operating loss for the nine months ended March 31, 1998
included $69.0 million of merger expenses and $4.9 million for incremental
re-engineering consulting fees. Excluding these charges, operating income was
$6.4 million and $29.7 million for the nine months ended March 31, 1999 and
1998, respectively.
EBITDA was $28.4 million and $92.9 million for the three and nine
months ended March 31, 1999 compared to $40.3 million and $121.5 million for the
three and nine months ended March 31, 1998. Adjusted EBITDA was $5.9 million and
$30.8 million for the three and nine months ended March 31, 1999 compared to
$19.2 million and $61.5 million for the three and nine months ended March 31,
1998.
Three and Nine Month Periods Ended March 31, 1999 Compared to Three and Nine
Month Periods Ended March 31, 1998
Revenues: Revenues decreased by $24.9 million, or 12.4%, from $200.9
million for the three months ended March 31, 1998 to $176.0 million for the
three months ended March 31, 1999. This decrease was principally due to a
decline in maintenance contract-based revenues as a result of equipment
cancellations exceeding sales of new contracts.
Revenues decreased by $46.1 million, or 7.6%, from $603.2 million for
the nine months ended March 31, 1998 to $557.1 million for the nine months ended
March 31, 1999. Maintenance contract-based revenues decreased by $51.5 million
as a result of equipment cancellations exceeding sales of new contracts. This
decrease was partially offset by an increase in per-incident revenues of $5.4
million. Per-incident revenues are subject to periodic fluctuation depending
upon customer demand for such services.
The Restructuring Plan is intended, in part, to restore revenue growth
by increasing the Company's focus on selected customers within its enterprise,
middle market, and alliance groups. While the Company expects these actions to
result in revenue growth from current levels, the timing of such revenue growth,
if any, is uncertain. The Company currently believes it is likely that its
revenues will further decline in the next fiscal quarter compared to the third
quarter ended March 31, 1999 and to the comparable quarter ended June 30, 1998.
Gross Profit: As a percentage of revenue, gross profit declined from
23.8% for the three months ended March 31, 1998 to 18.5% for the three months
ended March 31, 1999. The gross profit percentage declined from 23.1% for the
nine months ended March 31, 1998 to 20.5% for
23
<PAGE> 25
the nine months ended March 31, 1999. The Company's re-engineering initiatives
and variable cost reductions related to revenue declines have resulted in lower
costs of $9.7 million and $21.2 million for the three and nine month periods
ended March 31, 1999, respectively, compared to the corresponding fiscal 1998
periods. The lower costs are not proportionate to the revenue reductions due to
the fixed nature of much of the Company's cost structure and since certain
variable cost reduction actions typically trail revenue declines.
Management expects to further reduce costs in the next fiscal quarter
as a result of Restructuring Plan initiatives. The Company has reduced its
workforce and streamlined operations by consolidating from seven to four service
regions. However, future gross profit performance is difficult to predict and
improvements therein will largely depend upon the Company's ability to generate
revenue growth.
Selling, General and Administrative Expenses: Selling, general and
administrative ("SG&A") expenses decreased by $5.1 million, or 14.4%, from $35.3
million for the three months ended March 31, 1998 to $30.2 million for the three
months ended March 31, 1999. Included in SG&A expenses for the quarter ended
March 31, 1999 were employee severance costs under a pre-existing separation pay
plan of $1.0 million and $1.3 million of Restructuring Plan and re-engineering
related consulting fees. Included in SG&A expenses for the quarter ended March
31, 1998 were incremental consulting fees incurred in connection with the
Company's re-engineering efforts of $2.7 million (see "Liquidity and Capital
Resources" for additional information with respect to these expenditures).
Excluding these costs, SG&A declined by $4.7 million principally due to
reductions in employment costs as a result of implementing the restructuring
plan initiatives.
SG&A expenses increased by $3.4 million, or 3.6%, from $94.5 million
for the nine months ended March 31, 1998 to $97.9 million for the nine months
ended March 31, 1999. Included in SG&A expenses for the nine months ended March
31, 1999 were employee severance costs under a pre-existing separation pay plan
of $4.5 million and $1.9 million of Restructuring Plan-related consulting fees.
Also included in SG&A expenses for the nine months ended March 31, 1999 and 1998
were incremental consulting fees incurred in connection with the Company's
re-engineering efforts of $3.8 million and $4.9 million, respectively (see
"Liquidity and Capital Resources" for additional information with respect to
these expenditures). Excluding these costs, SG&A decreased by $1.9 million
principally due to reductions in employment costs as a result of implementing
the restructuring plan initiatives.
Management expects to further lower SG&A costs in the next fiscal
quarter as a result of the continuation of Restructuring Plan initiatives.
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).
