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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
DECISIONONE HOLDINGS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 0-28090 13-3435409
(STATE OR OTHER JURISDICTION OF (COMMISSION FILE #) (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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DECISIONONE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 333-28411 23-2328680
(STATE OR OTHER JURISDICTION OF (COMMISSION FILE #) (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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50 EAST SWEDESFORD ROAD
FRAZER, PENNSYLVANIA 19355
(610) 296-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF THE
PRINCIPAL EXECUTIVE OFFICES OF REGISTRANTS)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
DECISIONONE HOLDINGS CORP.:
11 1/2% SENIOR DISCOUNT DEBENTURES DUE 2008
DECISIONONE CORPORATION:
9 3/4% SENIOR SUBORDINATED NOTES DUE 2007
DECISIONONE HOLDINGS CORP.: COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether DecisionOne Holdings Corp. (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark whether DecisionOne Corporation (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
The aggregate market value of the voting stock of DecisionOne Holdings
Corp. held by non-affiliates, based upon the closing price of Common Stock on
September 10, 1999, as reported by the OTC Bulletin Board, was approximately
$738,000. In making such calculation, registrant is not making a determination
of the affiliate or non-affiliate status of any holders of shares of Common
Stock. All of the voting stock of DecisionOne Corporation is held by DecisionOne
Holdings Corp.
At September 10, 1999, 12,564,485 shares of DecisionOne Holdings Corp.
common stock were outstanding and one share of DecisionOne Corporation common
stock was outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
DecisionOne Corporation meets the conditions set forth in General
Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this form with
the reduced disclosure format.
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TABLE OF CONTENTS
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ITEM NO. PAGE
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PART I
1. Business.................................................... 1
2. Properties.................................................. 15
3. Legal Proceedings........................................... 15
4. Submission of Matters to a Vote of Security Holders......... 16
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 16
6. Selected Financial Data..................................... 17
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 30
8. Financial Statements and Supplementary Data................. 31
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 31
PART III
10. Directors and Executive Officers of the Registrant.......... 31
11. Executive Compensation...................................... 32
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 36
13. Certain Relationships and Related Transactions.............. 39
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 40
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
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 ability to complete the Restructuring, as described
herein, the competitive environment in the computer maintenance and technology
support services industry in general and in the Company's specific market areas;
changes in prevailing interest rates and the availability of and terms of
financing to fund the anticipated growth of the Company's business; inflation;
changes in costs of goods and services; economic conditions in general and in
the Company's specific market areas; demographic changes; changes in or failure
to comply with federal, state and/or local government regulations; liability and
other claims asserted against the Company; changes in operating strategy or
development plans; the ability to attract and retain qualified personnel; the
significant indebtedness of the Company; labor disturbances; changes in the
Company's acquisition and capital expenditure plans; and other factors
referenced herein. In addition, such forward looking statements are necessarily
dependent upon assumptions, estimates and dates that may be incorrect or
imprecise and involve known and unknown risks, uncertainties and other factors.
Accordingly, any forward looking statements included herein do not purport to be
predictions of future events or circumstances and may not be realized. Forward
looking statements can be identified by, among other things, the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," "seeks," "pro forma," "anticipates," or "intends" or the negative of
any thereof, or other variations thereon or comparable terminology, or by
discussions of strategy or intentions. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward looking
statements. The Company disclaims any obligations to update any such factors or
to publicly announce the results of any revisions to any of the forward looking
statements contained herein to reflect future events or developments.
PART I
ITEM 1. BUSINESS
Item 1. is presented with respect to both registrants submitting this
filing, DecisionOne Holdings Corp. ("Holdings") and DecisionOne Corporation
(collectively, the "Company").
GENERAL
The Company is the largest independent provider of multivendor computer
maintenance services in the United States, based on Dataquest Incorporated
("Dataquest") estimates for calendar year 1998. The Company offers its customers
a single-source solution for virtually all of their computer maintenance and
technology support requirements, including hardware maintenance services,
software support, end-user/help desk services, network support and other
technology support services. The Company believes that it is the most
comprehensive independent (i.e., not affiliated with an original equipment
manufacturer, or "OEM") provider of these services across a broad range of
computing environments, including data center, midrange, network and desktops.
The Company provides support for over 30,000 hardware products manufactured by
more than 1,000 OEMs. The Company also supports most major operating systems and
over 150 off-the-shelf software applications. The Company delivers its services
through an extensive service delivery organization comprised of more than 3,500
service professionals located in more than 150 service locations throughout the
United States and Canada, as well as through strategic alliances in selected
international markets.
The Company services over 36,000 customers at over 145,000 sites across the
United States and Canada. The Company's customers include a diverse group of
national and multinational corporations, including SABRE Group, Inc., (an
affiliate of American Airlines, Inc.), Sun Microsystems, Inc., Bank of America,
DuPont Company, Southwestern Bell Corporation, Netscape Communications
Corporation and Bell Atlantic.
General Business Development. The Company's roots extend back to 1969,
when it was first known as Decision Data, then a provider of keypunch machines.
During the 1980's, its operations expanded to include
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the sale of midrange computer hardware products and related maintenance
services. In 1992, the Company sold off its computer hardware products business
and focused primarily on providing computer maintenance and technology support
services.
Proceeds from the sale of the hardware business allowed the Company to
embark upon a strategy of selective acquisitions aimed at bolstering its
infrastructure and capabilities. The Company also acquired key "books of
business" designed to help it leverage its infrastructure by increasing the
geographic density of its customer base. Through this strategy, the Company
established a major presence in the servicing of midrange computer systems by
successfully acquiring and integrating nearly 30 companies in just over three
years. The first significant acquisition was the 1994 purchase of IDEA Servcom,
Inc., which raised the Company's customer base to 27,000 and, in following
months, increased the revenues to where they had been before the sale of the
hardware unit.
In October 1995, the Company completed its largest acquisition -- that of
Bell Atlantic Business Systems Services, Inc. ("BABSS"), with approximately
4,400 employees and more than $500 million in sales. BABSS possessed a breadth
of services, market presence, a blue-chip customer base and over 30 years of
experience in the computer service business that complemented and strengthened
the Company. Upon the acquisition, the Company changed its name to DecisionOne.
In 1996, the Company purchased the assets of the U.S. service business of
Memorex Telex Corporation, a hardware manufacturer and computer service company
with annual revenues of more than $100 million. In 1997, acquisitions included
certain assets of Xerox Technology Services (Canada) and the maintenance
business on several types of tape-drive storage machines from EMC(2)
Corporation.
In October 1997, the Company acquired the network service and support
business of Gandalf Technologies, a provider of ISDN and frame relay remote
access equipment. As a result, the Company gained key network technical
expertise to support its growing network service portfolio. Additionally, in its
fiscal year 1998, the Company acquired the assets of General Diagnostics
Incorporated, a hardware depot repair firm. This transaction added eight
additional depot repair centers spread across the United States to the Company's
network of repair centers.
Merger. On August 7, 1997, the Company consummated a merger with an
affiliate of DLJ Merchant Banking Partners II, L.P. ("DLJMB") pursuant to which
DLJMB and certain of its affiliates (collectively, the "DLJMB Group") acquired
approximately 10.9 million shares, or 87.4%, of the Holdings Common Stock in
exchange for approximately $225 million (the "Merger"). Such equity proceeds,
along with $145.5 million of net proceeds from the sale of the 9 3/4% Senior
Subordinated Notes due 2007 (the "9 3/4% Notes"), $81.6 million of net proceeds
from the sale of 148,400 units consisting of 11 1/2% Senior Discount Debentures
due 2008 and warrants to purchase 281,960 shares of Holdings common stock
exercisable at $23 per share (the "11 1/2% Notes") and borrowings of $470
million under a $575 million senior secured loan facility (the "Existing Credit
Facility") were used to repurchase approximately 26.5 million shares of common
stock of Holdings for approximately $609.7 million, cash out then existing
Holdings options and warrants, repay the Company's then existing revolving
credit facility, and pay various fees and expenses incurred in connection with
the Merger. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Current Operating Plan. The Company's results from operations have been
significantly below those anticipated at the time of the Merger. The Company has
continued to experience declining trends in revenues, earnings and EBITDA
throughout fiscal 1998 and 1999, and has incurred net losses in both fiscal
years. The declining trends have resulted principally from lower sales of new
service contracts, continued erosion of the Company's existing revenue base,
minimal acquisition growth and decreased per-incident revenues.
On January 28, 1999, the Company initiated an operating plan intended to
restore revenue growth and improve financial performance (the "Operating Plan").
The Operating Plan included the following key components: (i) focusing 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" customers), medium-sized
accounts (also known as "Middle-Market" customers),
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and alliance customers, including OEMs, software publishers, systems
integrators, distributors and resellers, etc. (also known as "Strategic
Alliance" customers); (ii) a cost-reduction program designed to reduce the
Company's cost structure by $40 million annually upon full implementation,
including a workforce reduction of more than 500 employees; and (iii) financial
structure changes, including an additional $7.3 million investment by DLJMB and
certain of its affiliates in the form of 14% Senior Unsecured Notes due 2006
(the "14% Notes"), and the Company's agreement with its lenders to waive all
financial covenants under the Existing Credit Facility through July 29, 1999
(the "Waiver").
On July 14, 1999, Holdings' common stock was delisted from the NASDAQ
National Market System. Since that date, Holdings' common stock has been quoted
on the OTC Bulletin Board.
Indebtedness Restructuring. On July 29, 1999, the Waiver expired. As a
result, since July 29, 1999, the Company has been in default of certain
financial covenants under the Existing Credit Facility. In addition, on August
2, 1999, the Company failed to make the interest payments due on both the 9 3/4%
Notes and the 14% Notes. Given the existing events of default under the Existing
Credit Facility, the Existing Credit Facility lenders (the "bank lending group")
had previously delivered to the Company a notice prohibiting such payments. As a
result of the Company's failure to comply with such financial covenants and to
make such interest payments, events of default have occurred under the Existing
Credit Facility and under the indentures for the 9 3/4% Notes and the 14% Notes.
Accordingly, the bank lending group and the holders of the 9 3/4% Notes and the
14% Notes could declare the amounts outstanding under these debt instruments
immediately due and payable and seek to exercise remedies, including, in the
case of the Existing Credit Facility, foreclosure on the collateral securing
such amounts.
On August 2, 1999, the Company announced an agreement in principle with the
bank lending group and the holders of the 14% Notes on the restructuring of its
indebtedness (the "Indebtedness Restructuring"). Under the terms of the final
agreement, the bank lending group would exchange approximately $523 million in
existing indebtedness for approximately 94.6 percent of the reorganized
Company's equity and $250 million in new senior secured bank debt (the "New
Credit Agreement"). The agreement further provides that the holders of the 14%
Notes would exchange their notes for (a) warrants equal to approximately 4.2
percent of the reorganized Company's fully diluted equity, at an exercise price
based on an enterprise value of $350 million and (b) warrants equal to
approximately 2.0 percent of the reorganized Company's equity, at an exercise
price based on an equity valuation of $280 million. The holders of the 9 3/4%
Notes would exchange their notes for (a) approximately 5.0 percent of the
reorganized Company's equity; (b) warrants equal to approximately 2.8 percent of
the reorganized Company's fully diluted equity, at an exercise price based on an
enterprise value of $350 million; (c) warrants equal to approximately 5.0
percent of the reorganized Company's equity, at an exercise price based on an
equity valuation of $200 million; and (d) warrants equal to approximately 3.0
percent of the reorganized Company's equity, at an exercise price based on an
equity valuation of $280 million. In addition, the holders of the 11 1/2% Notes
and the holders of unsecured claims of Holdings would receive a total of
approximately 0.4 percent of the reorganized Company's equity.
The proposed Indebtedness Restructuring will be implemented pursuant to a
prepackaged bankruptcy subject to the approval of a United States Bankruptcy
Court (the "Bankruptcy Court") pursuant to Chapter 11 of Title 11 of the United
States Code, as amended (the "Bankruptcy Code") and the approval of the bank
lending group and the holders of the 14% Notes. Management does not anticipate
any adverse impact on customers, vendors or employees as a result of the
Indebtedness Restructuring, since the Indebtedness Restructuring will address
only the de-leveraging of the Company's balance sheet through the reduction of
its indebtedness. However, there can be no assurance that the Indebtedness
Restructuring will be approved by the Bankruptcy Court, nor that any adverse
impact to the Company, its customers, creditors or employees will be avoided.
See Note 2 to the Company's Consolidated Financial Statements as of and for the
fiscal year ended June 30, 1999 for additional information.
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INDUSTRY BACKGROUND
According to Dataquest projections, the U.S. hardware maintenance and
technology support services market was approximately $35.2 billion in 1998 and
is projected to grow at a compound annual rate of 10.1% to $51.8 billion by the
year 2002. Within the market surveyed by Dataquest, Dataquest estimates that the
independent/multivendor segment was approximately $9.3 billion in 1997 and
projects the segment to grow at an 11% compound annual rate to $14.1 billion by
the year 2001. According to Dataquest, independent/ multivendor service
providers such as the Company are taking market share from the OEM service
providers faster than OEMs are contracting new business. The Company believes
that this is occurring because: (i) customers are looking for single source
providers who support multiple computer hardware and software platforms, (ii)
independent service providers are viewed as being unbiased toward computer
purchase decisions and (iii) OEMs are increasingly outsourcing customer
maintenance service (including warranty and post-warranty services) and
technical customer support such as help desk services to independents in order
to focus on their core design, technology and marketing competencies. According
to Dataquest, within the independent/multivendor segment, hardware maintenance
was the dominant service, accounting for approximately 73% of 1997 revenues,
with technology support services, including software support, network support
and end-user training, comprising the remaining 27% of 1997 revenues.
The Company believes that the independent/multivendor segment is also
fragmented and consolidating. Participants in the independent/multivendor
segment include: (i) independent service providers, (ii) the multivendor
segments of OEM service organizations and (iii) hundreds of smaller independent
companies servicing either product niches or limited geographical areas of the
United States. The significant market position of OEMs is due largely to their
traditional role of servicing their own installed base of equipment and their
customers' former reliance on centralized, single vendor solutions (i.e.,
mainframe systems).
COMPANY SERVICES
The Company has built a service portfolio and infrastructure that is
designed to offer its customers a single-source solution for virtually all of
their computer maintenance and technology support requirements. The Company's
portfolio includes services such as hardware support, software support, network
support, and planning and consulting services for customers with mainframe,
midrange and distributed computing environments. The Company also provides
multivendor parts repair and refurbishment and inventory management services as
part of its logistics services portfolio, targeted at OEMs, resellers and other
third-party service providers.
While many of its services and its heritage are rooted in providing
equipment maintenance and technical support, the Company has expanded its
portfolio to optimize its customers' investments in information technology.
Companies today are struggling to cope with increasingly complex computing
environments that feature an abundance of networked computer equipment from a
multitude of manufacturers. This equipment is often used to perform the
companies' mission-critical operations, and can severely impact their businesses
when a failure occurs. The Company believes that it can leverage its
infrastructure and breadth of services to help customers reduce the cost of
supporting their computer equipment while increasing their systems'
availability.
The Company's marketing strategy is focused on services in three different
market segments: large customers, who have complex computing environments,
including data centers and tens of thousands of end-users; medium-sized
customers that primarily maintain midrange and desktop computing systems; and
strategic alliance customers, including a broad range of OEMs, software
publishers, systems integrators, outsourcers and distributors/resellers, who are
seeking complementary services to support their end-users.
The Company's integrated portfolio of services is designed to appeal to
each of these customer segments by helping to increase computer system
availability, enhance end-user productivity and reduce the cost of running and
managing information technology systems. The Company has tailored service
portfolios to meet the unique needs of a number of computer environments,
including desktop computing, data center computing, midrange computing and
logistics. In addition, in July 1999, the Company introduced its new web-base
support capability, DecisionOne's ADVISE, which will initially provide users
with online hardware maintenance request capability and real time status
reporting on outstanding requests. Ultimately,
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DecisionOne's ADVISE will give customers a single point of contact for all its
desktop life cycle support services.
Integrated Services for the Distributed Computing Desktop Environment: One
To 1. The Company's One To 1 offering for the workgroup environment is an
integrated package of life cycle services designed to reduce the total cost of
ownership and increase system availability and end-user productivity. The
Company believes that One To 1's strength lies in its ability to provide
customers with a single-source solution for effectively supporting large,
complex desktop environments. By utilizing all of the services in One To 1,
customers leverage the Company's national and international infrastructure and
its ability to compile valuable service data to provide support at the desktop
level. By purchasing all of these services from one supplier, One To 1 customers
can provide greater support to their end-users and organization while still
reducing the total cost of owning desktop assets. One To 1 includes:
Hardware Services: The Company provides warranty upgrades and
post-warranty maintenance support to thousands of different desktop hardware
devices from hundreds of different manufacturers. Services are provided at the
customer's location through one of the largest service infrastructures in the
industry, or through the Company's network of depot repair centers.
Network Services: NetworkOne services help customers manage the total life
cycle of their complex network environments, from designing systems to
maintaining network hardware on wide area and local area networks. The Company
utilizes its network systems management engine, ControlOne, located at the
Company's headquarters facility, to monitor, assess and fix network problems.
ControlOne features state-of-the-art network management tools and is manned by a
staff of highly experienced network engineers and technicians. The Company also
maintains a backup network management facility in Dallas, Texas.
TCO Consulting Services: ExpertOne services provide access to desktop
support experts who can analyze a desktop environment, recommend solutions,
manage their implementation and audit the results.
Help Desk Services: CallOne services provide telephone technical support
on more than 100 shrink-wrapped desktop software packages and a wide range of
operating systems. The Company's Customer Support Centers ("CSCs") handle more
than 370,000 calls per month for various types of customers including corporate
help desk, Internet Service Providers and OEMs. CallOne services are available
on a 24 hour a day, 7 day a week basis.
Asset Management Services: The Company can inventory information
technology asset data, such as personal computer location and number of software
licenses, and provide information that leads to better asset management
practices.
Project Management Services: Through Project Management Services, the
Company provides customized service programs to help system professionals manage
all their information technology resources. For example, Technology Deployment
Services can help companies roll out or retire desktop assets as part of a
technology migration program.
Services for the Mainframe Environment: MainOne. The Company has an
extensive history in providing services to the data center. As part of its
effort to standardize its offerings and in response to the changing life cycle
needs of the data center marketplace, the Company developed a complete suite of
support services for the data center called MainOne. MainOne services extend
beyond critical hardware support to services that meet the strategic needs of
data center management, including planning, consulting and management support.
The Company offers a single source for maintaining the many brands and
types of mission-critical equipment found in the data center through a full
suite of services that includes: remedial and preventative maintenance on the
mainframe and associated peripheral devices; equipment moves, additions and
changes, including data center relocations; migration assistance for customers
changing processors and/or software operating systems; assistance to customers
in managing and consolidating vendor relationships; environmental, financial and
disaster recovery services; and consulting expertise to help customers reduce
data center costs, improve equipment performance and increase processor
capacity.
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Services for the Midrange Environment: MidrangeOne. The Company's
MidrangeOne services are designed to meet the support requirements of complex
midrange computing environments. For many customers, midrange devices play the
same mission-critical role as mainframe computers, as well as support their
distributed computing environments.
The Company offers an integrated suite of services, MidrangeOne, that
addresses all the elements of today's more complex midrange environment,
including: remedial and preventative maintenance on midrange equipment (such as
IBM, Digital Equipment Corporation, Sun Microsystems, Inc., Sequent Computer
Corporation, Hewlett-Packard and Memorex Telex Corporation), as well as on a
full range of peripheral devices from hundreds of different manufacturers;
problem resolution and migration support for midrange operating systems;
services to support remote systems operations and backups; partnerships with
industry leaders for specialized services such as disaster recovery,
environmental auditing and equipment financing; and advice from midrange experts
to assist with increasing system capacity, improving performance and lowering
cost of ownership.
Logistics Services: LogisticsOne. The Company's LogisticsOne services
provide information technology companies such as OEMs, value added resellers and
other third-party maintainers with cost-effective alternatives to internal parts
repair and inventory pipeline management. The Company provides three distinct
services under LogisticsOne:
Hardware Services: The Company repairs and refurbishes computer parts and
assemblies at its network of 15 depot repair centers across the United States.
In addition to supporting its own business, these services are provided
primarily for OEMs, distributors and other third-party maintenance companies.
Systems Configuration Management Services: The Company assists customers
with technology transitions, such as handling the current disposition of
equipment or configuring machines for new technology roll-outs. The Company has
years of experience installing and servicing a multivendor, multi-platform
technology base.
Inventory Life Cycle Management Services: These services, in support of
OEMs, support both in-production or end-of-life parts and provide materials
management support for the entire life cycle of products. These services help
companies acquire inventory and maintain optimal stocking levels, allowing them
to redirect funds normally spent on overstocking or replenishing inventory.
Support Partner Programs. Customers increasingly demand turnkey services
from vendors who can meet the total life cycle requirements of their systems.
The Company is a services-only company, meaning it does not provide those
aspects of the systems' life cycle that are not service- and support-related. To
meet the needs of its customers, the Company maintains strategic alliances with
companies who have expertise in key areas of the industry. Together with these
support partners, the Company can offer customers the total life cycle of
support, including such areas as equipment financing and leasing, disaster
recovery services, environmental analysis, wiring and cabling, system design and
equipment procurement.
Sales and Marketing. The Company sells its services through a sales force
of approximately 100 sales professionals aligned under several sales
organizations:
Commercial Sales sells hardware repair, commercial help desk, network
and project services (equipment installations, moves, additions and changes
or IMAC) to large and multinational commercial customers.
Alliance Sales sells repair, professional services and deployment
services to OEMs, distributors and resellers.
Logistics Sales sells parts repair and logistics support services to
OEMs, resellers, third-party service providers and select commercial
accounts.
End-User Support Sales sells help desk services to internet service
providers, software publishers, OEMs, systems integrators and outsourcers.
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International Business Partners. In order to provide international service
to its multinational customers, the Company supplements its broad North American
infrastructure with strategic alliances in selected international markets. The
Company maintains relationships with International Computers Limited ("ICL") and
Fujitsu Australia Limited ("FAL"). The Company licenses certain of its
proprietary multivendor support tools to FAL and to ICL Systems Service, which
is ICL's multivendor services group in Western Europe. As a result, the Company
is able to offer to its multinational customers service in Western Europe, Asia
and Australia.
ICL is a leading information technology company that has approximately
23,000 employees operating in about 80 countries around the world. In Western
Europe, ICL Systems Service companies provide multivendor services in 17
countries with approximately 250 service locations and about 6,000 employees.
Several of the Company's major customers, including SABRE Group, Inc. and DuPont
Company, benefit from the agreement between the Company and ICL, whereby ICL
agrees to provide services at the European locations of the Company's
multinational customers. Through ICL, the Company utilizes the service branches
of both ICL and ICL's parent company, Fujitsu Ltd., to provide worldwide
multivendor support throughout Asia, the Pacific Rim, the Middle East and
Africa.
FAL, an affiliate of Fujitsu Ltd., provides multivendor services in
Australia and New Zealand from more than 20 locations with 600 employees. In
addition to providing technical support to FAL, the Company has supplied various
management and sales support personnel to FAL. FAL also provides services to
certain of the Company's multinational customers, including Sun Microsystems,
Inc.
SERVICE INFRASTRUCTURE
Centralized Dispatch. When a customer places a call for remedial
maintenance, the Company uses its Dispatch Data Gathering system ("DDG") to
manage the process. When a customer is identified, the DDG system displays the
customer's service level requirements and covered equipment. Specific
information on the symptoms of the problem and the products that are
malfunctioning are entered into the system to begin tracking the service event.
The Company's Customer Support Representative ("CSR") selects, based upon the
requirements of the service event, the appropriate Customer Service Engineer
("CSE") from a list of pre-assigned primary and back-up personnel and passes
this information to the selected CSE.
The Company maintains three CSCs in Malvern, Pennsylvania; Minneapolis,
Minnesota; and Tulsa, Oklahoma. Customers can reach the CSCs by calling a toll
free telephone number. The CSCs currently are staffed with over 600 CSRs.
Parts Logistics. To meet the service needs of its customers, the Company
stocks more than 2.5 million units of spare parts representing more than 150,000
different parts for more than 25,000 types of equipment. The Company maintains
more than 2,200 parts stocking locations to provide its technicians with rapid
access to needed parts to support customer requirements, including locations at
airports and overnight express hub locations to meet the needs of
mission-critical support.
In order to meet customer computer repair requirements, the Company
maintains a tiered approach to management of its spare parts. Parts or
assemblies with low failure rates are stocked in either the Company's central
distribution center located in Malvern, Pennsylvania or in its critical parts
center in Wilmington, Ohio. The Company also maintains six regional distribution
centers in Atlanta, Georgia; Newark, New Jersey; Los Angeles, California; San
Francisco, California; Chicago, Illinois; and Dallas, Texas. A major
distribution center is also operated in Wilmington, Ohio to enable quick
distribution of critical parts throughout the United States via Airborne's hub
center. In order to service customers whose response time requirements are two
to four hours, higher usage parts are maintained at the Company's branch offices
or local attended stocking locations. Customer site parts storage is arranged
when customer response time requirements are two hours or less.
The Company's Field Inventory System ("FIS") is a real-time system which
tracks the spare parts assigned to its field workforce. It is located at
distribution centers, field offices or customer sites. Parts information
processed through FIS is integrated with the Company's other key systems,
including DDG and International Support Information System ("ISIS").
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For a discussion of the Company's recent accounting change with respect to
spare parts, see "Restructuring -- Significant Recent Events."
Parts Repair. The Company repairs and refurbishes computer parts and
assemblies at depot repair centers across the United States. Repair facilities
are located in the following areas: Phoenix, Arizona; Los Angeles and San
Francisco, California; Chicago, Illinois; Boston, Massachusetts; Nashua, New
Hampshire; Columbus, Ohio; Philadelphia, Pennsylvania; and Dallas, Texas; with a
major distribution center at an Airborne transportation hub in Wilmington, Ohio.
These centers are either certified to ISO-9002 quality processes and standards
or are in the process of obtaining certification.
In addition to supporting the Company's business, parts repair is provided
to OEMs, distributors and other third-party maintenance companies. Repair
capabilities include systems logic boards, hard drive assemblies, LCD panels,
monitors, peripherals, power supplies and related equipment. Continued
investment in repair technology enhances the Company's ability to service
today's latest technology, such as flat-panel displays on laptop computers, and
to perform component-level repair on complex multi-level circuit boards and
subassemblies.
Effective July 1, 1999, the Company changed its method of accounting for
spare parts. See "Accounting Change-Spare Parts" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Field Service. The Company delivers support through one of the most
extensive field service infrastructures in the industry. Approximately 2,100
field service technicians deliver service to approximately 36,000 customers at
over 145,000 customer sites. These field technicians are based out of more than
150 service offices located across the United States and Canada. Depending on
customer requirements, some Company personnel are based at customer sites.
Technical Support. The Company is a Microsoft Certified Support Center,
providing help desk support for a full range of Microsoft business software
applications and operating systems. It is also designated as an Authorized
Support Center by Lotus Development Corporation. Technical support is delivered
through the CSCs and ranges from basic end-user software support to second level
professional support. Technical support is provided with respect to software
such as Microsoft Office Suite and operating systems such as Novell Netware,
Windows NT, Windows 95/98, Sun Solaris, and Linux. Groupware Products such as
Lotus Notes and Internet browsers, such as the Netscape Navigator and Microsoft
Explorer, are also fully supported.
Service Technology. The Company has developed several proprietary
technologies for use in service planning, support and delivery. These service
tools include proprietary databases, remote diagnostic and system monitoring
software and instructional documentation. These technical support tools not only
provide remote and on-site predictive and remedial service support, but also
enable the Company to collect extensive, objective systems performance
measurement information (on a customer's environment as well as benchmarking
against the Company's database) which its customers can use to identify
potential efficiencies, evaluate competing products and technologies, and
determine whether their requirements are being met.
The Company's proprietary service technologies include ISIS, SERVICE EDGE
and MAXwatch(R). The Company licenses certain of these technologies and provides
other technical support to certain foreign multivendor service providers,
including ICL in Europe and FAL in Australia and New Zealand.
International Support Information System. ISIS is a database accessible by
the Company's CSEs which is comprised of diagnostic and symptom fix data for
thousands of products; service updates; service planning information, such as
machine performance and parts usage information; and remote support capabilities
for large IBM systems, including automatic "call home" to the Company. The
Company believes that ISIS is the most comprehensive service-related database of
any independent computer service organization.
SERVICE EDGE. SERVICE EDGE is a personal computer-based system installed
at the customer's site which monitors error messages and collects and reports
service data to help customers predict potential system failures and provide
customers with system performance information.
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MAXwatch(R). MAXwatch(R) is an on-site program for products of Digital
Equipment Corporation which monitors system integrity, proactively detects and
corrects certain system errors, and automatically "calls home" for remote
technical support when pre-defined error thresholds are exceeded. A similar
product, MAX400, is available for IBM AS/400 systems.
DecisionOne(R), ISIS, Service Edge, MAXwatch(R), One to 1, NetworkOne,
ExpertOne, CallOne, AssetOne, MainOne, MidrangeOne and LogisticsOne are service
marks or trademarks owned by the Company. All other brand names, service marks
or trademarks appearing herein are the property of their respective owners.
Training. The Company maintains the technical expertise of its CSEs
through training programs designed to teach the various techniques for
determining the status of a customer's total computer operations. The Company's
training offers support professionals broad exposure to various computer system
technologies.
The Company's training facilities include 12 classrooms, 18,000 square feet
of hands-on lab space, a curriculum of over 80 courses and computer-based
training consisting of 800 titles and 4,000 hours of self-paced instructions.
The Company has five training centers and labs located in Frazer, Pennsylvania;
Malvern, Pennsylvania; Minneapolis, Minnesota; Tulsa, Oklahoma; and Phoenix,
Arizona. Six months following course work, the Company surveys the CSEs to gauge
the effectiveness and applicability of its training curriculum.
CUSTOMERS
The Company services over 36,000 customers at over 145,000 sites across the
United States and Canada. The Company sells services primarily to three types of
customers: large businesses that have complex computing support needs and
typically maintain data center, distributed computing and desktop environments;
medium-sized businesses that rely primarily on distributed systems for their
computing needs; and OEMs and software developers that contract with the Company
for warranty services, logistics support services or help desk support. The
majority of the Company's revenues are attributable to large businesses with
complex computing support needs.
COMPETITION
Competition among computer support service providers, both OEM and
independent service organizations, is intense. The Company believes that
approximately 80% of that portion of the hardware maintenance services market
that is related to mainframes and stand alone midrange systems is currently
serviced by OEM service organizations. In addition, the Company believes that
OEM service organizations provide a smaller, but still significant, portion of
the computer maintenance services related to distributed systems, work groups
and personal computers. The remainder of the technology support services market
is serviced by a small number of larger, independent companies, such as the
Company, offering a broader range of service capabilities, as well as numerous
small companies focusing on narrower areas of expertise.
The Company considers its principal competitors to include IBM, Compaq,
Unisys Corporation, GetronicsWang and the multivendor service divisions of
certain other OEMs, other national independent service organizations providing
service that are not affiliated with OEMs such as Inacom Corporation, CompuCom
Systems, Inc., Sykes Enterprises, Inc. and various regional service providers.
The Company believes that the primary competitive factors in the computer
services industry are the quality of a company's services, the ability to
service a wide range of products supplied by a variety of vendors, the
geographic coverage of a company's services and the cost to the customer of
those services. The Company believes that customers are increasingly looking for
service providers capable of providing a single-source solution for their
increasingly complex multivendor systems. See "Risk Factors."
EMPLOYEES
As of June 30, 1999, the Company had approximately 5,050 full-time and 60
part-time employees. None of the Company's employees are currently covered by
collective bargaining agreements. Management considers employee relations to be
good.
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RISK FACTORS
FAILURE TO COMPLETE INDEBTEDNESS RESTRUCTURING
As previously described, the proposed Indebtedness Restructuring is subject
to formal approvals by both the bank lending group and the Bankruptcy Court
prior to consummation. The Company believes that obtaining the approval of the
bank lending group and the holders of the 14% Notes, before filing the
Indebtedness Restructuring Plan (the "Plan") with the Bankruptcy Court would
minimize disputes concerning the Indebtedness Restructuring and would,
therefore, substantially reduce the time and costs of the bankruptcy case and
afford the best opportunity to complete the Indebtedness Restructuring. There
can be no assurance, however, that these approvals will be obtained, or that the
Plan will be approved in the form submitted. Further, if the Plan is not
approved, the Company will be forced to evaluate its available options, which
include, but are not limited to, filing for protection under the Bankruptcy Code
without a pre-approved plan of reorganization. Such a filing could result in
liquidation, rather than a reorganization of the Company, and any such
reorganization, even if undertaken, may not be accomplished on terms as
favorable to the Company's creditors as the terms of the Indebtedness
Restructuring.
Additionally, it is possible that perceived difficulties from the Company's
involvement in a bankruptcy case could adversely affect the relationships of the
Company with its suppliers, customers and employees, and could have other
adverse effects of the Company's business, particularly in the event of a
bankruptcy other than pursuant to a pre-approved plan of reorganization.
Management believes, however, that using a prepackaged plan of reorganization in
connection with the Company's bankruptcy case will reduce the adverse effect of
a bankruptcy filing on the Company's business because such a prepackaged case is
likely to be completed more quickly than an ordinary bankruptcy case, disputes
with and among creditor and equity holder groups will be minimized, and the
Company will have the opportunity to take certain preparatory measures in
advance of the filing.
Upon filing of the approved Plan, the Company intends to seek promptly the
authorization of the Bankruptcy Court to continue to pay in full, in the
ordinary course of business, the general unsecured pre-petition claims of each
trade creditor and customer of the Company. Additionally, the Company intends to
seek the Bankruptcy Court's authorization to pay all accrued pre-petition
salaries, wages and commissions and applicable taxes thereon, as well as medical
and other benefits and other payroll-related liabilities, on an uninterrupted
basis. While the Company expects that these authorizations will likely be
granted by the Bankruptcy Court, there can be no assurance that these
authorizations will be obtained.
Even if the Company obtains the approval of the Plan from the bank lending
group and the holders of the 14% Notes, there can be no assurance that the
Bankruptcy Court will approve and confirm the Plan. Under the Bankruptcy Code,
any party in interest, including the United States Trustee, any creditor or any
equity holder, has the right to be heard by the Bankruptcy Court on any issue in
the prepackaged proceeding. It is possible that such a party could challenge,
among other things, the terms of the Plan, the adequacy of the Company's
disclosure in its Disclosure Statement filed in connection with the bankruptcy
filing or the adequacy of the time period allotted under the solicitation of
acceptance of the Plan for considering whether to accept or reject the Plan.
Further, even if such a challenge were not to occur, the Bankruptcy Court could
decline to approve the Plan if it found that a statutory condition for
confirmation had not been met. There can be no assurance that any such
challenges and/or failures to meet statutory conditions would be resolved by the
Company, that modifications of the Plan would not be required for its
confirmation, or that such modifications would not require resolicitation for
approvals from one or more classes of impaired claims or equity interests. Such
events, were these to occur, could result in either non-confirmation of the Plan
or a significant delay in Plan confirmation by the Bankruptcy Court, both of
which could have a material adverse impact on the Company and its operations.
LOSS OF CONTRACT-BASED REVENUE
As is customary in the computer services industry, the Company experiences
reductions in its contract-based revenue, which accounted for approximately 90%
of the Company's revenues during fiscal year 1999, as customers may eliminate
certain equipment or services from coverage under the contracts, typically upon
30 days' notice, or either cancel or elect not to renew their contracts upon 30,
60 or 90 days' notice. The
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Company believes that the principal reasons for the loss of contract-based
revenue are the replacement of the equipment being serviced with new equipment
covered under a manufacturer's warranty, the discontinuance of the use of
equipment being serviced for a customer due to obsolescence or a customer's
determination (based on cost, quality and scope of services) to utilize a
competitor's services or to move technical support services in house. There can
be no assurance that the Company will be able to offset the reduction of
contract-based revenue and maintain revenue growth through acquisitions and new
contracts in the future. Any failure to enter into new contracts, add additional
services and equipment to existing contracts or consummate acquisitions could
have a material adverse effect on the Company's profitability. See
"Business -- Current Operating Plan" and "Management's Discussion and Analysis
of Financial Conditions and Results of Operations."
DEPENDENCE ON COMPUTER INDUSTRY TRENDS
The Company's future success is dependent upon (i) the continuation of a
number of trends in the computer industry, including the migration by
information technology end-users to multivendor and multisystem computing
environments, the overall increase in the sophistication and interdependency of
computing technology, and a focus by information technology managers on cost
efficient management, and (ii) its ability to diversify its services to meet the
needs of clients with respect to these trends. The Company believes that these
trends have resulted in a movement by both end-users and original equipment
manufacturers (each, an "OEM") towards outsourcing and an increased demand for
support service providers that have the ability to provide a broad range of
multivendor support services. There can be no assurance that these trends will
continue in the future, see "Indebtedness Restructuring," or that the Company
will be able to diversify its available services to take advantage of such
trends. See "Failure of Diversification Strategy."
RAPID TECHNOLOGICAL CHANGE
Rapid technological change and compressed product life cycles are prevalent
in the computer industry, which may lead to the development of improved or lower
cost technologies, higher quality hardware with significantly reduced failure
rates and maintenance needs, or customer decisions to replace rather than
continue to repair and maintain aging hardware, which could result in a reduced
need for the Company's services in the future. Moreover, such rapid
technological changes could adversely affect the Company's ability to predict
equipment failure rates and, therefore, to establish prices that provide
adequate profitability. Similarly, new computer systems could be built based
upon proprietary, as opposed to open, systems that cannot be serviced by the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
VARIABILITY OF PER INCIDENT REVENUES
Per incident revenues, which consist primarily of revenues from services
performed for customers on an as requested basis (e.g., projects, help desk
services, parts repair, installations and moves, installation and de-
installation of computer equipment), are subject to monthly variation due to the
nature of per incident revenue transactions. Per incident revenues were
approximately $190 million during fiscal year 1999. It is difficult for the
Company's management to estimate the impact or amount of future per incident
revenues because per incident revenues are dependent on customer demand, which
fluctuates based upon various factors such as competition, the demand for "Year
2000" compliance assistance and customers' use of internal employees. In
addition, since a significant amount of per incident revenues are mostly
generated from the Company's customers with monthly maintenance contracts, a
decrease in the number of such contracts has resulted in a decrease in per
incident revenues. The Company may not be able to generate significant amounts
of per incident revenue in the future.
DEPENDENCE ON KEY PERSONNEL
The Company's continued success, including the successful implementation of
the Restructuring, depends, to a large extent, upon the efforts and abilities of
key managerial employees, particularly the Company's executive officers.
Competition for qualified management personnel in the industry is intense. The
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<PAGE> 14
loss of the services of certain of these key employees or the failure to retain
other qualified employees could have a material adverse effect on the Company's
business. There can be no assurance that the Company will be able to retain
qualified management personnel during or after the Indebtedness Restructuring
period, and recently, the Company has experienced the loss of several key
personnel. See "Business -- Indebtedness Restructuring" and "Directors and
Executive Officers."
FAILURE OF DIVERSIFICATION STRATEGY
Certain changes in the industry have made it necessary for the Company to
build its business beyond traditional hardware repair services in order to
remain competitive. Among other factors, the shift from mainframe to client
server environments, lower hardware prices, higher product reliability, longer
warranty periods, more rapid innovation, and standardization and convergence of
hardware and software have led to a number of new trends in the industry,
including (i) the convergence of replacement cost and repair cost, (ii) a
decline in hardware repair business opportunities, and (iii) a market shift from
servers, to desktop computers and networks. As a result, the Company expects to
continue to seek to diversify its services, particularly in emerging markets
such as the desktop environment, and to consolidate its presence in existing
markets by targeting specific customer groups. However, risks associated with
pursuing a diversification strategy of this nature include, without limitation,
the risk that the strategy chosen to be implemented is flawed or that such
strategy fails to be successfully implemented because, among other reasons, the
Company lacks financial resources or qualified personnel. As a result, the
Company may not implement the diversification strategy successfully. In
addition, there can be no assurance that the diversification strategy developed
by the Company will generate sufficient revenues to offset the continuing
decline in the Company's hardware repair revenues.
INABILITY TO FUND FUTURE GROWTH
The Company may not be able to maintain and increase its revenue base and
to respond to shifts in customer demand and changes in industry trends if it is
not able to generate sufficient cash flow or obtain sufficient capital for the
purpose of, among other things, financing acquisitions, satisfying customer
contractual requirements and financing infrastructure growth, including a
significant investment in inventory. There can be no assurance that the Company
will be able to generate sufficient cash flow or that financing will be
available on acceptable terms (or permitted to be incurred under the terms of
the New Credit Agreement or any other future indebtedness) to fund the Company's
future growth.