Interest Expense: The Company's interest expense, net of interest
income, increased by $1.5 million, or 8.1%, from $18.6 million for the three
months ended March 31, 1998 to $20.1 million for the three months ended March
31, 1999. This increase is principally due to the amortization of the $4.3
million waiver fee incurred under the Waiver Agreement. Net interest expense
increased by $8.7 million, or 17.9%, from $48.7 million for the nine months
ended March 31, 1998 to $57.4 million for the nine months ended March 31, 1999.
This increase is due principally to the
24
<PAGE> 26
Company's increased average borrowings as a result of the Merger, increases in
borrowings from the Company's revolver, the additional $7.3 million of debt
financing obtained on January 27, 1999 and the amortization of the $4.3 million
waiver fee incurred under the Waiver Agreement (see "Liquidity and Capital
Resources"). Average borrowings were approximately $766.5 million for the nine
months ended March 31, 1999, as compared to approximately $638.2 million for the
nine months ended March 31, 1998 (see Note 2 to the Company's unaudited
Condensed Consolidated Financial Statements for the three and nine month periods
ended March 31, 1999).
With respect to DecisionOne Corporation, consolidated interest expense,
net of interest income, increased by $2.0 million, or 14.3%, from $14.0 million
for the three months ended March 31, 1998 to $16.0 million for the three months
ended March 31, 1999. This increase is principally due to the amortization of
the $4.3 million waiver fee incurred under the Waiver Agreement. Net interest
expense increased by $7.4 million, or 19.6%, from $37.8 million for the nine
months ended March 31, 1998 to $45.2 million for the nine months ended March 31,
1999. This increase is due principally to the Company's increased average
borrowings as a result of the Merger, increases in borrowings from the Company's
revolver, the additional $7.3 million of debt financing obtained on January 27,
1999 and the amortization of the $4.3 million waiver fee incurred under the
Waiver Agreement (see "Liquidity and Capital Resources"). Average borrowings for
DecisionOne Corporation, on a consolidated basis, were $670.2 million for the
nine months ended March 31, 1999, as compared to $566.3 million for the nine
months ended March 31, 1998.
Consolidated net interest expense for DecisionOne Corporation during
the three and nine month periods ended March 31, 1999 was lower than the
aforementioned net interest expense 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 and interest income
on a $59.1 million parent company loan receivable held by DecisionOne
Corporation (see "Liquidity and Capital Resources").
Income Taxes: The $69.0 million of non-recurring expenses incurred in
consummating the Merger and certain other charges recorded by the Company in
fiscal 1998 resulted in significant additional tax loss carryforwards and
carrybacks. Net anticipated tax assets of approximately $25.4 million have been
reflected in the Company's March 31, 1999 consolidated balance sheet. The
anticipated net deferred tax assets have been reduced significantly, by a
valuation allowance for financial reporting purposes, due primarily to
management's projections of future taxable income and the length of the period
during which the anticipated tax benefits are expected to be realized.
The Company expects that its tax provision (benefit) in future periods
will reflect effective tax rates which vary significantly from enacted statutory
tax rates principally as a result of additional unrecognized tax benefits on
newly-arising net deferred tax assets. Future effective tax rates may also be
subject to volatility as a result of valuation allowance changes which arise
from differences between management's projections of future taxable income,
newly-arising net deferred tax assets and reversals of net deferred tax assets
and corresponding actual results.
25
<PAGE> 27
LIQUIDITY AND CAPITAL RESOURCES
Financing and Leverage
The Company incurred substantial indebtedness in connection with the
Merger. As of March 31, 1999 and June 30, 1998, the Company had outstanding debt
of approximately $787.9 million and $744.3 million, respectively. As of March
31, 1999 and June 30, 1998, the Company had available cash on hand of
approximately $35.1 million and $6.4 million, respectively. The Company's
significant debt service obligations could, under certain circumstances
including those described below, 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 fiscal year ended June 30, 1998.
In connection with the Merger, Holdings received proceeds of $85
million from the issuance 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 "New Credit
Facility"). 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 DLJMB and other institutional investors were used to finance the payments of
cash to cash-electing shareholders, to pay the holders of stock options and
stock warrants canceled or converted, as applicable, in connection with the
Merger, to repay DecisionOne Corporation's existing revolving credit facility
and to pay expenses incurred in connection with the Merger. (See Note 2 to the
Company's unaudited Condensed Consolidated Financial Statements for additional
information.)
During the three months ended March 31, 1998, the Company sought and
obtained amendments to the New Credit Facility to revise certain financial
performance measurements. The amended New Credit Facility contains various terms
and covenants which, among other things, place certain restrictions on the
Company's ability to pay dividends and incur additional indebtedness, and which
require the Company to meet certain minimum financial performance measurements,
including Adjusted EBITDA targets which increase over time. As of December 31,
1998, the Company obtained a waiver of certain financial covenants in the
amended New Credit Facility until January 28, 1999 and on January 27, 1999, the
Company entered into a Waiver of Financial Covenants (the "Waiver Agreement")
pursuant to which the Company's senior lenders agreed to waive financial
covenants in the amended New Credit Facility through July 29, 1999. These
waivers cover the quarters ending December 31, 1998, March 31, 1999 and June 30,
1999. Without these waivers, the Company would not be in compliance with certain
financial covenants under the amended New Credit Facility. The Waiver Agreement
requires the Company, among other things, to meet certain additional financial
covenants as of March 31, 1999, limits the additional borrowings available to
the Company under its revolver to $10 million, and generally, requires that
interest payments on loans must be made monthly. In connection with the Waiver
Agreement, the Company incurred waiver fees of approximately $4.3 million, which
are being amortized as interest expense through July 1999.
26
<PAGE> 28
On January 27, 1999, Holdings' principal shareholder, DLJMB, and
certain of its affiliates, purchased $7.3 million of unsecured 14% Senior Notes
(the "14% Notes") due 2006 in DecisionOne Corporation. The proceeds of the 14%
Notes were used for general corporate purposes.
The Company met the required March 31, 1999 financial covenants
contained in the Waiver Agreement. The Company anticipates that it will engage
in discussions with its lenders regarding additional amendments, waivers, or a
restructuring of the amended New Credit Facility by July 29, 1999. However, the
Company has not engaged in any such discussions and does not have any agreement
with any lenders participating in the amended New Credit Facility with respect
to any amendments, waivers, or restructuring beyond July 29, 1999. If the
Company is unable to obtain amendments, waivers or a restructuring beyond July
29, 1999, amounts outstanding under the amended New Credit Facility could be
declared due and payable because of the resulting defaults. The Company has
therefore classified all amounts outstanding under the amended New Credit
Facility as current as of March 31, 1999. If amounts outstanding under the
amended New Credit Facility are declared to be due and payable because of a
default, holders of the 11 1/2% Notes, the 9 3/4% Notes and the 14% Notes would
be permitted to declare such notes to be immediately due and payable. The
Company has therefore classified all amounts outstanding under the 11 1/2%
Notes, the 9 3/4% Notes and the 14% Notes as current as of March 31, 1999. In
addition, if amounts outstanding under the amended New Credit Facility are
declared to be due and payable because of a default, or if the lenders under the
amended New Credit Facility deliver a notice to the trustee for the 9 3/4% Notes
that a default exists under the amended New Credit Facility, the Company will be
prohibited from making the August 1, 1999 interest payment or any other payments
on its 9 3/4% Notes.
In connection with any further amendments, waivers or a restructuring
of the amended New Credit Facility, the Company could be required to restructure
its operations, sell assets, and/or issue additional capital or debt securities.
Any issuance of equity securities would likely be highly dilutive to existing
shareholders. Furthermore, any increase in the Company's debt service
requirements or any further reduction in amounts available for borrowings under
the amended New Credit Facility could significantly affect the Company's ability
to fund capital expenditures, acquisitions, and working capital. Management
believes that it can be successful in obtaining additional amendments, waivers
or a restructuring of the amended New Credit Facility. However, there can be no
assurance that the amended New Credit Facility will be renegotiated on terms
acceptable to the Company. Currently, the Company does not have in place any
alternative sources of liquidity if the Company cannot reach agreement in
respect of the amended New Credit Facility beyond July 29, 1999.
On August 1, 1999, interest payments of approximately $7.3 million and $0.5
million will become due on the Company's 9 3/4% Notes and 14% Notes,
respectively. In connection with any further amendments, waivers or
restructuring of the amended New Credit Facility, the lenders may seek to
prohibit the Company from borrowing under the amended New Credit Facility, and
from using its cash balances or operating cash flow, to make the August 1, 1999
interest payments. Unless the Company can obtain alternative sources of funds,
it will be unable to make these interest payments. The Company does not
currently have any alternative sources of funds available to it. If the Company
fails to make these interest payments, the holders of the 9 3/4% Notes and 14%
Notes would be permitted to declare such notes to be immediately due and
payable. In addition, an event of default would arise under the amended New
Credit Facility, giving those lenders the right to declare amounts outstanding
under the amended New Credit Facility to be immediately due and payable.
If the Company is unable to obtain the necessary funds to make the August 1,
1999 interest payments, or is prohibited from making these payments, the Company
may engage in discussions with holders of the 9 3/4% Notes and 14% Notes
regarding alternatives for restructuring the Company's obligations under these
notes. If any such holders or the lenders under the amended New Credit Facility
were to take any actions to declare the Company's obligations to be immediately
due and payable, it would be necessary for the Company to consider all available
alternatives.
Holdings and DecissionOne Corporation may from time to time depending
upon market conditions and subject to the limitations contained in its existing
debt agreements make open market purchases of the 11 1/2% Notes and the 9 3/4%
Notes.