COMPETITION AND THE COMPETITIVE ADVANTAGE OF OEMS
Competition among computer support service providers, both OEMs and
independent service organizations, is intense. The Company believes that
approximately 80% of that portion of industry hardware maintenance services
related to mainframes and stand alone midrange systems is currently serviced by
OEM service organizations. In addition, the Company believes that OEM service
organizations provide a smaller, but still significant, portion of the computer
maintenance services related to distributed systems, work groups and personal
computers. The remainder of the technology support services market is serviced
by a small number of larger, independent companies, such as the Company,
offering a broader range of service capabilities, as well as numerous small
companies focusing on narrower areas of expertise or serving limited geographic
areas.
In many instances, OEM service organizations have greater resources than
the Company, and, because of their access to the OEM's engineering data, may be
able to respond more quickly to servicing equipment that incorporates new or
emerging technologies. Moreover, some OEMs, especially in the mainframe
environment, do not make available to end-users or independent service
organizations the technical information, repairable parts, diagnostics,
information that relates to engineering changes and other support items required
to service their products, and design and sell their products in a manner so as
to make it virtually impossible for a third party to perform maintenance
services without potentially infringing upon certain proprietary rights of the
OEM. In addition, OEMs are sometimes able to develop proprietary remote
diagnostic or monitoring systems which the Company may not be able to offer.
Therefore, OEM service organizations sometimes have a cost and timing advantage
over the Company because the Company must first develop or acquire from another
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party the required support items before the Company can provide services for
that equipment. An OEM's cost advantage, the unavailability of required support
items or various proprietary rights of the OEM may preclude the Company from
servicing certain products. Furthermore, OEMs usually provide warranty coverage
for new equipment for specified periods, during which it is not economically
feasible for the Company to compete for the provision of maintenance services.
To the extent that OEMs choose, for marketing reasons or otherwise, to expand
their warranty periods or terms, the Company's business may be adversely
affected.
TERMINATION OF THE IBM CONSENT DECREE
In June 1994, International Business Machines Corporation ("IBM") filed in
the United States District Court for the Southern District of New York a motion
to terminate a 1956 consent decree (the "IBM Consent Decree") that, among other
things, requires IBM to provide spare parts, documentation and other support
items for IBM electronic data processing systems to third parties on reasonable
terms and places other restrictions on IBM's conduct. On January 18, 1996, the
court entered an order approving a modification of the IBM Consent Decree that,
among other things, terminated the IBM Consent Decree except insofar as it
applies to the System 360/370/390 (mainframes) and AS/400 (midrange) families of
IBM products. In July 1996, IBM and the U.S. Department of Justice reached an
agreement in tentative settlement of the remainder of IBM's motion and jointly
moved to terminate, on a phased basis, the remaining provisions of the IBM
Consent Decree. On May 1, 1997, the court granted the joint motion. On February
5, 1998, the United States Court of Appeals for the Second Circuit affirmed the
decision of the District Court. Consequently, certain of the remaining
provisions of the IBM Consent Decree (primarily relating to sales and marketing
restrictions on IBM) terminated either immediately upon, or within six months
of, entry of the court order; all of the other remaining provisions (including
those requiring IBM to provide parts and other support items to third parties)
terminate on July 2, 2000 with respect to AS/400 systems and on July 2, 2001
with respect to System 360/370/390 mainframes.
The impact, if any, upon the Company of the termination of such sales and
marketing restrictions is impossible to predict because such impact depends upon
what changes, if any, IBM will make in its sales and marketing policies and
practices. As a result of the termination of the IBM Consent Decree, the
Company's ability to service midrange and mainframe products may be adversely
affected. Furthermore, as the Company's business is highly dependent upon its
ability to service a wide variety of equipment in a multivendor environment, the
inability to compete effectively for the service of IBM mainframes and midrange
products could cause the loss of a substantial portion of the Company's customer
base to IBM or an IBM affiliate, which would have a material adverse effect on
the Company's business.
SINGLE SUPPLIERS FOR INVENTORY
Spare parts purchases are made from OEMs and other vendors. The Company
from time to time will have only a single supplier for a particular part which,
in some cases, may be the OEM for such spare part. Should a supplier be
unwilling or unable to supply any part or component in a timely manner, the
Company's business could be adversely affected. In addition, the Company is
dependent upon IBM for obtaining certain parts that are critical to the
maintenance of certain IBM mainframe and midrange systems that IBM is currently
required to make available to third parties pursuant to the IBM Consent Decree.
There can be no assurance that IBM will continue to make parts available for
AS/400 Systems after July 2, 2000 and for System 360/370/390 mainframes after
July 2, 2001. Even if such parts or components are available, a shortage of
supply could result in an increase in procurement costs which, if not passed on
to the customer, may adversely affect the Company's profitability.
DIFFICULTIES IN MANAGING INVENTORY
In order to service its customers, the Company is required to maintain a
high level of spare parts for extended periods of time. Any decrease in the
demand for the Company's maintenance services could result in a substantial
portion of the Company's spare parts becoming excess, obsolete or otherwise
unusable. In addition, rapid changes in technology could render significant
portions of the Company's spare parts obsolete, thereby giving rise to
write-offs and a reduction in profitability. The inability of the Company to
manage its
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spare parts or the need to write them off in the future could have a material
adverse effect on the Company's business, financial results and results of
operations.
Effective July 1, 1999, the Company changed its accounting policy for spare
parts. See "Accounting Change -- Spare Parts" included in Item 7 herein.
FAILURE TO PRICE FIXED FEE CONTRACTS ACCURATELY
Under many of the Company's contracts, the customer pays a fixed fee for
customized bundled services that are priced by the Company based on its best
estimates of various factors, including estimated future equipment failure
rates, cost of spare parts and labor expenses. There can be no assurance that
the Company will be able to estimate these factors with sufficient accuracy in
order to price these fixed fee contracts on terms favorable to the Company. The
failure of the Company to price its fixed fee contracts accurately could have a
material adverse effect on the Company's profitability.
CONTINUING LEVERAGE AND ABILITY TO SERVICE DEBT
Although the proposed Indebtedness Restructuring will significantly reduce
the Company's debt service obligations, the Company will remain highly leveraged
after consummation of the Plan. As of June 30, 1999, the principal amount of the
Company's indebtedness was approximately $786.8 million. After giving effect to
the Indebtedness Restructuring on a pro forma basis as of such date, the
principal amount of the Company's indebtedness would have been approximately
$253.0 million. Following completion of the Indebtedness Restructuring, the
Company will continue to be subject to significant principal and interest
payment obligations with respect to the New Credit Agreement. The Company's
ongoing high leverage and significant debt service obligations will continue to
pose a substantial risk to the holders of the Company's debt and equity
following the Indebtedness Restructuring.
Although the New Credit Agreement will revise the Existing Credit
Agreement's financial and operating covenants in light of the Indebtedness
Restructuring, the Company will continue to be subject to a number of
significant restrictive financial and operating covenants. The covenants
expected to be contained in the New Credit Agreement may impose more restrictive
limitations upon the Company's operations than the covenants of the Existing
Credit Agreement. Accordingly, the discretion of the Company's management will
continue to be significantly limited by such covenants following consummation of
the Indebtedness Restructuring.
Management believes that, following completion of the Indebtedness
Restructuring, the Company's operating cash flow, together with borrowings under
the New Credit Agreement, will be sufficient to meet its anticipated future
operating expenses, capital expenditures, and debt service obligations. However,
the Company's ability to meet its debt service obligations and to comply with
the financial and operating covenant restrictions contained in the New Credit
Agreement, will depend on a number of factors, including its future operating
performance and its ability to achieve the Operating Plan and its fiscal year
2000 Business Plan, which will be affected by general economic, financial,
competitive, legislative, regulatory, business and other factors beyond its
control. While management believes that the Company's financial projections are
reasonable, there can be no assurance that such projections will prove to be
correct, or that the Company will be able to meet its ongoing debt service
obligations. If the Company's future operating cash flows are less than
currently anticipated, it may be forced, in order to meet its debt service
obligations, to reduce or delay acquisitions, purchases of spare parts or
capital expenditures, or to sell assets or reduce operating expenses, including,
but not limited to, investment spending such as selling and marketing expenses,
expenditures on management information systems, expenditures on new products and
personnel-related expenses. If the Company is unable to meet its debt service
obligations, it could attempt to restructure or refinance its indebtedness or to
seek additional equity capital. There can be no assurance that the Company will
be able to effect any of the foregoing on satisfactory terms, if at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
After consummation of the proposed Indebtedness Restructuring, the Company
will not have in place any sources of liquidity other than the New Credit
Agreement and cash from operations. Any increase in the Company's debt service
requirements or any reduction in amounts available for borrowings under the New
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Credit Agreement could significantly affect the Company's ability to fund
working capital and capital expenditures following the Indebtedness
Restructuring.
CONTROL BY DLJ
Approximately 87.4% of the outstanding shares of the Company's common stock
are currently held by the DLJMB Group. As a result of its stock ownership and
the Investors' Agreement (which includes members of management to the extent
their shares are acquired through the Company's Direct Investment Program), the
DLJMB Group controls the Company and has the power to elect a majority of the
Company's directors, appoint new management and approve any action requiring the
approval of the holders of the Company's common stock, including adoption of
certain amendments to the Company's certificate of incorporation and approving
mergers or sales of all or substantially all of the Company's assets. The
directors elected by the DLJMB Group have the authority to effect decisions
affecting the capital structure of the Company, including the issuance of
additional capital stock, the implementation of stock repurchase programs and
the declaration of dividends. Following the Merger, there has been a limited
market for the Company's common stock because of the significant ownership of
the DLJMB Group. As a result, stockholders may experience difficulty selling
shares or obtaining prices that reflect the value thereof. If consummated, the
proposed Restructuring would result in a significant change in control of the
Company's common stock. See "Business -- Indebtedness Restructuring."
ITEM 2. PROPERTIES
Item 2 is presented with respect to both registrants submitting this
filing, DecisionOne Holdings Corp. ("Holdings") and DecisionOne Corporation.
FACILITIES
The Company leases certain office and warehouse facilities under operating
leases and subleases that expire at various dates through November 30, 2009. The
Company's executive offices are located at the Frazer, Pennsylvania facility
listed below. The principal facilities currently leased or subleased by the
Company are as follows:
<TABLE>
<CAPTION>
SQUARE LEASE
FOOTAGE EXPIRATION
------- --------------
<S> <C> <C>
Frazer, Pennsylvania (Office)............................ 109,800 December 2005
Malvern, Pennsylvania (Depot/Call Center)................ 200,000 February 2006
Richfield, Minnesota (Call Center)....................... 83,360 May 2006
Hayward, California (Depot).............................. 91,112 September 2002
Northborough, Massachusetts (Depot)...................... 52,778 July 2001
Wilmington, Ohio (Warehouse)............................. 102,400 January 2001
Grove City, Ohio (Depot)................................. 116,573 July 2002
Phoenix, Arizona (Depot)................................. 60,000 April 2001
Devon, Pennsylvania (Office/Warehouse)................... 50,400 December 2005
College Station, Texas (Call Center)..................... 50,096 November 2009
Tulsa, Oklahoma (Office/Call Center)..................... 36,530 October 2004
</TABLE>
The Company's management believes that its current facilities will be
adequate to meet its operational requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Item 3 is presented with respect to both registrants submitting this
filing, DecisionOne Holdings Corp. ("Holdings") and DecisionOne Corporation
(collectively, the "Company").
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The Company is also party to various legal proceedings incidental to its
business. Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company. In the opinion of
management, these actions can be successfully defended or resolved without a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
The Company, or certain businesses as to which it is alleged that the
Company is a successor, have been identified as potentially responsible parties
in respect of four waste disposal sites that have been identified by the United
States Environmental Protection Agency as Superfund Sites: (i) PAS Irwin Dump
Site, Oswego, New York (and six satellite sites, including the Fulton Terminals
Site, Fulton, New York); (ii) North Penn Area 6 Site, Lansdale, Pennsylvania;
(iii) Revere Chemical Site, Nockamixon, Pennsylvania; and (iv) Malvern TCE site,
Malvern, Pennsylvania. In addition, the Company received a notice several years
ago that it may be a potentially responsible party with respect to the Boarhead
Farms Site, Bridgeton, Pennsylvania, at a site related to the Revere Chemical
site, but has not received any additional communication with respect to that
site. Under applicable law, all parties responsible for disposal of hazardous
substances at those sites are jointly and severally liable for clean up costs.
The Company initially estimated that its share of the costs of the clean up of
one of the sites was approximately $500,000, of which $372,000 remained unpaid
and accrued for in the accompanying consolidated balance sheet as of June 30,
1999. Complete information as to the scope of required clean up at these sites
is not yet available and, therefore, management's evaluation may be affected as
further information becomes available. However, in light of information
currently available to management, including information regarding assessments
of the sites to date and the nature of involvement of the Company's predecessor
at the sites, it is management's opinion that the Company's potential additional
liability, if any, for the cost of clean up of these sites will not be material
to the consolidated financial position, results of operations or liquidity of
the Company. See Note 18 to the Company's Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE OF THE COMMON STOCK
The Common Stock of DecisionOne Holdings Corp. is traded in the
over-the-counter market, in the "pink sheets" published by the National
Quotation Bureau and is listed on the OTC Bulletin Board under the symbol
"DOCI". The common stock shares previously traded on the Nasdaq National Market
System from April 6, 1996 through July 14, 1999. As of September 10, 1999, there
were approximately 600 stockholders of record. The following table shows, for
the periods indicated, the high and low sale prices of a share of the Company
Common Stock as reported by the Nasdaq National Market System through July 14,
1999, the date of delisting of the Common Stock, and by the National Quotation
Bureau thereafter.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997
First Quarter............................................... 19 14 3/4
Second Quarter.............................................. 22 3/4 14 3/4
Third Quarter............................................... 30 22 3/8
Fourth Quarter.............................................. 34 3/8 24 1/2
1998
First Quarter............................................... 27 3/8 17 1/2
Second Quarter.............................................. 23 1/2 17 1/2
Third Quarter............................................... 20 1/8 8 1/2
Fourth Quarter.............................................. 10 4 3/4
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1999
First Quarter............................................... 6 3/32 1 3/8
Second Quarter.............................................. 3 9/16 1 1/4
Third Quarter*.............................................. 2 7/16 15/32
</TABLE>
- ---------------
* Through September 10, 1999.
Since its initial public offering in 1996, the Company has not paid any
cash dividends on its Common Stock and it does not have any present intention to
commence payment of any cash dividends. The Company's debt agreements and other
agreements to which it is a party contain certain covenants restricting the
payment of dividends on, or repurchases of, Company Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data sets forth, for the
periods and the dates indicated, selected consolidated financial data of the
Company, derived from the historical consolidated financial statements of the
Company. The consolidated financial data of the Company for the years ended June
30, 1999, 1998 and 1997 and as of June 30, 1999 and 1998 are derived from the
Company's audited consolidated financial statements included elsewhere herein.
The information set forth below is qualified by reference to and should be read
in conjunction with the Company's and DecisionOne Corporation and Subsidiaries'
Consolidated Financial Statements and Notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------------
THE COMPANY 1999 1998 1997 1996 1995
- ----------- --------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PRO FORMA LOSS PER COMMON SHARE)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(1)(4)
Revenues.................................. $ 725,943 $ 805,717 $785,950 $540,191 $163,020
Income (loss) before discontinued
operations and extraordinary item....... (105,600) (183,130) 31,084 20,789 41,415
Net Income (loss)(2)...................... (105,600) (183,130) 31,084 18,862 42,528
Earnings (loss) per share................. (8.40) (13.05) 1.03 0.75 1.86
Pro forma net loss (unaudited)(3)......... (124,266) (183)
Pro forma loss per common share
(unaudited)(3).......................... (9.91) (0.01)
BALANCE SHEET DATA:(1)(4)
Consumable parts.......................... $ 15,859 $ 23,097 $ 29,052 $ 29,770 $ 3,455
Repairable parts.......................... 134,924 142,446 205,366 154,970 27,360
Total assets.............................. 455,887 541,987 623,105 514,510 135,553
Debt...................................... 786,840 744,323 237,509 190,903 25,571
Redeemable preferred stock................ -- -- -- -- 6,811
Total shareholders' equity (deficiency)... (467,156) (361,606) 214,888 180,793 14,677
</TABLE>
- ---------------
(1) The Selected Financial Data presented includes the results of operations and
balance sheet data of the Company, including the following acquisitions:
Servcom from September 1, 1994, BABSS from October 20, 1995 and certain
assets of the U.S. computer service business of Memorex Telex from November
15, 1996.
(2) The years ended June 30, 1998 and 1995 includes a $15.8 million and $23.1
million, respectively net benefit arising from the recognition of future tax
benefits of tax loss carryforwards and temporary timing differences. See
Note 11 to the Company's Consolidated Financial Statements for additional
information.
(3) Pro forma net loss and loss per common share information for the fiscal
years ended June 30, 1998 and 1997 is presented to reflect the Merger and
related transactions as if these had occurred on July 1, 1996.
17
<PAGE> 20
Historical per share data is not presented as this would not be meaningful.
See Note 4 to the Company's Consolidated Financial Statements for additional
information.
(4) Certain reclassifications have been made to prior years' data in order to
conform to the 1999 presentation.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------------
DECISIONONE CORPORATION 1999 1998 1997 1996 1995
- ----------------------- --------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(1)(4)
Revenues.................................. $ 725,943 $ 805,717 $785,950 $540,191 $163,020
Income (loss) before discontinued
operations and extraordinary item....... (162,918) (171,641) 31,084 20,789 41,415
Net Income (loss)(2)...................... (162,918) (171,641) 31,084 18,862 42,528
Pro forma net income (loss)
(unaudited)(3).......................... (111,357) 5,726
BALANCE SHEET DATA:(1)(4)
Consumable parts.......................... $ 15,859 $ 23,097 $ 29,052 $ 29,770 $ 3,455
Repairable parts.......................... 134,924 142,446 205,366 154,970 27,360
Total assets.............................. 451,711 606,439 623,105 514,510 135,553
Debt...................................... 683,344 652,077 237,509 190,903 25,571
Redeemable preferred stock................ -- -- -- -- 6,811
Total shareholder's equity (deficiency)... (367,336) (204,468) 214,888 180,793 14,677
</TABLE>
- ---------------
(1) The Selected Financial Data presented includes the results of operations and
balance sheet data of DecisionOne Corporation, including the following
acquisitions: Servcom from September 1, 1994, BABSS from October 20, 1995
and certain assets of the U.S. computer service business of Memorex Telex
from November 15, 1996.
(2) The years ended June 30, 1998 and 1995 includes a $14.8 million and $23.1
million, respectively net benefit arising from the recognition of future tax
benefits of tax loss carryforwards and temporary timing differences. See
Note 11 to DecisionOne Corporation's Consolidated Financial Statements for
additional information.
(3) Pro forma net income (loss) for the fiscal years ended June 30, 1998 and
1997 is presented to reflect the Merger and related transactions as if these
had occurred on July 1, 1996. See Note 4 to DecisionOne Corporation's
Consolidated Financial Statements for additional information.
(4) Certain reclassifications have been made to prior years' data in order to
conform to the 1999 presentation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements, DecisionOne Corporation and Subsidiaries'
Consolidated Financial Statements and the respective Notes thereto, as included
in Item 8 herein. Item 7 and 7A are presented with respect to both registrants
submitting this filing, DecisionOne Holdings Corp. and DecisionOne Corporation.
(As used in this Item 7, 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.)
This discussion contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" in Item 1.
COMPANY HISTORY
Founded in 1969, the Company began operations as a provider of key punch
machines under the tradename "Decision Data". During the 1980s, its operations
expanded to include the sale of midrange computer hardware and related
maintenance services. During fiscal 1993, the Company decided to focus on
providing computer maintenance and support services and sold its computer
hardware products business.
18
<PAGE> 21
Since the beginning of fiscal 1993, the Company established a major
presence in the computer maintenance and technology support services industry
through the acquisition and integration of assets and contracts of 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 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 are derived from
maintenance 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 repairable parts and labor expenses. The
Company customizes its contracts to the individual customer based generally on
the nature of the customer's requirements, the term of the contract and the
services that are provided.
The Company experiences reductions in revenue when customers replace
equipment being serviced with new equipment covered under a manufacturer's
warranty, discontinue the use of equipment being serviced due to obsolescence,
choose to use a competitor's services or move technical support services
in-house. The Company must more than offset this revenue "reduction" to grow its
revenues and seeks revenue growth from two principal sources: internally
generated sales from its direct and indirect sales force and the acquisition of
contracts and assets of other service providers. The acquisition of contracts
and assets has generally provided the Company with an opportunity to realize
economies of scale because the Company generally does not increase its costs
related to facilities, personnel and consumable and repairable parts in the same
proportion as increases in acquired revenues. 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 has not completed any
acquisitions since the first quarter of fiscal 1999 and it expects to be unable
to finance acquisitions pending the restructuring of its indebtedness, see
"Overview."
Cost of revenues is comprised principally of personnel-related costs
(including fringe benefits), consumable parts cost recognition, amortization and
repair costs for repairable parts, and facilities costs and related expenses.
MERGER AND RECAPITALIZATION
On August 7, 1997, the Company consummated the Merger with Quaker Holding
Co. ("Quaker"), an affiliate of 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 DecisionOne
Holdings Corp. common stock outstanding immediately prior to the Merger received
$23 per share in cash in exchange for these shares. Holders of approximately
5.3% of shares of
19
<PAGE> 22
DecisionOne Holdings Corp. common stock outstanding immediately prior to the
Merger retained such shares in the merged Company, as determined based upon
shareholder elections and stock proration factors specified in the Merger
Agreement. The aggregate value of the Merger was approximately $940 million,
including refinancing of DecisionOne Corporation's then existing revolving
credit facility (see Note 4 and Note 10 to the Company's Consolidated Financial
Statements).
The Company incurred various expenses, aggregating approximately $69.0
million, 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 was
reflected during the first quarter of fiscal 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").
RESULTS OF OPERATIONS
The following discussion of results of operations is presented for the
fiscal years ended June 30, 1999, 1998 and 1997. The results of operations of
the Company include the operations of Memorex Telex from November 15, 1996.
The following tables set forth, for the periods indicated, certain
operating data expressed in dollar amounts and as a percentage of revenues:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------
1999 1998 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................ $ 725,943 $ 805,717 $ 785,950
Cost of Revenues................................ 575,063 613,806 584,755
--------- --------- ---------
Gross Profit.................................... 150,880 191,911 201,195
Selling, general and administrative expenses.... 120,625 142,462 105,675
Amortization of intangibles..................... 26,969 27,169 23,470
Merger expenses................................. -- 69,046 --
Loss on asset sales and disposals............... 1,491 87,458 --
Employee severance and unutilized lease
losses........................................ 4,500 -- 4,300
--------- --------- ---------
Total operating expenses........................ 153,585 326,135 133,445
--------- --------- ---------
Operating income (loss)....................... (2,705) (134,224) 67,750
Interest expense, net of interest income........ 77,535 64,683 14,698
Provision (benefit) for income taxes............ 25,360 (15,777) 21,968
--------- --------- ---------
Net income (loss)............................. $(105,600) $(183,130) $ 31,084
========= ========= =========
OTHER DATA:
EBITDA(1)....................................... $ 128,951 $ 166,834 $ 168,639
Less: Amortization of repairable parts........ 85,391 81,597 63,870
--------- --------- ---------
Adjusted EBITDA(1).............................. $ 43,560 $ 85,237 $ 104,769
========= ========= =========
Net cash provided by operating activities....... $ 71,900 $ 13,337 $ 88,974
Net cash (used in) investing activities......... (78,816) (98,629) (129,244)
Net cash provided by financing activities....... 31,750 80,830 42,926
</TABLE>
- ---------------
(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 year ended June 30, 1998), loss on
asset sales and disposals
20
<PAGE> 23
(approximately $1.5 million and $87.5 million for the years ended June 30,
1999 and 1998 respectively), a special charge to the provision for
uncollectible receivables (approximately $12.3 million for the year ended
June 30, 1998), and incremental charges related to the Company's ongoing
service delivery re-engineering program (approximately $7.7 million during
the fiscal year ended June 30, 1998). "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 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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... 100.0% 100.0% 100.0%
Cost of Revenues............................................ 79.2% 76.2% 74.4%
----- ----- -----
Gross Profit................................................ 20.8% 23.8% 25.6%
Selling, general and administrative expenses................ 16.6% 17.7% 13.4%
Amortization of intangibles................................. 3.7% 3.4% 3.0%
Merger expenses............................................. -- 8.6% --
Loss on asset sales and disposals........................... 0.2% 10.9%
Employee severance and unutilized lease losses.............. 0.6% 0.0% 0.5%
Total operating expenses.................................... 21.2% 40.5% 17.0%
Operating income (loss)................................... (0.4)% (16.7)% 8.6%
Interest expense, net of interest income.................... 10.7% 8.0% 1.9%
Provision (benefit) for income taxes........................ 3.5% (2.0)% 2.8%
----- ----- -----
Net income (loss)......................................... (14.5)% (22.7)% 4.0%
===== ===== =====
</TABLE>
OVERVIEW
The Company has continued to experience declining trends in revenues,
earnings and EBITDA for the three and twelve-month periods ended June 30, 1999
compared to the corresponding periods ended June 30, 1998. The declining trends
principally result from lower sales of new service contracts, erosion of
contract base, and minimal acquisition growth.
On January 28, 1999, the Company initiated a corporate operating plan
("Operating Plan") intended to restore revenue growth and improve financial
performance. The Operating Plan included the following key components:
(i) focusing 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).
The Company is on schedule to achieve its $40 million annual cost reduction
target. Notwithstanding the Operating Plan, the Company currently believes it is
likely that its revenues will decline further in the next fiscal quarter
compared to the fourth quarter ended June 30, 1999 and to the comparable prior
year quarter ended September 30, 1998.
21
<PAGE> 24
On August 2, 1999, the Company announced an agreement in principle with the
bank lending group and the holders of the 14% Notes on the restructuring of its
indebtedness (the "Indebtedness Restructuring"). Under the terms of the final
agreement, the bank lending group would exchange approximately $523 million in
existing indebtedness for approximately 94.6 percent of the reorganized
Company's equity and $250 million in new senior secured bank debt (the "New
Credit Agreement"). The agreement further provides that the holders of the 14%
Notes would exchange their notes for (a) warrants equal to approximately 4.2
percent of the reorganized Company's fully diluted equity, at an exercise price
based on an enterprise value of $350 million and (b) warrants equal to
approximately 2.0 percent of the reorganized Company's equity, at an exercise
price based on an equity valuation of $280 million. The holders of the 9 3/4%
Notes would exchange their notes for (a) approximately 5.0 percent of the
reorganized Company's equity; (b) warrants equal to approximately 2.8 percent of
the reorganized Company's fully diluted equity, at an exercise price based on an
enterprise value of $350 million; (c) warrants equal to approximately 5.0
percent of the reorganized Company's equity, at an exercise price based on an
equity valuation of $200 million; and (d) warrants equal to approximately 3.0
percent of the reorganized Company's equity, at an exercise price based on an
equity valuation of $280 million. In addition, the holders of the 11 1/2% Notes
and the holders of unsecured claims of Holdings would receive a total of
approximately 0.4 percent of the reorganized Company's equity.
The Company did not make the $7.3 million interest payment on its 9 3/4%
Notes, which was due on August 2, 1999 nor the interest payment due to the
holders of the 14% Notes. The Waiver, pursuant to which the bank lending group
agreed to waive certain financial covenants under its Existing Credit Facility,
expired on July 29, 1999. The holders of the 9 3/4% Notes, the holders of the
14% Notes and the bank lending group have the right to declare the respective
outstanding loan amounts immediately due and payable and seek to exercise
remedies, including, in the case of the Existing Credit Facility, foreclosure on
the collateral securing such amounts. While management does not believe such
holders or the bank lending group will take such action, the Company has
reflected all such loan amounts as current liabilities as of June 30, 1999 (see
"Liquidity and Capital Resources").
The Company reported net income (loss) of $(105.6) million, $(183.1)
million, and $31.1 million in fiscal 1999, 1998 and 1997, respectively.
Operating income (loss) for the respective periods was $(2.7) million, $(134.2)
million, and $67.8 million. Operating loss for the fiscal period ended June 30,
1999 includes a non-recurring loss on asset sales and disposals of $1.5 million,
and $5.7 million for incremental re-engineering and Operating Plan related
consulting fees. Operating loss for the fiscal period ended June 30, 1998
includes merger expenses totaling $69.0 million, a non-recurring loss on asset
sales and disposals of $87.5 million, a special charge to the provision for
uncollectible receivables of $12.3 million and $7.7 million for incremental
charges related to the Company's ongoing service delivery re-engineering
program. Operating income for the fiscal period ended June 30, 1999 and 1997
included special charges for employee severance of $4.5 and $4.3 million
respectively. Excluding the respective charges in the 1999, 1998 and 1997
periods, operating income was $9.0 million for fiscal 1999 compared to $42.3
million for fiscal 1998 and $72.1 million for fiscal 1997.
A more detailed discussion of items affecting the comparison of operating
results is provided below.
Fiscal 1999 Compared to Fiscal 1998
Revenues: Revenues decreased by $79.8 million, or 9.9%, to $725.9 million
for the fiscal year ended June 30, 1999 from $805.7 million for the fiscal year
ended June 30, 1998. This decrease was principally due to a decline in
maintenance contract-based revenues as a result of equipment cancellations
exceeding sales of new contracts.
The Operating 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
22
<PAGE> 25
quarter compared to the fourth quarter ended June 30, 1999 and to the comparable
quarter ended September 30, 1998.
Cost of Revenue: Cost of revenues decreased by $38.7 million, or 6.3%, to
$575.1 million for the fiscal year ended June 30, 1999 from $613.8 million for
the fiscal year ended June 30, 1998. The Company's re-engineering initiatives
and variable cost reductions related to the revenue declines have resulted in
lower costs of approximately $34.5 million for the twelve month period ended
June 30, 1999. The Company has reduced its workforce and streamlined operations
by consolidating from seven to four service regions. 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.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses decreased by $21.9 million, or 15.4%, to $120.6 million
for the fiscal year ended June 30, 1999 from $142.5 million for the fiscal year
ended June 30, 1998. This decrease was principally due to (1) a non-recurring
special charge to the provision for uncollectible receivables of $12.3 million
as result of changes in management's estimates and (2) incremental non-recurring
consulting fees of approximately $7.7 million incurred in connection with the
Company's re-engineering efforts, both of which were incurred during the fiscal
year ended June 30, 1998. The remaining decrease was attributable principally to
decreased sales commission costs due to lower sales levels during fiscal 1999.
Amortization of Intangibles: Amortization of intangible assets declined by
$.2 million, or .7%, from $27.2 million for the fiscal year ended June 30, 1998
to $27.0 million for the fiscal year ended June 30, 1999. This decline resulted
from completed amortization of certain intangibles offset by minimal acquisition
growth during fiscal 1999.
Loss on Asset Sales and Disposals: In connection with the Company's fiscal
1999 cost reduction program, the company sold all of its owned facilities, a
multipurpose facility located in Tulsa, Oklahoma and a logistics service
facility located in the suburbs of Milwaukee, Wisconsin, at a net loss of $1.5
million.
During its annual fourth quarter fiscal 1998 physical inventory, management
determined that over 1.2 million of its computer parts were obsolete. These
parts were retired and subsequently sold to salvage dealers for nominal scrap
value. The parts obsolescence was principally due to the convergence of
significant changes in the Company's business operations and the computer
service industry, which the Company expects will continue. The significant
changes include: (1) accelerated technology migration trends as customers modify
their computing environments to remediate year 2000 ("Y2K") problems, (2)
increasing shifts in demand from data center and midrange systems to desktop
computing environments, and (3) declining life cycles of the products under
current and anticipated service contracts due to increasingly rapid changes in
technology. The abnormal nature of this retirement and subsequent sale required
immediate loss recognition of $75 million.
As a result of the abnormal retirement of computer parts and related life
cycle studies, the Company revised the useful lives of repairable parts and
increased the obsolescence provision for consumable parts prospectively.
Effective July 1, 1998 the Company amortized its existing composite group of
repairable parts and future repairable parts purchases over an estimated average
remaining life of three years.
In connection with the aforementioned acquisition of BABSS, the Company
acquired contractual profit participation rights pursuant to an existing
agreement between BABSS and ICL Sorbus Limited (ICL). On June 29, 1998, the
Company sold all of its contractual profit participation rights back to ICL at a
loss of approximately $12.5 million. Operating income reflects $0.0 million,
$0.5 million, and $1.7 million, in 1999, 1998, and 1997, respectively for
amounts earned pursuant to these rights.
Provision for Parent Company Receivables: The charge of $72.5 million for
parent company receivables for the fiscal year ended June 30, 1999 represents a
provision for amounts deemed by management to be uncollectible (see Note 17 to
the DecisionOne Corporation consolidated financial statements).
Interest Expense: DecisionOne Holdings Corp. interest expense, net of
interest income, increased by $12.8 million from $64.7 million for the fiscal
year ended June 30, 1998 to $77.5 million for the fiscal year
23
<PAGE> 26
ended June 30, 1999. DecisionOne Corporation interest expense, net of interest
income, increased by $10.4 million from $52.2 million for the fiscal year ended
June 30, 1998 to $62.6 million for the fiscal year ended June 30, 1999. The
respective increases are primarily attributable to the Company's increased debt
levels as a result of the Merger and additional borrowings during fiscal 1999
(see "Liquidity and Capital Resources"). The interest expense, net of interest
income is higher for DecisionOne Holdings Corp. than DecisionOne Corporation as
a result of interest expense on $85 million of 11 1/2% Senior Discount
Debentures issued by Holdings in connection with the Merger and interest income
on the $59.1 and $10.8 million parent company loans receivable held by
DecisionOne Corporation.
Income Taxes: The Company's income tax expense for the fiscal year ended
June 30, 1999 reflects an increase in the valuation allowance by $25.4 million
to reduce previously recognized gross deferred tax assets to the level where
management believes that it is more likely than not that the tax benefit will be
realized. Newly-arising net deferred tax assets during fiscal 1999 have been
offset by a corresponding increase in the valuation allowance. The Company's
income tax benefit of $15.8 million for the fiscal year ended June 30, 1998 was
significantly reduced by a valuation allowance to the level where management
believed that it was more likely than not that the tax benefit would be
realized.
The Company expects that its tax expense (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.
Fiscal 1998 Compared to Fiscal 1997
Revenues: Revenues increased by $19.7 million, or 2.5%, to $805.7 million
for the fiscal year ended June 30, 1998 from $786.0 million for the fiscal year
ended June 30, 1997. This increase is attributable primarily to the inclusion of
revenues for service contracts acquired from Memorex Telex on November 15, 1996
for an additional 4.5 months during fiscal 1998. Excluding the Memorex Telex
related increase, revenues declined during the fiscal year ended June 30, 1998
principally due to lower monthly maintenance contract-based revenues as a result
of equipment cancellations exceeding sales of new contracts.
Cost of Revenue: Cost of revenues increased by $29.0 million, or 5.0%, to
$613.8 million for the fiscal year ended June 30, 1998 from $584.8 million for
the fiscal year ended June 30, 1997. This increase is due principally to a $17.7
million increase in the amortization of repairable parts from $63.9 million for
the year ended June 30, 1997 to $81.6 million for the year ended June 30, 1998.
The parts amortization increase resulted primarily from higher average levels of
repairable parts on hand in fiscal 1998 in comparison to fiscal 1997 and the use
of shorter lives for personal computer parts purchased in fiscal 1998. The
inclusion of the costs of servicing contracts acquired from Memorex Telex on
November 15, 1996 for an additional 4.5 months during fiscal 1998 compared to
fiscal 1997 also contributed to the increase in cost of revenues.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased by $36.8 million, or 34.8%, to $142.5 million
for the fiscal year ended June 30, 1998 from $105.7 million for the fiscal year
ended June 30, 1997. This increase is primarily attributable to (1) a special
charge to the provision for uncollectible receivables of $12.3 million as a
result of changes in management's estimates regarding the collectibility of
accounts receivable, (2) incremental consulting fees of approximately $7.7
million incurred in connection with the Company's re-engineering efforts, (3)
the inclusion of an additional 4.5 months of costs related to the acquisition of
Memorex Telex service contracts, (4) the development of new information systems
for the Company's central dispatch and service contract administration processes
and (5) increases in sales employment costs.
Amortization of Intangibles: Amortization of intangible assets increased
by $3.7 million, or 15.7%, from $23.5 million for the fiscal year ended June 30,
1997 to $27.2 million for the fiscal year ended June 30, 1998. This increase was
attributable principally to the amortization of intangibles resulting from the
Memorex Telex acquisition and the acquisition of service contracts of several
other complementary businesses.
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<PAGE> 27
Loss on Asset Sales and Disposals: During its annual fourth quarter fiscal
1998 physical inventory, management determined that over 1.2 million of its
computer parts were obsolete. These parts were retired and subsequently sold to
salvage dealers for nominal scrap value. The parts obsolescence was principally
due to the convergence of significant changes in the Company's business
operations and the computer service industry. The significant changes include:
(1) accelerated technology migration trends as customers modify their computing
environments to remediate year 2000 ("Y2K") problems, (2) increasing shifts in
demand from data center and midrange systems to desktop computing environments,
and (3) declining life cycles of the products under current and anticipated
service contracts due to increasingly rapid changes in technology. The abnormal
nature of this retirement and subsequent sale required immediate loss
recognition of $75 million.
As a result of the abnormal retirement of computer parts and related life
cycle studies, the Company revised the useful lives of repairable parts and
increased the obsolescence provision for consumable parts prospectively.
Effective July 1, 1998 the Company amortized its existing composite group of
repairable parts and future repairable parts purchases over an estimated average
remaining life of three years.
In connection with the aforementioned acquisition of BABSS, the Company
acquired contractual profit participation rights pursuant to an existing
agreement between BABSS and ICL Sorbus Limited (ICL). On June 29, 1998, the
Company sold all of its contractual profit participation rights back to ICL at a
pretax loss of approximately $12.5 million. Operating income reflects $0.0
million, $0.5 million, and $1.7 million in 1999, 1998, and 1997, respectively
for amounts earned pursuant to these rights.
Interest Expense: DecisionOne Holdings Corp. interest expense, net of
interest income, increased by $50.0 million from $14.7 million for the fiscal
year ended June 30, 1997 to $64.7 million for the fiscal year ended June 30,
1998. DecisionOne Corporation interest expense, net of interest income,
increased by $37.5 million from $14.7 million for the fiscal year ended June 30,
1997 to $52.2 million for the fiscal year ended June 30, 1998. The respective
increases are primarily attributable to the Company's increased debt levels as a
result of the Merger (see "Liquidity and Capital Resources"). The interest
expense, net of interest income is higher for DecisionOne Holdings Corp. than
DecisionOne Corporation as a result of interest expense on $85 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.
Income Taxes: The Company's income tax provision for the fiscal year ended
June 30, 1998 reflects an estimated effective income tax benefit of
approximately 8%, while the effective income tax expense for the fiscal year
ended June 30, 1997 was approximately 41%. The change in the Company's
anticipated effective income tax rate was due primarily to the recording of a
valuation allowance for financial reporting purposes to reduce the tax benefit
recognized on operating loss carryforwards generated during fiscal 1998.
ACCOUNTING CHANGE -- SPARE PARTS
Effective July 1, 1999, the Company changed its method of accounting for
repairable parts from the amortization method to the usage method. Under the
amortization method, the Company amortized the cost of repairable parts over an
estimated average useful life and recorded the costs of refurbishing repairable
parts as a component of cost of revenues as incurred. Under the usage method,
the Company will record in cost of revenues the cost of new and refurbished
parts when used to service customers. Additionally, under the usage method,
management will perform periodic assessments to determine the existence of
excess or obsolete parts and will record any necessary provisions to reduce such
parts to net realizable value, consistent with past practice. Management
believes that this change in method for repairable parts more accurately
reflects periodic results of operations based on parts used to service
customers. The effect of this change will be recorded as a cumulative effect
charge of approximately $74.4 million, during the fiscal quarter ending
September 30, 1999. The Company does not expect to record any tax benefit
resulting from this charge. See Notes 3 and 11 to the Company's consolidated
financial statements for the year ended June 30, 1999. The pro forma effect of
this change in accounting principle on prior years' operations is not presented
because such effects are not reasonably determinable.
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<PAGE> 28
LIMITATION ON USE OF NET OPERATING LOSS CARRYFORWARDS AND OTHER TAX CREDITS
As of June 30, 1999, the Company had tax loss carryforwards of
approximately $152.1 million, $151.2 million and $10.1 million for Federal,
state and foreign income tax purposes, respectively, which are scheduled to
expire between 2000 and 2019. The Company also had minimum Federal tax credits
of approximately $2.8 million as of June 30, 1999, with no applicable expiration
period. These carryforwards and credits may be utilized, as applicable, to
reduce future taxable income.
As a result of the Merger with Quaker on August 7, 1997 an "ownership
change" occurred pursuant to Section 382 of the Internal Revenue Code.
Accordingly, for U.S. Federal income tax purposes, net operating loss and tax
credit carryforwards of approximately $27.9 million arising prior to the
ownership change are limited during any future period to the Section 382
"limitation amount" of approximately $9.0 million per annum. The tax benefit
recognized for these carryforwards has been reduced by a valuation allowance
(see Note 11 to the Company's Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred substantial indebtedness in connection with the Merger
on August 7, 1997. Holdings received net proceeds of $85 million from the
issuance of 11 1/2% Senior Discount Debentures due 2008 (the "11 1/2% Notes").
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 (the "Existing Credit Facility") providing for term
loans of $470 million and revolving loans of up to $105 million. The proceeds of
the 11 1/2% Notes (which were issued with attached warrants), 9 3/4% Notes, the
initial borrowings under the Existing Credit Facility and the purchase of
approximately $225 million of Holdings common stock by the DLJMB Group 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
then existing revolving credit facility and to pay expenses incurred in
connection with the Merger. See Note 4 and Note 10 to the Company's and
DecisionOne Corporation's Consolidated Financial Statements for additional
information.
As of June 30, 1999, the Company had outstanding debt of approximately
$786.8 million, as compared to approximately $744.3 million as of June 30, 1998.
(See Note 10 to the Company's Consolidated Financial Statements.)
During the three months ended March 31, 1998, the Company sought and
obtained amendments to the Existing Credit Facility to revise certain financial
performance measurements. The amended Existing 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 Existing Credit Facility until January 28, 1999 and on January 27, 1999,
the Company entered into a Waiver of Financial Covenants (the "Waiver") pursuant
to which the Company's lenders under the Existing Credit Facility (the "bank
lending group") agreed to waive financial covenants in the amended Existing
Credit Facility through July 29, 1999. The Waiver covered the quarters ending
December 31, 1998, March 31, 1999 and June 30, 1999. Without the Waiver, the
Company would not have been in compliance with certain financial covenants under
the amend Existing Credit Facility. The Waiver required the Company, among other
things, to meet certain additional financial covenants as of March 31, 1999,
limited the additional borrowings available to the Company under its revolver to
$10 million, and generally, required that interest payments on loans must be
made monthly. In connection with the Waiver, the Company incurred waiver fees of
approximately $4.3 million, which are being amortized as interest expense
through July 1999. The Company met the required March 31, 1999 financial
covenants contained in the Waiver.
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.
26
<PAGE> 29
On July 29, 1999, the Waiver expired. As a result, since July 29, 1999, the
Company has been in default of certain financial covenants under the Existing
Credit Facility. In addition, on August 2, 1999, the Company failed to make the
interest payments due on both the 9 3/4% Notes and the 14% Notes. Given the
existing events of default under the Existing Credit Facility, the bank lending
group had previously delivered to the Company a notice prohibiting such
payments. As a result of the Company's failure to comply with such financial
covenants and to make such interest payments, events of default have occurred
under the Existing Credit Facility and under the indentures for the 9 3/4% Notes
and the 14% Notes. Accordingly, the bank lending group, the holders of the
9 3/4% Notes, the holders of the 11 1/2 Notes, and the 14% Notes could declare
the amounts outstanding under these debt instruments immediately due and payable
and seek to exercise remedies, including, in the case of the Existing Credit
Facility, foreclosure on the collateral securing such amounts.
On August 2, 1999, the Company announced an agreement in principle with the
bank lending group and the holders of the 14% Notes on the restructuring of its
indebtedness (the "Indebtedness Restructuring"). Under the terms of the final
agreement, the bank lending group would exchange approximately $523 million in
existing indebtedness for approximately 94.6 percent of the reorganized
Company's equity and $250 million in new senior secured bank debt (the "New
Credit Agreement"). The agreement further provides that the holders of the 14%
Notes would exchange their notes for (a) warrants equal to approximately 4.2
percent of the reorganized Company's fully diluted equity, at an exercise price
based on an enterprise value of $350 million and (b) warrants equal to
approximately 2.0 percent of the reorganized Company's equity, at an exercise
price based on an equity valuation of $280 million. The holders of the 9 3/4%
Notes would exchange their notes for (a) approximately 5.0 percent of the
reorganized Company's equity; (b) warrants equal to approximately 2.8 percent of
the reorganized Company's fully diluted equity, at an exercise price based on an
enterprise value of $350 million; (c) warrants equal to approximately 5.0
percent of the reorganized Company's equity, at an exercise price based on an
equity valuation of $200 million; and (d) warrants equal to approximately 3.0
percent of the reorganized Company's equity, at an exercise price based on an
equity valuation of $280 million. In addition, the holders of the 11 1/2% Notes
and the holders of unsecured claims of Holdings would receive a total of
approximately 0.4 percent of the reorganized Company's equity.
The proposed Indebtedness Restructuring will be implemented pursuant to a
prepackaged bankruptcy subject to the approval of a United States Bankruptcy
Court (the "Bankruptcy Court") pursuant to Chapter 11 of Title 11 of the United
States Code, as amended (the "Bankruptcy Code") and the approval of the bank
lending group and the holders of the 14% Notes. Management does not anticipate
any adverse impact on customers, vendors or employees as a result of the
Indebtedness Restructuring, since the Indebtedness Restructuring will address
only the de-leveraging of the Company's balance sheet through the reduction of
its indebtedness. However, there can be no assurance that the Indebtedness
Restructuring will be approved by the Bankruptcy Court, nor that any adverse
impact to the Company, its customers, creditors or employees will be avoided.
See Note 2 to the Company's Consolidated Financial Statements as of and for the
fiscal year ended June 30, 1999 for additional information.
The interest rate applicable to outstanding borrowings under the amended
Existing Credit Facility as of June 30, 1999, varies, at the Company's option,
based upon LIBOR (plus applicable margins not to exceed 3.0%, as amended) or the
Prime Rate (plus applicable margin not to exceed 1.75%). As of June 30, 1999,
the weighted average interest rate applicable to loans under the Existing Credit
Facility was 8.0%.
Financial Condition: Cash flow from operating activities for the fiscal
year ended June 30, 1999 was approximately $71.9 million. These funds, together
with borrowings under the Existing Credit Facility, provided the required
capital to fund repairable part purchases and capital expenditures of
approximately $92.8 million as well as remaining payments on prior period
acquisitions of contracts and assets of complementary businesses for
approximately $2.8 million.
In fiscal years 1998 and 1997, the Company generated net cash flow from
operating activities of $13.3 million and $89.0 million, respectively. Cash flow
from operating activities for fiscal year 1998 has been reduced by $69.0 million
for non-recurring Merger expenses, which were funded through the proceeds of the
27
<PAGE> 30
Merger financing. Cash required to fund the purchase of repairable parts and for
capital expenditures totaled $88.5 million and $97.0 million, during fiscal
years 1998 and 1997, respectively. Cash required to fund the acquisition of
contracts and assets of complimentary businesses were approximately $10.2
million and $32.3 million during fiscal years 1998 and 1997, respectively.
The most significant of the Company's acquisitions during the fiscal year
ended June 30, 1997 was the Memorex Telex acquisition on November 15, 1996. The
adjusted purchase price was $52.7 million, comprised of the Company's assumption
of $28.3 million of liabilities under acquired customer maintenance contracts,
and $24.4 million in cash, excluding transactions and closing costs, after
taking into account certain purchase price adjustments.
The Company's fiscal year ended 1999 EBITDA -- as defined in footnote (1)
above -- was $129.0 million, as compared to EBITDA of $166.8 million for the
fiscal year ended June 30, 1998 and EBITDA of $168.6 million for the fiscal year
ended June 30, 1997. Adjusted EBITDA was $43.6 million, $85.2 million, and
$104.8 million in fiscal 1999, 1998, and 1997, respectively.
The Company, or certain businesses as to which it is alleged that the
Company is a successor, have been identified as potentially responsible parties
in respect of four waste disposal sites that have been identified by the U.S.
Environmental Protection Agency as Superfund sites. In addition, the Company
received a notice several years ago that it may be a potentially responsible
party in respect of a fifth site, but has not received any other communication
in respect of that site. The Company originally estimated that its share of the
costs of the cleanup of one of the sites was approximately $500,000, of which
$372,000 remained unpaid and accrued in the accompanying consolidated balance
sheet as of June 30, 1999. 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. See Note 18 to the Company's
Consolidated Financial Statements.
EFFECT OF INFLATION; SEASONALITY
Inflation has not been a material factor affecting the Company's business.
In recent years, the cost of electronic components has remained relatively
stable due to competitive pressures within the industry, which has enabled the
Company to contain its service costs. The Company's general operating expenses,
such as salaries, employee benefits, and facilities costs, are subject to normal
inflationary pressures.
The operations of the Company are generally not subject to seasonal
fluctuations.
YEAR 2000 COMPLIANCE
This Year 2000 disclosure is being designated as a Year 2000 Readiness
Disclosure under the Year 2000 Information and Readiness Disclosure Act of 1998,
Public Law 105-271.
As is the case with most other businesses, the Company has evaluated and
continues to address 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 having time-sensitive software may otherwise 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 mainframe information technology systems all of which have been
remediated and placed into service, the most recent mission-critical mainframe
system having been placed in service in September, 1999. Additionally, the
Company is in the process of
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<PAGE> 31
implementing Year 2000-Ready releases from its software vendor for the Company's
packaged financial and human resources/payroll systems. The Company has
installed, tested and placed these packaged software upgrades into service. The
Company has also identified approximately seventy (70) non-mission critical
information technology systems which the Company is in the process of
remediating by using in-house personnel or by seeking certifications and/or
upgrades from its vendors. Subsequently, the Company expects most of these
non-mission critical systems to be compliance tested by in-house personnel on an
on-going basis through the balance of the year. The Company has commenced
remediation of its non-information technology systems and expects to have such
remediation complete during the balance of the year.
The Company has ongoing communications with all of its significant business
partners via Vendor Readiness Surveys 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 engaged a consulting firm to assess the Company's processes in place to
achieve Year 2000 readiness, and 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.
The Company's approach to contingency planning is to employ a combination
of existing disaster recovery plans and to develop 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 performed an initial test of the disaster
recovery plan at an off-site facility in March, 1999. While certain issues arose
during the test 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 (DDG), 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 back-up system is in the process of being tested for
Year 2000 readiness. To gain a greater degree of confidence that all other
mainframe applications will function properly, the Company conducted an
integrated system test, once remediation work was completed. The Company is
planning to conduct this test at an off-site facility specially developed for
Year 2000 testing.
Additionally, one of the most critical facets of the Company's contingency
planning involves ensuring adequate staffing to meet potentially-significant
service call volume increases. To prepare for this possibility, the Company has
placed substantial restrictions on authorized leave time for essential
call-center, operational, and information technology personnel during the
critical initial three weeks of January, 2000.
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 continues 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 through the balance of the year. In the meantime, the Company continues
to monitor the need for additional contingency planning.
As of June 30, 1999 the Company incurred costs of approximately $5.0
million and expects to incur approximately $3.0 million thereafter to remediate
or upgrade all of the Company's Systems. The $3.0 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
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<PAGE> 32
plans. There can be no assurance that these estimates 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 may not be 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company uses its revolving credit facility, term loans, senior discount
debentures, 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 Existing 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 Existing Credit Facility, term loans, senior discount
debentures, and senior subordinated notes in effect at June 30, 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) quoted market
prices for the term loans, senior discount debentures, and senior subordinated
notes; (2) the carrying value for the revolving credit facility as interest
rates are reset periodically; and (3) estimates obtained from dealers to settle
interest rate swap and collar agreements. Note 10 to the consolidated financial
statements contain descriptions of the Company's Existing Credit Facility, term
loans, senior discount debentures, senior subordinated notes and interest rate
risk management agreements and should be read in conjunction with the table
below (amounts in thousands).
<TABLE>
<CAPTION>
FISCAL YEAR OF MATURITY
------------------------------------------------------------- TOTAL DUE FAIR VALUE AT
INTEREST RATE SENSITIVITY 2000 2001 2002 2003 2004 THEREAFTER AT MATURITY JUNE 30, 1999
- ------------------------- ------- ------- ------- ------- -------- ---------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEBT:
Fixed Rate.............. -- -- -- -- -- $305,700 $305,700 $ 8,192
Average Interest Rate... -- -- -- -- -- 10.7% -- --
Variable Rate........... $19,325 $36,875 $49,062 $73,438 $126,874 $217,514 $523,088 $235,390
Average Interest Rate... 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% -- --
INTEREST RATE INSTRUMENTS:
Variable to Fixed
Swaps................. $75,000 -- -- -- -- -- $ 75,000 $ (115)
Average Pay Rate........ 5.9% -- -- -- -- -- -- --
Average Receive Rate.... 5.7% -- -- -- -- -- -- --
COLLARS:................ $25,000 $75,000 -- -- -- -- $100,000 $ (237)
Average Cap Rate........ 5.8% 6.7% -- -- -- -- -- --
Average Floor Rate...... 5.7% 5.7% -- -- -- -- -- --
</TABLE>
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<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached hereto and a part of this report are financial statements and
supplementary data for DecisionOne Holdings Corp. and DecisionOne Corporation
listed in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information concerning the directors
and executive officers of the Company as of June 30, 1999. Officers are
appointed until the next annual meeting of stockholders and until their
successors are duly appointed.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Karl R. Wyss................... 58 Chairman and Chief Executive Officer and Director
Thomas J. Fitzpatrick*......... 41 Executive Vice President, Chief Operating Officer and Chief
Financial Officer
Thomas M. Farrell.............. 48 Senior Vice President of End User and Software Support
Services
Joseph S. Giordano*............ 44 Senior Vice President of Sales and Marketing
Charles N. Heller.............. 61 Senior Vice President of Logistics
Thomas M. Molchan.............. 44 Senior Vice President, General Counsel and Corporate
Secretary
Kirk Scott*.................... 36 Senior Vice President, Technology Services and Chief
Technology Officer
Dwight T. Wilson............... 43 Senior Vice President -- Human Resources
Peter T. Grauer................ 54 Director
Lawrence M.v.D. Schloss........ 45 Director
Kirk B. Wortman................ 37 Director
</TABLE>
Karl R. Wyss was named Chairman and Chief Executive Officer of the Company
in February 1999. Since 1993, Mr. Wyss has served as Managing Director and
Senior Operating Partner for DLJ Merchant Banking Partners. Prior to joining
DLJ, Mr. Wyss served as Chairman and Chief Executive Officer of Lear Siegler,
Inc. from 1989 to 1993.
Thomas J. Fitzpatrick was named the Chief Operating Officer, Executive Vice
President and Chief Financial Officer in February 1999. Mr. Fitzpatrick served
as the Executive Vice President and Chief Financial Officer of the Company from
April 1998 to February 1999 and was Vice President and Chief Financial Officer
of the Company from August 1996 through April 1998. Prior to August 1996, Mr.
Fitzpatrick was Vice President of Network Finance at Bell Atlantic Network
Services, Inc. Mr. Fitzpatrick served more than eight years at Bell Atlantic
Business Systems Services, Inc. ("BABSS"), including over four years as Vice
President and Chief Financial Officer. On September 7, 1999, Mr. Fitzpatrick
left the Company. On that date, Thomas J. Fogarty was named Senior Vice
President and Chief Financial Officer.
Thomas M. Farrell was named Senior Vice President of End User and Software
Support Services of the Company in February 1999. From May 1997 to February
1999, Mr. Farrell served as Vice President of End User and Software Support
Services. Prior to being employed by the Company, Mr. Farrell served as Vice
President of Sykes Enterprises (1995-1997) and Chief Operating Officer of Quick
Start Technologies (1993-1995).
31
<PAGE> 34
Joseph S. Giordano was named Senior Vice President of Sales and Marketing
in February 1999. Mr. Giordano served as the Senior Vice President -- Field
Operations of the Company since October 1995. From October 1993 to October 1995,
Mr. Giordano was Vice President Sales and Service Delivery of BABSS. From
January 1991 to October 1993, he was an Area General Manager of BABSS.
Charles N. Heller has served as Senior Vice President of Logistics for the
Company since January 1996. Mr. Heller served as Vice President and General
Manager of BABSS from 1983 to December 1995.
Thomas M. Molchan has been General Counsel and Corporate Secretary of the
Company since October 1995 and was named a Senior Vice President in April 1998.
From December 1986 to October 1995, he was Vice President and General Counsel of
BABSS.
Kirk Scott was named Senior Vice President, Technical Services and Chief
Technology Officer for the Company in February 1999. Mr. Scott served as Vice
President of Network Support Services from November 1996 to February 1999. From
March 1996 to November 1996 Mr. Scott served as Director of Technology
Development for the Company. Prior to being employed by the Company, Mr. Scott
was employed by Genicom/Harris Adacom as the Director of Technology and
Development from December 1991 to March 1996. On September 30, 1999, Mr. Scott
left the Company.
Dwight T. Wilson was named Senior Vice President -- Human Resources of the
Company in February 1999. From October 1995 to February 1999, Mr. Wilson served
as Vice President -- Human Resources of the Company. From April 1994 to October
1995, Mr. Wilson was Vice President -- Human Resources of BABSS. From October
1990 to March 1994, Mr. Wilson was Director, Human Resources Policies and
Planning of BABSS.
Peter T. Grauer has been a Director of the Company since August 1997 and a
Managing Director of DLJ Merchant Banking II, Inc. since September 1992. From
April 1989 to September 1992, he was Co-Chairman of Grauer & Wheat, Inc., an
investment firm specializing in leveraged buyouts. Prior to April 1989, Mr.
Grauer was a Senior Vice President of Donaldson, Lufkin & Jenrette Securities
Corporation. Mr. Grauer is a director of Total Renal Care Holdings, Inc. and
Thermadyne Holdings Corp.
Lawrence M.v.D. Schloss has been a Director of the Company since August
1997 and the Managing Partner of DLJ Merchant Banking II, Inc. since November
1995. Prior to November 1995, he was the Chief Operating Officer and Managing
Director of DLJ Merchant Banking, Inc. Mr. Schloss currently serves as Chairman
of the Board of McCulloch Corporation and as a director of Thermadyne Holdings
Corp.
Kirk B. Wortman has been a Director of the Company since August 1997 and a
Principal of DLJ Merchant Banking II, Inc. since February 1997. For the five
years prior to joining DLJ Merchant Banking II, Inc. he worked in the Leveraged
Finance Group within DLJ's Investment Banking Group, most recently as a Senior
Vice President.
* No longer an executive officer of the Company as of October, 1999.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth for the years ended June 30, 1999, 1998 and
1997 certain compensation paid by the Company to its current and former Chief
Executive Officers and the four other most highly paid executive officers of the
Company whose cash compensation exceeded $100,000 for the year ended June 30,
1999.
32
<PAGE> 35
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ----------------
------------------------------------- SECURITIES
OTHER UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ANNUAL ($) OPTIONS/SARS (#) COMPENSATION ($)(1)
- --------------------------- ---- ---------- --------- ---------- ---------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Karl R. Wyss............. 1999 175,385(2) 200,000(2) -- -- --
Chairman and Chief 1998 -- -- -- -- --
Executive Officer 1997 -- -- -- -- --
Stephen J. Felice(3)..... 1999 243,879(4) -- -- 173,000 300,944
Former President and 1998 271,000 250,000 -- 173,000 --
Chief Executive 1997 225,000 300,000 -- 9,000 --
Officer
Thomas J. Fitzpatrick(5)... 1999 250,000 261,250(6) -- 100,000 1,985
Executive Vice 1998 200,800 75,000 -- 100,000 --
President, Chief 1997 168,077(7) 155,000(7) 224,908(8) 100,000 --
Operating Officer and
Chief Financial Officer
Thomas M. Molchan........ 1999 205,000 93,250(9) -- 50,000 2,011
Senior Vice President 1998 159,900 40,000 -- 50,000 --
and General Counsel 1997 139,300 95,000 -- 10,000 --
Joseph S. Giordano(10)... 1999 180,731 95,800(11) -- 30,000 2,138
Senior Vice President, 1998 170,000 40,000 -- 30,000 --
Sales and Marketing 1997 140,000 84,150 -- 21,000 --
Thomas Farrell........... 1999 165,000 80,050(12) -- 25,000 1,137
Senior Vice President, 1998 165,000 45,000 -- 25,000 --
End User Support 1997 18,404(13) -- 104,880(14) -- --
Services
</TABLE>
- ---------------
(1) Includes company contributions to DecisionOne's defined contribution plan
in 1999 of: Mr. Wyss $0, Mr. Felice $944, Mr. Fitzpatrick $1,985, Mr.
Molchan $2,011, Mr. Giordano $2,138, and Mr. Farrell $1,137. In addition,
Mr. Felice was paid $300,000 in severance pursuant to the agreement between
the Company and him, dated February 17, 1999.
(2) Mr. Wyss joined the Company and was named Chief Executive Officer on
February 18, 1999. The salary and bonus shown reflect the amount earned
after such date through June 30, 1999.
(3) Mr. Felice's employment terminated on February 18, 1999.
(4) In addition to base salary, $4,264 was paid for unused vacation.
(5) Mr. Fitzpatrick's employment terminated subsequent to the end of the fiscal
year.
(6) Mr. Fitzpatrick received a bonus of $73,750 for performance during fiscal
1999 and a bonus of $187,500 pursuant to his participation in the Executive
Retention Plan.
(7) Mr. Fitzpatrick joined the Company and was named an executive officer on
August 12, 1996. The salary and bonus reflect the amount earned after such
date through June 30, 1997. Of the bonus amount, $30,000 was a one-time
signing bonus.
(8) Of this amount, $223,908 was for relocation assistance. The other $1,000
was for tax preparation assistance.
(9) Mr. Molchan received a bonus of $42,000 for performance during fiscal 1999
and a bonus of $51,250 pursuant to his participation in the Executive
Retention Plan.
(10) Mr. Giordano's employment terminated subsequent to the end of the fiscal
year.
(11) Mr. Giordano received a bonus of $45,800 for performance during fiscal 1999
and a bonus of $50,000 pursuant to his participation in the Executive
Retention Plan.
(12) Mr. Farrell received a bonus of $38,800 for performance during fiscal 1999
and a bonus of $41,250 pursuant to his participation in the Executive
Retention Plan.
(13) Mr. Farrell joined the Company on May 12, 1997. The salary reflects the
amount earned after such date through June 30, 1997.
33
<PAGE> 36
(14) This amount was for relocation assistance.
The following table summarizes stock options granted during fiscal 1999 to
the persons named in the Summary Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM ($)(2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED (#)(1) FISCAL 1999 ($/SH) DATE 5% 10%
- ---- -------------- ------------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Karl R. Wyss................. -- -- -- -- -- --
Stephen J. Felice............ 173,000 9.9% 6.1041 8/06/07 553,951 1,350,797
Thomas J. Fitzpatrick........ 87,000 5.0% 6.1041 8/06/07 278,577 679,302
13,000 0.7% 6.1041 4/26/08 45,969 114,403
Thomas M. Molchan............ 30,000 1.7% 6.1041 8/06/07 96,061 234,242
20,000 1.1% 6.1041 4/26/08 70,721 176,005
Joseph S. Giordano........... 30,000 1.7% 6.1041 8/06/07 96,061 234,242
Thomas Farrell............... 25,000 1.4% 6.1041 8/06/07 80,051 195,202
</TABLE>
- ---------------
(1) All stock option grants since August 7, 1997 were cancelled and new grants
were issued on December 14, 1998 with an exercise price at the then current
market price. The number of shares, vesting schedules and expiration dates
were retained from the cancelled grants. The shares underlying these grants
are subject to the terms of the Investors' Agreement. Half of the shares
underlying each grant vests in four equal annual installments commencing on
the first anniversary date of the original grant. The other half of the
shares underlying each grant vests on the seventh anniversary of the
original grant, but vesting may accelerate over the first four anniversaries
of the original grant if certain financial goals are met. The shares
underlying unvested options are cancelled upon termination of the optionee's
service with the Company.
(2) Potential Realizable Values are calculated by applying an assumed annual
compounded annual rate of return to the per share price of the Company's
common share on the date of grant from the date of the grant until the end
of the term of the option. These amounts are reported net of the option
exercise price, but before any taxes associated with exercise or subsequent
sale of the underlying stock. The 5% and 10% assumed rates are mandated by
rules of the Securities and Exchange Commission. The actual value to be
realized by the option holder may be greater or less than the values
estimated in this table.
The following table summarizes option exercises during fiscal 1999 and the
value at June 30, 1999 of vested and unvested options for each person named in
the Summary Compensation Table. Year-end values are based upon a price of $2.00
per share, which was the closing market price of a share of Common Stock on June
30, 1999, the last trading day of the fiscal year.
34
<PAGE> 37
AGGREGATED OPTION/SAR EXERCISES IN LAST YEAR AND YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT JUNE 30, 1999 THE-MONEY OPTIONS AT
SHARES (#)(1) JUNE 30, 1999 ($)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Karl R. Wyss............ -- -- -- -- -- --
Stephen J. Felice....... -- -- 46,084 151,375 -- --
Thomas J. Fitzpatrick... -- -- 31,101 87,500 -- --
Thomas M. Molchan....... -- -- 18,316 43,750 -- --
Joseph S. Giordano...... -- -- 15,816 26,250 -- --
Thomas Farrell.......... -- -- 3,125 21,875 -- --
</TABLE>
- ---------------
(1) All shares issued upon exercise of options and all shares underlying
unexercised options are subject to the terms of the Investors' Agreement.
The following table summarizes the "repriced" stock option grants to
executive officers through June 30, 1999.
TEN-YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
NUMBER OF MARKET LENGTH OF
SECURITIES PRICE OF EXERCISE ORIGINAL
UNDERLYING STOCK AT PRICE AT OPTION TERM
OPTIONS/ TIME OF TIME OF REMAINING
REPRICED OR REPRICING OR REPRICING OR NEW AT DATE OF
AMENDED AMENDMENT AMENDMENT EXERCISE REPRICING OR
NAME DATE (#) ($)(1) ($) PRICE ($) AMENDMENT
- ---- -------- ----------- ------------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Stephen J. Felice*............ 12/14/98 173,000 6.1041 20.6084 6.1041 104 Months
Former President and Chief
Executive Officer
James S. Burkhardt*........... 12/14/98 100,000 6.1041 20.6084 6.1041 113 Months
Former Senior Vice
President, Sales and
Marketing
Thomas Farrell................ 12/14/98 25,000 6.1041 20.6084 6.1041 104 Months
Senior Vice President, End
User Support Services
Thomas J. Fitzpatrick*........ 12/14/98 87,000 6.1041 20.6084 6.1041 104 Months
Executive Vice President, 12/14/98 13,000 6.1041 20.6084 6.1041 112 Months
Chief Operating Officer and
Chief Financial Officer
Joseph S. Giordano*........... 12/14/98 30,000 6.1041 20.6084 6.1041 104 Months
Senior Vice President, Sales
and Marketing
Charles N. Heller............. 12/14/98 15,000 6.1041 20.6084 6.1041 104 Months
Senior Vice President,
Logistics
Thomas M. Molchan............. 12/14/98 30,000 6.1041 20.6084 6.1041 104 Months
Senior Vice President and 12/14/98 20,000 6.1041 20.6084 6.1041 112 Months
General Counsel
Kirk Scott*................... 12/14/98 20,000 6.1041 20.6084 6.1041 104 Months
Senior Vice President and
Chief Technology Officer
Dwight T. Wilson.............. 12/14/98 25,000 6.1041 20.6084 6.1041 104 Months
Senior Vice President, Human
Resources
</TABLE>
- ---------------
* No longer an executive officer as of November, 1999.
35
<PAGE> 38
(1) The Market Price of Stock is the fair market value of a share of common
stock as defined in the 1997 Management Incentive Plan -- the average
reported closing price of a share for the three trading days immediately
preceding the date of a stock option grant.
(2) The new exercise price was set higher than the market price because the
intent of the Compensation Committee of the Board of Directors at the time
was to set the exercise price for all stock option grants at the same
exercise price as the original stock option grants.
Stock Option "Repricing". On December 14, 1998, the Compensation Committee
cancelled all outstanding stock option grants and replaced them with new grants,
equal in the number of securities underlying each grant, at the then current
fair market value of a share of common stock, $6.1041. The new grants retained
the same vesting schedules and expiration dates as the cancelled grants. The
Committee chose this action in light of the decline in the trading price of
common stock over the previous several months. It recognized that key employees
were not motivated by stock option grants that were well out-of-the-money. In a
very competitive information technology employment market, the Committee acted
to support the Company in retaining key employees.
COMPENSATION COMMITTEE OF THE BOARD OF
DIRECTORS
PETER T. GRAUER, CHAIRMAN
LAWRENCE M.V.D. SCHLOSS
KIRK B. WORTMAN
EMPLOYMENT, SEVERANCE AND RETENTION AGREEMENTS
Mr. Felice entered into an employment agreement with DecisionOne Holdings
Corp. and DecisionOne Corporation (the "Companies") as of August 7, 1997,
pursuant to which he served as the President and Chief Operating Officer of the
Companies. In connection with the termination of his employment in February
1999, the Companies and Mr. Felice entered into an agreement pursuant to which
Mr. Felice received a severance payment of $300,000. As provided in his
employment agreement, Mr. Felice is subject to a perpetual confidentiality
covenant, a one-year non-competition covenant and a two-year non-solicitation
covenant.
Messrs. Farrell, Giordano, Heller, Molchan and Wilson have severance
arrangements with DecisionOne Corporation which provide for a severance payment
of one times base annual salary and a continuation of certain benefits for up to
one year in the event of termination without cause, or if their work location is
moved by more than 50 miles from its present location and the employee chooses
not to accept relocation. Recipients of severance benefits are required to sign
a release of claims against the Company and to agree to a one-year
non-solicitation covenant.
In March 1999, DecisionOne Corporation established an Executive Retention
Bonus Plan (the "Retention Plan") in order to retain the services of key
executives during the implementation of the Company's Operating Plan. Pursuant
to the Retention Plan, Messrs. Fitzpatrick, Farrell, Giordano, Heller, Molchan,
Scott and Wilson and certain other officers received in August 1999 a retention
bonus ranging from three to nine months' base salary.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of November 12, 1999
(except as otherwise noted) regarding the ownership of Common Stock (i) by each
person known by the Company to be the beneficial owner of more than five percent
of the Company's outstanding Common Stock, (ii) by each director of the Company,
(iii) by each executive officer of the Company named in the Summary Compensation
Table
36
<PAGE> 39
included elsewhere in this proxy statement and (iv) by all current executive
officers and directors of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE
BENEFICIALLY OF
BENEFICIAL OWNER OWNED(1) CLASS(1)
- ---------------- ------------ ----------
<S> <C> <C>
DLJ Merchant Banking Partners II, L.P. group(2)(3).......... 11,075,165 88.2%
The Apollo group(3)(4)...................................... 810,117 6.4
The Bain Capital group(3)(5)................................ 810,117 6.4
The THL group(3)(6)......................................... 810,117 6.4
Stephen J. Felice........................................... -- --
Thomas J. Fitzpatrick....................................... -- --
Joseph S. Giordano.......................................... -- --
Thomas M. Molchan(3)(7)..................................... 36,917 *
Thomas Farrell(3)(8)........................................ 24,630 *
Karl R. Wyss(9)............................................. -- --
Peter T. Grauer(9).......................................... -- --
Lawrence M.v.D. Schloss(9).................................. -- --
Kirk B. Wortman(9).......................................... -- --
All current executive officers and directors as a group (11
persons)(3)............................................... 133,479 1.1
</TABLE>
- ---------------
* Less than one percent.
(1) Applicable percentage of ownership is based on 12,551,819 shares of Common
Stock outstanding as of November 12, 1999. In accordance with the rules of
the Securities and Exchange Commission, options to purchase shares of Common
Stock that are exercisable as of November 12, 1999 or exercisable within 60
days thereafter are deemed to be outstanding and beneficially owned by the
person holding such options for purpose of computing such person's
percentage ownership, but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person. The persons listed
in the table have sole voting or investment power with respect to the shares
listed opposite their name unless noted otherwise.
(2) 7,520,009 shares (approximately 59.9% of the outstanding Common Stock) are
held directly by DLJMB and the following investors related to DLJMB
(collectively, "DLJ Entities"): DLJ Offshore Partners, II, C.V.
("Offshore"), a Netherlands Antilles limited partnership; DLJ Diversified
Partners, L.P. ("Diversified"), a Delaware limited partnership; DLJMB
Funding II, Inc. ("Funding"), a Delaware corporation; DLJ Merchant Banking
Partners II-A, L.P. ("DLJMBPIIA"), a Delaware limited partnership; DLJ
Diversified Partners-A L.P. ("Diversified A"), a Delaware limited
partnership; DLJ Millennium Partners, L.P. ("Millennium"), a Delaware
limited partnership; DLJ Millennium Partners-A, L.P. ("Millennium A"), a
Delaware limited partnership; DLJ EAB Partners, L.P. ("EAB"), a Delaware
limited partnership; UK Investment Plan 1997 Partners ("UK Partners"), a
Delaware partnership; and DLJ First ESC LLC, a Delaware limited liability
company ("DLJ First"). See "Certain Relationships and Related Transactions."
The address of each of DLJMB, Diversified, Funding, DLJMBPIIA, Diversified
A, Millenium, Millenium A, DLJ First and EAB is 277 Park Avenue, New York,
New York 10172. The address of Offshore is John B. Gorsiraweg 14,
Willemstad, Curacao, Netherlands, Antilles, The address of UK Partners is
2121 Avenue of the Stars, Fox Plaza, Suite 3000, Los Angeles, California
90067.
(3) Because of the restrictions on transfer, voting requirements and other
provisions of the Investors' Agreement (See "Certain Relationships and
Related Transactions"), the DLJ Entities are also deemed to beneficially own
(a) the 3,398,970 shares held by the following institutional investors
(collectively, "Institutional Investors") which are parties to the
Investors' Agreement: Apollo Advisors II, L.P. and related entities
("Apollo"), Bain Capital, Inc. and related entities ("Bain Capital"), Thomas
H. Lee
37
<PAGE> 40
Company and related entities ("THL"), certain investment funds associated
with DLJ Capital Corp. ("Sprout") and Ontario Teacher's Pension Plan Board
("Teachers"); (b) the 133,479 shares held by the executive officers named in
the Summary Compensation Table as further detailed in Notes (7) and (8)
below; and (c) 22,707 shares subject to the Investors' Agreement held by
other members of management of the Company (together with the executive
officers referred to above, the "Management Shareholders"). Therefore, the
share amounts set forth opposite the names of the other entities and
individuals in the table are also included in the ownership of the DLJ
Entities shown in the table.
Details concerning the share ownership of Apollo, Bain Capital and THL are
set forth in Notes (4)-(6) below. Sprout holds 475,504 shares (approximately
3.8% of the outstanding Common Stock) and Teachers holds 493,115 shares
(approximately 3.9% of the outstanding Common Stock). Sprout's shares are
held by DLJ Capital Corp. ("DLJCC"), a Delaware corporation, Sprout Growth
II, L.P., a Delaware limited partnership, The Sprout CEO Fund, L.P., a
Delaware limited partnership and one additional entity managed by the Sprout
Group, the venture capital affiliate of DLJ. DLJCC is a wholly owned
subsidiary of DLJ. Sprout Growth II, L.P. has two general partners: DLJCC is
the managing general partner and DLJ Growth Associates II, L.P. is the
general partner. DLJ Growth Associates II, L.P. is a Delaware limited
partnership, whose general partners are a group of individual employees of
DLJCC and DLJ Growth Associates (II), Inc., a Delaware corporation which is
a wholly owned subsidiary of DLJCC. DLJCC is the managing general partner of
The Sprout CEO Fund. The address of Sprout is 277 Park Avenue, New York, New
York 10172.
Teachers is an independent corporation established in 1990 to administer the
benefits and manage the investments of the pension plan for over 200,000
Ontario teachers. The address of Teachers is 5650 Yonge Street, 5th Floor,
North York, Ontario M2M 4H5.
(4) Apollo's shares are held by Apollo Investment Fund III, L.P., a Delaware
limited partnership ("AIF III"), Apollo Overseas Partners III, L.P., a
Delaware limited partnership ("Overseas Partners"), and Apollo (U.K.)
Partners III, L.P., a limited partnership organized under the laws of
England ("Apollo UK Partners") (collectively, "Apollo Entities"). Each of
the Apollo Entities is principally engaged in the business of investment
securities.
Apollo Advisors II, L.P., a Delaware limited partnership ("Advisors"), is
the general partner of AIF III and the managing general partner of Overseas
Partners and Apollo UK Partners. Advisors is principally engaged in the
business of providing advice regarding investments by, and serving as the
general partner of, the Apollo Entities. The address of Apollo is 1301
Avenue of the Americas, 38th Floor, New York, New York 10019.
(5) Bain Capital's shares are held by Bain Capital Fund V, L.P., Bain Capital
Fund, V-B, L.P., BCIP Associates, and BCIP Trust Associates, L.P. Bain
Capital Investors V, Inc. is the general partner of Bain Capital Partners V,
L.P. ("BCP V"), a Delaware limited partnership. BCP V is the general partner
of Bain Capital Fund V, L.P. and Bain Capital Fund V-B, L.P. (the "Bain Fund
Vs"), both of which are Delaware limited partnerships. The Bain Fund Vs'
primary business activity is to make investments in private equity
securities and other interests in business organizations, domestic and
foreign.
BCIP Associates, a general partnership, and BCIP Trust Associates, L.P., a
limited partnership (together the "BCIPs"), are both organized under the
laws of the state of Delaware. The BCIPs' primary business activity is to
make investments in private equity securities and other interests in
domestic and foreign business organizations. The address of Bain Capital is
Two Copley Place, Boston, Massachusetts 02116.
(6) THL's shares are held by Thomas H. Lee Equity Fund III, L.P., a Delaware
limited partnership ("Fund III"), Thomas H. Lee Foreign Fund III, L.P., a
Delaware limited partnership ("Foreign Fund"), THL Co-Investors III-A, LLC,
a Massachusetts limited liability company ("Co-Investors A"), the THL Co-
Investors III-B, LLC, a Massachusetts limited liability company
("Co-Investors B"). The general partners of each of Fund III and Foreign
Fund is THL Equity Advisors III Limited Partnership, a Massachusetts limited
partnership ("Equity Advisors"). The general partner of Equity Advisors is
THL Equity Trust III, a Massachusetts business trust, the beneficial owners
of which are affiliates of
38
<PAGE> 41
Thomas H. Lee Company. The manager of each of Co-Investors A and
Co-Investors B. is Thomas H. Lee. The address of THL is 75 State Street,
26th Floor, Boston, Massachusetts 02109.
(7) Consists of 4,851 shares, 20,000 shares subject to the Investors' Agreement
issuable upon exercise of options exercisable as of November 12, 1999 or
within 60 days thereafter ("Option Shares") and 12,066 shares subject to the
Investors' Agreement issuable upon exercise of fully-vested options (the
"Rollover Options") resulting from the conversion by certain Management
Shareholders of options outstanding at the time of the Recapitalization.
(8) Consists of 12,130 shares and 12,500 Option Shares.
(9) Messrs. Wyss, Schloss, Grauer and Wortman are officers of DLJ Merchant
Banking II, Inc., an affiliate of DLJMB. DLJ Merchant Banking II, Inc. is
the general partner of DLJ Merchant Banking II, L.P. Share data shown for
such individuals excludes shares shown as held by the DLJ Entities, as to
which such individuals disclaim beneficial ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Investors' Agreement restricts transfers of the shares of Common Stock
by the Management Shareholders, permits the Management Shareholders to
participate in certain sales of shares of Common Stock by the DLJ Entities,
requires the Management Shareholders to sell shares of Common Stock in certain
circumstances should the DLJ Entities choose to sell any such shares owned by
the DLJ Entities, permits the Management Shareholders and the Institutional
Investors to purchase equity securities proposed to be issued by the Company on
a preemptive basis in the event the DLJ Entities choose to acquire any such
equity securities, and provides for certain registration rights. The Investors'
Agreement also provides that the DLJ Entities have the right to appoint a
majority of the members of the Board of Directors of the Company.
On January 1, 1999, the Company entered into an agreement with The
Equitable Life Assurance Society of the United States ("Equitable"), which is an
affiliate of Donaldson, Lufkin and Jenrette, Inc. and the DLJ Entities. Under
the agreement, the Company performed installation of computer hardware and
software at Equitable's Harmon Meadow location. All services under the agreement
have been completed. The Company believes that the services were rendered at
such prices and upon such terms and conditions as would apply in an arm's-length
transaction between unrelated parties.
In addition, DLJ Capital Funding, Inc., an affiliate of the DLJ Entities,
received customary fees and reimbursement of expenses in connection with the
arrangement and syndication of the new credit facility entered into by a
subsidiary of the Company in connection with the Recapitalization and as a
lender thereunder. DLJSC, an affiliate of the DLJ Entities, received customary
fees in connection with the underwriting of the Senior Subordinated Notes and
the Debentures issued by the Company in connection with the Recapitalization.
DLJSC received a merger advisory fee of $5.0 million from the Company upon
consummation of the Recapitalization.
The Company has entered into an agreement with DLJSC pursuant to which
DLJSC will act as the Company's exclusive financial advisor for an annual fee of
$500,000. In addition, the Company agrees to engage DLJSC in connection with any
financial transaction (as defined in the agreement) on usual and customary terms
for such engagements. The agreement continues until the earlier of (i) August 6,
2002 or (ii) such time as the DLJ Entities shall own less than 20% of the
outstanding Common Stock.