The Company currently anticipates that its operating cash flow,
together with the additional $10 million of borrowings available under the
amended New Credit Facility as of March 31, 1999, will be sufficient to meet its
anticipated future operating expenses and capital expenditures and to service
its debt requirements as they become due through July 29, 1999. However, the
Company may be unable to obtain the necessary funds to enable it to make the
interest payments of approximately $7.8 million that will become due on its 9
3/4% Notes and 14% Notes on August 1, 1999, or the Company may be prohibited
from making these payments. The Company's ability to make scheduled payments of
principal and interest on, or to refinance, its debt obligations and to satisfy
its other obligations from and after July 29, 1999 will depend upon many
factors, including its ability to achieve the Restructuring Plan, to obtain
amendments, waivers or a restructuring of the amended New Credit Facility, to
attract alternative sources of liquidity and future operating performance, which
will be affected by general economic, financial, competitive, legislative,
regulatory, business and other factors beyond its control. See "Risk Factors"
included in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1998.
The interest rate applicable to outstanding borrowings under the
amended New Credit Facility as of March 31, 1999, varies, at the Company's
option, based upon LIBOR (plus
27
<PAGE> 29
applicable margins not to exceed 3.0%, as amended) or the Prime Rate (plus
applicable margin not to exceed 1.75%). As of March 31, 1999, the weighted
average interest rate applicable to loans under the New Credit Facility was
7.9%. Any additional borrowings up to the $10 million limit will be subject to
an annual interest rate of Prime plus 4.0%.
The Company has received notification from Nasdaq that it does not meet
the requirements for continued listing on the Nasdaq National Market or for
listing on the NASDAQ SmallCap Market. The Company is appealing Nasdaq's
determination to delist the Company's common stock, which will remain on the
National Market pending the outcome of the appeal.
Financial Condition:
Cash flow from operating activities for the nine months ended March 31,
1999 was approximately $57.5 million. These funds, together with borrowings
under the revolver, provided the required capital to fund repairable part
purchases and capital expenditures of approximately $75.6 million during the
nine months ended March 31, 1999, as well as the scheduled payments of previous
obligations for acquisition of contracts and assets of complementary businesses
for approximately $2.8 million during this period.
The Company incurred approximately $0.9 million and $7.6 million in
incremental expenditures for information systems and related re-engineering
initiatives during the three and nine months ended March 31, 1999, respectively,
and expects to incur an additional $1.8 million through June 30, 1999. The
initiatives being funded include the following: (i) enhancements to the
Company's service entitlement process which will ensure that customers are
billed for all work performed; (ii) improvements to the Company's dispatch
system and field engineer data collection, technical support tools and service
delivery processes, all of which are designed to increase productivity; (iii)
enhancements to the Company's help desk and central dispatch systems to provide
an integrated support solution to the customer base; and (iv) improvements to
the Company's field inventory tracking system which will facilitate increased
transfer of consumable and repairable parts among field locations and reduce
purchases of repairable parts.
The Company, or certain businesses as to which it is alleged that the
Company is a successor, have been identified as potentially responsible parties
in respect of three waste disposal sites that have been identified by the U.S.
Environmental Protection Agency as Superfund sites. In addition, the Company
received a notice several years ago that it may be a potentially responsible
party in respect of a fourth 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 accrued for in the accompanying condensed consolidated balance sheets as of
March 31, 1999 and June 30, 1998. 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.
28
<PAGE> 30
YEAR 2000 COMPLIANCE
This Year 2000 disclosure is being designated as a Year 2000 Readiness
Disclosure statement under the Year 2000 Readiness and Disclosure Act of 1998.
As is the case with most other businesses, the Company is in the
process of evaluating and addressing the Year 2000 readiness of both its
information technology systems and its non-information technology systems
(collectively referred to as "Systems"). Such Year 2000 readiness efforts are
designed to identify, address and resolve issues that may be created by computer
programs written to use two digits rather than four to define the applicable
year. Any of the Company's computer programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. If
this situation occurs, the potential exists for System failure or
miscalculations by computer programs, which could cause disruption of
operations.
The Company has completed an assessment of both its information
technology systems and its non-information technology systems. The Company has
four mission critical information technology systems, three of which have been
remediated and two of which are Year 2000 ready and have been placed into
service. The third system is in the process of being tested. Remediation is
continuing on the fourth mission critical information technology system and is
expected to be complete by August 1999. The Company has identified approximately
70 non-mission critical information technology systems, which the Company plans
to remediate using in-house personnel or through certifications and/or upgrades
from its vendors. Subsequently, the Company expects all of the systems to be
compliance tested by in-house personnel. The Company believes it is
approximately 60% complete with the above remediation processes and believes it
will be 100% complete by October 1999. The Company has commenced remediation of
its non-information technology systems and expects to have such remediation
complete by October 1999.
The Company has also initiated communications with all of its
significant business partners via a Vendor Readiness Survey to determine their
plans to comply with Year 2000. All responses are evaluated as received to
determine if additional action is required to determine the compliance of the
business partner.