In connection with the Recapitalization, the Company extended non-recourse
loans (the "Loans") to the following executive officers, in the amounts shown,
to fund, in whole or in part, their purchase of shares of Common Stock: Stephen
J. Felice -- $249,979.89; Thomas J. Fitzpatrick -- $116,664.15; Joseph S.
Giordano -- $99,971.35; Thomas M. Molchan -- $99,971.35; and Thomas
Farrell -- $124,989.95. Each of the Loans matures on August 7, 2001, with
interest at the rate of 6.39% per annum and principal due and payable at
maturity. The Loans are secured by a pledge of the shares of Common Stock
purchased with the
39
<PAGE> 42
Loans and any shares of Common Stock obtained through the borrower's exercise of
Rollover Options or options issued under the Plan. The Loans to Messrs. Felice,
Fitzpatrick and Giordano were cancelled upon termination of their employment
with the Company, and those employees forfeited their right, title and interest
in the shares of Common Stock and all options which were pledged as security for
the Loans. For Messrs. Molchan and Farrell, the loan amounts shown above
represent the amount outstanding as of November 12, 1999 and the largest
aggregate amount of indebtedness outstanding at any time since July 1, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
See Index to Financial Statements appearing on Page F-1.
(2) Financial Statement Schedules
Schedule I -- Condensed Financial Information of Registrant
(DecisionOne Holdings Corp. only)
Schedule II -- Valuation and Qualifying Accounts
(3) Exhibits
DECISIONONE HOLDINGS CORP.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated May 4, 1997 between the
Company and Quaker Holding Co.(5) (appears as Annex A)
2.2 Amendment No. 1 to the Agreement and Plan of Merger, dated
as of July 15, 1997.(5) (appears as Annex A-1)
3.1 Amended and Restated Certificate of Incorporation (Exhibit
3.1).(1)
3.2 Amended and Restated Bylaws (Exhibit 3.2).(1)
4.1 Specimen of DecisionOne Corporation's 9 3/4% Senior
Subordinated Notes due 2007 (included in Exhibit 4.2).(6)
4.2 9 3/4% Senior Subordinated Note Indenture dated as of August
7, 1997 between DecisionOne Corporation and State Street
Bank and Trust Company as Trustee.(6)
4.3 Specimen of the Company's 11 1/2% Senior Discount Debenture
due 2008 (included in Exhibit 4.4).(6)
4.4 11 1/2% Senior Discount Debenture Indenture dated as of
August 7, 1997 by and between Quaker Holding Co. and State
Street Bank and Trust as Trustee.(6)
4.5 Form of Warrant (included in Exhibit 4.6).(6)
4.6 Warrant Agreement dated as of August 7, 1997 between Quaker
Holding Co. and State Street Bank and Trust as Warrant
Agent.(6)
4.7 Debenture Agreement dated as of August 7, 1997 between the
Company and State Street Bank and Trust as Trustee (included
in Exhibit 4.4).(6)
4.8 Warrant Assumption dated as of August 7, 1997 between the
Company and State Street Bank and Trust as Warrant Agent
(included in Exhibit 4.6).(6)
4.9 Specimen of DecisionOne Corporation's 14% Senior Notes due
2006 (included in Exhibit 4.10).(10)
4.10 14% Senior Notes Indenture dated as of January 27, 1999
between DecisionOne Corporation and State Street Bank and
Trust Company as Trustee.(10)
10.1* Management Incentive Plan.(6)
10.2* Direct Investment Program.(6)
10.3 Investors' Agreement dated August 7, 1997.(6)
</TABLE>
40
<PAGE> 43
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.4 U.S. $575,000,000 Credit Agreement ("Credit Agreement")
dated as of August 7, 1997 by and among DecisionOne
Corporation, various financial institutions, DLJ Capital
Funding Inc. (as Syndication Agent), Nations Bank of Texas,
N.A. (as Administrative Agent) and BankBoston, N.A. (as
Documentation Agent).(6)
10.5 Amendment No. 2, dated January 12, 1998 to the Credit
Agreement.(8)
10.6 Amendment No. 3, dated March 18, 1998 to the Credit
Agreement.(9)
10.7* Employment Agreement with Kenneth Draeger (Exhibit 10.7).(1)
10.8* Employment Letter with Stephen J. Felice (Exhibit 10.8).(1)
10.9* Employment Letter with James J. Greenwell (Exhibit
10.10).(1)
10.10 Amended and Restated Registration Rights Agreement (Exhibit
10.11).(1)
10.11 First Amendment to Amended and Restated Registration Rights
Agreement (Exhibit 10.12).(1)
10.12* Employment Letter with Joseph S. Giordano (Exhibit
10.17).(2)
10.13* Employment Letter with Thomas J. Fitzpatrick (Exhibit
10.22).(3)
10.14* Employment Letter with Thomas M. Molchan.(4)
10.15* Employment Letter with Dwight T. Wilson.(4)
10.16 Intercompany Note made by the Company in favor of
DecisionOne Corporation dated as of August 7, 1997.(6)
10.17* Form of Purchase Agreement dated as of August 7, 1997.(6)
10.18* Form of Option Agreement dated as of August 7, 1997.(6)
10.19* Employment Letter for James S. Burkhardt.(12)
10.20 Waiver of Financial Covenants.(10)
10.21* Agreement with Stephen J. Felice dated February 17,
1999.(11)
12 Computation of Ratios of Earnings to Fixed Charges.(5)
21+ Subsidiaries of the Registrant.
23+ Consent of Deloitte & Touche LLP.
24+ Power of Attorney.
27+ Financial Data Schedule.
</TABLE>
- ---------------
(1) Filed as an Exhibit to Registration Statement No. 333-1256 on Form S-1
filed with the Securities and Exchange Commission on February 9, 1996.
+ Filed herewith.
* Compensation plans and arrangements for executives and others.
(2) Filed as an Exhibit to Pre-Effective Amendment No. 1 to Registration
Statement No. 333-1256 on Form S-1 filed with the Securities and Exchange
Commission on March 14, 1996.
(3) Filed as an Exhibit to the Annual Report on Form 10-K filed with the
Securities and Exchange Commission on September 30, 1996.
(4) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on May 15, 1997.
(5) Filed as an Exhibit to Registration Statement No. 333-28265 on Form S-4
filed with the Securities and Exchange Commission on June 2, 1997.
(6) Filed as an Exhibit to the Annual Report on Form 10-K for DecisionOne
Corporation filed with the Securities and Exchange Commission on September
29, 1997.
(7) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on November 14, 1997.
(8) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on February 12, 1998.
41
<PAGE> 44
(9) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on May 15, 1998.
(10) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on February 16, 1999.
(11) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on May 17, 1999.
(12) Filed as an Exhibit to the Annual Report on Form 10-K for DecisionOne
Corporation filed with the Securities and Exchange Commission on September
28, 1998.
DECISIONONE CORPORATION
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the
Company, as amended.(1)
3.2 Amended and Restated Bylaws of the Company.(1)
4.1 Specimen of the Company's 9 3/4% Senior Subordinated Notes
due 2007 (included in Exhibit 4.2).(6)
4.2 9 3/4% Senior Subordinated Note Indenture dated as of August
7, 1997 between the Company and State Street Bank and Trust
as Trustee.(6)
4.3 Specimen of the Company's 14% Senior Notes due 2006
(included in Exhibit 4.4).(7)
4.4 14% Senior Notes Indenture dated as of January 27, 1999
between the Company and State Street Bank and Trust as
Trustee.(7)
10.1* Employment Agreement with Kenneth Draeger.(2)
10.2* Employment Letter with Stephen J. Felice.(2)
10.3 Lease for Frazer, Pennsylvania executive offices (East).(2)
10.4 Lease for Frazer, Pennsylvania executive offices (West).(2)
10.5 Lease for Malvern, Pennsylvania depot and call center.(2)
10.6+ Lease for Hayward, California depot.(3)
10.7 Lease for Northborough, Massachusetts depot.(3)
10.8 Form of Tax Sharing Agreement.(1)
10.9 U.S. $575,000,000 Credit Agreement dated as of August 7,
1997 by and among the Company, various finance institutions,
DLJ Capital Funding Inc. (as Syndication Agent), NationsBank
of Texas, N.A. (as Administrative Agent) and BankBoston,
N.A. (as Documentation Agent).(6)
10.10 Intercompany Note made by the DecisionOne Holdings Corp. in
favor of the Company dated as of August 7, 1997.(6)
10.11* Agreement with Stephen J. Felice dated February 17, 1999.(8)
10.12 Waiver of Financial Covenants.(7)
10.13*+ Executive Retention Plan.
10.14+ Lease for Devon, PA office and warehouse.
10.15+ Lease for College Station, TX call center.
10.16+ Lease for Wilmington, OH warehouse.
10.17 Lease for Richfield, Minnesota call center.(10)
10.18 Lease for Grove City, Ohio depot.(9)
10.19 Lease for Phoenix, Arizona depot.(9)
10.20*+ Executive Severance Plan.
12.1 Statement Regarding Computation of Ratios.(1)
</TABLE>
42
<PAGE> 45
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
21+ Subsidiaries of the Registrant.
23+ Consent of Deloitte & Touche LLP.
24+ Power of Attorney.
27+ Financial Data Schedule.
</TABLE>
- ---------------
(1) Filed as an Exhibit to Registration Statement No. 333-28411 on Form S-1
filed with the Securities and Exchange Commission on June 3, 1997.
+ Filed herewith.
* Compensation plans and arrangements for executives and others.
(2) Filed as an Exhibit to Registration Statement No. 333-1256 on Form S-1
filed with the Securities and Exchange Commission on February 9, 1996.
(3) Filed as an Exhibit to Pre-Effective Amendment No. 1 to Registration
Statement No. 333-1256 on Form S-1 filed with the Securities and Exchange
Commission on March 14, 1996.
(4) Filed as an Exhibit to the Annual Report on Form 10-K filed by DecisionOne
Holdings Corp. with the Securities and Exchange Commission on September 30,
1996.
(5) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed by
DecisionOne Holdings Corp. with the Securities and Exchange Commission on
May 15, 1997.
(6) Filed as an Exhibit to the Annual Report on Form 10-K filed by DecisionOne
Holdings Corp. with the Securities and Exchange Commission on September 29,
1997.
(7) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed by
DecisionOne Holdings Corp. with the Securities and Exchange Commission on
February 1, 1999.
(8) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed by
DecisionOne Holdings Corp. with the Securities and Exchange Commission on
May 17, 1999.
(9) Filed as an Exhibit to the Annual Report on Form 10-K for DecisionOne
Holdings Corp. with the Securities and Exchange Commission on September 28,
1998.
(10) Filed as an Exhibit to the Quarterly Report on Form 10-Q for DecisionOne
Holdings Corp. with the Securities and Exchange Commission on February 12,
1998.
(b) Current Reports on Form 8-K filed during the quarter ended June 30,
1999:
None.
43
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in Frazer, Pennsylvania
on November , 1999.
DECISIONONE HOLDINGS CORP.
By: /s/ KARL R. WYSS
------------------------------------
Karl R. Wyss
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the indicated persons. Each person whose
signature appears below in so signing also makes, constitutes and appoints Karl
Wyss and Thomas J. Fogarty, and each of them acting for him and in his name,
place and stead in any and all capacities, to execute and cause to be filed with
the Securities and Exchange Commission any and all amendments to this report,
and in each case to file the same, with all exhibits thereto and other documents
in connection therewith, and hereby ratifies and confirms all that said
attorney-in-fact or his substitute or substitutes may do or cause to be done by
virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ KARL R. WYSS Chairman and Chief Executive December 6, 1999
- ----------------------------------------------------- Officer (Principal
Karl R. Wyss Executive Officer)
/s/ THOMAS J. FOGARTY Senior Vice President and December 6, 1999
- ----------------------------------------------------- Chief Financial Officer
Thomas J. Fogarty (Principal Financial and
Accounting Officer)
/s/ PETER T. GRAUER Director December 6, 1999
- -----------------------------------------------------
Peter T. Grauer
/s/ LAWRENCE M.V.D. SCHLOSS Director December 6, 1999
- -----------------------------------------------------
Lawrence M.v.D. Schloss
/s/ KIRK B. WORTMAN Director December 6, 1999
- -----------------------------------------------------
Kirk B. Wortman
</TABLE>
44
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in Frazer, Pennsylvania
on November , 1999.
DECISIONONE CORPORATION
By: /s/ KARL R. WYSS
------------------------------------
Karl R. Wyss
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the indicated persons. Each person whose
signature appears below in so signing also makes, constitutes and appoints Karl
Wyss and Thomas J. Fogarty, and each of them acting for him and in his name,
place and stead in any and all capacities, to execute and cause to be filed with
the Securities and Exchange Commission any and all amendments to this report,
and in each case to file the same, with all exhibits thereto and other documents
in connection therewith, and hereby ratifies and confirms all that said
attorney-in-fact or his substitute or substitutes may do or cause to be done by
virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ KARL R. WYSS Chairman and Chief Executive December 6, 1999
- ----------------------------------------------------- Officer (Principal
Karl R. Wyss Executive Officer)
/s/ THOMAS J. FOGARTY Senior Vice President and December 6, 1999
- ----------------------------------------------------- Chief Financial Officer
Thomas J. Fogarty (Principal Financial and
Accounting Officer)
/s/ PETER T. GRAUER Director December 6, 1999
- -----------------------------------------------------
Peter T. Grauer
/s/ KIRK B. WORTMAN Director December 6, 1999
- -----------------------------------------------------
Kirk B. Wortman
</TABLE>
45
<PAGE> 48
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF DECISIONONE HOLDINGS
CORP.:
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of June 30, 1999 and
1998................................................... F-3
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the Years Ended June 30, 1999, 1998
and 1997............................................... F-4
Consolidated Statements of Shareholders' Deficiency for
the Years Ended June 30, 1999, 1998 and 1997........... F-5
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1999, 1998 and 1997........................... F-6
Notes to Consolidated Financial Statements................ F-7
CONSOLIDATED FINANCIAL STATEMENTS OF DECISIONONE
CORPORATION:
Independent Auditors' Report.............................. F-29
Consolidated Balance Sheets as of June 30, 1999 and
1998................................................... F-30
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the Years Ended June 30, 1999, 1998
and 1997............................................... F-31
Consolidated Statements of Shareholder's Deficiency for
the Years Ended June 30, 1999, 1998 and 1997........... F-32
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1999, 1998 and 1997........................... F-33
Notes to Consolidated Financial Statements................ F-34
FINANCIAL STATEMENT SCHEDULES:
Schedule I -- Condensed Financial Information of
Registrant (DecisionOne Holdings Corp. only)........... S-1
Schedule II -- Valuation and Qualifying Accounts.......... S-7
</TABLE>
F-1
<PAGE> 49
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of DecisionOne Holdings Corp.:
We have audited the accompanying consolidated balance sheets of DecisionOne
Holdings Corp. and subsidiaries (the "Company") as of June 30, 1999 and 1998,
and the related consolidated statements of operations and comprehensive income
(loss), shareholders' deficiency and cash flows for each of the three years in
the period ended June 30, 1999. Our audits also included the related financial
statement schedules listed in the Index at Item 14. These financial statements
and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of DecisionOne Holdings Corp. and
subsidiaries as of June 30, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1999 in conformity with generally accepted accounting principles. Also, in our
opinion, the financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company's recent losses from
operations, significant shareholders' deficiency, default under terms of its
credit agreement, and the related Indebtedness Restructuring and planned
Bankruptcy court filings raise substantial doubt about its ability to operate as
a going concern. Management's plans concerning these matters are also described
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
September 1, 1999
F-2
<PAGE> 50
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 31,249 $ 6,415
Restricted cash........................................... 3,410
Accounts receivable, net of allowances of $18,066 and
$22,572................................................ 93,134 114,082
Consumable parts, net of allowances of $8,906 and
$9,271................................................. 15,859 23,097
Prepaid expenses and other assets......................... 21,738 28,106
--------- ---------
Total current assets.............................. 165,390 171,700
REPAIRABLE PARTS, Net of accumulated amortization of
$141,842 and $135,277..................................... 134,924 142,446
PROPERTY AND EQUIPMENT...................................... 25,028 29,095
INTANGIBLES................................................. 128,509 154,029
DEFERRED TAX ASSET.......................................... 25,360
OTHER ASSETS................................................ 2,036 19,357
--------- ---------
TOTAL ASSETS...................................... $ 455,887 $ 541,987
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of debt................................... $ 778,866 $ 13,311
Notes payable -- related party............................ 7,300
Accounts payable and accrued expenses..................... 92,635 101,851
Deferred revenues......................................... 28,876 40,758
Other liabilities......................................... 8,540 10,925
--------- ---------
Total current liabilities......................... 916,217 166,845
DEBT........................................................ 674 731,012
OTHER LIABILITIES........................................... 6,152 5,736
SHAREHOLDERS' DEFICIENCY:
Preferred stock, $.01 par value; authorized 15,000,000;
none outstanding....................................... -- --
Common stock, $.01 par value; authorized 30,000,000;
issued and outstanding 12,564,485 shares in 1999 and
12,584,219 shares in 1998.............................. 126 126
Additional paid-in capital................................ 242,181 242,181
Accumulated deficiency.................................... (706,795) (601,195)
Accumulated other comprehensive income (loss)............. (2,668) (2,718)
--------- ---------
Total shareholders' deficiency.................... (467,156) (361,606)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY.... $ 455,887 $ 541,987
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 51
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
REVENUES................................................... $ 725,943 $ 805,717 $785,950
COST OF REVENUES........................................... 575,063 613,806 584,755
--------- --------- --------
GROSS PROFIT............................................... 150,880 191,911 201,195
OPERATING EXPENSES:
Selling, general and administrative expenses............. 125,125 142,462 109,975
Amortization of intangibles.............................. 26,969 27,169 23,470
Merger expenses.......................................... 69,046
Loss on asset sales and disposals........................ 1,491 87,458
--------- --------- --------
OPERATING INCOME (LOSS).................................... (2,705) (134,224) 67,750
INTEREST EXPENSE, Net of interest income of $622 in 1999,
$1,417 in 1998, and $197 in 1997......................... 77,535 64,683 14,698
--------- --------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES (BENEFIT).......................................... (80,240) (198,907) 53,052
PROVISION (BENEFIT) FOR INCOME TAXES....................... 25,360 (15,777) 21,968
--------- --------- --------
NET INCOME (LOSS).......................................... $(105,600) $(183,130) $ 31,084
========= ========= ========
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS................. (85) (912) (38)
PENSION LIABILITY ADJUSTMENT............................. 135 (517) (25)
--------- --------- --------
COMPREHENSIVE INCOME (LOSS)................................ $(105,550) $(184,559) $ 31,021
========= ========= ========
BASIC EARNINGS (LOSS) PER COMMON SHARE..................... $ (8.40) $ (13.05) $ 1.03
========= ========= ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING....... 12,577 14,033 30,110
========= ========= ========
PRO FORMA INFORMATION (UNAUDITED) -- See Note 4:
Pro forma net loss....................................... $(124,266) $ (183)
========= ========
Pro forma net loss per share............................. $ (9.91) $ (.01)
========= ========
Pro forma weighted average number of common shares
outstanding........................................... 12,545 14,200
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 52
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT NUMBER OF SHARES OF COMMON STOCK)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
--------------------------------------
COMMON STOCK FOREIGN TOTAL
-------------------- ADDITIONAL CURRENCY PENSION SHARE-
NUMBER OF PAID-IN ACCUMULATED TRANSLATION LIABILITY HOLDERS'
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT ADJUSTMENT DEFICIENCY
----------- ------ ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996.......... 27,340,288 $273 $ 255,262 $ (73,516) $ 622 $(1,848) $ 180,793
Net income...................... 31,084 31,084
Adjustment to pension
liability................... (25) (25)
Tax benefit -- disqualifying
stock disposition........... 2,635 2,635
Foreign currency translation
adjustment.................. (38) (38)
Exercise of stock options..... 477,544 5 434 439
----------- ---- --------- --------- ----- ------- ---------
BALANCE, JUNE 30, 1997.......... 27,817,832 278 258,331 (42,432) 584 (1,873) 214,888
Net loss...................... (183,130) (183,130)
Adjustment to pension
liability................... (517) (517)
Foreign currency translation
adjustment.................. (912) (912)
Repurchase of common stock in
connection with
recapitalization............ (26,506,705) (265) (244,639) (375,633) (620,537)
Issuance of common stock in
connection with
recapitalization............ 11,108,354 111 226,472 226,583
Purchase and retirement of
common stock................ (23,026) (85) (85)
Issuance of warrants.......... 1,880 1,880
Exercise of stock options..... 187,764 2 222 224
----------- ---- --------- --------- ----- ------- ---------
BALANCE, JUNE 30, 1998.......... 12,584,219 126 242,181 (601,195) (328) (2,390) (361,606)
Net loss...................... (105,600) (105,600)
Adjustment to pension
liability................... 135 135
Foreign currency translation
adjustment.................. (85) (85)
Common stock retired.......... (19,734) -- --
----------- ---- --------- --------- ----- ------- ---------
BALANCE, JUNE 30, 1999.......... 12,564,485 $126 $ 242,181 $(706,795) $(413) $(2,255) $(467,156)
=========== ==== ========= ========= ===== ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 53
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................... $(105,600) $(183,130) $ 31,084
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss on asset sales and disposals....................... 1,491 87,458
Depreciation............................................ 13,842 15,729 13,549
Amortization of repairable parts........................ 85,391 81,597 63,870
Amortization of intangibles............................. 26,969 27,169 23,470
Provision for uncollectible receivables................. 4,266 15,515 7,849
Provision for consumable parts obsolescence............. 4,188 1,852 2,554
Provision for deferred taxes............................ 25,360
Changes in operating assets and liabilities, net of
effects from companies acquired, which provided (used)
cash:
Accounts receivable................................... 16,682 (802) (38,365)
Consumable parts...................................... 3,057 (1,889) (6,038)
Accounts payable and accrued expenses................. (9,588) 4,581 3,885
Deferred revenues..................................... (12,714) (20,311) (25,427)
Net changes in other assets and liabilities........... 18,556 (14,432) 12,543
--------- --------- ---------
Net cash provided by operating activities............. 71,900 13,337 88,974
--------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures...................................... (16,402) (10,222) (10,540)
Repairable spare parts purchases, net..................... (76,415) (78,239) (86,446)
Acquisitions of companies and contracts................... (2,793) (10,168) (32,258)
Proceeds from asset sales................................. 16,794 -- --
--------- --------- ---------
Net cash used in investing activities................. (78,816) (98,629) (129,244)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock in connection with
recapitalization........................................ 226,583 439
Redemption of common stock in connection with
recapitalization........................................ (609,654)
Redemption of common stock warrants in connection with
recapitalization........................................ (12,149)
Issuance of warrants...................................... 1,880
Net proceeds from borrowings.............................. 32,292 476,918 43,625
Principal payments under capital leases................... (457) (480) (1,075)
Other..................................................... (85) (2,268) (63)
--------- --------- ---------
Net cash provided by financing activities............. 31,750 80,830 42,926
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.......................................... 24,834 (4,462) 2,656
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR................................................... 6,415 10,877 8,221
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 31,249 $ 6,415 $ 10,877
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Net cash paid (received) during the year for:
Interest................................................ $ 64,091 $ 41,644 $ 15,640
Income taxes............................................ (9,365) 4,031 8,381
Noncash investing/financing activities:
Issuance of seller notes in connection with
acquisitions.......................................... 2,224
Issuance of seller notes in exchange for repairable
parts................................................. 1,855
Repairable parts received in lieu of cash for accounts
receivable............................................ 1,124
Repairable parts received in exchange for the assumption
of liabilities........................................ 2,100
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 54
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1. NATURE OF BUSINESS
DecisionOne Holdings Corp. and its wholly-owned subsidiaries (the
"Company") are providers of multivendor computer maintenance and technology
support services. The Company offers its customers a single-source, independent
(i.e., not affiliated with an original equipment manufacturer, or "OEM")
solution for computer maintenance and technology support requirements, including
hardware maintenance services, software support, end-user/help desk services,
network support and other technology support services. These services are
provided by the Company across a broad range of computing environments,
including mainframes, midrange and distributed systems, workgroups, personal
computers ("PCs") and related peripherals. In addition, the Company provides
outsourcing services for OEMs, software publishers, system integrators and other
independent service organizations. The Company delivers its services through an
extensive field service organization of approximately 3,500 service
professionals in over 150 service locations throughout North America and through
strategic alliances in selected international markets.
DecisionOne Corporation is the principal operating subsidiary of the
Company. The Company's wholly owned, direct international subsidiaries are not
significant to the Company's consolidated financial statements. The Company
operates as one business segment (See Note 3).
2. INDEBTEDNESS RESTRUCTURING
The Company has continued to experience declining trends in revenues, and
earnings throughout fiscal 1999. The declining trends principally result from
lower sales of new service contracts, erosion of contract base, and minimal
growth from acquisitions.
As previously announced, on January 28, 1999, the Company initiated a
corporate operating plan ("Operating Plan") intended to restore revenue growth
and improve financial performance. The Operating 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 "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 14% Senior Unsecured Notes due 2006 (the "14% Notes")
in DecisionOne Corporation by an affiliate of DLJ Merchant Banking Partners II,
L.P. ("DLJMB"), and the Company's agreement with its lenders to waive certain
financial covenants in the Company's credit agreement through July 29, 1999 (the
"Waiver").
On July 14, 1999, the reorganized Company's common stock was delisted from
the NASDAQ national market System. Since that date, the Company's common stock
has been quoted on the OTC Bulletin Board.
On August 2, 1999, the Company announced an agreement in principle with the
bank lending group and the holders of the 14% Notes on the restructuring of its
indebtedness (the "Indebtedness Restructuring"). Under the terms of the final
agreement, the bank lending group would exchange approximately $523 million in
existing indebtedness for approximately 94.6 percent of the reorganized
Company's equity and $250 million in new senior secured bank debt (the "New
Credit Agreement"). The agreement further provides that the holders of the 14%
Notes would exchange their notes for (a) warrants equal to approximately 4.2
percent of the reorganized Company's fully diluted equity, at an exercise price
based on an enterprise value of $350 million and (b) warrants equal to
approximately 2.0 percent of the reorganized Company's equity, at an exercise
price based on an equity valuation of $280 million. The holders of the 9 3/4%
Senior Subordinated Notes due 2007 (the "9 3/4% Notes") would exchange their
notes for (a) approximately 5.0 percent of the reorganized Company's equity; (b)
warrants equal to approximately 2.8 percent of the reorganized Company's
F-7
<PAGE> 55
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fully diluted equity, at an exercise price based on an enterprise value of $350
million; (c) warrants equal to approximately 5.0 percent of the reorganized
Company's equity, at an exercise price based on an equity valuation of $200
million; and (d) warrants equal to approximately 3.0 percent of the reorganized
Company's equity, at an exercise price based on an equity valuation of $280
million. In addition, the holders of the 11 1/2% Senior Discount Debentures due
2008 (the "11 1/2% Notes") and the holders of unsecured claims of Holdings would
receive a total of approximately 0.4 percent of the reorganized Company's
equity.
The Company did not make the $7.3 million interest payment on its 9 3/4%
Notes, which was due on August 2, 1999 nor the interest payment due to the
holders of the 14% Notes. The Waiver, pursuant to which the bank lending group
agreed to waive certain financial covenants under its Existing Credit Facility,
expired on July 29, 1999. The holders of the 9 3/4% Notes, the holders of the
11 1/2% Notes, the holders of the 14% Notes and the bank lending group have the
right to declare the respective outstanding loan amounts immediately due and
payable and seek to exercise remedies, including, in the case of the Existing
Credit Facility, foreclosure on the collateral securing such amounts. As such,
the Company has reflected all such loan amounts as current liabilities as of
June 30, 1999 (See Note 10).
The Company's proposed Indebtedness Restructuring will be subject to the
approval of a United States Bankruptcy Court (the "Bankruptcy Court") pursuant
to Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code").
The Indebtedness Restructuring will be accomplished through a plan of
reorganization (the "Plan") in a prepackaged case under Chapter 11 of the
Bankruptcy Code. The Plan along with a related disclosure statement will be
delivered to the bank lending group and the holders of the 14% Notes in
connection with the Company's pre-petition solicitation of acceptances of the
proposed Plan. If, by the end of the solicitation period, the requisite
acceptances have been received from the bank lending group and the holders of
the 14% Notes, the Company intends to file a petition under Chapter 11 and to
use the acceptances received pursuant to the solicitation to seek confirmation
of the Plan. With respect to all the other creditors and equity holders of the
Company that are impaired under the Plan, the Company intends to seek
confirmation of the Plan under the "cram down" provisions of the Bankruptcy
Code. The Plan will only be confirmed if the Bankruptcy Court determines that
all the requirements of the Bankruptcy Code have been met, including, without
limitation, that the Plan is (i) accepted by all impaired classes of claims and
equity interests or, if rejected by an impaired class, that the Plan does not
"discriminate unfairly" and is "fair and equitable" as to such class, (ii)
feasible and (iii) in the "best interests" of creditors and equity holders
impaired under the Plan.
The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and do not reflect any adjustments that might
result if the Company is unable to continue as a going concern. The Company's
recent losses from operations, significant shareholders' deficiency, default
under the terms of its credit agreement, and the related Indebtedness
Restructuring and planned Bankruptcy Court filings raise substantial doubt about
the Company's ability to operate as a going concern. The appropriateness of
using the going concern basis is dependent upon, among other things, (i) the
Company's ability to reverse its declining revenue trends; (ii) the Company's
ability to generate sufficient cash from operations and/or obtain additional
financing to meets its obligations prior to confirmation of a plan of
reorganization; (iii) confirmation of the Company's plan of reorganization under
the Bankruptcy Code, and (iv) the Company's ability to achieve profitable
operations and generate sufficient cash from operations and/or obtain additional
financing after such confirmation.
3. SIGNIFICANT ACCOUNTING POLICIES
Consolidation -- The consolidated financial statements include the accounts
of DecisionOne Holdings Corp. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
F-8
<PAGE> 56
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro Forma Information (Unaudited) -- The pro forma information included in
the accompanying statement of operations and in Note 4 has been prepared to
reflect the Company's recapitalization and merger with Quaker Holding Co.
("Quaker") and related transactions as if these had occurred on July 1, 1996.
Cash and Cash Equivalents -- Cash and cash equivalents are highly liquid
investments with remaining maturities of three months or less at the time of
purchase. Cash equivalents, consisting primarily of repurchase agreements with
banks, are stated at cost, which approximates fair market value.
Restricted Cash -- Restricted cash at June 30, 1999 represents amounts
deposited into a trust as security for letters of credit issued by the Company
for certain employee obligations of the Company (see Note 10).
Consumable Parts and Repairable Parts -- In order to provide maintenance
and repair services to its customers, the Company is required to maintain
significant levels of computer parts. These parts are classified as consumable
parts or as repairable parts.
Consumable parts, which are expended during the repair process, are stated
principally at weighted average cost, less an allowance for obsolescence and
shrinkage. Consumable parts are reflected in the cost of revenues during the
period utilized.
Repairable (rotable) parts, which can be refurbished and reused, are stated
at original weighted average cost less accumulated amortization. Monthly
amortization of repairable parts is reflected in cost of revenues. The costs of
refurbishing parts are also included in the cost of revenues as incurred.
Amortization of repairable costs is based principally on the composite group
method, using straight-line whole life and remaining life composite rates.
Repairable parts generally have an economic life that corresponds to the
estimated normal life cycle of the related products.
As consumable and repairable parts are retired, the weighted average gross
amounts at which such parts have been carried are removed from the respective
asset accounts, and charged to the accumulated allowance or accumulated
amortization accounts as applicable. Periodic revisions to amortization and
allowance estimates are required, based upon the evaluation of several factors,
including changes in estimated product life cycles, usage levels, and technology
changes. Changes in these estimates are reflected on a prospective basis unless
such changes result from an abnormal retirement (including sales, disposals and
shrinkage) which requires immediate loss recognition. In addition, impairment is
recognized when the net carrying value of the parts exceeds the estimated
current and anticipated undiscounted net cash flows. Measurement of the amount
of impairment if any is calculated based upon the difference between carrying
value and fair value.
The Company had amortized the majority of its composite group of repairable
parts over an estimated average useful life of five years based principally on
historic product life cycle studies. As a result of the abnormal retirement of
computer parts (see Note 5) and related life studies, the Company revised the
useful lives of repairable parts and increased the obsolescence provision for
consumable parts prospectively. Effective July 1, 1998 the Company began
amortizing its existing composite group of repairable parts and future
repairable part purchases over an estimated average remaining life of three
years.
Accounting Change - Repairable Parts -- Effective July 1, 1999, the Company
changed its method of accounting for repairable parts from the amortization
method to the usage method. Under the amortization method, the Company amortized
the cost of repairable parts over an estimated average useful life and recorded
the costs of refurbishing repairable parts as a component of cost of revenues as
incurred. Under the usage method, the Company will record in cost of revenues
the cost of new and refurbished parts when used to service customers.
Additionally, under the usage method, management will perform periodic
assessments to determine the existence of excess or obsolete parts and will
record any necessary provisions to reduce such parts to net realizable value,
consistent with past practice. Management believes that this change in method
for repairable parts more accurately reflects periodic results of operations
based on parts used to service customers. The effect of this change will be
recorded as a cumulative effect charge of approximately $74.4
F-9
<PAGE> 57
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million, during the fiscal quarter ending September 30, 1999. The Company does
not expect to record any tax benefit resulting from this charge. See Note 11 to
the Company's consolidated financial statements for the year ended June 30,
1999. The pro forma effect of this change in accounting principle on prior
years' operations is not presented because such effects are not reasonably
determinable.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is provided for principally using the straight-line composite group
method over the estimated useful lives of the depreciable asset group.
Capitalized equipment leases and leasehold improvements are amortized over the
shorter of the related lease terms or asset lives. Maintenance and repairs are
charged to expense as incurred. Upon retirement or disposition of property and
equipment, the cost and related accumulated depreciation are removed from the
respective asset accounts, and charged to accumulated depreciation and
amortization accounts as applicable.
Business and Contract Acquisitions -- Business and contract acquisitions
have been accounted for as purchase transactions, with the purchase price of
each acquisition allocated to the assets acquired and liabilities assumed based
upon their respective estimated fair values at the dates of acquisition.
Consistent with the Company's parts retirement accounting methods, the gross
value of parts acquired is generally stated at weighted average cost. Fair value
adjustments, if any, are reflected as adjustments to the respective accumulated
amortization or allowance accounts. The excess of the purchase price over
identified net assets acquired is amortized, on a straight-line basis, over the
expected period of future benefit (see Notes 6 and 8).
Typical contract acquisitions are comprised primarily of customer
maintenance and support contracts of complementary entities, along with the
accompanying consumable and repairable parts required to support these contracts
and other identifiable intangibles, such as noncompete agreements. Liabilities
assumed in business and contract acquisitions consist primarily of prepaid
amounts related to multi-period customer maintenance and support contracts.
These liabilities are recorded as deferred revenues at acquisition dates and are
recognized as revenues when earned in accordance with the terms of the
respective contracts.
Intangible Assets -- Intangible assets are comprised of excess purchase
price over the fair value of net assets acquired, acquired customer lists and
other intangible assets, including the fair value of contractual profit
participation rights and amounts assigned to noncompete agreements.
Intangible assets, which arise principally from acquisitions, are generally
amortized on a straight-line basis over their respective estimated useful lives
(see Note 8). The Company evaluates the carrying value of intangible assets
whenever events or changes in circumstances indicate that these carrying values
may not be recoverable within the amortization period. Impairment is recognized
when the net carrying value of the intangible asset exceeds the estimated future
undiscounted net cash flows. Measurement of the amount of impairment, if any, is
calculated based upon the difference between carrying value and fair value.
Revenue -- The Company enters into maintenance contracts whereby it
services various manufacturers' equipment. Revenues from these contracts are
recognized ratably over the terms of such contracts. Prepaid revenues from
multi-period contracts are recorded as deferred revenues and are recognized
ratably over the term of the contracts.
Revenues derived from the maintenance of equipment not under contract are
recognized as the service is performed. Revenues derived from other technology
support services are recognized as the service is performed or ratably over the
term of the contract.
Income Taxes -- The Company recognizes deferred tax assets and liabilities
for temporary differences between the financial reporting basis and the tax
basis of the Company's assets and liabilities and expected benefits of utilizing
net operating loss carryforwards. The impact on deferred taxes of changes in tax
rates and laws, if any, applied to the years during which temporary differences
are expected to be settled, are reflected in the consolidated financial
statements in the period of enactment.
F-10
<PAGE> 58
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign Currency Translation -- Gains and losses resulting from foreign
currency translation are accumulated as a separate component of accumulated
other comprehensive income (loss). Gains and losses resulting from foreign
currency transactions are included in operations, except for intercompany
foreign currency transactions which are of a long-term nature and are
accumulated as a separate component other comprehensive income (loss).
Credit Risk -- Concentration of credit risk with respect to trade
receivables is limited due to the large number of customers comprising the
Company's customer base and their dispersion across many industries.
Fair Value of Financial Instruments -- The following disclosures of the
estimated fair value of financial instruments were made in accordance with the
requirements of SFAS No. 107, Disclosures about Fair Value of Financial
Instruments. The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies.
Cash and Cash Equivalents, Accounts Receivable, and Accounts Payable -- The
carrying amount of these items are a reasonable estimate of their fair value.
Debt -- As more fully described in Note 10, the fair values of debt such as
the Existing Credit Facility, the senior discount debentures, the senior
unsecured notes and the senior subordinated notes and the fair values of
interest rate swaps and collars are based primarily on quoted market prices.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates and
assumptions.
Stock-Based Compensation -- The Company follows the provisions of SFAS No.
123, Accounting for Stock-Based Compensation. SFAS No. 123 encourages, but does
not require, companies to record compensation cost for stock-based compensation
plans at fair value. The Company has elected to continue to account for
stock-based compensation in accordance with Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations, as permitted by SFAS 123. Compensation expense for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock (see Note 13).
Derivative Financial Instruments -- Derivative financial instruments, which
constitute interest rate swap and collar agreements (see Note 10), are
periodically used by the Company in the management of its variable interest rate
exposure. Amounts to be paid or received under interest rate swap and collar
agreements are recognized as interest expense or interest income during the
period in which these accrue. Gains or losses realized, if any, on the early
termination of interest rate swap or collar contracts are deferred, to be
recognized upon the termination of the related asset or liability or expiration
of the original term of the swap or collar contract, whichever is earlier. The
Company does not hold any derivative financial instruments for trading purposes.
Earnings (Loss) Per Common Share -- In February 1997, the Financial
Accounting Standards Board (FASB) issued SFAS No. 128, Earnings Per Share, which
the Company adopted during fiscal 1998. SFAS No. 128, which supersedes APB No.
15, Earnings Per Share, requires a dual presentation of basic and diluted
earnings per share as well as disclosures including a reconciliation of the
computation of basic earnings per share to diluted earnings per share. Basic
earnings per share excludes the dilutive impact of common stock equivalents and
is computed by dividing net income (loss) by the weighted average number of
shares of common stock outstanding for the period. Diluted earnings per share
includes the effect of potential dilution from the exercise of outstanding
common stock equivalents into common stock, using the treasury stock
F-11
<PAGE> 59
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
method at the average market price of the Company's common stock for the period.
In accordance with SFAS No. 128, diluted earnings per share is not presented
because the effect of the potential exercise of outstanding common stock
equivalents is antidilutive as a result of the losses incurred for the fiscal
year ended June 30, 1999 and 1998. The total weighted average common stock
equivalents that would have been used to determine diluted earnings per share as
of June 30,1999 and 1998 were as follows: common stock options of approximately
1,341,000 in 1999 and 1,568,000 in 1998 and common stock warrants of 313,047 in
1999 and 1998.
Comprehensive Income (Loss) -- In June 1997, the FASB issued SFAS No. 130,
Reporting Comprehensive Income -- The Company adopted this pronouncement in
fiscal 1999. Components of comprehensive income for the Company include net
income (loss), pension liability adjustment and foreign currency translation.
Business segmentation -- In June, 1997, the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 requires segments to be determined based on how management measures
performance and makes decisions about allocating resources. Except for
geographic information set forth below, the adoption of SFAS No. 131 has not
resulted in any changes to presentation of financial data in fiscal 1999, as the
Company operates as one business segment. Summary geographic financial
information for the Company for the fiscal years ended June 30, 1999, 1998 and
1997 as is as follows:
<TABLE>
<CAPTION>
UNITED STATES CANADA TOTAL COMPANY
------------- ------- -------------
<S> <C> <C> <C>
1999
Total revenues................................. $696,797 $29,146 $725,943
Total assets................................. $442,569 $13,318 $455,887
1998
Total revenues............................... $772,683 $33,034 $805,717
Total assets................................. $523,604 $18,383 $541,987
1997
Total revenues............................... $755,254 $30,696 $785,950
Total assets................................. $605,764 $17,341 $623,105
</TABLE>
Recent Accounting Pronouncements -- In February 1998, the FASB issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." This statement, which revises certain disclosure requirements for the
Company's retirement plan assets and obligations, is effective for fiscal
periods beginning after December 15, 1997. Restatement of prior years'
information is required, where available. As this statement only requires a
change in methods of disclosure and not in accounting methods, it did not have
any impact on the Company's consolidated financial position and results of
operations. The Company adopted SFAS No. 132 in fiscal 1999, as required.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those assets or liabilities at fair value. This statement
is effective for fiscal years beginning after June 15, 1999, although early
adoption is encouraged. In June, 1999, the FASB issued SFAS No. 137, which
defers the effective date of SFAS No. 133 until June 15, 2000. The Company is
evaluating the effect that the adoption of SFAS No. 133 will have on its
consolidated financial position or results of operations.
Reclassifications -- Certain reclassifications have been made to prior year
data in order to conform with the 1999 presentation.
F-12
<PAGE> 60
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. 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
(the "Merger Agreement") between the Company and Quaker dated May 4, 1997.
In accordance with the terms of the Merger Agreement, which was formally
approved by the Company's shareholders on August 7, 1997, Quaker merged with and
into the Company, and the holders of approximately 94.7% of shares of Company
common stock outstanding immediately prior to the merger received $23 per share
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 then existing revolving credit facility (see Note 10).
In connection with the merger, the Company raised $85 million through the
public issuance of senior discount debentures, in addition to publicly issued
senior subordinated notes for approximately $150 million. The Company also
entered into a new syndicated credit facility providing for term loans of $470
million and revolving loans of up to $105 million. The proceeds of the 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 have been used to finance the payments of cash to cash-electing
shareholders, to pay the holders of stock options and stock warrants canceled or
converted, as applicable, in connection with the merger, to repay the Company's
then existing revolving credit facility and to pay expenses incurred in
connection with the merger.
As a result of the merger, the Company incurred various expenses,
aggregating approximately $69.0 million (approximately $63.5 million after
related tax benefit) in connection with consummating the transaction. These
costs consisted primarily of compensation costs, underwriting discounts and
commissions, professional and advisory fees and other expenses. The Company
reported this one-time charge during the first quarter of fiscal 1998. In
addition to these expenses, the Company also incurred approximately $22.3
million of capitalized debt issuance costs associated with the merger financing.
These costs will be charged to expense over the terms of the related debt
instruments.
The following summarized unaudited pro forma information for the years
ended June 30, 1998 and 1997 assumes that the merger had occurred on July 1,
1996. The pro forma results have been prepared for comparative purposes only and
do not purport to be indicative of the results of operations which actually
would have resulted had the merger occurred as of July 1, 1996 or which may
result in the future.
<TABLE>
<CAPTION>
UNAUDITED
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
YEAR ENDED JUNE 30,
---------------------
1998 1997
--------- --------
<S> <C> <C>
PRO FORMA LOSS STATEMENT INFORMATION:
Revenues.................................................... $ 805,717 $785,950
Operating income (loss)..................................... (65,178) 67,750
Loss from continuing operations before income tax provision
(benefit)................................................. (134,971) (312)
Net loss.................................................... (124,266) (183)
Loss per common share....................................... $ (9.91) $ (0.01)
Weighted average common shares outstanding................ 12,545 14,200
</TABLE>
F-13
<PAGE> 61
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 1998 pro forma net loss 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 tax
benefit related to these adjustments of approximately $5.1 million, including
the effect of valuation allowances against certain deferred tax assets (see Note
11). Pro forma weighted average common shares outstanding includes 12,499,978
shares outstanding immediately subsequent to the merger on August 7, 1997 in
addition to shares subsequently issued and outstanding.
The 1997 pro forma net loss reflects a net increase in interest expense of
approximately $53.4 million ($31.3 million after related pro forma tax effect),
attributable to additional financing incurred in connection with the merger, net
of repayment of the Company's existing revolving credit facility. Pro forma
weighted average common and common equivalent shares outstanding include
12,499,978 shares outstanding immediately subsequent to the merger on August 7,
1997 and dilutive common stock warrants and stock options (convertible into
281,960 and 1,418,530 shares of common stock, respectively) issued in connection
with or immediately subsequent to the merger.
5. LOSS ON ASSET SALES AND DISPOSALS
In connection with the company's fiscal 1999 cost reduction program, the
Company sold all of its owned facilities, consisting of a multi-purpose facility
located in Tulsa, Oklahoma, and a Logistics service facility located in a suburb
of Milwaukee, Wisconsin, at a total net loss of approximately $1.5 million.
Management determined that over 1.2 million of its computer parts were
obsolete during its annual fourth quarter physical inventory in fiscal 1998.
These parts were retired and subsequently sold to salvage dealers for nominal
scrap value. The parts obsolescence was principally due to the convergence of
significant changes in the Company's business operations and the computer
service industry. The significant changes include: (1) accelerated technology
migration trends as customers modify their computing environments to remediate
year 2000 ("Y2K") problems, (2) increasing shifts in demand from data center and
midrange systems to desktop computing environments, and (3) declining life
cycles of the products under current and anticipated service contracts due to
increasingly rapid changes in technology. The abnormal nature of this retirement
and subsequent sale required immediate loss recognition of $75 million in the
fourth quarter of fiscal 1998.
In connection with the acquisition of BABSS, the Company acquired
contractual profit participation rights pursuant to an existing agreement
between BABSS and ICL Sorbus, Ltd. (ICL) (See Note 6). On June 29, 1998, the
Company sold its contractual profit participation rights back to ICL at a pretax
loss of approximately $12.5 million.
F-14
<PAGE> 62
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. BUSINESS AND CONTRACT ACQUISITIONS
During the years ended June 30, 1999, 1998 and 1997, the Company acquired
certain net assets of other service companies as follows (in thousands):
<TABLE>
<CAPTION>
CONSIDERATION EXCESS PURCHASE
----------------------------------------------- PRICE OVER FAIR
NUMBER OF LIABILITIES TOTAL PURCHASE VALUE OF NET ASSETS
YEARS ENDED ACQUISITIONS CASH ASSUMED NOTES PRICE OTHER TANGIBLES ACQUIRED
- ----------- ------------ ------- ----------- ------ -------------- --------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Non-significant
business or
maintenance contract
acquisitions:
June 30, 1997...... 9 $32,258 $45,829 $2,201 $80,288 $32,239 $48,049
June 30, 1998...... 4 10,168 6,317 $4,538 21,023 4,600 16,423
June 30, 1999...... 1 2,793 1,204 -- 3,997 139 3,858
</TABLE>
Included in non-significant maintenance contract acquisitions is the
acquisition of substantially all of the contracts and related assets, including
spare parts of the U.S. computer service business of Memorex Telex Corporation
and certain of its affiliates (collectively, "Memorex Telex"). Memorex Telex had
filed a petition in bankruptcy in the United States Bankruptcy Court (the
"Court") in the District of Delaware on October 15, 1996; the Court approved the
sale to the Company on November 1, 1996. The adjusted purchase price was $52.7
million, comprised of the assumption of certain liabilities under contracts of
the service business, which were valued at $28.3 million, and base cash
consideration of approximately $24.4 million, after certain purchase price
adjustments, excluding transaction and closing costs. Pro forma information has
not been presented with respect to those acquisitions, as the Company does not
consider these acquisitions to be significant. During the third quarter of
fiscal 1997, the Company recorded an adjustment increasing the deferred revenues
assumed in the Memorex Telex acquisition by approximately $2,300,000, to revise
the estimated fair value of certain contract liabilities of the business assumed
by the Company.
7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and buildings.......................................... $ -- $ 6,312
Equipment................................................... 10,292 15,335
Computer hardware and software.............................. 41,480 32,459
Furniture and fixtures...................................... 7,088 9,628
Leasehold improvements...................................... 7,034 5,190
-------- --------
65,894 68,924
Accumulated depreciation and amortization................... (40,866) (39,829)
-------- --------
$ 25,028 $ 29,095
======== ========
</TABLE>
The principal lives (in years) used in determining depreciation and
amortization rates of various assets are: buildings (20-40); equipment (3-10);
computer hardware and software (3-5); furniture and fixtures (5-10) and
leasehold improvements (term of related leases).
Depreciation and amortization expense was approximately $13,842,000,
$15,729,000, and $13,549,000 for the fiscal years ended 1999, 1998 and 1997,
respectively. As more fully described in Note 5, the Company sold both of its
owned facilities during fiscal 1999.
F-15
<PAGE> 63
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INTANGIBLES
Intangibles consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Excess purchase price over fair value of net assets
acquired.................................................. $138,307 $137,241
Customer lists.............................................. 60,370 60,370
Noncompete agreements....................................... 4,331 9,231
Other intangibles........................................... 9,881 8,014
-------- --------
212,889 214,856
Accumulated amortization.................................... (84,380) (60,827)
-------- --------
$128,509 $154,029
======== ========
</TABLE>
The periods (in years) used in determining the amortization rates of
intangible assets are: excess purchase price over fair value of net assets
acquired (4-20); customer lists (3-8); non-compete agreements (3-5) and other
(1-6).
Amortization expense relating to intangibles was approximately $26,968,000,
$27,169,000, and $23,470,000 for the fiscal years ended 1999, 1998 and 1997,
respectively.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 1998
------- --------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable............................................ $39,102 $ 56,040
Compensation and benefits................................... 21,175 20,928
Interest.................................................... 7,098 11,485
Unused leases............................................... 531 175
Pension accrual............................................. 1,145 1,515
Accrued professional fees................................... 880 568
Non-income taxes and other.................................. 22,704 11,140
------- --------
$92,635 $101,851
======= ========
</TABLE>
F-16
<PAGE> 64
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Existing Credit Facility:
Revolving credit loans.................................... $ 65,700 $ 30,700
Term loans................................................ 457,388 467,938
Senior discount debentures, 11 1/2%, due 2008............... 103,496 92,246
Senior subordinated notes, 9 3/4%, due 2007................. 150,000 150,000
Senior unsecured notes, 14%, due 2006....................... 7,300 --
Seller noninterest-bearing notes payable.................... 2,664 2,179
Seller note payable -- purchase of spare parts.............. -- 508
Capitalized lease obligations, payable in varying
installments.............................................. 292 752
-------- --------
786,840 744,323
Less current portion........................................ 786,166 13,311
-------- --------
$ 674 $731,012
======== ========
</TABLE>
In connection with the Company's merger with Quaker (see Note 4), the
revolving credit loans outstanding immediately prior to the merger were repaid
in full, including all interest due thereon. This refinancing was accomplished,
in part, through the issuance of certain new debt instruments, consisting of the
Existing Credit Facility, senior discount notes, and senior subordinated notes
which, in the aggregate, provided financing of approximately $810 million,
subject to certain conditions.
As more fully described in Note 2, during fiscal 1999 the Company sought
and obtained a waiver (the "Waiver") of certain financial covenants contained in
its new 1997 Credit Facility (the "Existing Credit Facility"). In connection
with the Waiver, The Company incurred waiver fees of approximately $4.3 million,
which are being amortized as interest expense through July, 1999. This Waiver
expired on July 29, 1999, and the Company is currently, therefore, in technical
default under the terms of the Existing Credit Facility. As a result of this
default, all amounts outstanding under the Existing Credit Facility could become
immediately due and payable, and have been classified as current liabilities in
the accompanying consolidated balance sheet as of June 30, 1999. Additionally,
as a result of this default, any additional borrowings under the Existing Credit
Facility are subject to the approval of the holders of the Existing Credit
Facility.
As more fully described in Note 2, on August 2, 1999, the Company announced
an agreement in principle with the bank lending group and the holders of the 14%
Notes on the restructuring of its indebtedness (the "Indebtedness
Restructuring"). Although Company management expects the Indebtedness
Restructuring to be consummated, such consummation is subject to various
approvals outside of the Company's control. Currently, the Company does not have
in place any alternate sources of liquidity if the Indebtedness Restructuring,
or another similar debt restructuring agreement, is not consummated.
The Company had average borrowings of approximately $770,177,000 during
1999 at an average interest rate of approximately 9.0%. Maximum borrowings
during 1999 were approximately $788,000,000. The Company had average borrowings
of $699,873,000 and $221,069,000 during 1998 and 1997, respectively, at an
average interest rate of 9.0% and 6.4%, respectively. Maximum borrowings during
1998 and 1997 were $751,016,000 and $243,350,000, respectively.
The Company's Canadian subsidiary has available a $5.0 million (Canadian)
revolving line of credit agreement with a local financial institution. At June
30, 1999 and 1998, no amounts were outstanding under
F-17
<PAGE> 65
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the agreement. At June 30, 1997, approximately $471,000 (in U.S. dollars) was
outstanding under this agreement.
Annual maturities on long-term debt outstanding at June 30, 1999, are as
follows (in thousands): 2000, $786,166; 2001, $612, and 2002, $62.
The Company has approximately $10,325,000 of letters of credit outstanding
as of June 30, 1999. The Company bears the credit risk on this amount to the
extent that it does not comply with the provisions of certain agreements. The
letters of credit, net of amounts deposited in trust as restricted cash (see
Note 3) reduce the amount available under the Company's revolving loans under
its Existing Credit Facility.
EXISTING CREDIT FACILITY
The Existing Credit Facility provides for term loans of $470,000,000 (term
loan A -- $195,000,000 and term loan B -- $275,000,000) and revolving loans of
up to $105,000,000. Term loan A expires in August 2003 with uneven quarterly
principal payments commencing in September 1998. Term loan B expires in August
2005 with uneven quarterly principal payments commencing in December 1997. The
revolving loans expire in August 2003. The Company pays a quarterly commitment
fee on the unused amount of the revolving loans. The Company incurred debt
issuance costs of approximately $14,375,000 in connection with the Existing
Credit Facility. These costs have been deferred and are being amortized to
interest expense over the term of the facility.
The interest rate applicable to the Existing Credit Facility varies, at the
Company's option, based upon LIBOR plus applicable margins (2.75% for term loan
A and the revolving loans and 3.0% for term loan B) or based upon Prime Rate
plus applicable margins (1.5% for term loan A and the revolving loans and 1.75%
for term loan B). The applicable weighted average interest rates at June 30,
1999 were 8.47%, 8.71% and 8.96% for term loan A, term loan B, and the revolving
loans, respectively.
The Existing 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. These measurements
include (1) Adjusted EBITDA, (2) Leverage Ratio, (3) Interest Coverage Ratio,
and (4) Fixed Charge Ratio. Additionally, the Company has pledged the assets of
substantially all of its subsidiaries as collateral security for the Existing
Credit Facility. During the third quarter of fiscal 1998, the Company sought and
obtained amendments to the Existing Credit Facility. The amendments revised
certain financial performance measurements and increased the borrowing rate by
0.25%. The Company incurred fees of approximately $1,400,000 in connection with
the amendments. These costs have been deferred and are being amortized to
interest expense over the remaining term of the related debt instruments. The
estimated fair value of the Existing Credit Facility was approximately $235.4
million and is based on quoted market prices as of June 30, 1999.
SENIOR DISCOUNT DEBENTURES (11 1/2% NOTES)
The Company received net proceeds of $85,003,520 from the sale of
$148,400,000 principal amount at maturity of its 11 1/2% senior discount
debentures due 2008. The debentures accrete at a rate of 11 1/2% per annum,
compounded semi-annually, to an aggregate principal amount at maturity of
$148,400,000 by August 1, 2002. Commencing on February 1, 2003, cash interest on
the debentures will be payable, semi-annually in arrears on each February 1 and
August 1. The Company incurred debt issuance costs of $3,400,141 in connection
with the senior discount debentures. These costs have been deferred and are
being amortized to interest expense over the life of the debentures.
Each unit ($1,000 principal amount) was issued with a warrant which allows
the holder, subject to certain conditions, to purchase 1.9 shares of common
stock, for a total of 281,960 shares, at an exercise price
F-18
<PAGE> 66
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of $23.00 per share, subject to adjustment under certain circumstances. The
warrants expire on August 1, 2007. The senior discount debentures are
subordinate to the Existing Credit Facility, the senior subordinated notes and
the senior unsecured notes.
The estimated fair value of the senior discount debentures and the attached
warrants as of June 30, 1999 was approximately $1.1 million and is based on
quoted market prices for that publicly traded debt.
SENIOR SUBORDINATED NOTES (9 3/4% NOTES)
The 9 3/4% senior subordinated notes mature on August 1, 2007. Interest on
the notes is payable semi-annually on February 1 and August 1 of each year,
commencing on February 1, 1998. The Company incurred debt issuance costs of
$4,500,000 in connection with the senior subordinated notes. These costs have
been deferred and are being amortized to interest expense over the life of the
notes. The senior subordinated notes are subordinate to the Existing Credit
Facility and the senior unsecured notes.
The estimated fair value of the senior subordinated notes as of June 30,
1999 was approximately $6.7 million and is based on quoted market prices.
SENIOR UNSECURED NOTES (14% NOTES)
On January 27, 1999, the Company's principal shareholder, DLJMB and certain
of its affiliates, purchased $7,300,000 of unsecured 14% senior notes due 2006
in DecisionOne Corporation. The proceeds of the 14% senior notes were used for
general corporate purposes. The senior unsecured notes are subordinate only to
the Existing Credit Facility.
The estimated fair value of the senior unsecured notes as of June 30, 1999,
was approximately $0.3 million based on indicative quoted market rates.
SELLER NOTES PAYABLE
In connection with certain acquisitions (see Note 6), the Company issued
noninterest-bearing notes, the principal of which is primarily due upon
settlement of contingent portions of the acquisition purchase price within a
specified period subsequent to closing, generally not exceeding one year from
the acquisition date. Contingencies typically pertain to actual amounts of
monthly maintenance contract revenues acquired and prepaid contract liabilities
assumed in comparison to amounts estimated in acquisition agreements. The
Company imputes interest, based upon market rates, for long-term,
non-interest-bearing obligations.
During 1997, the Company issued a secured note payable to the seller for
the purchase of repairable parts in the original amount of $1,854,000. The note
accrued interest at an interest rate of approximately 8%, and required quarterly
payments of principal and interest of approximately $273,000 through December
1998.
REVOLVING CREDIT LOANS -- 1997 AND PRIOR
The Company had a revolving credit facility of $300,000,000, which was
repaid in connection with the Company's merger in August, 1997 (see Note 4).
INTEREST RATE RISK MANAGEMENT
The use of interest rate risk management instruments, such as Swaps and
Collars, is required under the terms of the Existing Credit Facility. The
Company manages interest costs using a mix of fixed and variable rate debt.
Using Swaps, the Company agrees to exchange, at specified intervals, the
difference between fixed and variable interest rate amounts calculated by
reference to an agreed-upon notional principal amount.
F-19
<PAGE> 67
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Collars limit the Company's exposure to and benefits from interest rate
fluctuations on variable rate debt to within a certain range of rates.
The following table summarizes the terms of the Company's existing Swaps
and Collars as of June 30, 1999:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT MATURITIES AVERAGE INTEREST RATE ESTIMATED FAIR VALUE
--------------- ---------- --------------------- --------------------
<S> <C> <C> <C> <C>
Variable to Fixed
Swaps.............. $ 75,000,000 2000 5.9% $(115,000)
Collars.............. $100,000,000 2000 - 2001 5.7% - 6.7% $(237,000)
</TABLE>
The notional amounts of interest rate instruments, as presented in the
above table, are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The estimated fair value
approximates the proceeds (costs) to settle the outstanding contracts. While
Swaps and Collars represent an integral part of the Company's interest rate risk
management, their incremental effect on interest expense for the year ended June
30, 1999 was not significant.
11. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.............................................. $ -- $ (8,209) $10,909
State.............................................. -- 100 3,616
Foreign............................................ -- (372) 1,080
Deferred:
Federal............................................ 21,483 (6,991) 6,460
State.............................................. 3,877 (917) 16
Foreign............................................ -- 612 (113)
------- -------- -------
Provision (benefit) for income taxes................. $25,360 $(15,777) $21,968
======= ======== =======
</TABLE>
F-20
<PAGE> 68
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1999 1998
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Gross deferred tax assets:
Accounts receivable......................................... $ 6,139 $ 7,869
Inventory................................................. 4,038 2,819
Accrued expenses.......................................... 5,798 6,348
Unused leases............................................. (133) (277)
Fixed assets.............................................. 1,964 1,714
Intangibles............................................... 21,781 17,049
Debt issuance costs....................................... 8,155 3,743
Other..................................................... 2,447 1,298
Operating loss carryforwards.............................. 62,763 53,554
Tax credit carryforwards.................................. 2,969 2,969
--------- --------
Gross deferred tax assets................................... 115,921 97,086
Valuation allowance......................................... (115,921) (57,833)
--------- --------
Gross deferred tax assets less valuation allowance.......... -- 39,253
Gross deferred tax liabilities -- repairable spare parts.... -- (13,893)
--------- --------
Net deferred tax asset...................................... $ -- $ 25,360
========= ========
</TABLE>
Net operating loss and minimum tax credit carry forwards available at June
30, 1999 expire in the following years:
<TABLE>
<CAPTION>
YEAR OF
AMOUNT EXPIRATION
-------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Federal operating losses............................... $152,085 2006 - 2019
State operating losses................................. 151,178 2000 - 2019
Foreign operating losses............................... 10,148 2000 - 2006
Investment tax credit.................................. 134 2004
Minimum tax credit..................................... 2,835 INDEFINITE
</TABLE>
A reconciliation between the provision (benefit) for income taxes, computed
by applying the statutory federal income tax rate of 35% for 1999, 1998 and 1997
to income before income taxes, and the actual provision (benefit) for income
taxes follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- ----
<S> <C> <C> <C>
Federal income tax provision at statutory tax rate.......... (35.0)% (35.0)% 35.0%
State income taxes, net of federal income tax provision..... (5.1) (3.9) 5.0
Foreign income taxes........................................ 1.2 (0.4) 0.4
Change in valuation allowance............................... 72.4 29.1
Other....................................................... (1.9) 2.3 1.0
----- ----- ----
Actual income tax provision (benefit) effective tax rate.... 31.6% (7.9)% 41.4%
===== ===== ====
</TABLE>
As a result of the Company's merger with Quaker on August 7, 1997 (see Note
4), an "ownership change" occurred pursuant to Section 382 of the Internal
Revenue Code. Accordingly, for Federal income tax purposes, net operating loss
and tax credit carryforwards of approximately $27.9 million arising prior to the
F-21
<PAGE> 69
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ownership change are limited during any future period to the Section 382
"limitation amount" of approximately $9.0 million per annum. The federal, state
and foreign net operating loss carryforwards expire in varying amounts between
2000 and 2019.
The Company recorded an increase in the valuation allowance of $58,088,000
during the year ended June 30, 1999 from $57,833,000 as of June 30, 1998 to
$115,921,000 as of June 30, 1999. The valuation allowance reduces the gross
deferred tax assets to the level where management believes that it is more
likely than not that the tax benefit will be realized. The ultimate realization
of deferred tax benefits is dependant upon the generation of future taxable
income during the periods in which the temporary differences become deductible.
12. OTHER LIABILITIES
Other (noncurrent) liabilities consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------
1999 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Accrued severance........................................... $3,847 $2,973
Other noncurrent liabilities................................ 2,305 2,763
------ ------
$6,152 $5,736
====== ======
</TABLE>
Accrued severance reflects the actuarial determined liability for the
separation of employees who are entitled to severance benefits under
pre-existing separation pay plans.
Other noncurrent liabilities include deferred operating lease liabilities
related to scheduled rent increases, recorded in accordance with the provisions
of SFAS No. 13, Accounting for Leases. Also included in other noncurrent
liabilities are provisions relating to unutilized lease losses.
13. STOCK-BASED COMPENSATION PLANS
In connection with the Company's merger with Quaker on August 7, 1997 (see
Note 4), all vested and unvested options then outstanding under the Stock Option
and Restricted Stock Purchase Plan were cancelled, and the holders of these
options received the right to receive cash payments equal to the excess, if any,
of $23.00 over the exercise price of each option. Certain option holders elected
to convert 255,828 options under the Stock Option and Restricted Stock Purchase
Plan into options to purchase common stock of the merged Company, in lieu of
cash payments. The converted options were fully vested.
MANAGEMENT INCENTIVE PLAN
The 1997 Management Incentive Plan (Incentive Plan), a stock option plan,
was created concurrently with the Quaker Merger. Under the Incentive Plan,
officers, directors and key employees may be granted options to purchase the
Company's common stock at an exercise price determined by the Compensation
Committee at the time of the grant. On August 7, 1997, the Company granted
1,179,000 options and granted an additional 725,828 options during the remainder
of fiscal 1998. In July 1998, the Company increased the aggregate number of
shares of Company Common Stock reserved for issuance to the Management Incentive
Plan by 250,000 shares. The aggregate number of shares of Company common stock
permitted for issuance pursuant to the Incentive Plan was 1,948,280 as of June
30, 1999. Options generally vest and become exercisable either in installments
of 25% per year on each of the first through fourth anniversaries of the grant
date or as defined corporate performance goals are met. All options become fully
vested in seven years. Options generally expire upon the earlier of termination
of employment (with a defined period to exercise vested options) or ten years
from date of grant.
F-22
<PAGE> 70
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Incentive Plan activity for the years ended June 30, 1999
and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------ -----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Balance, beginning of
year...................... 1,584,774 $19.86 0 $ 0.00
Options granted............. 1,748,625 6.92 1,904,828 19.09
Options exercised......... -- -- (107,264) 0.96
Options cancelled......... (2,236,603) 16.70 (212,790) 22.58
---------- ---------
Balance, end of year........ 1,096,796 $ 4.85 1,584,774 $19.86
========== =========
</TABLE>
The following tables summarize information about options outstanding at
June 30, 1999:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------------------------
RANGE OF WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES NUMBER OF SHARES CONTRACTUAL LIFE EXERCISE PRICE
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
$1.96 332,000 9.8 $ 1.96
$6.10 - $7.17 685,288 8.4 $ 6.14
$12.54 - $15.01 74,508 8.1 $14.26
$26.75 5,000 8.1 $26.75
---------
Total 1,096,796 8.8 $ 5.52
=========
</TABLE>
<TABLE>
<CAPTION>
EXERCISABLE OPTIONS
------------------------------------
RANGE OF WEIGHTED AVERAGE
EXERCISE PRICE NUMBER OF OPTIONS EXERCISE PRICE
- --------------- ----------------- ----------------
<S> <C> <C>
$6.10 - $7.17 95,662 $ 6.38
$12.54 - $15.01 74,508 $14.26
$26.75 5,000 $26.75
-------
Total 175,170 $10.31
=======
</TABLE>
On December 14, 1998, the Company repriced 1,225,625 stock option grants,
with an exercise price of $6.10, the then-quoted market price. Of these repriced
stock option grants, 577,625 were cancelled subsequently during fiscal 1999.
All stock option grants to date have been issued with an exercise price
equal to or in excess of the market price of the underlying stock at the date of
the grant. As a result, and in accordance with APB Opinion 25, no compensation
expense is recognized in the Company's financial statements. Had compensation
expense for the Incentive Plan been determined based on the fair value at the
grant dates under the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss and net loss per share for fiscal 1999 and
pro forma net loss and pro forma loss per share (see Note 4) would have been
increased to the following adjusted amounts (dollars in thousands, except per
share amounts):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Net loss -- as reported..................................... $(105,600) $(183,130)
Net loss -- as adjusted..................................... $(105,975) $(185,607)
Basic loss per share -- as reported......................... $ (8.40) $ (13.05)
Basic loss per share -- as adjusted......................... $ (8.43) $ (13.23)
</TABLE>
The weighted average fair value of options granted during fiscal 1999 and
1998 is estimated as $3.09 and $10.88, respectively, on the date of the grant
using the Black-Scholes option pricing model with the following
F-23
<PAGE> 71
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assumptions: volatility of 57.0% and 46.0%, respectively, risk-free interest
rate of 5.81% and 5.52%, respectively, dividend yield of 0.0% and an expected
life of 5 years for both fiscal years.
STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN
Under the plan, the Company, at the discretion of the Board of Directors,
issued restricted stock, incentive stock options and non-qualified options for
shares of the Company's common stock. Vesting of the restricted stock and stock
options was at the discretion of the Board of Directors and generally occurred
at a rate of 25% per year. No such options were granted at prices less then 100%
of the fair value of common shares at the date of issuance. Options were to
expire through February 2007.
Presented below is the activity in the Plan for the years ended June 30,
1998 and 1997:
<TABLE>
<CAPTION>
OPTIONS PRICE RANGE
---------- ---------------
<S> <C> <C>
Balance, June 30, 1996................................. 2,611,470 $.50 - $27.50
Options exercised...................................... (477,544) $.50 - $8.00
Options granted...................................... 1,254,000 $14.00 - $22.13
Options cancelled.................................... (532,579) $1.25 - $27.50
----------
Balance, June 30, 1997................................. 2,855,347 $.50 - $26.75
Options exercised.................................... (80,500) $0.50 - $6.00
Options cancelled.................................... (2,774,847) $0.45 - $26.75
----------
Balance, June 30, 1998................................. 0 $0.00
==========
</TABLE>
The fair value of the options granted were estimated using the
Black-Scholes option pricing model. The fair values of the options granted
during 1997 was $9.61. The assumptions used to determine the fair value were as
follows: risk-free interest rate of 6.58 %; expected volatility of 27.1% in 1997
and 27.0%; and an expected life of 10 years.
Had compensation expense for the Plan been determined based on the fair
value at the grant dates under the provisions of SFAS No. 123, the pre-tax pro
forma compensation expense in 1997 would have been approximately $4.4 million.
14. LEASE COMMITMENTS
The Company conducts its operations primarily from leased warehouses and
office facilities and uses certain computer, data processing and other equipment
under operating lease agreements expiring on various dates through 2009. The
future minimum lease payments for operating leases having initial or remaining
noncancelable terms in excess of one year for the five years succeeding June 30,
1999 and thereafter are as follows (in thousands):
<TABLE>
<S> <C>
2000............................................... $20,092
2001............................................... 17,194
2002............................................... 12,188
2003............................................... 9,749
2004............................................... 7,661
Thereafter......................................... 7,623
-------
$74,507
=======
</TABLE>
Rental expense amounted to approximately $23,405,000, $19,379,000, and
$17,367,000, for the fiscal years ended 1999, 1998 and 1997, respectively.
F-24
<PAGE> 72
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SHAREHOLDERS' DEFICIENCY
In connection with the merger (see Note 4), certain executive management
employees were given the option to acquire common stock shares at current market
prices. The Company provided non-recourse interest bearing loans to those key
executives who elected to acquire common stock. Total loans outstanding at June
30, 1999 and 1998 were $995,000 and $1,329,000, respectively. The Company has
recorded the employee loans receivable as a reduction to shareholders'
deficiency.
On August 7, 1997, the Company amended its Certificate of Incorporation to
decrease the number of authorized shares of common stock to 30,000,000 shares,
and to increase the number of authorized shares of preferred stock to 15,000,000
shares.
16. RETIREMENT PLANS
The Company maintains a 401(k) plan for its employees. Under this plan,
eligible employees may contribute amounts through payroll deductions
supplemented by employer contributions for investment in various investments
specified in the plan. The Company's contribution to this plan for fiscal 1999,
1998, and 1997 were $1,070,000, $1,013,000 and $0, respectively. A similar plan
exists for former employees of an acquired company for which eligibility and
additional contributions were frozen in September 1988.
In addition, the Company assumed the liability of the defined benefit
pension plan applicable to employees of a company acquired in 1986. The
eligibility and benefits were frozen as of the date of the acquisition.
Periodic (income) cost, and related financial information with respect to
the defined benefit pension plan is as follows:
<TABLE>
<CAPTION>
1999 1998
------ -------
(IN THOUSANDS)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year..................... $9,156 $ 7,290
Service cost................................................ -- --
Interest cost............................................... 610 611
Plan amendments............................................. -- --
Actuarial (gain) loss....................................... 70 1,613
Benefits paid............................................... (929) (358)
------ -------
Benefit obligation at end of year........................... $8,907 $ 9,156
====== =======
CHANGE IN PLAN ASSETS:
Fair Value of plan assets at beginning of year.............. $7,858 $ 6,128
Actual return on plan assets................................ 747 1,506
Employer contributions...................................... 284 582
Benefits paid............................................... (928) (358)
------ -------
Fair Value of plan assets at end of year.................... $7,961 $ 7,858
====== =======
RECONCILIATION OF FUNDED STATUS:
Funded status............................................... $ (947) $(1,298)
Unrecognized transition asset............................... 405 438
Unrecognized prior service cost............................. -- --
Unrecognized (gain) loss.................................... 2,255 2,390
------ -------
Net amount recognized....................................... $1,713 $ 1,530
====== =======
</TABLE>
F-25
<PAGE> 73
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
------ -------
(IN THOUSANDS)
<S> <C> <C>
AMOUNTS RECOGNIZED ON THE CONSOLIDATED BALANCE SHEETS
CONSIST OF:
Intangible asset............................................ $ 405 $ 438
Accrued benefit liability................................... (947) (1,298)
Accumulated other comprehensive income...................... 2,255 2,390
------ -------
Accrued benefit cost........................................ $1,713 $ 1,530
====== =======
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
PERIOD (INCOME) COST:
Service Cost............................................... -- -- --
Interest Cost.............................................. $ 610 $ 611 $ 521
Expected return on plan assets............................. (631) (525) (409)
Amortization of transition asset........................... 33 33 33
Amortization of prior service costs........................
Amortization of (gain) loss................................ 88 115 (23)
----- ----- -----
Total Net periodic benefit (income) cost................... $ 100 $ 234 $ 122
===== ===== =====
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.25% for 1999, 7.0% for 1998, and 7.5% for
1997. The expected long-term rate of return on assets was 8.5% for 1999, 1998
and 1997. The mortality table used for 1999 and 1998 was the 1983 Group Annuity
Mortality Table for Males and Females and the mortality table used for 1997 was
the UP-1984 Unisex Mortality Table.
17. EMPLOYEE SEVERANCE AND UNUTILIZED LEASE COSTS
During the second quarter of fiscal 1997, in connection with the Memorex
Telex acquisition (see Note 6), the Company recorded a $3.4 million pre-tax
charge for estimated future employee severance costs, and a $0.9 million pre-tax
charge for unutilized lease/contract losses ("exit costs"), primarily associated
with duplicate facilities to be closed. The $3.4 million charge, recorded in
accordance with SFAS No. 112, Employers' Accounting for Postemployment Benefits,
reflects the actuarially determined benefit costs for the separation of
employees who are entitled to benefits under pre-existing separation pay plans.
These costs are included in selling, general and administrative expenses in the
accompanying consolidated statement of operations for the year ended June 30,
1997.
During the year ended June 30, 1999, the Company recorded charges of $4.5
million, included in selling, general and administrative expenses, for estimated
future severance costs in accordance with 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 Operating Plan (see Note 2).
See Note 12 for further information regarding accrued severance and
unutilized lease losses.
18. COMMITMENTS AND CONTINGENT LIABILITIES
The Company, or certain businesses as to which it is alleged that the
Company is a successor, have been identified as potentially responsible parties
in respect to four waste disposal sites that have been identified by the United
States Environmental Protection Agency as Superfund sites. In addition, the
Company received a notice several years ago that it may be a potentially
responsible party with respect to a fifth, related site, but has not received
any other communication with respect to that site. Under applicable law, all
parties responsible for disposal of hazardous substances at those sites are
jointly and severally liable for clean-up costs.
F-26
<PAGE> 74
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company initially estimated that its share of the costs of the clean-up of
one of these sites was approximately $500,000, of which $372,000 and $460,000
remained unpaid and accrued in the accompanying consolidated balance sheets as
of June 30, 1999 and 1998, respectively. Complete information as to the scope of
required clean-up at these sites is not yet available and, therefore,
management's evaluation may be affected as further information becomes
available. However, in light of information currently available to management,
including information regarding assessments of the sites to date and the nature
of involvement of the Company's predecessor at the sites, it is management's
opinion that the Company's potential additional liability, if any, for the cost
of clean-up of these sites will not be material to the consolidated financial
position, results of operations or liquidity of the Company.
The Company is also party to various legal proceedings incidental to its
business. Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company. In the opinion of
management, these actions can be successfully defended or resolved without a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
During the fourth quarter of fiscal 1997, the Company received $2.0 million
in full settlement of a claim against its former insurance carrier, related to
unreimbursed losses. This settlement was reflected as a reduction of selling,
general and administrative costs in the accompanying statement of operations.
19. RELATED PARTY TRANSACTIONS
During the years ended June 30, 1999 and 1998, respectively, the Company
incurred costs of approximately $528,000 and $500,000 for financial advisory
services to the DLJ Group. Of these amounts, approximately $528,000 and $0
remained unpaid at June 30, 1999 and 1998, respectively.
As more fully described in Note 10, on January 27, 1999, the DLJ Group
purchased $7,300,000 of unsecured 14% senior notes due 2006 by DecisionOne
Corporation. Interest expense of approximately $430,000 remained unpaid at June
30, 1999, with respect to these obligations.
20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly financial information
for the fiscal years ended 1999 and 1998:
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30(1),
--------- -------- --------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1999
Revenues............................... $196,044 $185,017 $176,005 $ 168,877
Gross profit........................... 47,565 34,235 32,534 36,546
Net loss............................... (10,992) (25,649) (24,481) (44,478)
Basic loss per share................... $ (0.87) $ (2.04) $ (1.95) $ (3.54)
</TABLE>
F-27
<PAGE> 75
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------
SEPT. 30(2), DEC. 31, MARCH 31, JUNE 30(3),
------------ -------- --------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1998
Revenues.............................. $202,264 $200,075 $200,910 $ 202,468
Gross profit.......................... 44,819 46,769 47,747 52,576
Net loss.............................. (57,627) (10,718) (10,994) (103,791)
Basic net income (loss) per share..... (3.07) (0.86) (0.87) (8.25)
Pro forma net income (loss)........... 1,237 (10,718) (10,994) (103,791)
Pro forma earnings (loss) per share... 0.09 (0.86) (0.87) (8.25)
</TABLE>
- ---------------
(1) Net loss for the fourth quarter of 1999 includes a charge of $25.4 million
to reduce deferred tax assets to the level where management believes it is
more likely than not that such tax benefits will be realized (See Note 11).
(2) Net loss for the first quarter of 1998 includes $69.0 million of pre-tax
merger expenses (See Note 4).
(3) Net loss for the fourth quarter of 1998 includes $87.5 million of pre-tax
loss on asset sales and disposals and a $12.3 million pre-tax special charge
to the provision for uncollectible receivables (See Note 5).