The Company has engaged a consulting firm to assess the Company's
processes in place to achieve Year 2000 readiness. The Company also has in place
a Year 2000 Steering Committee, which meets regularly and periodically reports
the progress of Year 2000 readiness to the Company's executive management and
the Board of Directors.
The Company's approach to addressing Year 2000 readiness is to minimize
the possibility of any Year 2000-related interruptions or miscalculations.
Worst-case Year 2000 scenarios include the interruption of certain aspects of
the Company's business as a result of information technology systems failure or
the failure of the Company's business partners. Any such failure could have an
impact on future results; consequently, the Company is in the process of
formulating contingency plans.
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<PAGE> 31
The Company's approach to contingency planning is to employ a
combination of existing disaster recovery plans and the development of
additional plans as needed. Because the Company has elected to remediate its
mission critical legacy systems as opposed to replacing them, during a
worst-case scenario, the Company would invoke the disaster recovery plan the
Company has developed under its standard operating procedures. The Company had
scheduled an initial test of the disaster recovery plan at an off-site facility
in March, 1999. While certain issues arose relating to disaster recovery, the
Company was able to set the operating system date to February 29, 2000. In
addition, the Company's highest priority legacy system, the service delivery
system, has always had a back-up system residing on a different platform. This
back-up system has always stored four-digit year dates and is used when the
primary system is taken off line for maintenance. This system is in the process
of being tested for Year 2000 readiness. To gain a greater degree of confidence
that all other systems will function properly, the Company has elected to
conduct an integrated system test once all remediation work is completed. The
Company expects to conduct this test at an off-site facility specially developed
for Year 2000 testing.
The Company believes that additional contingency plans may need to be
developed relating to its suppliers. In June, 1998, the Company began the
process of surveying its vendors, suppliers, and key business associates to
determine their level of Year 2000 readiness. Responses to these inquiries
continue to be received, reviewed and assessed. The Company expects to identify
which of its vendors, suppliers, and business associates are mission-critical
and to develop alternate means as necessary. The Company plans to identify
mission-critical vendors and to establish related contingency planning by
September, 1999. In the meantime, the Company plans to continue to monitor the
need for additional contingency planning.
As of March 31, 1999 the Company incurred costs of approximately $4.2
million and expects to incur approximately $3.1 million thereafter to remediate
or upgrade all of the Company's Systems. The $3.1 million represents
approximately 10% of the Company's information technology budget. No significant
information technology projects have been deferred due to the Company's Year
2000 efforts. The future remediation and upgrade costs to be incurred are based
on management's best estimates, which were derived using assumptions of future
events including the continued availability of resources and the reliability of
third party modification plans. There can be no assurance that this estimate
will be achieved and actual results may be materially different. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel with appropriate skills and the
ability to locate and correct all non-compliant Systems.
The Company is aware of the potential for claims against it and other
companies for damages for products and services that were not Year 2000
compliant. Although the Company believes it is taking adequate measures to
address Year 2000 issues, the Company is uncertain how it may be affected by
litigation given the evolving nature of such litigation. The Company believes,
however, that it does not have material exposure to liability for such claims.
While the Company does not believe that the Year 2000 matters presented
in this discussion will have a material impact on its business, financial
condition or results of operations, it is uncertain whether or to what extent
the Company may be affected by such matters, given the forward-looking nature of
the Year 2000 issues.
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<PAGE> 32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company uses its revolving credit facility, term loans, senior
discount debentures, senior unsecured notes, and senior subordinated notes to
finance a significant portion of its operations. These on-balance sheet
financial instruments, to the extent they provide for variable rates of
interest, expose the Company to interest rate risk resulting from changes in
LIBOR or the prime rate. The Company uses off-balance sheet interest rate swap
and collar agreements to partially hedge interest rate exposure associated with
on-balance sheet financial instruments. All of the Company's derivative
financial instrument transactions are entered into for non-trading purposes. The
terms and characteristics are matched with the underlying on-balance
instruments, subject to the terms of the New Credit Facility.
To the extent that the Company's financial instruments expose the
Company to interest rate risk and market risk, they are presented in the table
below. The table presents principal cash flows and related interest rates by
year of maturity for the Company's revolving credit facility, term loans, senior
discount debentures, senior unsecured notes, and senior subordinated notes in
effect at March 31, 1999 and, in the case of the senior discount notes, exclude
the potential exercise of the redemption feature. For interest rate swaps and
collars, the table presents notional amounts and the related reference interest
rates by year of maturity. Fair values included herein have been determined
based on (1) management's estimates of indicative market prices for the term
loans, the revolver, senior discount debentures, senior unsecured notes and
senior subordinated notes and (2) estimates obtained from dealers to settle
interest rate swap and collar agreements.