F-28
<PAGE> 76
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of DecisionOne Corporation:
We have audited the accompanying consolidated balance sheets of DecisionOne
Corporation (a wholly-owned subsidiary of DecisionOne Holdings Corp.) and
subsidiaries (the "Company") as of June 30, 1999 and 1998, and the related
consolidated statements of operations, shareholder's deficiency and cash flows
for each of the three years in the period ended June 30, 1999. Our audits also
included the related financial statement schedule listed in the Index at Item
14. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of DecisionOne Corporation and
subsidiaries as of June 30, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1999 in conformity with generally accepted accounting principles. Also, in our
opinion, the financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company's recent losses from
operations, significant shareholders' deficiency, default under terms of its
credit agreement, and the related Indebtedness Restructuring and planned
Bankruptcy court filings raise substantial doubt about its ability to operate as
a going concern. Management's plans concerning these matters are also described
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
September 1, 1999
F-29
<PAGE> 77
DECISIONONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 30,061 $ 5,205
Restricted cash........................................... 3,410
Accounts receivable, net of allowances of $18,066 and
$22,572................................................ 93,134 114,082
Consumable parts, net of allowances of $8,906 and
$9,271................................................. 15,859 23,097
Prepaid expenses and other assets......................... 18,750 27,797
--------- ---------
Total current assets.............................. 161,214 170,181
REPAIRABLE PARTS, Net of accumulated amortization of
$141,842 and $135,277..................................... 134,924 142,446
PROPERTY AND EQUIPMENT...................................... 25,028 29,095
INTANGIBLES................................................. 128,509 154,029
PARENT COMPANY RECEIVABLES, net of allowances of $72,546 and
$0........................................................ 69,867
DEFERRED TAX ASSET.......................................... 24,370
OTHER ASSETS................................................ 2,036 16,451
--------- ---------
TOTAL ASSETS...................................... $ 451,711 $ 606,439
========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIENCY
CURRENT LIABILITIES:
Current portion of debt................................... $ 675,370 $ 13,311
Notes payable -- related party............................ 7,300
Accounts payable and accrued expenses..................... 92,135 101,351
Deferred revenues......................................... 28,876 40,758
Other liabilities......................................... 8,540 10,925
--------- ---------
Total current liabilities......................... 812,221 166,345
DEBT........................................................ 674 638,766
OTHER LIABILITIES........................................... 6,152 5,796
SHAREHOLDER'S DEFICIENCY:
Common stock, no par value; one share authorized, issued
and outstanding in 1999 and 1998....................... -- --
Additional paid-in capital................................ 12,323 12,323
Accumulated deficit....................................... (376,991) (214,073)
Accumulated other comprehensive income (loss)............. (2,668) (2,718)
--------- ---------
Total shareholder's deficiency.................... (367,336) (204,468)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S DEFICIENCY.... $ 451,711 $ 606,439
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE> 78
DECISIONONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
REVENUES................................................. $ 725,943 $ 805,717 $785,950
COST OF REVENUES......................................... 575,063 613,806 584,755
--------- --------- --------
GROSS PROFIT............................................. 150,880 191,911 201,195
OPERATING EXPENSES:
Selling, general and administrative expenses........... 125,125 142,462 109,975
Amortization of intangibles............................ 26,969 27,169 23,470
Merger expenses........................................ -- 69,046 --
Loss on asset sales and disposals...................... 1,491 87,458 --
Provision for parent company receivables............... 72,546 -- --
--------- --------- --------
OPERATING INCOME (LOSS).................................. (75,251) (134,224) 67,750
INTEREST EXPENSE, Net of interest income of $4,903 in
1999, $5,442 in 1998 and $197 in 1997, of which $4,323,
$5,236 and $0 represent related party interest income
for 1999, 1998 and 1997, respectively.................. 62,644 52,204 14,698
--------- --------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES (BENEFIT)........................................ (137,895) (186,428) 53,052
PROVISION (BENEFIT) FOR INCOME TAXES..................... 25,023 (14,787) 21,968
--------- --------- --------
NET INCOME (LOSS)........................................ $(162,918) $(171,641) $ 31,084
========= ========= ========
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS............... (85) (912) (38)
PENSION LIABILITY ADJUSTMENT........................... 135 (517) (25)
--------- --------- --------
COMPREHENSIVE LOSS....................................... $(162,868) $(173,070) $ 31,021
========= ========= ========
PRO FORMA INFORMATION (UNAUDITED) -- See Note 4:
Pro forma net income (loss)............................ $(111,357) $ 5,726
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE> 79
DECISIONONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S DEFICIENCY
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT NUMBER OF SHARES OF COMMON STOCK)
<TABLE>
<CAPTION>
ACCUMULATED OTHER
COMPREHENSIVE INCOME
(LOSS)
------------------------
FOREIGN TOTAL
ADDITIONAL CURRENCY PENSION SHARE-
PAID-IN ACCUMULATED TRANSLATION LIABILITY HOLDER'S
CAPITAL DEFICIT ADJUSTMENT ADJUSTMENT DEFICIENCY
---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996.............. $ 255,535 $ (73,516) $ 622 $(1,848) $ 180,793
Net income.......................... 31,084 31,084
Adjustment to pension liability... (25) (25)
Foreign currency translation
adjustment..................... (38) (38)
Tax benefit -- disqualifying stock
disposition.................... 2,635 2,635
Contributed capital............... 439 439
--------- --------- ----- ------- ---------
BALANCE, JUNE 30, 1997.............. 258,609 (42,432) 584 (1,873) 214,888
Net loss.......................... (171,641) (171,641)
Adjustment to pension liability... (517) (517)
Foreign currency translation
adjustment..................... (912) (912)
Dividends declared................ (244,000) (244,000)
Contributed capital............... 349 349
Reversal of tax
benefit -- disqualifying stock
disposition.................... (2,635) (2,635)
--------- --------- ----- ------- ---------
BALANCE, JUNE 30, 1998.............. 12,323 (214,073) (328) (2,390) (204,468)
Net loss.......................... (162,918) (162,918)
Adjustment to pension liability... 135 135
Foreign currency translation
adjustment..................... (85) (85)
--------- --------- ----- ------- ---------
BALANCE, JUNE 30, 1999.............. $ 12,323 $(376,991) $(413) $(2,255) $(367,336)
========= ========= ===== ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE> 80
DECISIONONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)....................................... $(162,918) $(171,641) $ 31,084
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss on asset sales and disposals....................... 1,491 87,458
Depreciation......................................... 13,842 15,729 13,549
Amortization of repairable parts..................... 85,391 81,597 63,870
Amortization of intangibles.......................... 26,968 27,169 23,470
Provision for uncollectible receivables.............. 76,812 15,515 7,849
Provision for consumable parts obsolescence.......... 4,188 1,852 2,554
Provision for deferred taxes......................... 25,023
Changes in operating assets and liabilities, net of
effects from companies acquired, which provided
(used) cash:
Accounts receivable................................ 16,682 (802) (38,365)
Consumable parts................................... 3,057 (1,889) (6,038)
Accounts payable and accrued expenses.............. (9,588) 4,081 3,885
Deferred revenues.................................. (12,714) (20,311) (25,427)
Cumulative effect of accounting change
Net changes in other assets and liabilities........ 3,688 (26,631) 12,543
--------- --------- ---------
Net cash provided by operating activities.......... 71,922 12,127 88,974
--------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures.................................... (16,402) (10,222) (10,540)
Repairable spare parts purchases, net................... (76,415) (78,239) (86,446)
Acquisitions of companies and contracts................. (2,793) (10,168) (32,258)
Proceeds from sales of assets........................... 16,794 -- --
--------- --------- ---------
Net cash used in investing activities.............. (78,816) (98,629) (129,244)
--------- --------- ---------
FINANCING ACTIVITIES:
Capital contributions................................... 349 439
Payment of dividends to Parent.......................... (244,000)
Loan made to Parent..................................... (69,617)
Net proceeds from borrowings............................ 32,292 397,195 43,625
Principal payments under capital leases................. (457) (480) (1,075)
Other................................................... (85) (2,617) (63)
--------- --------- ---------
Net cash provided by financing activities.......... 31,750 80,830 42,926
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 24,856 (5,672) 2,656
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.............. 5,205 10,877 8,221
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR.................... $ 30,061 $ 5,205 $ 10,877
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid (received) during the year for:
Interest............................................. $ 64,091 $ 38,472 $ 15,640
Income taxes......................................... $ (8,712) 4,031 8,381
Noncash investing/financing activities:
Issuance of seller notes in connection with
acquisitions....................................... 2,224
Issuance of seller notes in exchange for repairable
parts.............................................. 1,855
Repairable parts received in lieu of cash for
accounts receivable................................ 1,124
Repairable parts received in exchange for the
assumption of liabilities.......................... 2,100
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE> 81
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1. NATURE OF BUSINESS
DecisionOne Corporation (a wholly-owned subsidiary of DecisionOne Holdings
Corp., herein called "Holdings") and its wholly-owned subsidiaries (the
"Company") are providers of multivendor computer maintenance and technology
support services. The Company offers its customers a single-source, independent
(i.e., not affiliated with an original equipment manufacturer, or "OEM")
solution for computer maintenance and technology support requirements, including
hardware maintenance services, software support, end-user/help desk services,
network support and other technology support services. These services are
provided by the Company across a broad range of computing environments,
including mainframes, midrange and distributed systems, workgroups, personal
computers ("PCs") and related peripherals. In addition, the Company provides
outsourcing services for OEMs, software publishers, system integrators and other
independent service organizations. The Company delivers its services through an
extensive field service organization of approximately 3,500 service
professionals in over 150 service locations throughout North America and through
strategic alliances in selected international markets.
On May 29, 1997, Holdings completed a restructuring of the legal
organization of its subsidiaries (the "Corporate Reorganization"). The Corporate
Reorganization involved Holdings' contribution to DecisionOne Corporation of
ownership interests in its subsidiaries, all of which were under Holdings'
control (the "Contributed Subsidiaries"). The Corporate Reorganization has been
accounted for in a manner similar to a pooling of interests. Accordingly, the
Company's consolidated financial statements include the accounts of the
Contributed Subsidiaries for the year ended June 30, 1997.
The Company's wholly owned, direct international subsidiaries are not
significant to the Company's consolidated financial statements.
2. INDEBTEDNESS RESTRUCTURING
The Company has continued to experience declining trends in revenues, and
earnings throughout fiscal 1999. The declining trends principally result from
lower sales of new service contracts, erosion of contract base, and minimal
growth from acquisitions.
As previously announced, on January 28, 1999, the Company initiated a
corporate operating plan ("Operating Plan") intended to restore revenue growth
and improve financial performance. The Operating 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 "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 14% Senior Unsecured Notes due 2006 (the "14% Notes")
in DecisionOne Corporation by an affiliate of DLJ Merchant Banking Partners II,
L.P. ("DLJMB"), and the Company's agreement with its lenders to waive certain
financial covenants in the Company's credit agreement through July 29, 1999 (the
"Waiver").
On July 14, 1999, Holdings' common stock was delisted from the NASDAQ
national market System. Since that date, the Holdings' common stock has been
quoted on the OTC Bulletin Board.
On August 2, 1999, the Company announced an agreement in principle with the
bank lending group and the holders of the 14% Notes on the restructuring of its
indebtedness (the "Indebtedness Restructuring"). Under the terms of the final
agreement, the bank lending group would exchange approximately $523 million in
existing indebtedness for approximately 94.6 percent of the reorganized
Company's equity and $250 million in new senior secured bank debt (the "New
Credit Agreement"). The agreement further provides that the
F-34
<PAGE> 82
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
holders of the 14% Notes would exchange their notes for (a) warrants equal to
approximately 4.2 percent of the reorganized Company's fully diluted equity, at
an exercise price based on an enterprise value of $350 million and (b) warrants
equal to approximately 2.0 percent of the reorganized Company's equity, at an
exercise price based on an equity valuation of $280 million. The holders of the
9 3/4% Senior Subordinated Notes due 2007 (the "9 3/4% Notes") would exchange
their notes for (a) approximately 5.0 percent of the reorganized Company's
equity; (b) warrants equal to approximately 2.8 percent of the reorganized
Company's fully diluted equity, at an exercise price based on an enterprise
value of $350 million; (c) warrants equal to approximately 5.0 percent of the
reorganized Company's equity, at an exercise price based on an equity valuation
of $200 million; and (d) warrants equal to approximately 3.0 percent of the
reorganized Company's equity, at an exercise price based on an equity valuation
of $280 million. In addition, the holders of the 11 1/2% Senior Discount
Debentures due 2008 (the "11 1/2% Notes") and the holders of unsecured claims of
Holdings would receive a total of approximately 0.4 percent of the reorganized
Company's equity.
The Company did not make the $7.3 million interest payment on its 9 3/4%
Notes, which was due on August 2, 1999 nor the interest payment due to the
holders of the 14% Notes. The Waiver, pursuant to which the bank lending group
agreed to waive certain financial covenants under its Existing Credit Facility,
expired on July 29, 1999. The holders of the 9 3/4% Notes, the holders of the
11 1/2% Notes, the holders of the 14% Notes and the bank lending group have the
right to declare the respective outstanding loan amounts immediately due and
payable and seek to exercise remedies, including, in the case of the Existing
Credit Facility, foreclosure on the collateral securing such amounts. As such,
the Company has reflected all such loan amounts as current liabilities as of
June 30, 1999 (See Note 10).
The Company's and Holdings' proposed Indebtedness Restructuring will be
subject to the approval of a United States Bankruptcy Court (the "Bankruptcy
Court") pursuant to Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code").
The Indebtedness Restructuring will be accomplished through a plan of
reorganization (the "Plan") in a prepackaged case under Chapter 11 of the
Bankruptcy Code. The Plan along with a related disclosure statement will be
delivered to the bank lending group and the holders of the 14% Notes in
connection with the Company's pre-petition solicitation of acceptances of the
proposed Plan. If, by the end of the solicitation period, the requisite
acceptances have been received from the bank lending group and the holders of
the 14% Notes, the Company intends to file a petition under Chapter 11 and to
use the acceptances received pursuant to the solicitation to seek confirmation
of the Plan. With respect to all the other creditors and equity holders of the
Company that are impaired under the Plan, the Company intends to seek
confirmation of the Plan under the "cram down" provisions of the Bankruptcy
Code. The Plan will only be confirmed if the Bankruptcy Court determines that
all the requirements of the Bankruptcy Code have been met, including, without
limitation, that the Plan is (i) accepted by all impaired classes of claims and
equity interests or, if rejected by an impaired class, that the Plan does not
"discriminate unfairly" and is "fair and equitable" as to such class, (ii)
feasible and (iii) in the "best interests" of creditors and equity holders
impaired under the Plan.
The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and do not reflect any adjustments that might
result if the Company is unable to continue as a going concern. The Company's
recent losses from operations, significant shareholders' deficiency, default
under the terms of its credit agreement, and the related Indebtedness
Restructuring and planned Bankruptcy Court filings raise substantial doubt about
the Company's ability to operate as a going concern. The appropriateness of
using the going concern basis is dependent upon, among other things, (i) the
Company's ability to reverse its declining revenue trends; (ii) the Company's
ability to generate sufficient cash from operations and/or obtain additional
financing to meets its obligations prior to confirmation of a plan of
reorganization; (iii) confirmation of the Company's plan of reorganization under
the Bankruptcy Code, and
F-35
<PAGE> 83
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(iv) the Company's ability to achieve profitable operations and generate
sufficient cash from operations and/or obtain additional financing after such
confirmation.
3. SIGNIFICANT ACCOUNTING POLICIES
Consolidation -- The consolidated financial statements include the accounts
of DecisionOne Corporation and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Pro Forma Information (Unaudited) -- The pro forma information included in
the accompanying statement of operations and in Note 4 has been prepared to
reflect the Company's and Holding's recapitalization and merger with Quaker
Holding Co. ("Quaker") and related transactions as if these had occurred on July
1, 1996.
Cash and Cash Equivalents -- Cash and cash equivalents are highly liquid
investments with remaining maturities of three months or less at the time of
purchase. Cash equivalents, consisting primarily of repurchase agreements with
banks, are stated at cost, which approximates fair market value.
Restricted Cash -- Restricted cash at June 30, 1999 represents amounts
deposited into a trust as security for letters of credit issued by the Company
for certain employee obligations of the Company (see Note 10).
Consumable Parts and Repairable Parts -- In order to provide maintenance
and repair services to its customers, the Company is required to maintain
significant levels of computer parts. These parts are classified as consumable
parts or as repairable parts.
Consumable parts, which are expended during the repair process, are stated
principally at weighted average cost, less an allowance for obsolescence and
shrinkage. Consumable parts are reflected in the cost of revenues during the
period utilized.
Repairable (rotable) parts, which can be refurbished and reused, are stated
at original weighted average cost less accumulated amortization. Monthly
amortization of repairable parts is reflected in cost of revenues. The costs of
refurbishing parts are also included in the cost of revenues as incurred.
Amortization of repairable costs is based principally on the composite group
method, using straight-line whole life and remaining life composite rates.
Repairable parts generally have an economic life that corresponds to the
estimated normal life cycle of the related products.
As consumable and repairable parts are retired, the weighted average gross
amounts at which such parts have been carried are removed from the respective
asset accounts, and charged to the accumulated allowance or accumulated
amortization accounts as applicable. Periodic revisions to amortization and
allowance estimates are required, based upon the evaluation of several factors,
including changes in estimated product life cycles, usage levels, and technology
changes. Changes in these estimates are reflected on a prospective basis unless
such changes result from an abnormal retirement (including sales, disposals and
shrinkage) which requires immediate loss recognition. In addition, impairment is
recognized when the net carrying value of the parts exceeds the estimated
current and anticipated undiscounted net cash flows. Measurement of the amount
of impairment if any is calculated based upon the difference between carrying
value and fair value.
The Company had amortized the majority of its composite group of repairable
parts over an estimated average useful life of five years based principally on
historic product life cycle studies. As a result of the abnormal retirement of
computer parts (See Note 5) and related life studies the Company revised the
useful lives of repairable parts and increased the obsolescence provision for
consumable parts prospectively. Effective July 1, 1998, the Company began
amortizing its existing composite group of repairable parts and future
repairable part purchases over an estimated average remaining life of three
years.
F-36
<PAGE> 84
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounting Change - Repairable Parts -- Effective July 1, 1999, the Company
changed its method of accounting for repairable parts from the amortization
method to the usage method. Under the amortization method, the Company amortized
the cost of repairable parts over an estimated average useful life and recorded
the costs of refurbishing repairable parts as a component of cost of revenues as
incurred. Under the usage method, the Company will record in cost of revenues
the cost of new and refurbished parts when used to service customers.
Additionally, under the usage method, management will perform periodic
assessments to determine the existence of excess or obsolete parts and will
record any necessary provisions to reduce such parts to net realizable value,
consistent with past practice. Management believes that this change in method
for repairable parts more accurately reflects periodic results of operations
based on parts used to service customers. The effect of this change will be
recorded as a cumulative effect charge of approximately $74.4 million, during
the fiscal quarter ending September 30, 1999. The Company does not expect to
record any tax benefit resulting from this charge. See Note 11 to the Company's
consolidated financial statements for the year ended June 30, 1999. The pro
forma effect of this change in accounting principle on prior years' operations
is not presented because such effects are not reasonably determinable.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is provided for principally using the straight-line composite group
method over the estimated useful lives of the depreciable asset group.
Capitalized equipment leases and leasehold improvements are amortized over the
shorter of the related lease terms or asset lives. Maintenance and repairs are
charged to expense as incurred. Upon retirement or disposition of property and
equipment, the cost and related accumulated depreciation are removed from the
respective asset accounts, and charged to accumulated depreciation and
amortization accounts as applicable.
Business and Contract Acquisitions -- Business and contract acquisitions
have been accounted for as purchase transactions, with the purchase price of
each acquisition allocated to the assets acquired and liabilities assumed based
upon their respective estimated fair values at the dates of acquisition.
Consistent with the Company's parts retirement accounting methods, the gross
value of parts acquired is generally stated at weighted average cost. Fair value
adjustments, if any, are reflected as adjustments to the respective accumulated
amortization or allowance accounts. The excess of the purchase price over
identified net assets acquired is amortized, on a straight-line basis, over the
expected period of future benefit (see Notes 6 and 8).
Typical contract acquisitions are comprised primarily of customer
maintenance and support contracts of complementary entities, along with the
accompanying consumable and repairable parts required to support these contracts
and other identifiable intangibles, such as noncompete agreements. Liabilities
assumed in business and contract acquisitions consist primarily of prepaid
amounts related to multi-period customer maintenance and support contracts.
These liabilities are recorded as deferred revenues at acquisition dates and are
recognized as revenues when earned in accordance with the terms of the
respective contracts.
Intangible Assets -- Intangible assets are comprised of excess purchase
price over the fair value of net assets acquired, acquired customer lists and
other intangible assets, including the fair value of contractual profit
participation rights and amounts assigned to noncompete agreements.
Intangible assets, which arise principally from acquisitions, are generally
amortized on a straight-line basis over their respective estimated useful lives
(see Note 8). The Company evaluates the carrying value of intangible assets
whenever events or changes in circumstances indicate that these carrying values
may not be recoverable within the amortization period. Impairment is recognized
when the net carrying value of the intangible asset exceeds the estimated future
undiscounted future net cash flows. Measurement of the amount of impairment, if
any, is calculated based upon the difference between carrying value and fair
value.
Revenue -- The Company enters into maintenance contracts whereby it
services various manufacturers' equipment. Revenues from these contracts are
recognized ratably over the terms of such contracts. Prepaid
F-37
<PAGE> 85
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
revenues from multi-period contracts are recorded as deferred revenues and are
recognized ratably over the term of the contracts.
Revenues derived from the maintenance of equipment not under contract are
recognized as the service is performed. Revenues derived from other technology
support services are recognized as the service is performed or ratably over the
term of the contract.
Income Taxes -- The Company recognizes deferred tax assets and liabilities
for temporary differences between the financial reporting basis and the tax
basis of the Company's assets and liabilities and expected benefits of utilizing
net operating loss carryforwards. The impact on deferred taxes of changes in tax
rates and laws, if any, applied to the years during which temporary differences
are expected to be settled, are reflected in the consolidated financial
statements in the period of enactment.
Holdings and its wholly owned subsidiaries file a consolidated tax return.
The Company participates in a tax sharing agreement with the consolidated group
whereby consolidated income tax expense or benefit is allocated to the Company
as if the Company was filing separate tax returns.
Foreign Currency Translation -- Gains and losses resulting from foreign
currency translation are accumulated as a separate component of shareholders'
equity (deficit). Gains and losses resulting from foreign currency transactions
are included in operations, except for intercompany foreign currency
transactions which are of a long-term nature and are accumulated as a separate
component of shareholders' equity (deficit).
Credit Risk -- Concentration of credit risk with respect to trade
receivables is limited due to the large number of customers comprising the
Company's customer base and their dispersion across many industries.
Fair Value of Financial Instruments -- The following disclosures of the
estimated fair value of financial instruments were made in accordance with the
requirements of SFAS No. 107, Disclosures about Fair Value of Financial
Instruments. The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies.
Cash and Cash Equivalents, Accounts Receivable, and Accounts Payable -- The
carrying amount of these items are a reasonable estimate of their fair value.
Debt -- As more fully described in Note 10, fair values of debt such as the
Existing Credit Facility, the senior discount debentures, the senior unsecured
notes and the senior subordinated notes and the fair values of interest rate
swaps and collars are based on quoted market prices.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates and
assumptions.
Derivative Financial Instruments -- Derivative financial instruments, which
constitute interest rate swap and collar agreements (see Note 10), are
periodically used by the Company in the management of its variable interest rate
exposure. Amounts to be paid or received under interest rate swap and collar
agreements are recognized as interest expense or interest income during the
period in which these accrue. Gains or losses realized, if any, on the early
termination of interest rate swap or collar contracts are deferred, to be
recognized upon the termination of the related asset or liability or expiration
of the original term of the swap or collar contract, whichever is earlier. The
Company does not hold any derivative financial instruments for trading purposes.
Comprehensive Income (Loss) -- In June 1997, the FASB issued SFAS No. 130,
Reporting Comprehensive Income -- The Company adopted this pronouncement in
fiscal 1999. Components of comprehensive income for the Company include net
income (loss), pension liability adjustment and foreign currency translation.
F-38
<PAGE> 86
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Business segmentation -- In June, 1997, the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 requires segments to be determined based on how management measures
performance and makes decisions about allocating resources. Except for
geographic information set forth below, the adoption of SFAS No. 131 has not
resulted in any changes to presentation of financial data in fiscal 1999, as the
Company operates as one business segment. Summary geographic financial
information for the Company for the fiscal years ended June 30, 1999, 1998 and
1997 as is as follows:
<TABLE>
<CAPTION>
UNITED STATES CANADA TOTAL COMPANY
------------- ------- -------------
<S> <C> <C> <C>
1999
Total revenues................................. $696,797 $29,146 $725,943
Total assets................................. 442,569 13,318 455,887
1998
Total revenues............................... 772,683 33,034 805,717
Total assets................................. 523,604 18,383 541,987
1997
Total revenues............................... 755,254 30,696 785,950
Total assets................................. 605,764 17,341 623,105
</TABLE>
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement, which revises
certain disclosure requirements for the Company's retirement plan assets and
obligations, is effective for fiscal periods beginning after December 15, 1997.
Restatement of prior years' information is required, where available. As this
statement only requires a change in methods of disclosure and not in accounting
methods, it did not have any impact on the Company's consolidated financial
position and results of operations. The Company adopted SFAS No. 132 in fiscal
1999, as required.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133".) This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those statements at fair value. This statement is effective
for fiscal years beginning after June 15, 1999, although early adoption is
encouraged. In June, 1999, the FASB issued SFAS No. 137, which defers the
effective date of SFAS No. 133 until June 15, 2000. The Company is evaluating
the effect that the adoption of SFAS No. 133 will have on its consolidated
financial position or results of operations.
Reclassifications -- Certain reclassifications have been made to prior year
data in order to conform with the 1999 presentation.
4. 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 was recorded as a recapitalization for accounting
purposes as of the consummation date, occurred pursuant to an Agreement and Plan
of Merger (the "Merger Agreement") by and among the Company, Holdings and Quaker
dated May 4, 1997.
In accordance with the terms of the Merger Agreement, which was formally
approved by the Company's shareholders on August 7, 1997, Quaker merged with and
into Holdings, and the holders of approximately 94.7% of shares of Holdings
common stock outstanding immediately prior to the merger received $23 per share
in cash in exchange for each of these shares. Holders of approximately 5.3% of
shares of Holdings
F-39
<PAGE> 87
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock outstanding immediately prior to the merger retained such shares in
the merged Holdings, as determined based upon shareholder elections and stock
proration factors specified in the Merger Agreement. Immediately following the
merger, continuing shareholders owned approximately 11.9% of shares of
outstanding Holdings common stock. The aggregate value of the merger transaction
was approximately $940 million, including refinancing of the Company's then
existing revolving credit facility (see Note 10).
In connection with the merger, Holdings raised $85 million through the
public issuance of senior discount debentures, and the Company issued publicly
held senior subordinated notes for approximately $150 million. The Company also
entered into a new syndicated credit facility providing for term loans of $470
million and revolving loans of up to $105 million. The proceeds of the senior
discount notes, senior subordinated notes and the initial borrowings under the
new credit facility along with a loan of approximately $59.1 million and a $10.8
million subordinated promissory note, each due 2010, from the Company to
Holdings and the purchase of approximately $225 million of Holdings common stock
by Quaker have been used to finance the payments of cash to cash-electing
Holdings shareholders, to pay the holders of Holdings stock options and stock
warrants canceled or converted, as applicable, in connection with the merger, to
repay the Company's then existing revolving credit facility and to pay expenses
incurred in connection with the merger.
As a result of the merger, the Company and Holdings incurred various
expenses, aggregating approximately $69.0 million on a pretax basis
(approximately $63.5 million after related tax benefit) in connection with
consummating the transaction. These costs consisted primarily of compensation
costs, underwriting discounts and commissions, professional and advisory fees
and other expenses. The Company reported this one-time charge during the first
quarter of fiscal 1998. In addition to these expenses, the Company and Holdings
also incurred approximately $22.3 million of capitalized debt issuance costs
associated with the merger financing. These costs will be charged to expense
over the terms of the related debt instruments.
The following summarized unaudited pro forma information for the years
ended June 30, 1998 and 1997 assumes that the merger had occurred on July 1,
1996. The pro forma results have been prepared for comparative purposes only and
do not purport to be indicative of the results of operations which actually
would have resulted had the merger occurred as of July 1, 1996 or which may
result in the future.
<TABLE>
<CAPTION>
(UNAUDITED)
(IN THOUSANDS)
YEAR ENDED JUNE 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
PRO FORMA LOSS STATEMENT INFORMATION:
Revenues.................................................... $805,717 $785,950
Operating income (loss)..................................... (65,178) 67,750
Income (loss) from continuing operations before income
taxes..................................................... (120,972) 9,772
Net income (loss)........................................... (111,357) 5,726
</TABLE>
The 1998 pro forma net loss 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 $5.2 million, including
the effect of valuation allowances against certain deferred tax assets (see Note
11).
The 1997 pro forma net income reflects a net increase in interest expense
of approximately $43.3 million ($25.4 million after related pro forma tax
effect), attributable to additional financing incurred in connection with the
merger, net of repayment of the Company's existing revolving credit facility.
F-40
<PAGE> 88
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LOSS ON ASSET SALES AND DISPOSALS
In connection with the company's fiscal 1999 cost reduction program, the
Company sold all of its owned facilities, consisting of a multi-purpose facility
located in Tulsa, Oklahoma, and a Logistics service facility located in a suburb
of Milwaukee, Wisconsin, at a total net loss of approximately $1.5 million.
Management determined that over 1.2 million of its computer parts were
obsolete during its annual fourth quarter physical inventory in fiscal 1998.
These parts were retired and subsequently sold to salvage dealers for nominal
scrap value. The parts obsolescence was principally due to the convergence of
significant changes in the Company's business operations and the computer
service industry, which the Company expects will continue. The significant
changes include: (1) accelerated technology migration trends as customers modify
their computing environments to remediate year 2000 ("Y2K") problems, (2)
increasing shifts in demand from data center and midrange systems to desktop
computing environments, and (3) declining life cycles of the products under
current and anticipated service contracts due to increasingly rapid changes in
technology. The abnormal nature of this retirement and subsequent sale required
immediate loss recognition of $75 million in the fourth quarter of fiscal 1998.
In connection with the acquisition of BABSS, the Company acquired
contractual profit participation rights pursuant to an existing agreement
between BABSS and ICL Sorbus, Ltd. (ICL) (See Note 6). On June 29, 1998, the
Company sold its contractual profit participation rights back to ICL at a pretax
loss of approximately $12.5 million.
6. BUSINESS AND CONTRACT ACQUISITIONS
During the years ended June 30, 1999, 1998 and 1997, the Company acquired
certain net assets of other service companies as follows (in thousands):
<TABLE>
<CAPTION>
CONSIDERATION EXCESS PURCHASE
----------------------------------------------- PRICE OVER FAIR
NUMBER OF LIABILITIES TOTAL PURCHASE VALUE OF NET ASSETS
YEARS ENDED ACQUISITIONS CASH ASSUMED NOTES PRICE OTHER TANGIBLES ACQUIRED
- ----------- ------------ ------- ----------- ------ -------------- --------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Non-significant
business or
maintenance contract
acquisitions:
June 30, 1997...... 9 $32,258 $45,829 $2,201 $80,288 $32,239 $48,049
June 30, 1998...... 4 10,168 6,317 4,538 21,023 4,600 16,423
June 30, 1999...... 1 2,793 1,204 -- 3,997 139 3,858
</TABLE>
Included in nonsignificant maintenance contract acquisitions is the
acquisition of substantially all of the contracts and related assets, including
spare parts of the U.S. computer service business of Memorex Telex Corporation
and certain of its affiliates (collectively, "Memorex Telex"). Memorex Telex had
filed a petition in bankruptcy in the United States Bankruptcy Court (the
"Court") in the District of Delaware on October 15, 1996; the Court approved the
sale to the Company on November 1, 1996. The adjusted purchase price was $52.7
million, comprised of the assumption of certain liabilities under contracts of
the service business, which were valued at $28.3 million, and base cash
consideration of approximately $24.4 million, after certain purchase price
adjustments, excluding transaction and closing costs. During the third quarter
of fiscal 1997, the Company recorded an adjustment increasing the deferred
revenues assumed in the Memorex Telex acquisition by approximately $2,300,000,
to revise the estimated fair value of certain contract liabilities of the
business assumed by the Company.
F-41
<PAGE> 89
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and buildings.......................................... $ -- $ 6,312
Equipment................................................... 10,292 15,335
Computer hardware and software.............................. 41,480 32,459
Furniture and fixtures...................................... 7,088 9,628
Leasehold improvements...................................... 7,034 5,190
-------- --------
65,894 68,924
Accumulated depreciation and amortization................... (40,866) (39,829)
-------- --------
$ 25,028 $ 29,095
======== ========
</TABLE>
The principal lives (in years) used in determining depreciation and
amortization rates of various assets are: buildings (20-40); equipment (3-10);
computer hardware and software (3-5); furniture and fixtures (5-10) and
leasehold improvements (term of related leases).
Depreciation and amortization expense was approximately $13,842,000 ,
$15,729,000, and $13,549,000 for the fiscal years ended 1999, 1998 and 1997,
respectively. As more fully described in Note 5, the Company sold both of its
owned facilities during fiscal 1999.
8. INTANGIBLES
Intangibles consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Excess purchase price over fair value of net assets
acquired.................................................. $138,307 $137,241
Customer lists.............................................. 60,370 60,370
Noncompete agreements....................................... 4,331 9,231
Other intangibles........................................... 9,881 8,014
-------- --------
212,889 214,856
Accumulated amortization.................................... (84,380) (60,827)
-------- --------
$128,509 $154,029
======== ========
</TABLE>
The periods (in years) used in determining the amortization rates of
intangible assets are: excess purchase price over fair value of net assets
acquired (4-20); customer lists (3-8); noncompete agreements (3-5) and other
(1-6).
Amortization expense relating to intangibles was approximately $26,968,000,
$27,169,00, and $23,470,000, for the fiscal years ended 1999, 1998 and 1997,
respectively.
F-42
<PAGE> 90
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 1998
------- --------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable............................................ $39,102 $ 56,040
Compensation and benefits................................... 21,175 20,928
Interest.................................................... 7,098 11,485
Unused leases............................................... 531 175
Pension accrual............................................. 1,145 1,515
Accrued professional fees................................... 880 568
Non-income taxes and other.................................. 22,204 10,640
------- --------
$92,135 $101,351
======= ========
</TABLE>
10. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Existing Credit Facility:
Revolving credit loans...................................... $ 65,700 $ 30,700
Term loans................................................ 457,388 467,938
Senior subordinated notes, 9 3/4%, due 2007................. 150,000 150,000
Senior unsecured notes, 14%, due 2006....................... 7,300 --
Seller noninterest-bearing notes payable.................... 2,664 2,179
Seller note payable -- purchase of spare parts.............. -- 508
Capitalized lease obligations, payable in varying
installments.............................................. 292 752
-------- --------
683,344 652,077
Less current portion........................................ 682,670 13,311
-------- --------
$ 674 $638,766
======== ========
</TABLE>
In connection with the Company's merger with Quaker (see Note 4), the
revolving credit loans outstanding immediately prior to the merger were repaid
in full, including all interest due thereon. This refinancing was accomplished,
in part, through the issuance of certain new debt instruments, consisting of a
Existing Credit Facility, senior discount notes, and senior subordinated notes
which, in the aggregate, provide financing of approximately $810 million,
subject to certain conditions.
As more fully described in Note 2, during fiscal 1999 the Company sought
and obtained a waiver (the "Waiver") of certain financial covenants contained in
its new 1997 Credit Facility (the "Existing Credit Facility"). In connection
with the Waiver, The Company incurred waiver fees of approximately $4.3 million,
which are being amortized as interest expense through July, 1999. This Waiver
expired on July 29, 1999, and the Company is currently, therefore, in technical
default under the terms of the Existing Credit Facility. As a result of this
default, all amounts outstanding under the Existing Credit Facility could become
immediately due and payable, and have been classified as current liabilities in
the accompanying consolidated balance sheet
F-43
<PAGE> 91
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as of June 30, 1999. Additionally, as a result of this default, any additional
borrowings under the Existing Credit Facility are subject to the approval of the
holders of the Existing Credit Facility.
As more fully described in Note 2, on August 2, 1999, the Company announced
an agreement in principle with the bank lending group and the holders of the 14%
Notes on the restructuring of its indebtedness (the "Indebtedness
Restructuring"). Although Company management expects the Indebtedness
Restructuring to be consummated, such consummation is subject to various
approvals outside of the Company's control. Currently, the Company does not have
in place any alternate sources of liquidity if the Indebtedness Restructuring,
or another similar debt restructuring agreement, is not consummated.
The Company had average borrowings of approximately $675,417,000 during
1999 at an average interest rate of 8.3%. Maximum borrowings during 1999 were
approximately $690,055,000. The Company had average borrowings of $609,629,000
and $221,069,000 during 1998 and 1997, respectively, at an average interest rate
of 8.2% and 6.4%, respectively. Maximum borrowings during 1998 and 1997 were
$659,732,000 and $243,350,000, respectively.
The Company's Canadian subsidiary has available a $5.0 million (Canadian)
revolving line of credit agreement with a local financial institution. At June
30, 1999 and 1998, no amounts were outstanding under this agreement. At June 30,
1997, approximately $471,000 (in U.S. dollars) was outstanding under this
agreement.
Annual maturities on long-term debt outstanding at June 30, 1999, are as
follows (in thousands): 2000, $682,670; 2001, $612 and; 2002, $62.
The Company has approximately $10,325,000 of letters of credit outstanding
as of June 30, 1999. The Company bears the credit risk on this amount to the
extent that it does not comply with the provisions of certain agreements. The
letters of credit, net of amounts deposited in trust as restricted cash (see
Note 3), reduce the amount available under the Company's revolving loans under
its Existing Credit Facility.
EXISTING CREDIT FACILITY
The Existing Credit Facility provides for term loans of $470,000,000 (term
loan A -- $195,000,000 and term loan B -- $275,000,000) and revolving loans of
up to $105,000,000. Term loan A expires in August 2003 with uneven quarterly
principal payments commencing in September 1998. Term loan B expires in August
2005 with uneven quarterly principal payments commencing in December 1997. The
revolving loans expire in August 2003. The Company pays a quarterly commitment
fee on the unused amount of the revolving loans. The Company incurred debt
issuance costs of approximately $14,375,000 in connection with the Existing
Credit Facility. These costs have been deferred and are being amortized to
interest expense over the term of the facility.
The interest rate applicable to the Existing Credit Facility varies, at the
Company's option, based upon LIBOR plus applicable margins (2.75% for term loan
A and the revolving loans and 3.0% for term loan B) or based upon Prime Rate
plus applicable margins (1.5% for term loan A and the revolving loans and 1.75%
for term loan B). The applicable weighted average interest rates at June 30,
1999 were 8.47%, 8.71% and 8.96% for term loan A, term loan B, and the revolving
loans, respectively.
The Existing 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. These measurements
include (1) Adjusted EBITA, (2) Leverage Ratio, (3) Interest Coverage Ratio, and
(4) Fixed Charge Ratio. Additionally, Holdings has pledged the assets of
substantially all of its subsidiaries as collateral security for the Existing
Credit Facility. During the third quarter of fiscal 1998, the Company sought and
obtained amendments to the Existing Credit Facility. The amendments revised
certain financial performance measure-
F-44
<PAGE> 92
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ments and increased the borrowing rate by 0.25%. The Company incurred fees of
approximately $1,400,000 in connection with the amendments. These costs have
been deferred and are being amortized to interest expense over the remaining
term of the related debt instruments. The Company is in compliance with its
covenants under the amended Existing Credit Facility as of June 30, 1999.
The estimated fair value of the Existing Credit Facility was approximately
$235.4 million and is based on quoted market prices, as of June 30, 1999.
SENIOR SUBORDINATED NOTES (9 3/4% NOTES)
The 9 3/4% senior subordinated notes mature on August 1, 2007. Interest on
the notes is payable semi-annually on February 1 and August 1 of each year,
commencing on February 1, 1998. The Company incurred debt issuance costs of
$4,500,000 in connection with the senior subordinated notes. These issuance
costs have been deferred and are being amortized over the life of the notes.
The estimated fair value of the senior subordinated notes as of June 30,
1999 was approximately $6.7 million and is based on quoted market prices. The
senior subordinated notes are subordinate to the Existing Credit Facility and
the senior unsecured notes.
SENIOR UNSECURED NOTES (14% NOTES)
On January 27, 1999, the Company's principal shareholder, DLJMB and certain
of its affiliates, purchased $7,300,000 of unsecured 14% senior notes due 2006
in DecisionOne Corporation. The proceeds of the 14% senior notes were used for
general corporate purposes. The senior unsecured notes are subordinate only to
the Existing Credit Facility.
The estimated fair value of the senior unsecured notes as of June 30, 1999,
was approximately $0.3 million based on indicative quoted market rates.
SELLER NOTES PAYABLE
In connection with certain acquisitions (see Note 6), the Company issued
noninterest-bearing notes, the principal of which is primarily due upon
settlement of contingent portions of the acquisition purchase price within a
specified period subsequent to closing, generally not exceeding one year from
the acquisition date. Contingencies typically pertain to actual amounts of
monthly maintenance contract revenues acquired and prepaid contract liabilities
assumed in comparison to amounts estimated in acquisition agreements. The
Company imputes interest, based upon market rates, for long-term,
non-interest-bearing obligations.
During 1997, the Company issued a secured note payable to the seller for
the purchase of repairable parts in the original amount of $1,854,000. The note
accrues interest at an interest rate of approximately 8%, and requires quarterly
payments of principal and interest of approximately $273,000 until maturity in
December 1998.
REVOLVING CREDIT LOANS -- 1997 AND PRIOR
The Company had a revolving credit facility of $300,000,000, which was
repaid in connection with the Company's merger in August, 1997 (see Note 4).
INTEREST RATE RISK MANAGEMENT
The use of interest rate risk management instruments, such as Swaps and
Collars, is required under the terms of the Existing Credit Facility. The
Company manages interest costs using a mix of fixed and variable rate debt.
Using Swaps, the Company agrees to exchange, at specified intervals, the
difference between fixed and variable interest rate amounts calculated by
reference to an agreed-upon notional principal amount.
F-45
<PAGE> 93
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Collars limit the Company's exposure to and benefits from interest rate
fluctuations on variable rate debt to within a certain range of rates.
The following table summarizes the terms of the Company's existing Swaps
and Collars as of June 30, 1999:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT MATURITIES AVERAGE INTEREST RATE ESTIMATED FAIR VALUE
--------------- ----------- --------------------- --------------------
<S> <C> <C> <C> <C>
Variable to Fixed
Swaps.............. $ 75,000,000 2000 5.9% $(115,000)
Collars.............. $100,000,000 2000 - 2001 5.7% - 6.7% $(237,000)
</TABLE>
The notional amounts of interest rate instruments, as presented in the
above table, are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The estimated fair value
approximates the proceeds (costs) to settle the outstanding contracts. While
Swaps and Collars represent an integral part of the Company's interest rate risk
management, their incremental effect on interest expense for the year ended June
30, 1999 was not significant.
11. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------
1999 1998 1997
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.............................................. $ 653 $ (8,209) $10,909
State.............................................. 100 3,616
Foreign............................................ (372) 1,080
Deferred:
Federal............................................ 21,240 (6,315) 6,460
State.............................................. 3,130 (603) 16
Foreign............................................ 612 (113)
------- -------- -------
Provision (benefit) for income taxes................. $25,023 $(14,787) $21,968
======= ======== =======
</TABLE>
The tax effects of temporary differences consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1999 1998
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Gross deferred tax assets:
Accounts receivable......................................... $ 6,139 $ 7,869
Inventory................................................. 4,038 2,819
Accrued expenses.......................................... 34,971 6,348
Unused leases............................................. (133) (277)
Fixed assets.............................................. 1,964 1,714
Intangibles............................................... 21,781 17,049
Other..................................................... 2,447 1,298
Operating loss carryforwards.............................. 59,929 52,278
Tax credit carryforwards.................................. 2,969 2,969
--------- --------
</TABLE>
F-46
<PAGE> 94
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1999 1998
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Gross deferred tax assets................................... 134,105 92,067
Valuation allowance......................................... (134,105) (53,804)
--------- --------
Gross deferred tax assets less valuation allowance.......... $ -- $ 38,263
Gross deferred tax liabilities -- repairable spare
parts.................................................. (13,893)
--------- --------
Net deferred tax asset...................................... $ -- $ 24,370
========= ========
</TABLE>
Net operating loss and minimum tax credit carryforwards available at June
30, 1999 expire in the following years:
<TABLE>
<CAPTION>
YEAR OF
AMOUNT EXPIRATION
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Federal operating losses.................................. $145,036 2006 - 2019
State operating losses.................................... 147,728 2000 - 2019
Foreign operating losses.................................. 10,148 2000 - 2006
Investment tax credit..................................... 134 2004
Minimum tax credit........................................ 2,835 INDEFINITE
</TABLE>
A reconciliation between the provision (benefit) for income taxes, computed
by applying the statutory federal income tax rate of 35% for 1999, 1998 and 1997
to income before income taxes, and the actual provision (benefit) for income
taxes follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Federal income tax provision at statutory tax rate.......... (35.0)% (35.0)% 35.0%
State income taxes, net of federal income tax provision..... (5.2) (3.8) 5.0
Foreign income taxes........................................ 0.7 (0.4) 0.4
Change in valuation allowance............................... 58.2 30.0
Other....................................................... (0.6) 2.4 1.0
----- ----- -----
Actual income tax provision (benefit) effective tax rate.... 18.1% (6.8)% 41.4%
===== ===== =====
</TABLE>
As a result of the Company's merger with Quaker on August 7, 1997 (see Note
4), an "ownership change" occurred pursuant to Section 382 of the Internal
Revenue Code. Accordingly, for Federal income tax purposes, net operating loss
and tax credit carryforwards of approximately $27.6 million arising prior to the
ownership change are limited during any future period to the Section 382
"limitation amount" of approximately $9.0 million per annum. The federal, state
and foreign net operating loss carryforwards expire in varying amounts between
1999 and 2019.
The Company recorded an increase in the valuation allowance of $80,301,000
during the year ended June 30, 1999, from $53,804,000 as of June 30, 1998 to
$134,105,000 as of June 30, 1999. The valuation allowance reduces the gross
deferred tax assets to the level where management believes that it is more
likely than not that the tax benefit will be realized. The ultimate realization
of deferred tax benefits is dependant upon the generation of future taxable
income during the periods in which the temporary differences become deductible.
F-47
<PAGE> 95
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. OTHER LIABILITIES
Other (noncurrent) liabilities consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------
1999 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Accrued severance........................................... $3,847 $2,973
Other noncurrent liabilities................................ 2,305 2,823
------ ------
$6,152 $5,796
====== ======
</TABLE>
Accrued severance reflects the actuarial determined liability for the
separation of employees who are entitled to severance benefits under
pre-existing separation pay plans.
Other noncurrent liabilities include deferred operating lease liabilities
related to scheduled rent increases, recorded in accordance with the provisions
of SFAS No. 13, Accounting for Leases. Also included in other noncurrent
liabilities are provisions relating to unutilized lease losses.
13. LEASE COMMITMENTS
The Company conducts its operations primarily from leased warehouses and
office facilities and uses certain computer, data processing and other equipment
under operating lease agreements expiring on various dates through 2009. The
future minimum lease payments for operating leases having initial or remaining
noncancelable terms in excess of one year for the five years succeeding June 30,
1999 and thereafter are as follows (in thousands):
<TABLE>
<S> <C>
2000............................................... $20,092
2001............................................... 17,194
2002............................................... 12,188
2003............................................... 9,749
2004............................................... 7,661
Thereafter......................................... 7,623
-------
$74,507
=======
</TABLE>
Rental expense amounted to approximately $23,405,000, $19,379,000, and
$17,367,000, for the fiscal years ended 1999, 1998 and 1997, respectively.
14. RETIREMENT PLANS
The Company maintains a 401(k) plan for its employees. Under this plan,
eligible employees may contribute amounts through payroll deductions
supplemented by employer contributions for investment in various investments
specified in the plan. The Company's contribution to this plan for fiscal 1999,
1998, and 1997 were $1,070,000, $1,013,000 and $0, respectively. A similar plan
exists for former employees of an acquired company for which eligibility and
additional contributions were frozen in September 1988.
In addition, the Company assumed the liability of the defined benefit
pension plan applicable to employees of a company acquired in 1986. The
eligibility and benefits were frozen as of the date of the acquisition.
F-48
<PAGE> 96
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Periodic (income) cost, and related financial information with respect to
the defined benefit pension plan is as follows:
<TABLE>
<CAPTION>
1999 1998
------ -------
(IN THOUSANDS)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year..................... $9,156 $ 7,290
Service cost................................................ -- --
Interest cost............................................... 610 611
Plan amendments............................................. -- --
Actuarial (gain) loss....................................... 70 1,613
Benefits paid............................................... (929) (358)
------ -------
Benefit obligation at end of year........................... $8,907 $ 9,156
====== =======
CHANGE IN PLAN ASSETS:
Fair Value of plan assets at beginning of year.............. $7,858 $ 6,128
Actual return on plan assets................................ 747 1,506
Employer contributions...................................... 284 582
Benefits paid............................................... (928) (358)
------ -------
Fair Value of plan assets at end of year.................... $7,961 $ 7,858
====== =======
RECONCILIATION OF FUNDED STATUS:
Funded status............................................... $ (947) $(1,298)
Unrecognized transition asset............................... 405 438
Unrecognized prior service cost............................. -- --
Unrecognized (gain) loss.................................... 2,255 2,390
------ -------
Net amount recognized....................................... $1,713 $ 1,530
====== =======
AMOUNTS RECOGNIZED ON THE CONSOLIDATED BALANCE SHEETS
CONSIST OF:
Intangible asset............................................ $ 405 $ 438
Accrued benefit liability................................... (947) (1,298)
Accumulated other comprehensive income...................... 2,255 2,390
------ -------
Accrued benefit cost........................................ $1,713 $ 1,530
====== =======
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
PERIOD (INCOME) COST:
Service Cost............................................... -- -- --
Interest Cost.............................................. $ 610 $ 611 $ 521
Expected return on plan assets............................. (631) (525) (409)
Amortization of transition asset........................... 33 33 33
Amortization of prior service costs........................
Amortization of (gain) loss................................ 88 115 (23)
----- ----- -----
Total Net periodic benefit (income) cost................... $ 100 $ 234 $ 122
===== ===== =====
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.25% for 1999, 7.0% for 1998, and 7.5% for
1997. The expected long-term rate of return on assets was 8.5%
F-49
<PAGE> 97
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for 1999, 1998 and 1997. The mortality table used for 1999 and 1998 was the 1983
Group Annuity Mortality Table for Males and Females and the mortality table used
for 1997 was the UP-1984 Unisex Mortality Table.
15. EMPLOYEE SEVERANCE AND UNUTILIZED LEASE COSTS
During the second quarter of fiscal 1997, in connection with the Memorex
Telex acquisition (see Note 5), the Company recorded a $3.4 million pre-tax
charge for estimated future employee severance costs, and a $0.9 million pre-tax
charge for unutilized lease/contract losses ("exit costs"), primarily associated
with duplicate facilities to be closed. The $3.4 million charge, recorded in
accordance with SFAS No. 112, Employers' Accounting for Postemployment Benefits,
reflects the actuarially determined benefit costs for the separation of
employees who are entitled to benefits under pre-existing separation pay plans.
These costs are included in selling, general and administrative expenses in the
accompanying consolidated statement of operations for the year ended June 30,
1997.
During the year ended June 30, 1999, the Company recorded charges of $4.5
million, included in selling, general and administrative expenses, for estimated
future severance costs in accordance with 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 Operating Plan (see Note 2).
See Note 12 for further information regarding accrued severance and
unutilized lease losses.
16. COMMITMENTS AND CONTINGENT LIABILITIES
The Company, or certain businesses as to which it is alleged that the
Company is a successor, have been identified as potentially responsible parties
in respect to four waste disposal sites that have been identified by the United
States Environmental Protection Agency as Superfund sites. In addition, the
Company received a notice several years ago that it may be a potentially
responsible party with respect to a fifth, related site, but has not received
any other communication with respect to that site. Under applicable law, all
parties responsible for disposal of hazardous substances at those sites are
jointly and severally liable for clean-up costs. The Company initially estimated
that its share of the costs of the clean-up of one of these sites was
approximately $500,000, of which $372,000 and $460,000 remained unpaid and
accrued in the accompanying consolidated balance sheets as of June 30, 1999 and
1998. Complete information as to the scope of required clean-up at these sites
is not yet available and, therefore, management's evaluation may be affected as
further information becomes available. However, in light of information
currently available to management, including information regarding assessments
of the sites to date and the nature of involvement of the Company's predecessor
at the sites, it is management's opinion that the Company's potential additional
liability, if any, for the cost of clean-up of these sites will not be material
to the consolidated financial position, results of operations or liquidity of
the Company.
The Company is also party to various legal proceedings incidental to its
business. Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company. In the opinion of
management, these actions can be successfully defended or resolved without a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
During the fourth quarter of fiscal 1997, the Company received $2.0 million
in full settlement of a claim against its former insurance carrier, related to
unreimbursed losses. This settlement was reflected as a reduction of selling,
general and administrative costs in the accompanying statement of operations.
17. RELATED PARTY TRANSACTIONS
In connection with the Quaker Merger (See Note 4), DecisionOne Corporation
made a loan to DecisionOne Holdings Corp. for $59,100,000 and a $10,800,000
subordinated promissory note, each due 2010,
F-50
<PAGE> 98
DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which were used to finance the merger. The subordinated promissory notes accrue
interest at an annual interest rate of 8 1/4%. Interest and principal are both
due upon maturity in August 2010. Interest income recorded by DecisionOne
Corporation was approximately $4,323,000 and $5,236,000 in fiscal 1999 and 1998,
respectively.
As more-fully described in Note 2, the Company's proposed plan for
Indebtedness Restructuring will result in a reorganization of the Company and
Holdings, and raises substantial doubt as to the ultimate collectibility of the
aforementioned subordinated promissory notes between Holdings and the Company.
Accordingly, these amounts have been fully reserved in the Company's financial
statements as of June 30, 1999, resulting in a charge of $72.5 million for the
year ended June 30, 1999. These transactions and related fiscal 1999 charge have
no impact on the consolidated financial statements of Decision One Holdings
Corp. and Subsidiaries, as these are eliminated in consolidation.
During the years ended June 30, 1999 and 1998, respectively, the Company
incurred costs of approximately $528,000 and $500,000 for financial advisory
services to the DLJ Group. Of these amounts, approximately $528,000 and $0
remained unpaid at June 30, 1999 and 1998, respectively.
As more fully described in Note 10, on January 27, 1999, DLJMB purchased
$7,300,000 of unsecured 14% senior notes due 2006 by DecisionOne Corporation.
Interest expense of approximately $430,000 remained unpaid at June 30, 1999,
with respect to these obligations.
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly financial information
for the fiscal years ended 1999 and 1998:
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30(1),
--------- -------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1999
Revenues............................... $196,044 $185,017 $176,005 $ 168,877
Gross profit........................... 47,565 34,235 32,534 36,546
Net loss............................... (6,997) (21,622) (20,352) (113,947)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------
SEPT. 30(1), DEC. 31, MARCH 31, JUNE 30(2),
------------ -------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1998
Revenues.............................. $202,264 $200,075 $200,910 $202,468
Gross profit.......................... 44,819 46,769 47,747 52,576
Net loss.............................. (57,117) (6,625) (8,033) (99,866)
Proforma net loss..................... (824) (6,625) (8,033) (95,875)
</TABLE>
- ---------------
(1) Net loss for the fourth quarter of 1999 includes a charge of $25.0 million
to reduce deferred tax assets to the level where management believes it is
more likely than not that such tax benefits will be realized (see Note 11).
Additionally, the Company has recorded a charge of $72.5 million to reflect
a provision for amounts deemed by management to be uncollectable at June 30,
1999 (see Note 17).
(2) Net loss for the first quarter of 1998 includes $69.0 million of pre-tax
merger expenses (See Note 4).
(3) Net loss for the fourth quarter of 1998 includes $87.5 million of pre-tax
loss on asset sales and disposals and a $12.3 million pre-tax special charge
to the provision for uncollectible receivables (See Note 5).
F-51
<PAGE> 99
SCHEDULE I
DECISIONONE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(PARENT COMPANY ONLY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets.............................................. $ 1,188 $ 1,519
Other assets.............................................. 2,988 3,896
--------- ---------
Total assets...................................... $ 4,176 $ 5,415
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Investment in deficiency of subsidiaries.................. $ 294,790 $ 204,468
Senior discount debentures................................ 103,496 92,246
Intercompany loan and payables............................ 73,987 69,867
Other liabilities......................................... 500 440
Preferred stock, no par value; authorized 15,000,000; none
outstanding............................................ -- --
Common stock, $.01 par value; authorized 30,000,000;
12,564,485 issued and outstanding shares in 1999 and
12,584,219 shares in 1998.............................. 126 126
Additional paid-in capital................................ 242,181 242,181
Accumulated deficiency.................................... (708,236) (601,195)
Accumulated other comprehensive income (loss)............. (2,668) (2,718)
--------- ---------
Total shareholders' equity (deficiency)........... (468,597) (361,606)
--------- ---------
Total liabilities and shareholders' equity
(deficiency).................................... $ 4,176 $ 5,415
========= =========
</TABLE>
See notes to condensed financial information.
S-1
<PAGE> 100
SCHEDULE I
DECISIONONE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
(PARENT COMPANY ONLY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------
1999 1998 1997
--------- --------- -------
<S> <C> <C> <C>
Equity in net income (loss) of subsidiaries............... $ (90,372) $(171,641) $31,084
Interest expense, net of interest income of $42 in 1999
and $1,210 in 1998........................................ 16,332 12,479 --
--------- --------- -------
Income (loss) before provision (benefit) for income
taxes................................................... (106,704) (184,120) 31,084
Provision (benefit) for income taxes...................... 337 (990) --
--------- --------- -------
Net income (loss)......................................... $(107,041) $(183,130) $31,084
========= ========= =======
</TABLE>
See notes to condensed financial information.
S-2
<PAGE> 101
SCHEDULE I
DECISIONONE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Operating Activities:
Net income (loss)........................................ $(107,041) $(171,641) $ 31,084
Adjustments to reconcile net income (loss) to net cash
provided by operating activities.................... 107,019 172,851 (31,084)
--------- --------- --------
Net cash provided by (used in) operating
activities..................................... (22) 1,210 --
--------- --------- --------
Investing Activities -- contribution to capital of
subsidiaries........................................... -- -- (439)
--------- --------- --------
Financing Activities:
Proceeds from issuance of common stock................. -- 226,583 --
Proceeds from issuance of senior discount debentures... -- 79,723 --
Proceeds from related party loan....................... -- 69,617 --
Issuance of common stock and warrants.................. -- 1,880 439
Cash paid to redeem common stock....................... -- (621,803) --
Dividends received from subsidiary..................... -- 244,000 --
Issuance of preferred stock............................ -- -- --
Preferred stock dividends.............................. -- -- --
--------- --------- --------
Net cash provided by financing activities......... -- -- 439
--------- --------- --------
Net change in cash..................................... (22) 1,210 --
Cash, beginning of year................................ 1,210 -- --
--------- --------- --------
Cash, end of year...................................... $ 1,188 $ 1,210 $ --
========= ========= ========
</TABLE>
S-3
<PAGE> 102
SCHEDULE 1
DECISIONONE HOLDINGS CORP.
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements include the accounts of
DecisionOne Holdings Corp. (the "Parent") and on an equity basis its
subsidiaries and should be read in conjunction with the consolidated financial
statements of DecisionOne Holdings Corp. and Subsidiaries (the "Company") and
the notes thereto.
2. INDEBTEDNESS RESTRUCTURING
The Company has continued to experience declining trends in revenues, and
earnings throughout fiscal 1999. The declining trends principally result from
lower sales of new service contracts, erosion of contract base and minimal
growth from acquisitions.
As previously announced, on January 28, 1999, the Company initiated a
corporate operating plan ("Operating 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 "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 14% Senior Unsecured Notes due 2006 (the "14% Notes")
in DecisionOne Corporation by an affiliate of DLJ Merchant Banking Partners II,
L.P. ("DLJMB"). DLJMB, and the Company's agreement with its lenders to waive
certain financial covenants in the Company's credit agreement through July 29,
1999 (the "Waiver").
On July 14, 1999, the Company's common stock was delisted from the NASDAQ
national market System. Since that date, the Company's common stock has been
quoted on the OTC Bulletin Board.
On August 2, 1999, the Company announced an agreement in principle with the
bank lending group and the holders of the 14% Notes on the restructuring of its
indebtedness (the "Indebtedness Restructuring"). Under the terms of the final
agreement, the bank lending group would exchange approximately $523 million in
existing indebtedness for approximately 94.6 percent of the reorganized
Company's equity and $250 million in new senior secured bank debt (the "New
Credit Agreement"). The agreement further provides that the holders of the 14%
Notes would exchange their notes for (a) warrants equal to approximately 4.2
percent of the reorganized Company's fully diluted equity, at an exercise price
based on an enterprise value of $350 million and (b) warrants equal to
approximately 2.0 percent of the reorganized Company's equity, at an exercise
price based on an equity valuation of $280 million. The holders of the 9 3/4%
Senior Subordinated Notes due 2007 (the "9 3/4% Notes") would exchange their
notes for (a) approximately 5.0 percent of the reorganized Company's equity; (b)
warrants equal to approximately 2.8 percent of the reorganized Company's fully
diluted equity, at an exercise price based on an enterprise value of $350
million; (c) warrants equal to approximately 5.0 percent of the reorganized
Company's equity, at an exercise price based on an equity valuation of $200
million; and (d) warrants equal to approximately 3.0 percent of the reorganized
Company's equity, at an exercise price based on an equity valuation of $280
million. In addition, the holders of the 11 1/2% Senior Discount Debentures due
2008 (the "11 1/2% Notes") and the holder of unsecured claims of Holdings would
receive a total of approximately 0.4 percent of the reorganized Company's
equity.
S-4
<PAGE> 103
The Company did not make the $7.3 million interest payment on its 9 3/4%
Notes, which was due on August 2, 1999 nor the interest payment due to the
holders of the 14% Notes. The Waiver, pursuant to which the bank lending group
agreed to waive certain financial covenants under its Existing Credit Facility
expired on July 29, 1999. The holders of the 9 3/4% Notes, the holders of the
11 1/2% Notes, the holders of the 14% Notes and the bank lending group have the
right to declare the respective outstanding loan amounts immediately due and
payable and seek to exercise remedies, including, in the case of the Existing
Credit Facility, foreclosure on the collateral securing such amounts. As such,
the Company has reflected all such loan amounts as current liabilities as of
June 30, 1999. See note 10 to the Company's consolidated financial statements
for further information.
The Company's proposed Indebtedness Restructuring will be subject to the
approval of a United States Bankruptcy Court (the "Bankruptcy Court") pursuant
to Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code").
The Indebtedness Restructuring will be accomplished through a plan of
reorganization (the "Plan") in a prepackaged case under Chapter 11 of the
Bankruptcy Code. The Plan along with a related disclosure statement will be
delivered to the bank lending group and the holders of the 14% Notes in
connection with the Company's prepetition solicitation of acceptances of the
proposed Plan. If, by the end of the solicitation period, the requisite
acceptances have been received from the bank lending group and the holders of
the 14% Notes, the Company intends to file a petition under Chapter 11 and to
use the acceptances received pursuant to the solicitation to seek confirmation
of the Plan. With respect to all the other creditors and equity holders of the
Company that are impaired under the Plan, the Company intends to seek
confirmation of the Plan under the "cram down" provisions of the Bankruptcy
Code. The Plan will only be confirmed if the Bankruptcy Court determines that
all the requirements of the Bankruptcy Code have been met, including, without
limitation, that the Plan is (i) accepted by all impaired classes of claims and
equity interests or, if rejected by an impaired class, that the Plan does not
"discriminate unfairly" and is "fair and equitable" as to such class, (ii)
feasible and (iii) in the "best interests" of creditors and equity holders
impaired under the Plan.
The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and do not reflect any adjustments that might
result if the Company is unable to continue as a going concern. The Company's
recent losses from operations, significant shareholders' deficiency, default
under the terms of its credit agreement, and the related Indebtedness
Restructuring and planned Bankruptcy Court filings raise substantial doubt about
the Company's ability to operate as a going concern. The appropriateness of
using the going concern basis is dependent upon, among other things, (i) the
Company's ability to reverse its declining revenue trends; (ii) the Company's
ability to generate sufficient cash from operations and/or obtain additional
financing to meets its obligations prior to confirmation of a plan of
reorganization; (iii) confirmation of the Company's plan of reorganization under
the Bankruptcy Code, and (iv) the Company's ability to achieve profitable
operations and generate sufficient cash from operations and/or obtain additional
financing after such confirmation.
3. SENIOR DISCOUNT DEBENTURES
The Parent received net proceeds of $85,003,520 from the sale of
$148,400,000 principal amount at maturity of its 11 1/2% senior discount
debentures due 2008. The debentures accrete at a rate of 11 1/2% per annum,
compounded semi-annually, to an aggregate principal amount at maturity of
$148,400,000 by August 1, 2002. Commencing on February 1, 2003, cash interest on
the debentures will be payable, semi-annually in arrears on each February 1 and
August 1. The Parent incurred debt issuance costs of $3,400,141 in connection
with the senior discount debentures. These costs have been deferred and are
being amortized to interest expense over the life of the debentures. See Note 4
to the Company's consolidated financial statements for further information.
S-5
<PAGE> 104
4. RELATED PARTY TRANSACTIONS
In connection with the Quaker Merger (See Note 4 to the Company's
consolidated financial statements), DecisionOne Corporation made a loan to
DecisionOne Holdings Corp. for $59,100,000 and a $10,800,000 subordinated
promissory note, each due 2010, which were used to finance the merger. The
subordinated promissory notes accrue interest at an annual interest rate of
8 1/4%. Interest and principal are both due upon maturity in August 2010.
Interest expense recorded by DecisionOne Holdings Corp. was approximately
$5,764,000 and $5,236,000 in fiscal 1999 and 1998, respectively.
5. INCOME TAXES
The Parent and its wholly owned subsidiaries file a consolidated tax
return. The Parent participates in a tax sharing agreement with the consolidated
group whereby consolidated income tax expense or benefit is allocated to the
Parent as if the Parent was filing separate tax returns.
S-6
<PAGE> 1
Exhibit 10.6
MODIFIED TRIPLE NET LEASE
Lease Preparation Date: July 16, 1999
-------------------------------------------------------
Lessor: PS Business Parks, LP
-----------------------------------------------------------------
Lessee: DecisionOne Corporation, A Delaware Corporation
-----------------------------------------------------------------
Guarantor:
-----------------------------------------------------------------
1. LEASE TERMS
1.01 Premises: The leased Premises located within the Project as
indicated on Exhibit "A1" contains Approximately 91,112 rentable square feet.
The address of the leased Premises is: 2323/2335 and 2345 Industrial Parkway
West, Hayward, CA 94545
------------------------------------------------------------------------------
1.02 Building: The Premises is located in the Building indicated on
Exhibit "A-2" and contains 91,112 rentable square feet and is part of the
Project.
1.03 Project: The Project, as indicated on Exhibit A-3, which consists
of all buildings on the Property, of which the Premises is a part is commonly
referred to as: PS Business Park 2323 - 2365 Industrial Parkway West,
Hayward,CA 94545 and contains approximately 226,792 Rentable square feet
- ------------------------------------------------------------------------------
1.04 Property: The Premises, the Project, and all Lessor's land
thereunder or appurtenant thereto as described in Exhibit "A" represent the
Property.
1.05 Lessee's Notice Address: Lessee's Notice Address is the address of
the leased Premises as stated in Paragraph 1.01 above unless otherwise specified
here: 50 East Swedesford Road, Frazer, PA 19355
- -------------------------------------------------------------------------------
1.06 Lessor's Notice Address: Lessor's Notice Address is:
2551 San Ramon Valley Blvd., Suite 204 San Ramon, CA 94583
- -------------------------------------------------------------------------------
1.07 Lessee's Permitted Use: Lessee and Lessor agree that Lessee may
only use the Premises for the following purpose(s): Assembly, repairs,
distribution of electronic components, light industrial and office use.
- -------------------------------------------------------------------------------
1.08 Lease Term: The Lease Term commences on October 1, 1999 and
ends and ends on September 30, 2002 (36 months, and 0 days).
1.09 Base Rent: During the original term of this Lease, Base Rent shall
be paid monthly, in lawful money of the United States of America in the amounts
specified below, during the applicable periods noted:
<TABLE>
<CAPTION>
Base Rent Applicable Period
<S> <C> <C> <C>
$ $61,348.63 Beginning October 1, 1999 Ending September 30, 2002
-------------- -------------------- --------------------
$ Beginning Ending
-------------- -------------------- --------------------
$ Beginning Ending
-------------- -------------------- --------------------
$ Beginning Ending
-------------- -------------------- --------------------
</TABLE>
1.10 Security Deposit: $ 137,274.00 payable in lawful money of the
United States of America.
1.11 Lease Documentation Fee: $ Waived
-----------------------------------------
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June 1999: Version One
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<PAGE> 2
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1.12 Initial Monthly Rent Charges: Base Rent (1.09) $ 61,348.63 .
CAM (1.13) $ 3,100.52 .
Taxes (1.13) $ 279.58 .
Insurance (1.13) $ 3,670.65 .
Total initial monthly payment $ 68,399.38 .
</TABLE>
1.13 Proportionate Share: Lessee's Proportionate share of the Project,
which represents the approximate Proportionate Share of the Premises to the
Project is .4017 (CAM&Ins) *Tax Addendum -42 Lessee's Proportionate Share of
the Building within which it is located, which represents the approximate
proportionate share of the Premises to the Building is 2323/2335 equals 100% of
building; 2345 Industrial Pkwy. West = .2643 of building Proportionate Share
may be adjusted during the Lease Term if the size of the Project, Premises or
Building changes.
1.14 Operating Expense Estimate: Lessee's Operating Expense Estimate is
$7,050.75 ($.08 per square foot)
1.15 Broker(s): Colliers International, Grubb & Ellis (Landlord);
Equis Corporation (Tenant)
- -------------------------------------------------------------------------------
1.16 Additional Attachments:
------------------------------------------
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June 1999: Version One
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<PAGE> 3
2. LETTING; CONDITION; POSSESSION
2.01 Lessor leases to Lessee, and Lessee leases from Lessor, the
Premises, as indicated in Paragraph 1.01 in consideration of Lessee's payment of
Base Rent and other payments hereunder subject to all of the terms, covenants
and conditions of this Lease and all recorded matters, laws, ordinances and
governmental regulations and orders. Lessee's possession and occupancy of the
Premises constitutes Lessee's acknowledgment that it has satisfied itself with
respect to the overall condition of the Premises, the present and future
suitability of the Premises for Lessee's intended use and the substantial
completion of Lessor constructed Lessee Improvements, if any, consistent with
Paragraph 10 below and specifically set forth in Exhibit "B".
2.02 Lessee shall only use the Premises for its permitted use. Lessee
shall not occupy or use the Premises or any part thereof for other than its
permitted use and not for any use or purpose which is unlawful or deemed by
Lessor to be disreputable in any manner or dangerous to life, limb or property.
2.03 Unless otherwise provided herein, any statement of square footage
set forth in this Lease is an approximation which Lessor and Lessee agree is
reasonable for all purposes and shall be the basis for this Lease. Lessor
reserves the right to change Lessee's proportionate share to reflect any
increase or decrease in the common area. Any use of the terms "rentable" and
"usable" is for convenience only, and such descriptions represent Lessor's
interpretation of such terms. If there are no Tenant Improvements or Exhibit B
is not attached hereto, then Lessee accepts the Premises in "AS-IS" condition
and Lessor shall have no obligation to provide or pay for any repair or other
work therein, except as stated in this Lease; and Lessee shall obtain and
deliver to Lessor a certificate of occupancy for the Premises from the
appropriate governmental authority.
2.04 Lessor will deliver, where applicable, all systems in the Premises
to Lessee with existing plumbing, electrical, fire sprinkler, lighting, air
conditioning, heating and mechanical, if any, in good working condition. Lessee
has thirty (30) days after the Lease Term commences, or Lessee's occupancy,
whichever is sooner, to notify Lessor, in writing, of any non-operative items,
and Lessor will promptly rectify same at Lessor's sole cost. However, if Lessee
does not give Lessor written notice of any non-operative items within this
notification period, all repairs to the Premises which are Lessee's
responsibility per Paragraph 11.01 of this Lease will become the obligation of
Lessee at Lessee's sole cost and expense.
2.05 On the date Lessee takes possession of the Premises, to Lessor's
best knowledge, all Lessor-constructed Lessee Improvements on or in the Premises
as set forth in Exhibit "B", if any, will comply with all then applicable
governmental agency laws, codes, regulations, ordinances, covenants and
restrictions. However, Lessor makes no warranty nor accepts any responsibility
for specifically meeting such compliance presently or in the future with respect
to any Lessee activity, including but not limited to: a.) any Lessee
Improvements or Lessee Alterations, as defined in Paragraph 10.02 below, made or
to be made by Lessee or at Lessee's direction; b.) Lessee's Permitted Use; c.)
Lessee's occupancy of the Premises and/or the Property; and d.) the presence of
Lessee's employees, agents, contractors, suppliers, invitees or licensees on or
about the Property.
2.06 If for any reason Lessor cannot deliver possession of the Premises
on the Commencement Date of the Lease Term, Lessor will not be subject to any
liability nor will the validity of this Lease be affected in any manner.
However, if Lessee has not caused such delay, there will be a proportionate
adjustment of rent to cover the period between the Commencement Date of the
Lease Term and the actual date when possession is delivered, and based on the
actual date possession is delivered, both the commencement and ending dates of
the Lease Term, and the Beginning and Ending dates of each Applicable Period,
shall be adjusted accordingly, while the lengths of the Lease Term and each
Applicable Period shall remain constant. If for any reason possession of the
Premises is not delivered within ninety (90) days of the date the Lease Term
commences, Lessor or Lessee, (provided Lessee is not the cause of such delay),
may cancel this Lease with written notification. If for any reason Lessee fails
to take possession of the Premises within fifteen (15) days after Lessor
notifies Lessee in writing that the Premises is ready for Lessee's occupancy,
Lessee will be in Breach, as defined in Paragraph 20.02 below, of this Lease.
2.07 Subject to Paragraph 10.05 and Lessor's right to retain
improvements, upon termination of this Lease, Lessee agrees to return the
Premises to Lessor in the same condition as received by Lessee as of the
original date Lessor delivers the Premises to Lessee, normal wear and tear
excepted.
2.08 If Lessee, with Lessor's prior written consent, occupies the
Premises prior to the Commencement Date, Lessee's occupancy of the Premises
shall be subject to all the provisions of the Lease. Early occupancy of the
Premises shall not advance the expiration date of the Lease. Lessee shall not
pay Base Rent during the early occupancy period but all other charges shall
begin to accrue on the date of such early occupancy. Lessee shall, however,
provide Lessor with evidence of Insurance coverage pursuant to Paragraph 12,
prior to such early occupancy.
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June 1999: Version One
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<PAGE> 4
3. BASE RENT
3.01 On or before the first day of each calendar month of the Lease
Term, Lessee will pay to Lessor in lawful monies of the United States of
America, without deduction or offset, prior notice or demand, Base Rent at the
place Lessor designates. However, the first month's Base Rent and the Security
Deposit will be due and payable concurrently with Lessee's execution of this
Lease.
3.02 If indicated in Exhibit "B", Base Rent includes an amortized
estimation of Lessor's cost of making Lessee Improvements on Lessee's behalf
which, subject to the terms and conditions of this Lease, shall be paid in equal
installments as part of Base Rent by Lessee over the Lease Term. Subject to the
provisions of Exhibit "B", should Lessor and Lessee agree to any additional
Lessee Improvements not included in this estimate or if actual Lessee
Improvement costs and expenses exceed this estimate, Lessor may increase Base
Rent according to the terms and conditions outlined in Exhibit "B".
4. ADDITIONAL RENT
4.01 Unless otherwise specifically stated, any charge payable by Lessee
under this Lease other than Base Rent is called "Additional Rent". Additional
Rent is to be paid concurrently with and subject to the same terms and
conditions of Base Rent. The term "rent" whenever used in this Lease means Base
Rent, Additional Rent and/or any other monies payable by Lessee under the terms
of this Lease. In the event any rent payable under this Lease commences or ends
on a day other than the first day of a calendar month, the actual number of days
in the prorated month will be used as the basis for the calculation.
4.02 "Operating Expenses" as used herein shall include all costs and
expenses, operation, maintenance, and repair of the Premises, Building, Project
and Property, or any part thereof, incurred by Lessor including but not limited
to: (1) Property supplies, materials, labor, equipment, and tools; (2)
Lessor-incurred utility and service costs and expenses (as further described in
Paragraph 4.03B below), security, janitorial, and all applicable service and
maintenance agreements; (3) Property related legal, accounting, and consulting
fees, costs and expenses; (4) insurance premiums for all policies deemed
necessary by Lessor and/or its lenders, and all deductible amounts under such
policies (as further described in Paragraph 4.03C below); (5) costs and expenses
of operating, maintaining, and repairing common areas of the Property, including
but not limited to, hallways, restrooms, conference rooms, exercise rooms,
equipment and telephone rooms, driving, parking and other paved or unpaved areas
(including but not limited to, resurfacing and striping), landscaped areas
(including but not limited to, tree trimming), walkways, building exteriors
(including but not limited to, painting and roof repairs), signs and
directories, and elevators and stairways; (6) capital improvements and
replacements which have been made to improve the operating efficiency of the
Property; (7) capital improvements and replacements (including but not limited
to, all financing costs and interest charges) required by any governmental
authority or law including but not limited to, compliance required under the
Americans with Disabilities Act of 1990; (8) compensation (including but not
limited to, any payroll taxes, worker's compensation for employees, and
customary employee benefits) of all persons, including independent contractors,
who perform duties, or render services on behalf of, or in connection with the
Property, or any part thereof, including but not limited to, Property
operations, maintenance, repair, and rehabilitation; (9) Property management
fees; (10) Real Property Taxes (as further described in Paragraph 4.03, below),
provided, however, wherever the Lessee and/or any other lessee of space within
the Property has agreed in its lease or otherwise to provide any item of such
services partially or entirely at its own expense, or wherever in the Lessor's
judgment any such significant item of expense is not incurred with respect to or
for the benefit of all of the space within the Property, in allocating the
Operating Expenses pursuant to the foregoing provisions of this subsection the
Lessor shall make an appropriate adjustment, as aforesaid, so as to avoid
allocating to the Lessee or to such other lessee (as the case may be) those
Operating Expenses covering such services already being provided by the Lessee
or by such other lessee at its own expense, or to avoid allocating to all of the
net rentable space within the Property those Operating Costs incurred only with
respect to a portion thereof, as aforesaid. Expense recovery to cover costs
associated solely with Lessor's corporate or business existence. Operating
expenses to exclude commissions and leasing fees.
4.03A "Real Property Taxes" as used herein shall include any fee,
license, tax, late fee, levy, charge, assessment, penalty (if a result of
Lessee's delinquency or negligence), or surcharge (hereinafter individually
and/or collectively referred to as "Tax") imposed by any authority (including
but not limited to, any federal, state, county, or local government, or any
school, agricultural, lighting, drainage, or other improvement district, or
public or private association) having the direct or indirect power to tax and
where such Tax is imposed against the Property, or any part thereof, or Lessor
in connection with its ownership or operation of the Property, including but not
limited to: (1) any Tax on Lessor's right to receive, or the receipt of, rent or
income from the Property, or any part thereof, or Tax against Lessor's business
of leasing the Property; (2) any Tax by any authority for services or
maintenance provided to the Property, or any part thereof, including but not
limited to, fire protection, streets, sidewalks, and utilities; (3) any Tax on
real estate or personal property levied with respect to the Property, or any
part thereof, and any fixtures
California modified Triple Net
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<PAGE> 5
and equipment and other property of Lessor or the Property used in connection
with the operation, maintenance or repair of the Property; (4) any Tax imposed
on this transaction, or based upon a reassessment of the Property, or any part
thereof, due to a change in ownership or transfer of all or part of Lessor's
interest in the Property, or any part thereof and, (5) any Tax replacing,
substituting for, or in addition to any Tax previously included with this
definition. Real Property Taxes do not include: (1) Lessor's federal or state
income, franchise, inheritance, or estate taxes; or (2) Lessee's personal
property taxes (taxes charged against Lessee's trade fixtures, furnishings,
equipment, or other personal property) which are the sole responsibility of
Lessee, and shall be billed directly to, and paid in a timely manner by Lessee.
4.03B "Utility and Service Costs" as used herein shall include all
Lessor incurred utility and service costs and expenses including, but not
limited to water, electricity, gas, heating, lighting, steam sewer, waste
disposal, air conditioning, heating and ventilation.
4.03C "Insurance" as used herein shall include all insurance premiums
for all policies deemed necessary by Lessor and/or its lenders, including but
not limited to, worker's compensation, liability, commercial general liability,
automobile, rental interruption insurance and any and all additional
endorsements, extended coverage, riders under or attached to such policies.
4.04 Throughout the Lease Term, Lessee will pay as Additional Rent its
proportionate share (of the Project and/or building, as applicable) of Operating
Expenses which will be equal to each calendar year's total Operating Expenses
multiplied by Lessee's Proportionate Share. In the event Lessee is only
responsible for a portion of a given calendar year, Lessee's share will be based
on the actual number of elapsed applicable days. All Operating Expenses will be
adjusted to reflect an average Project occupancy level of eighty percent (80%)
during any calendar year in which the Project is not at least eighty percent
(80%) occupied. Operating Expense Estimates and actualized Operating expenses
will be determined as outlined in 4.05A, 4.05B below and subject to the
provisions of 4.07.
4.05 Lessee's Operating Expense estimates shall be determined as
follows:
4.05A. Lessee's Operating Expense estimates: On or about April 1st of
each calendar year, Lessor will provide Lessee with a statement of: (1) Lessee's
annual share of estimated Operating Expenses for the then current calendar year;
(2) Lessee's new monthly Operating Expense estimate for the then current year;
and, (3) Lessee's retroactive estimate correction billing (for the period of
January 1st through the date immediately prior to the commencement date of
Lessee's new monthly Operating Expense estimate) for the difference between
Lessee's new and previously billed monthly Operating Expense estimates for the
then current year.
4.05A(1). Annual estimate share: Lessee's annual share of
estimated Operating Expenses for the then current calendar
year shall be determined by multiplying Lessor's estimated
total Operating Expenses for the then current calendar year,
by Lessee's Proportionate Share (of the Project or Building,
as applicable) identified in Paragraph 1.13.
4.05A(2). Monthly Operating Expense estimate: Lessee's new
monthly Operating Expense estimate for the then current
calendar year shall be calculated by dividing Lessee's annual
share of estimated Operating Expenses, as determined in 4.05A,
above, by 12.
4.05A(3). Retroactive estimate correction: Lessee's share of
the change in Operating Expense estimates retroactive to
January 1st of each year shall be determined as follows: For
the then current calendar year, the total of Lessee monthly
Operating Expense estimates billed prior to the commencement
of Lessee's new monthly Operating Expense estimate shall be
subtracted from Lessee's new monthly Operating Expense
estimate multiplied by the number of elapsed months within the
same period.
4.05B. Lessee's share of actualized annual Operating Expenses: On or
about April 1st of each year, Lessor will provide Lessee with a statement
reflecting the total Operating Expenses for the calendar year just ended. If the
total of Lessee's Operating Expense estimates billed for the calendar year just
ended are less than Lessee's share of the actualized Operating Expenses for the
calendar year just ended, the statement will indicate the payment amount and
date due. If Lessee has paid more than its share of Operating Expenses for the
preceding calendar year, Lessor will credit the overpayment towards Lessee's
future Operating Expense obligations.
4.06 Under this Lease, monthly Operating Expense estimates, retroactive
estimate corrections, and Lessee's share of actualized annual Operating Expenses
are considered Additional Rent. Monthly Operating Expense estimates are due on
the 1st of each month and shall commence in the month specified by Lessor.