<TABLE>
<CAPTION>
Fiscal Year of Maturity Fair Value
------------------------ Total Due at Mar. 31,
Interest Rate Sensitivity 1999 2000 2001 2002 2003 Thereafter At Maturity 1999
- ------------------------- ---- ---- ---- ---- ---- ---------- ----------- ----
(DOLLARS IN THOUSANDS)
Debt:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate -- -- -- -- -- $305,700 $305,700 $15,552
Average Interest Rate -- -- -- -- -- 10.7% -- --
Variable Rate $2,637 $19,325 $36,875 $49,062 $73,438 $345,382 $526,719 $173,817
Average Interest Rate 7.9% 7.9% 7.9% 7.9% 7.9% 7.9% -- --
Interest Rate Instruments:
Variable to Fixed Swaps -- $75,000 -- -- -- -- $75,000 $(408)
Average Pay Rate -- 5.9% -- -- -- -- -- --
Average Receive Rate -- 5.7% -- -- -- -- -- --
Collars: -- $25,000 $75,000 -- -- -- $100,000 $(763)
Average Cap Rate -- 5.8% 6.7% -- -- -- -- --
Average Floor Rate -- 5.7% 5.7% -- -- -- -- --
</TABLE>
31
<PAGE> 33
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
DECISIONONE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable
Item 2. Changes in Securities and Use of Proceeds.
Not applicable
Item 3. Defaults Upon Senior Securities.
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable
Item 5. Other Information.
Not applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Description of Document
------ -----------------------
10.1 Executive Retention Plan
10.2 Agreement with Stephen J. Felice, dated
February 17, 1999.
27.1 Financial data schedule - DecisionOne Holdings Corp.
27.2 Financial data schedule - DecisionOne Corporation
(b) Reports on Form 8-K
On February 10, 1999, DecisionOne Holdings Corp. and
DecisionOne Corporation filed a Form 8-K, reporting a delay in
implementing the previously reported change in their fiscal
year end from June 30 to December 31. Each company's fiscal
year will end on June 30, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
DecisionOne Holdings Corp.
DATE: May 17, 1999 /s/ Thomas J. Fitzpatrick
------------ -----------------------------------
Thomas J. Fitzpatrick
Executive Vice President and
Chief Financial Officer
DecisionOne Corporation
DATE: May 17, 1999 /s/ Thomas J. Fitzpatrick
------------ -----------------------------------
Thomas J. Fitzpatrick
Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
33
<PAGE> 1
EXHIBIT 10.1
DECISIONONE CORPORATION
EXECUTIVE RETENTION PLAN
1. Severance. If the employment of any employee of the Company listed on
Schedule 1.1 hereto is terminated without "Cause" (other than by reason of
death or disability), or if the work location of any employee is moved more
than 50 miles from employee's current work location and the employee elects
not to accept such relocation, then the employee will receive Severance
Benefits as set forth below within ten days of Company's receipt of an
executed release from the employee, in form satisfactory to the Company,
releasing the Company from all claims. "Cause" shall mean a determination
by the Board of Directors of the Company that an employee (i) failed to
obey the reasonable and lawful orders of the Board of Directors, (ii) acted
with gross negligence in the performance of his or her duties, (iii)
willfully breached or habitually neglected his or her duties, or (iv)
committed a felony or any act involving dishonesty, fraud or moral
turpitude. The Severance Benefits for the employees listed on Schedule 1.1
will be (i) payment of a lump-sum amount, less applicable withholding
deductions, equal to the employee's then current annual base salary, and
(ii) continuation of medical, dental and life insurance benefits at
employee price tags for a 12 month period.
2. Retention Bonus. Each employee listed on Schedule 1.1 hereto who remains
employed by the Company through August 16, 1999 will receive, on or before
August 16, 1999, the Retention Bonus set forth below. If the employment of
any such employee is terminated without Cause (as defined in Section 1)
before August 16, 1999, then the Retention Bonus shall be pro-rated for the
period from February 1, 1999 through the date of termination and paid
simultaneously with the employee's Severance Benefits. The Retention Bonus
for employees listed on Schedule 1.1 shall be an amount equal to three
months' base salary as of July 31, 1999 (or date of termination).
3. Guaranty . The payment of the Retention Bonuses and Severance Benefits
for the employees listed on Schedule 1.1 will be unconditionally guaranteed
by an irrevocable letter of credit to be issued by a financial institution
to be approved by the Compensation Committee of the Board of Directors.
4. Supersedes Prior Agreements. The Severance Benefits and Retention
Bonuses payable hereunder are in lieu of, and supersede in their entirety,
any such benefits payable to the employees covered hereunder pursuant to
any Company plan or prior agreement.
<PAGE> 2
5. Non-Solicitation. As a condition to receiving benefits under this Plan,
employees shall agree that, in the event of their termination of employment
with the Company for any reason, for a period of one year from the date of
termination, they will not solicit (i) employees of the Company for
employment with any entity with which they are affiliated, or (ii)
customers of the Company for any service being provided to the customer by
DecisionOne.
6. Confidentiality. As a condition to participation in this Plan, each
employee shall agree to not disclose to any third party or other employee
of the Company (other than senior executives of the Company) the identity
of any employee of the Company eligible for benefits under the Key Manager
Retention Plan.
7. Remedies. In the event that an employee violates the terms of Section 5
or 6 hereof, the Company shall have the right to recover all monies paid to
the employee under this Plan and to seek injunctive relief.
8. No Right to Employment. Participation in this Plan shall not be
construed as giving an employee the right to be retained in the employ of
the Company. Further, the Company may at any time dismiss an employee from
employment, free from any liability or claim under the Plan, except as
otherwise expressly provided in this Plan.
9. Governing Law. The validity, construction, and effect of this Plan shall
be determined in accordance with the laws of the State of Delaware, without
giving effect to the conflict of laws principles thereof.
<PAGE> 3
EXECUTIVE RETENTION PLAN
SCHEDULE 1.1
Farrell, Thomas
Fitzpatrick, Thomas J.*
Giordano, Joseph S.
Heller, Charles N.
Molchan, Thomas M.
Scott, Kirk
Wilson, Dwight T.
Davis, Mark
Eggenberg, Pat
Martin, Greg G.
* Notwithstanding Section 2 of the Plan, Mr. Fitzpatrick's Retention Bonus
shall be nine months' base salary.
<PAGE> 1
Exhibit 10.2
CONFIDENTIAL
February 17, 1999
Stephen J. Felice
DecisionOne Holdings Corp.
50 East Swedesford Road
Frazer, PA 19355
Dear Steve:
This letter will confirm our mutual understanding concerning the
termination of your employment with DecisionOne Holdings Corp. ("HOLDINGS") and
DecisionOne Corporation (the "COMPANY") and, except as set forth below, the
termination of any rights and obligations of either you, Holdings or the Company
under the Employment Agreement dated as of August 17, 1997 among you, Holdings
and the Company (the "EMPLOYMENT AGREEMENT") and the related award agreements
under Holdings's Direct Investment Program and Management Incentive Plan (such
award agreements, plan documents and the Note, as defined below, are hereinafter
referred to as the "RELATED AGREEMENTS"), including the Promissory Note and
Pledge dated August 7, 1997 (the "NOTE"). Capitalized terms used herein and not
defined herein shall have the meanings assigned to them in the Employment
Agreement or the Related Agreements, as applicable.
You and the Company hereby agree as follows:
1. Your employment with the Company will terminate effective February
18, 1999, which shall be the "date of termination of employment," as referenced
in the Employment Agreement and the Related Agreements. You will continue to be
paid your Base Salary through March 5, 1999.
2. The Company will pay you as severance, $300,000, payable in five
substantially equal monthly installments (without interest), commencing February
17, 1999 or as soon as practicable thereafter and ending on July 17, 1999. Each
monthly payment will be made on, or as soon as practicable after, the 17th day
of the month, or if such day is not a business day, on the next succeeding
business day. All such payments will be made by check drawn on the Company's
bank account.
<PAGE> 2
3. You and your family will continue to be provided group health
insurance coverage until group medical coverage from subsequent employment is
available to you. Such continued coverage under the Company's group health plan
shall be made available to you on the same basis as that on which you currently
participate. Assuming that you commence employment with Dell Computer, as you
have previously described to the Company, such continued coverage would
terminate upon the date coverage provided by Dell becomes effective. In no
event, however, will such continued coverage extend beyond May 17, 2000.
4. You acknowledge that you continue to be bound by Section 9
(Noncompetition/Confidential Information) of your Employment Agreement, and that
the Company will be entitled to discontinue any payments hereunder as liquidated
damages for any breach of such provisions. For the avoidance of doubt, the
Company agrees that the job you have described as vice president of customer
service for large corporate accounts with Dell Computer will not violate your
covenant in Section 9(a) of the Employment Agreement.
5. You agree to return your corporate car to the Company in good
working order no later than 5:00 p.m. on February 22, 1999. Keys and all
relevant instruments and documents will be delivered to Dwight Wilson. The
Company will make one additional payment of not more than $3,750 on your
corporate-sponsored club membership.
6. You agree to the cancellation of any stock options currently held by
you and pledged under the Note, and to the transfer of any shares of Holdings
stock pledged under the Note to the Company or Holdings, in full satisfaction of
the Note. Holdings and the Company agree that such cancellation and transfer
will constitute full satisfaction of the Note.
7. In consideration of receipt of the foregoing, you hereby agree to
and do fully and completely release, discharge and waive any and all claims,
complaints, causes of action, actions, suits, debts, sums of money, contracts,
controversies, agreements, promises, or demands of whatever kind, in law or in
equity, which you ever had, now have or which you, your heirs, executors or
administrators may have (hereinafter "CLAIMS") against Holdings, the Company and
its shareholders, subsidiaries, affiliates, predecessors, successors and assigns
(collectively with the Company, the "COMPANY AFFILIATES"), and each and all of
their officers, directors, partners, associates, agents, shareholders and
employees by reason of any event, matter, cause or thing which has occurred to
the date of execution of this Agreement. You understand and acknowledge that
this release specifically covers, but is not limited to, any and all Claims
which you have or may otherwise have against Holdings or the Company relating in
any way to compensation, or to any other terms, conditions or circumstances of
your employment with the Company and to your termination of such employment,
whether for severance or
<PAGE> 3
based on statutory or common law claims for employment discrimination (including
but not limited to any claims under the Age Discrimination in Employment Act,
the Americans with Disabilities Act, or the Employee Retirement Income Security
Act of 1974 ("ERISA")), wrongful discharge, breach of contract (including the
Employment Agreement and the Related Agreements except as such agreements may be
amended hereby), or any other theory, whether legal or equitable.
Notwithstanding the foregoing, this release shall not apply to any Claims
relating to enforcement of rights or benefits under this letter agreement.
8. In consideration of good and valuable consideration as set forth in
this letter agreement, the Company Affiliates and each of their respective
successors and assigns hereby release and forever discharge you, Stephen J.
Felice, and your heirs, executors, administrators, and their respective
successors and assigns of and from all or any manner of claims, complaints,
causes of action, actions, suits, debts, sums of money, contracts,
controversies, agreements, promises or demands of whatever kind, in law or in
equity, which the Company ever had, now has or which the Company may have
against you by reason of any event, matter, cause or thing (except for a breach
of this letter agreement or of the Employment Agreement and Related Agreements
as amended hereby) which has occurred to the date of this letter agreement.
The Company agrees to indemnify and hold you harmless from and against
any and all claims asserted against you related to acts performed by you within
the scope of your employment or in your capacity as an officer of the Company or
Holdings, as long as you performed your duties within the law and regulatory
requirements.
9. You and the Company acknowledge that the decision to terminate your
employment was made for both professional and personal reasons. You and the
Company agree not to disclose or cause to be disclosed in any way the terms of
this letter agreement, the facts and circumstances underlying this letter
agreement or the fact that such letter agreement exists, except for the purpose
of enforcing this letter agreement, should that ever be necessary, and except as
and when such disclosure is required by law or applicable securities law
requirements. You and the Company will agree on wording of a press release
announcing your resignation, to be issued by the Company no later than the close
of business on February 17, 1999.
10. You agree that you will not make or cause to be made, directly or
indirectly, any disparaging or derogatory statement about the Company or any of
its shareholders, or any of their respective directors, officers, employees or
agents. The Company agrees that it will not make or cause to be made, directly
or indirectly, any disparaging or derogatory statement about you.
<PAGE> 4
11. The Company shall be entitled to withhold from any payment owing to
you hereunder any and all applicable federal, state and local withholding or
payroll taxes.
12. As amended hereby, the Employment Agreement and the Related
Agreements contain the entire understanding of you, Holdings and the Company
with respect to your employment and termination of employment and supersede any
and all prior understandings and agreements among you, Holdings and the Company
with respect thereto, whether oral or written. If there is any inconsistency
between the original terms of the Employment Agreement and the Related
Agreements and the terms of this letter agreement, this letter agreement shall
govern. In that regard, you agree that the payments, benefits and entitlements
referenced in Sections 2, 3 and 6 hereof are in full satisfaction of any
payments, benefits or entitlements owed to you under the Employment Agreement
and Related Agreements. This letter agreement may not be changed or altered,
except by a writing signed by you, Holdings and the Company. You, Holdings and
the Company each agree to cooperate to take any further actions needed to effect
the intent expressed in this letter agreement.
13. This letter agreement shall be binding upon the parties hereto and
their respective successors and assigns. Holdings and the Company shall require
any person, firm, corporation or other business entity that acquires all or any
material portion of the assets of Holdings or the Company, whether by purchase,
merger or otherwise, to assume its obligations hereunder. Otherwise, this
Agreement is not assignable by Holdings or the Company.
14. The laws of the Commonwealth of Pennsylvania will apply to any
dispute concerning this letter agreement. If any clause of this letter agreement
should ever be determined to be unenforceable, it is agreed that this will not
affect the enforceability of any other clause or the remainder of this letter
agreement.
15. The obligations to you hereunder are the joint and several
obligations of Holdings and the Company.
<PAGE> 5
We wish you success in your future endeavors.
Very truly yours,
DECISIONONE HOLDINGS CORP.
By: /s/ PETER T. GRAUER
--------------------------------
Name: Peter T. Grauer
Title: Chairman of the Board
DECISIONONE CORPORATION
By: /s/ THOMAS M. MOLCHAN
--------------------------------
Name: Thomas M. Molchan
Title: AVP and General Counsel
Agreed and Accepted
/s/ STEPHEN J. FELICE
- ----------------------------
Stephen J. Felice
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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