Lessee's retroactive estimate correction, and actualized annual Operating
Expense charges, if any, shall be due, in full, on the date(s) specified by
Lessor.
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4.07 Lessee will not be entitled to any reduction, refund, offset,
allowance or rebate should any Real Property Taxes be retroactively reduced,
credited, abated or exempted by any direct or indirect taxing authority for any
prior taxation or assessment period except to the extent that a reconciliation
of the previous year's operating expenses shall include such credit or refund
which shall be credited to Lessee in the coarse of reconciling such operating
expenses. If Lessor fails to provide Lessee with an Operating Expense statement
by April 1st of any calendar year, or elects not to bill Lessee its share of
actualized Operating Expenses, and/or Operating Expenses estimate(s), or
estimate increase(s) for any period of time, Lessor's right to bill and collect
these charges from Lessee at a later time is not waived.
4.08 Whether now in force or hereafter in force, Lessee will pay as
Additional Rent its share of any duties, levies or fees resulting from any
statutes or regulations, or interpretations thereof, enacted by any governing
authority which pertains to Lessor's or Lessee's use, ownership, occupancy or
alteration of the Premises, Project, or Property, or any part thereof. Lessee's
share of such duties or fees will be based on Lessee's Proportionate Share as
indicated in Paragraph 1.13, or other equitable method determined by Lessor in
its sole discretion. In the event the Property, or any part thereof, shares
common Operating Expenses, commonly used areas, land or other items not
exclusive to the Property, Lessor shall allocate and bill Lessee its share of
any costs and expenses attributable to such sharing on an equitable basis, as
determined by Lessor in its sole discretion.
4.09 In the event Lessee wishes to audit any Lessee rent charge, such a
review shall be performed only at a time and location designated solely by
Lessor, and only if Lessee is not in Default, as defined in Paragraph 20.02
below at the time of the audit request and/or at any time during the course of
the audit. Lessor and Lessee agree that any Lessee audit must be conducted
within twelve (12) months of the date the rent charge becomes due, and if this
audit is not conducted within this period of time, Lessee's right to audit is
waived, and the rent charge, as originally billed, including all calculations
used as the basis for the Base Year or expense stop shall be deemed conclusive
and final for all purposes under this Lease.
5. LATE CHARGES
Any installment, including any partial installment, of Base Rent,
Additional Rent, rent or any other rent charge payable which is not received by
Lessor within five (5) days after it becomes due, shall be considered past due,
and shall constitute a default per paragraph 20.02 below and Lessee shall,
without the necessity of notification from Lessor, pay Lessor a late charge
equal to fifty dollars ($50.00) or ten percent (10%) of the then delinquent
amount, whichever is greater. Additionally, a fifty dollar ($50.00) handling fee
will be paid to Lessor by Lessee for each bank returned check which return shall
constitute a Default, and Lessee will be required to make all future payments to
Lessor by money order or cashier's check. The acceptance of late charges and
returned check charges by Lessor will in no way constitute a waiver of Lessee's
Default with respect to any overdue amount nor prevent Lessor from exercising
any of its rights or remedies resulting from such late payment.
6. SECURITY DEPOSIT
6.01 Upon Lessee's execution of this Lease, Lessee will deposit with
Lessor an initial Security Deposit in the amount specified in Paragraph 1.10 as
security for Lessee's full and faithful performance of every provision under
this Lease. Lessor will not be required to keep the Security Deposit separate
from its general funds and has no obligation or liability for payment of
interest thereon (except when required by law). Any time the Base Rent increases
during the Lease Term, Lessee will deposit additional monies with Lessor as an
addition to the Security Deposit so that the total amount of the Security
Deposit will at all times at a minimum bear the same proportion to the then
current Base Rent as the initial Security Deposit bears to the initial Base Rent
set forth in Paragraph 1.09. Such additional Security Deposit monies will be due
and payable concurrently with the next payment of Base Rent, after receipt of
written notice from Lessor of the need to increase this Security Deposit as
required by this Paragraph.
6.02 In no event will Lessee have the right to apply any part of the
Security Deposit to any amounts payable under the terms of this Lease nor is it
a measure of Lessor's damages in event of a Default or Breach by Lessee. If
Lessee fails to pay any rent due herein, or otherwise is in Default or in Breach
of any provision of this Lease, Lessor may use, apply or retain all or any
portion of the Security Deposit for the payment of any amount due Lessor, or to
compensate Lessor, for any loss or damage suffered by Lessee's Default or
Breach. Within five (5) days after written notification by Lessor, Lessee will
pay monies to Lessor sufficient to restore the Security Deposit to the full
amount required under this Lease.
6.03 Within sixty (60) days (or as otherwise prescribed by law) after
the expiration or earlier termination of the Lease Term and after Lessee has
vacated the Premises, Lessor will return to Lessee that portion of the Security
Deposit not used or applied by Lessor to fulfill any and all of Lessee's
obligations under this Lease.
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6.04 At any time during the Lease Term, within ten (10) days after
written request from Lessor, Lessee shall deliver to Lessor such financial
statements as Lessor reasonably requires to verify the net worth of Lessee or
any assignee, subtenant, or guarantor of Lessee. In addition, Lessee shall
deliver to any lender designated by Lessor any financial statements required by
such lender to facilitate the financing or refinancing of the Property. Lessee
represents and warrants to Lessor that each financial statement is a true and
accurate statement as of the date of such statement. All financial statements
shall be confidential and shall be used only for the purposes set forth in this
Lease. As long as Lessee is a publicly traded company, Lessor will accept
financial reports available to the public. However, if such reports/statements
are unavailable for any reason, Lessee must provide Lessor the most current
financial statements available.
7. USE OF PREMISES; QUIET ENJOYMENT; TRASH
7.01 The Premises will be used and occupied only for Lessee's Permitted
Use, as described in Paragraph 1.07. Lessee agrees it has negotiated its
Permitted Use in a fair and reasonable manner and, as so written, the Permitted
Use is enforceable for all purposes under this Lease. Further, Lessee expressly
waives the right to challenge the validity of its Permitted Use, including but
not limited to, as defined in Paragraph 20. below, challenges which pertain to
Default or Breach of this Lease, mitigation of damages, and any and all
Transfers under this Lease.
7.02 Lessee will comply with all conditions and covenants of this
Lease, and all applicable governmental agency laws, codes, regulations,
ordinances, covenants and restrictions affecting the Property or any part
thereof. Lessee will not use or permit the use of the Premises, the Property or
any part thereof, in a manner that is unlawful, diminishes the appearance or
aesthetic quality of any part of the Property, creates waste or a nuisance,
disturbs Lessor, other lessees or any neighboring property occupants, or causes
damage to the Property, or any part thereof, or to any neighboring property,
personal property or person. Any animals, excepting guide dogs, on or about the
Property or any part thereof are expressly prohibited.
7.03 Lessor agrees that so long as Lessee performs all of its
obligations under the Lease, Lessee's possession, quiet enjoyment and use of the
Premises for the term of the Lease will not be disturbed by Lessor, subject only
to the provisions of the Lease.
7.04 Lessee shall be responsible for providing all trash receptacles
and pickup for its premises. In the event of any excessive trash in our outside
Lessee's premises, as determined by Lessor in its sole discretion, Lessor will
have the right to remove such excess trash, charge all costs and expenses
attributable to its removal to Lessee, and require Lessee to obtain, at its sole
cost and expense, additional trash receptacles, to be placed in a location
designated by Lessor for Lessee's specific use. Under no circumstances may any
"Hazardous Materials", as defined in Paragraph 14 below, any materials not
permitted by law, any materials improperly or illegally handled, stored,
contained or released, or any materials which are not permitted by Lessor, as
determined in its sole discretion, be disposed of in any trash receptacles
located in or about the Property. Lessee will not cause, maintain or permit any
outside storage on or about the Property without prior written consent by
Lessor, which consent, if given, may be revoked at any time. In the event of any
unauthorized outside storage by Lessee, Lessor will have the right, without
notice, in addition to such other rights and remedies it may have, to remove any
such storage and charge all direct and associated costs and expenses to Lessee.
8. PARKING
All parking will comply with the terms and conditions of this Lease and
the parking criteria set forth in Exhibit "D". Unless otherwise stated, Lessee,
its employees, agents, contractors, suppliers, invitees and licensees will have
a non-exclusive privilege, in conjunction with Lessor, other lessees of the
Property, and such other persons as Lessor may designate, to use those parking
spaces designated by Lessor for public parking. Vehicles parked in public
parking areas will be no larger than full-sized passenger automobiles or pick-up
trucks. Larger vehicles, if permitted in writing by Lessor, will be parked,
loaded and unloaded in locations designated by Lessor. Lessor reserves the
right, without notice to Lessee, to tow away at Lessee's sole cost and expense
any vehicles parked in any parking area for any continuous period of 24 hours or
more, or earlier if Lessor, in its sole discretion, determines such parking to
be a hazard or inconvenience to other lessees or Lessor, upon written notice to
Lessee, or violates any rules or regulations or posted notices related to
parking. Lessor shall not be responsible for enforcing Lessee's parking rights
against third parties. From time to time, Lessor reserves the right, upon
written notice to Lessee, to change the location, the availability and nature of
parking spaces, establish reasonable time limits on parking, and, on an
equitable basis, assign specific spaces without charge to Lessee.
9. UTILITIES
9.01 Lessor agrees to provide at its cost water and electric service
connections (and gas where applicable) to the Premises and telephone service
connections to the Building, but Lessee agrees
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to make all arrangements for and pay directly to the appropriate utility company
all costs and expenses of utility services supplied to, and for the use of,
Lessee in or about the Premises, including but not limited to, water, gas, heat,
light, power, telephone, sewer, sprinkler charges, usage costs and expenses,
service fees, connection charges, deposits and any duties or taxes for such
utilities.
9.02 If for any reason, Lessor incurs any utility costs and expenses
which are attributed to Lessee, as determined by Lessor, Lessee, upon
notification from Lessor, shall immediately reimburse Lessor for all such costs
and expenses.
9.03 In the event it is not possible for Lessee to pay directly for any
utility service, the utility service may, at Lessor's discretion, be obtained in
Lessor's name, and Lessee will pay Lessor, as Additional Rent, Lessor's best
estimate of Lessee's share of such utility costs and expenses. Lessor's best
estimate will be determined by Lessor in its sole discretion and will be subject
to change as Lessor deems necessary. Periodically during the Lease Term, Lessor
will compare Lessee's utility estimates to actual utility costs and expenses
incurred, and bill or credit, whichever is applicable, Lessee for any
difference. Lessor reserves the right to separately meter any such service not
so separately metered at Lessee's sole cost and expense at any time during the
Lease Term, at which time Lessee shall be directly responsible for payment of
such expense directly to the utility service provider, if possible.
9.04 Lessor will not be liable or deemed in Default or Breach, nor will
there be any abatement of rent, for any interruption or reduction of utilities,
utility services or telecommunication services. Additionally, Lessee agrees to
comply with any energy conservation programs implemented by Lessor by reason of
enacted laws or ordinances, or otherwise.
9.05 By execution of this Lease, Lessee acknowledges it has satisfied
itself as to the adequacy of any Lessor owned telephone equipment, if any, and
the quantity of telephone lines and service connections to the Building
available for Lessee's use. Should Lessee require additional equipment, lines or
wiring, beyond the initial installation of the outside line to the building
itself, any and all associated costs and expense will be borne directly by
Lessee and be subject to the provisions of this Lease and Lessor's written
approval. Additionally prior to termination of this Lease, Lessee at its sole
cost and expense, will remove all equipment, including but not limited to, all
lines, wiring and all telephone boards belonging to Lessee and restore the
Premises to the same condition as before such installation.
9.06 Lessee acknowledges and agrees that the number and installation of
telephone lines to its Premises, including any telephone, telecommunication or
other communication equipment (specifically including any antennas, towers
{microwave or otherwise} or other exterior equipment of any nature) which either
utilizes telephone or telecommunications equipment or technology or in any other
manner affects Lessor's ability to provide telephone or communications
facilities to the Project is subject to Lessor's approval, which will not be
unreasonably withheld. Additionally, in the event that Lessee wishes additional
telephone, telecommunication or other communication lines or access after the
date of Lessee's execution of this Lease, no such additional lines or access
shall be permitted nor other telephone, telecommunication or communication
related equipment installed without first securing the prior written consent of
Lessor, which will not be unreasonably withheld. Any telecommunications
installation shall be subject to the following:
(1) Lessor shall incur no expense whatsoever with respect to any aspect of
Lessee's need for additional access or equipment, including without limitation,
the costs of installation, consultants, materials, permits, service, etc..
(2) Prior to the commencement of any work in or about the Building to install
such additional access, lines or equipment, Lessee shall agree to abide by such
rules and regulations, as reasonably determined by Lessor.
(3) Lessor reasonably determines that there is sufficient space in the Building
for the placement of all of the lines, access and equipment.
(4) Lessee agrees to compensate Lessor the reasonable amount determined by
Lessor for space used in the Building for the storage and maintenance of the
equipment, if any lies outside the leased Premises, and for all costs that may
be incurred by Lessor in arranging for access by the Lessee's personnel,
security for Lessee's equipment, and any other such costs as Lessor may expect
to incur.
(5) Any other reasonable requirements Lessor may require
The refusal of Lessor to consent to any request shall not be deemed a Default or
Breach by Lessor of its obligation under this Lease nor be grounds for any
termination or offset by Lessee. Lessee agrees that to the extent service by any
telephone or communication equipment is interrupted, curtailed, or discontinued,
Lessor shall have no obligation or liability with respect thereto and it shall
be the sole obligation of Lessee at its expense to obtain substitute service,
but only with Lessor's prior written permission, which shall not be unreasonably
withheld. Lessor's consent under this section shall not be deemed a warranty or
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representation by Lessor as to the availability or suitability of the present or
future telephone or communications equipment, connections, compatibility or
space available for any additional equipment, lines or access. The provisions of
this clause may be enforced solely by the Lessee and Lessor, and are not for the
benefit of another party, specifically, without limitation, no telephone or
telecommunications provider shall be deemed a third party beneficiary of the
Lease.
10. LESSEE IMPROVEMENTS; LESSEE ALTERATIONS AND MECHANIC'S LIENS
10.01 Any improvements constructed under this Lease on behalf of Lessee
or at Lessee's expense prior to Lessor's initial delivery of the Premises are
referred to throughout this Lease as "Lessee Improvements". All Lessee
Improvements will be performed in accordance with the terms and conditions
outlined in Exhibit "B". Upon substantial completion, as determined by Lessor,
of the Lessee Improvements outlined in Exhibit "B", Lessor will be relieved of
any further obligation to alter, change, decorate or improve the Premises, or
any part thereof.
10.02 Lessor's prior written consent is required for any: (a) Lessee
constructed Lessee Improvements; and (b) any alterations, utility installations,
additions, or other improvements made by Lessee, at its sole cost and expense,
after Lessor's initial delivery of the Premises (hereafter collectively referred
to as Lessee Alterations). Lessor's consent will be conditioned upon its
approval of: (i) detailed plans and work specifications of Lessee Alterations;
and (ii) certificates of insurance from Lessee's contractor(s) for commercial
general liability, automobile liability and property damage insurance with
limits not less than $2,000,000 / $250,000 / $500,000 respectively endorsed to
show Lessor as an additional insured evidencing Lessor's requirement to be
notified at least thirty (30) days in advance of any change, expiration or
cancellation of any such policies along with proof of a current worker's
compensation policy. In addition, Lessee must obtain all approvals and permits
required by any and all governmental authorities and provide same to Lessor
prior to commencement of any work, and after work commences must comply with all
conditions of such approvals and permits and perform work in a prompt and
expeditious manner with good and sufficient materials. Lessor also retains the
right, as a condition of its consent, to require Lessee to provide Lessor with a
lien and completion bond in a form acceptable to Lessor in an amount equal to
one and one-half times the estimated cost of Lessee constructed Lessee
Improvements and Lessee Alterations and/or require the inclusion of Lessor's
non-responsibility language in all contracts in a form approved by Lessor.
Lessee will give Lessor a minimum of fifteen (15) days prior written notice to
the commencement of any Lessee constructed Lessee Improvements and Lessee
Alterations to allow Lessor sufficient time in which to post notices of
non-responsibility or no liability for work then in progress in, on, or about
the Premises as provided by law. Upon completion of any improvements, all
alterations or additions, Lessee shall deliver upon request to Lessor accurate,
reproducible as-built plans of such construction.
10.03 Lessor's approval of any Lessee constructed Lessee Improvements
and Lessee Alterations will not create any liability whatsoever on the part of
Lessor. By way of example and without limitation, Lessor's approval of Lessee's
plans and work specifications will not create any responsibility or liability on
the part of Lessor for their sufficiency, completeness or compliance with any
and all governmental laws, codes, regulations, ordinances, covenants and
restrictions (including without reservation any and all provisions of the
Americans with Disabilities Act of 1990 applicable to the Property, or any part
thereof).
10.04 Lessee will pay when due, all claims for services, labor and
materials furnished by, or at the request of Lessee, including any claims which
are secured by any mechanic's or materialmen's or other lien against the
Property, or any interest therein. Lessee agrees that should any lien be posted
on the Property due to work performed, materials furnished, or obligations
incurred by Lessee, or its employees, agents, contractors, suppliers, invitees
or licensees, Lessee will immediately notify Lessor and proceed to remove such
lien. Lessee further acknowledges that it will remain liable to Lessor and
indemnify Lessor for any costs and expenses or damages to Lessor or the Property
or any interest therein as a result of such lien(s). If Lessee, in good faith,
contests the validity of any such lien, claim or demand, Lessee will, at its
sole expense, defend and protect itself, Lessor and the Property, or any part
thereof. To ensure such protection of Lessor and the Property and any part
thereof, Lessor may, at its sole option, require Lessee to provide Lessor with a
surety bond satisfactory to Lessor in an amount deemed appropriate by Lessor
which will indemnify Lessor against any liability and ensure the Property, or
any part thereof, is free from the effect of such a lien or claim. In addition,
Lessor may require Lessee to pay all legal fees of Lessor's attorney(s) of
choice and any other associated costs and expenses should Lessor decide it is in
its best interest to participate in such an action. If Lessee fails to keep the
Property, or any part thereof, free from any lien or provide a Lessor approved
surety bond, then, in addition to any other rights and remedies available to
Lessor, Lessor may take any action necessary to discharge such a lien, including
but not limited to, payment to the claimant on whose behalf the lien was filed,
and regardless of the corrective action taken by Lessor, Lessee will be liable
to Lessor for all costs and expenses of such action to discharge the lien,
including, but not limited to, any legal fees and costs.
10.05 All Lessee Improvements and Lessee Alterations are part of the
realty and belong to Lessor. As a condition of Lessor consenting to any Lessee
Improvements or Lessee Alterations, Lessor reserves the right, at any time to:
(i) require Lessee to pay an amount determined by Lessor to cover the costs of
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demolishing part or all of any Lessee Improvements or Lessee Alterations and or
the cost of returning the Premises to their condition before any such work
commenced (normal wear and tear excepted); or (ii) elect to make Lessee the
owner of all or any specified part and, upon termination of this Lease, require
Lessee to remove same at its sole cost and expense. The provisions of this
Paragraph shall survive the termination of this Lease.
10.06 Lessee may, without prior written consent of Lessor, make
non-structural installations within the Premises of its trade fixtures,
equipment, and machinery in conformance with all applicable governing agency
laws, codes, regulations, ordinances, covenants and restrictions, and they may
be removed upon termination of this Lease provided the Premises are restored to
its condition at the commencement of this Lease and no material damage to the
Premises will occur. All such installations shall be made by a licensed and
bonded contractor, approved by Lessor, which approval will not be unreasonably
withheld, with all permits obtained when required by law.
10.07 Lessor retains the right to construct or permit construction of
improvements, and/or Lessee Alterations, for new and existing lessees and to
alter any commonly used areas in or about the Property. Notwithstanding anything
which may be contained in this Lease, Lessee understands this right of Lessor
and agrees that such construction will not be deemed to constitute a Default or
a Breach of this Lease by Lessor. Lessee waives any such claims which it might
have arising from such construction.
11. REPAIRS
11.01 This is a net lease. Lessee will, at all times and at its sole
cost and expense, keep all parts of the Premises, interior and exterior, in good
order, condition and repair, and all equipment and facilities within or serving
the Premises, including but not limited to: windows, glass and plate glass,
doors and office entry(s), walls and finish work, floors and floor coverings,
heating and air conditioning systems, electrical systems, dock boards, truck
doors, chain link gates installed by lessee and dock bumpers, life
safety-sprinkler systems, plumbing work and fixtures, termite and pest
extermination, regular removal of trash and debris keeping the parking areas,
driveways, alleys and whole of the Premises in a clean and sanitary condition to
prevent deterioration and to maintain aesthetic standards. The cost of
maintenance and repair of any common party wall (any wall, divider, partition or
other structure separating the premises from any adjacent premises occupied by
other Lessees) shall be shared equally by Lessee and the lessee occupying the
adjacent premises. Lessee shall not damage any party wall or disturb the
integrity and support provided by any party wall and shall, at its sole cost and
expense, promptly repair any damage or injury to any party wall caused by Lessee
or its employees, agents or invitees. Lessee will keep the Premises and every
part thereof in good order, condition and repair regardless of whether any
portion of the Premises requiring repairs, or the means of repairing same are
reasonably or readily accessible. Additionally, Lessee shall be obligated to
maintain and repair the Premises whether the need for such repairs or
maintenance occurs as a result of Lessee's use, any prior use, vandalism, acts
of third parties, Force Majeure or the age of the Premises. The standard for
comparison of condition will be the condition of the Premises as of the original
date of Lessor's delivery of the Premises and failure to meet such standard
shall create the need to repair. All Lessee repairs will be made by a licensed
and bonded contractor, approved by Lessor, with permits and any other
governmental agency approvals and requirements obtained and observed, and
conform to all requirements of Paragraph 10.02 herein. Lessor's maintenance and
repair obligations are limited to air-conditioning and other equipment,
facilities and areas used in common with other lessees, exterior walls,
foundations and exterior roofs which Lessor agrees to repair and maintain on
behalf of Lessee unless such repairs are due to negligent or intentional acts of
Lessee or its employees, agents, contractors, suppliers, invitees or licensee
11.02 Lessee expressly waives the benefit of any statute or other legal
right now or hereafter in effect which would otherwise afford Lessee the right
to make repairs at Lessor's expense, whether by deduction of rent or otherwise,
or to terminate this Lease because of Lessor's failure to keep the Property, or
any part thereof in good order, condition and repair. If Lessee does not keep
the Premises in good order, condition, conforming to and consistent with
Lessor-specified standard colors, materials and quality, or fails to make any
Lessor required maintenance or repairs, Lessor reserves the right to perform
such obligations of Lessee on Lessee's behalf, and Lessee will reimburse Lessor
for any direct costs and expenses incurred immediately upon demand. Failure by
Lessee to pay for such costs and expenses within five (5) days of written
notification by Lessor is a Breach of this Lease.
11.03 In the event the Premises constitute a portion of a multiple
occupancy building, Lessor shall perform the roof, paving, and landscape
maintenance, exterior painting and common sewage line plumbing which are
otherwise Lessee's obligation under Subsection 11.01 above, and Lessee shall, in
lieu of the obligations set forth under Section 11.01 above with respect to such
items, be liable for its Proportionate Share of the Building (as defined in
Section 1.13 above) of the costs and expense of Building maintenance and the
care for the grounds around the Building, including but not limited to, the
mowing of grass, care of shrubs, general landscaping, maintenance of parking
areas, driveways and alleys, roof maintenance, exterior repainting and common
sewage line; plumbing; provided, however, that Lessor shall have the right to
require Lessee to pay such other reasonable proportion for said mowing,
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shrub care and general landscaping costs as may be determined by Lessor in its
sole discretion, and further provided that if Lessee or any other particular
lessee of the Building can be clearly identified as being responsible for
obstruction or stoppage of the common sanitary sewage line, then Lessee, if
Lessee is responsible, or such other responsible lessee, shall pay the entire
cost thereof, upon demand, as Additional Rent.
12. INSURANCE
12.01 Except as expressly provided as Lessee's Permitted Use, or as
otherwise consented to by Lessor in writing, Lessee will not do or permit
anything to be done within or about the Premises or the Property which will
increase the existing rate of any insurance on any portion of the Property or
cause the cancellation of any insurance policy covering any portion of the
Property. Lessee will not keep, use or sell, or permit anyone to keep, use or
sell, anything in or about the Premises, which may be prohibited by the standard
form of fire and other insurance policies. Lessee will, at its sole cost and
expense, comply with any requirements of any insurer of Lessor and of Lessee.
12.02 Lessee agrees to maintain in full force and effect at all times during
the Lease Term, at its sole cost and expense, for the protection of
Lessee and Lessor, policies of insurance which afford the following
coverage:
(a) Worker's Compensation Statutory Requirements
Employer's Liability Not less than $1,000,000.00
(b) Commercial General Liability Not less than $1,000,000.00 per
occurrence
Not less than $2,000,000.00 aggregate
this location
Commercial policies shall insure on an occurrence and not a claims-made basis
and cover the premises, project and property. The policy shall cover liability
arising from premises, operations, independent contractors, products-completed
operations, personal injury, advertising injury and liability assumed under an
insured contract and not be excess, nor exclude pollution or employment-related
practices.
(c) Automobile Liability Not less than $300,000.00 combined
single limit including property damage
(d) "All Risk" coverage including fire and extended coverage, vandalism,
malicious mischief and any other perils normally covered therein. This insurance
coverage must be upon the Premises and all property owned by Lessee, for which
Lessee is legally liable, or which is made at the expense of or at the request
of Lessee, including but not limited to, any Lessee Improvements, Lessee
Alterations, furniture, fixtures, equipment, installations and any other
personal property of Lessee, in an amount not less than their full replacement
value.
The limits of the insurance coverage required under this Lease will not limit
the liability of Lessee nor relieve Lessee of any obligation hereunder. All
insurance to be carried by Lessee will be primary to, and non-contributory with
Lessor's insurance, and contain cross-liability endorsements and will in
addition to the above coverage specifically insure Lessor against any damage or
loss that may result either directly or indirectly from any breach or default of
Lessee under Paragraph 14 (Hazardous Materials) herein. Any similar insurance
carried by Lessor will be considered excess insurance only.
12.03 Lessee will name Lessor (and, at Lessor's request, any Mortgagee)
and each of its officers, subsidiaries, partners, officers, directors, and
employees as additional insureds on all insurance policies required of Lessee
under this Lease, other than Worker's Compensation and Fire and Extended
coverage (except on improvements or alterations to Lessees' Premises for which
Lessor shall be named an additional insured). Such insurance policies carried by
Lessee will include an express waiver of subrogation by the insurer in favor of
Lessor, permit the insured, prior to any loss, to agree with a third party to
waive any claim it might have against said third party without invalidating the
coverage under the insurance policy, and will release Lessor and any of its
agents and employees from any claims for damage to any person, to the Property
of which the Premises are a part, any existing improvements, etc., Lessee
Improvements and Lessee Alterations to the Premises, and to any furniture,
fixtures, equipment, installations and any other personal property of Lessee
caused by or resulting from, risks which are to be insured against by Lessee
under this Lease, regardless of cause, except for grossly negligent or
intentional acts by Lessor. Lessee's failure to provide evidence of this
required insurance coverage to Lessor shall constitute a Default under this
Lease, and Lessee's failure, at any time during the Lease Term, to maintain, in
full force and effect, this coverage, as required, shall constitute a Breach
under this Lease. Notwithstanding anything in this lease to the contrary, each
party shall look first to the proceeds of insurance for any damages suffered,
regardless of cause of damage and shall recover from the other party only to the
extent that such proceeds are insufficient to compensate for such damage.
12.04 Lessee will deliver to Lessor, (and, at Lessor's request any
Mortgagee, Assignee or Receiver) simultaneously with its execution of this
Lease, (and thereafter at least thirty (30) days prior to expiration,
cancellation or change in any Lessor required certificates of insurance),
certificates of insurance evidencing, at a minimum, the coverage specified in
Paragraph 12.02. All insurance required hereunder will be with companies
licensed and authorized to do business in the state in which the Property is
located and holding a "General Policyholders Rating" of "A -, VII" or better, as
set forth in the most current Best's
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Insurance Guide.
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12.05 Lessor will secure and maintain, at Lessee's expense, insurance
coverage in such limits as Lessor may deem reasonable in its sole judgment to
afford Lessor adequate protection. Lessor's coverage, where applicable, will
contain an express waiver of subrogation.
12.06 Lessor makes no representation that the insurance policies and
coverage amounts specified to be carried by Lessee or Lessor under the terms of
this Lease are adequate to protect Lessee, and in the event Lessee believes that
such insurance is insufficient, Lessee will provide, at its own expense, such
additional insurance as Lessee deems adequate.
12.07 As to any insurance proceeds received by Lessor, such proceeds
shall for all purposes be deemed Lessor's sole property, free from any claims of
Lessee, and unless otherwise stated, available for Lessor's exclusive use as it
may alone determine in the exercise of its sole discretion.
13. INDEMNIFICATION AND WAIVER OF CLAIMS
Lessee waives all claims against Lessor for any damage to any property
in or about the Property and for injury to any persons, including death
resulting therefrom, regardless of cause or time of occurrence. Lessee will
indemnify, protect, defend and hold harmless Lessor from and against all claims,
losses, damages, costs, expenses and liabilities, including reasonable legal
fees, arising out of, involving, or in connection with Lessee's occupancy of the
Premises, presence on the Property, the conducting of Lessee's business and any
act, omission or neglect of Lessee, its agents, contractors, employees,
suppliers, licensees or invitees except for any damage or injury which is the
direct result of the gross or intentional acts by Lessor, its agents,
contractors, employees, suppliers, licensees or invitees. In the event any
action or proceeding is brought against Lessor, its agents, contractors,
employees, suppliers, licensees or invitees, by reason of the foregoing, Lessee,
upon notice by Lessor, will defend Lessor, its agents, contractors, employees,
suppliers, licensees or invitees, at Lessee's sole cost and expense, and by
counsel reasonably satisfactory to Lessor.
14. HAZARDOUS MATERIALS
14.01 For purposes of this Lease, "Hazardous Materials" will mean any
product, substance, chemical, material or waste whose presence, nature, quantity
and/or intensity of existence, use, manufacture, disposal, transportation,
spill, release or effect, either by itself or in combination with other
materials expected to be on the Property, now or in the future, is either: (i)
potentially injurious to the public health, safety or welfare, the environment
or the Property, or any part thereof; (ii) regulated or monitored by any
governmental authority; or (iii) a basis for potential liability of Lessor to
any governmental authority or third party. Hazardous Materials does not include:
solvents and other materials commonly used in office buildings for everyday
cleaning uses. Hazardous Materials will include, but not be limited to,
solvents, petrochemical products, flammable materials, explosives, asbestos,
urea formaldehyde, PCB's, chlorofluorocarbons, freon or radioactive materials.
Lessor, however, grants Lessee permission to keep small amounts of materials or
substances in the Premises which are necessary for Lessee's normal business
operations. Lessee agrees to provide Lessor, prior to its occupancy of the
Premises, a list of all materials and substances, their locations within the
Premises, and methods of storage. Lessee further agrees to comply with all
future requests for information by Lessor including but not limited to copies of
all applicable Material Safety Data Sheets (MSDS sheets).
14.02 Lessee will not cause or permit any Hazardous Materials to be
brought upon, kept, stored, discharged, released or used in, under or about any
portion of the Property by itself, its agents, employees, contractors,
subcontractors, licensees or invitees, without the prior written consent of
Lessor, and Lessor's consent will be in its sole discretion. Should Lessor grant
such consent, Lessee shall: (1) use such Hazardous Material only as is
reasonably necessary to Lessee's business, in small, properly labeled
quantities; 2) handle, use, keep, store, and dispose of such Hazardous Material
using the highest accepted industry standards and in compliance with all
applicable regulatory agencies and governmental Hazardous Materials
requirements; (3) maintain at all times with Lessor a copy of the most current
MSDS sheet for each such Hazardous Material; and (4) comply with such other
rules and requirements Lessor may from time to time impose.
14.03 Should Lessor give Lessee its consent to bring on or about the
Property any Hazardous Materials, Lessee will comply with all federal, state and
local laws, ordinances, and rules and regulations relating to Hazardous
Materials, including but not limited to, current rules and regulations or levels
and standards as set from time to time by the Environmental Protection Agency,
the U. S. Occupational Safety and Health Administration, or any other
governmental agency. It is not necessary that any presence or contamination of
the Premises reflect any government mandated threshold or quantity in order for
Lessor to take any action under this paragraph 14.
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14.04 Upon expiration or earlier termination of this Lease, Lessee
will, at Lessee's sole cost and expense, cause all Hazardous Materials brought
on the Property by Lessee, its agents, contractors, employees, suppliers,
licensees or invitees, to be removed from the Property in compliance with any
and all applicable Hazardous Material disposal laws. If Lessee or its agents,
contractors, employees, suppliers, licensees or invitees, violates the
provisions of this Section 14, or performs any act or omission, or contaminates,
or expands the scope of contamination of the Premises, the Property, or any part
thereof, the underlying groundwater, or any property adjacent to Lessor's
Property, then Lessee will promptly, at Lessee's expense, take all investigatory
and/or remedial action (collectively called "Remediation") that is necessary to
clean up, remove and dispose of such Hazardous Materials and any contamination
so caused in compliance with any applicable Hazardous Material laws and
regulations. Lessee will also repair any damage to the Premises and any other
affected portion(s) of the Property caused by such Hazardous Material presence,
investigation and Remediation.
14.05 With respect to any Remediation of the Premises, the Property or
any portion thereof, Lessee will provide Lessor with written notice of Lessee's
intended Remediation, including Lessee's method, time and procedure of
Remediation, and Lessor will have the right to require reasonable changes in
such method, time or procedure before Lessee commences any such work. Lessee
will not commence any Remediation of Hazardous Materials in any way connected
with the Property, or any portion thereof, without first notifying Lessor, in
writing, of Lessee's intention to do so and affording Lessor ample opportunity
to appear, intervene or otherwise appropriately assert and protect Lessor's
interest.
14.06 Lessee will immediately notify Lessor in writing of any
governmental or regulatory action threatened, any claim, demand, or complaint
made or threatened by any person against Lessee or any portion of the Property
relating to damage, contribution, cost recovery compensation, or loss or injury
resulting from any Hazardous Materials, and any report made to any governmental
authority arising out of any Hazardous Materials on, or removed from, the
Property or any portion thereof. Lessor retains the right to join and
participate, as a party, in any legal actions affecting the Property or any
portion thereof initiated in connection with Hazardous Materials laws.
14.07 Lessee will indemnify, protect, defend and forever hold Lessor,
its agents, employees, lenders and ground lessor, if any, and the Premises, the
Property, or any portion thereof, harmless from any and all damages, losses,
liabilities, judgments, penalties, claims, obligations, attorneys' and
consultants' fees and any other costs and expenses arising out of any failure of
Lessee, its agents, contractors, employees, suppliers, licensees or invitees to
observe any covenants of this Section 14 of this Lease. Non-compliance by Lessee
with any provisions of this Section 14 shall constitute a Breach under this
Lease, and all provisions of this Section 14 shall survive any termination of
this Lease.
15. AUCTIONS AND SIGNS
15.01 Lessee will not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction on or about the Property, without
having the express written consent of Lessor, and Lessor will not be obligated
to exercise any standard of reasonableness in determining whether or not to
grant such consent. Should Lessor grant such consent, Lessee will comply with
any requirements of Lessor and any applicable laws governing such an auction.
15.02 Lessee will not place any Signage on or about the Property, or on
any part thereof, without the prior written consent of Lessor, which Lessor may
withhold in its sole discretion. All approved Lessee Signage will comply with
the terms and conditions of this Lease and the sign criteria set forth in
Exhibit "C" and Exhibit "D", Rules and Regulations, or other criteria which
Lessor may establish from time to time. Non-compliance with any of the
provisions of this Paragraph 15, Exhibit "C" or Exhibit "D" shall constitute a
Default under this Lease.
16. LESSOR'S ACCESS
16.01 Lessor, its agents, contractors, consultants, servants and
employees, will have the right to enter the Premises at any time in the case of
an emergency, and otherwise at reasonable times upon prior notice to (a) examine
the Premises; (b) perform any obligation to or exercise any right or remedy of
Lessor under this Lease; (c) make repairs, alterations, improvements or
additions to the Premises or to other portions of the Property as Lessor deems
necessary or desirable; (d) perform work necessary to comply with laws,
ordinances, rules or regulations of any governing authority or insurance
underwriter; (e) serve, post or keep posted any notices required or allowed
under the provisions of this Lease or by law; (f) show, at reasonable times
during last 180 days, Lessee's Premises to prospective lessees; (g) post on or
about the Premises any ordinary "For Lease" signs during the last sixty (60)
days of the Lease Term; and (h) perform work at Lessee's sole cost that Lessor
deems necessary to prevent waste or deterioration of the Premises should Lessee
fail to commence to make, and diligently pursue to completion, its required
repairs.
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16.02 For each of the purposes described in Paragraph 16.01 above,
Lessor will at all times have and retain any necessary keys with which to unlock
all doors in, upon and about the Premises, excluding Lessee's vaults and safes.
Lessee will not alter any lock or install new or additional locks or bolts on
any door in or about the Premises without obtaining Lessor's prior written
approval and will, in each event, furnish Lessor with a new key. All access
activities of Lessor will be without abatement of rent or liability on the part
of Lessor.
17. ABANDONMENT
Lessee will not vacate or abandon the Premises, or permit the Premises
to remain unoccupied for any period longer than fifteen (15) consecutive days
any time during the Lease Term. If Lessee abandons without payment of rent,
vacates or surrenders the Premises, or is dispossessed by process of law, or
otherwise, any personal property belonging to Lessee left in or about the
Premises will, at the option of Lessor, be deemed abandoned and may be disposed
of by Lessor. In the event Lessee abandons premises and continues to pay rent,
Lessor shall have immediate right of entry to monitor premises at lessee's
expense.
18. DAMAGE OR DESTRUCTION
18.01 If the Premises, or any portion of the Property, is damaged or
destroyed by fire or other casualty, Lessee will immediately give written notice
to Lessor of the casualty and Lessor will promptly repair the damage as set
forth in Paragraph 18.03 unless Lessor has the right to terminate this Lease as
provided in Paragraphs 18.02 and 18.04, and Lessor elects to so terminate.
18.02 If Lessee, or its agents, contractors, employees, suppliers,
licensees or invitees is not the cause of the casualty, Lessor will have the
right, but not the obligation, to terminate this Lease following a casualty if
any of the following occurs: (i) insurance proceeds (excluding Lessor's
deductible and including Lessee's deductible) together with any additional
monies Lessee elects, at its option, to contribute are not available to Lessor
to pay one hundred percent (100%) of the cost to fully repair the damage; (ii)
Lessor determines that the Premises cannot, with reasonable diligence, within
six (6) months after Lessor obtains knowledge of the casualty, be fully repaired
by Lessor or cannot be safely repaired because of the presence of hazardous
factors and conditions, including but not limited to, Hazardous Materials,
earthquakes, utility outages and any other similar dangers; (iii) the Premises
are damaged or destroyed within the last twelve (12) months of the Lease Term;
(iv) the building within which the Premises is located, or any other portion of
the Property, is damaged or destroyed and Lessor (as determined in its sole
discretion) cannot reasonably complete such repair within six (6) months of
Lessor obtaining knowledge of the casualty; (v) Lessee is in Default or Breach
of this Lease at the time of the casualty; or (vi) Lessor would be required
under Paragraph 18.05 to abate or reduce Lessee's rent for a period in excess of
six (6) months if the repairs were undertaken. If Lessor elects to terminate
this Lease pursuant to this Paragraph 18.02, Lessor will give Lessee written
notice of this election, and fifteen (15) days after Lessee's receipt of such
notice, this Lease will terminate. If Lessor elects to terminate this Lease,
subject to the rights of any mortgagee, Lessor will be entitled to retain all
applicable Lessee insurance proceeds excepting those attributable to Lessee's
furniture, fixtures, equipment, installations, and any other personal property.
18.03 If Lessee, or its agents, contractors, employees, suppliers,
licensees or invitees is not the cause of the casualty, and Lessor elects not to
terminate this Lease, this Lease will remain in full force and effect, and
Lessor will, within ten (10) days after receipt of all applicable insurance
proceeds and monies required to fully repair 100% of the Premises, begin the
process of obtaining all necessary permits and approvals, and upon receipt
thereof, diligently pursue the repair through completion.
18.04 Subject to Paragraph 12.03, if Lessee, or its agents,
contractors, employees, suppliers, licensees or invitees is the cause of the
casualty, or any portion thereof, Lessor may elect any of the following: (i) to
continue this Lease in full force and effect; (ii) to make Lessor or Lessee, as
determined in Lessor's sole discretion, responsible for the completion of all,
or any portion, of the repairs necessitated by the casualty, and all such
repairs shall be at Lessee's sole cost and expense; and/or (iii) terminate this
Lease with fifteen (15) days written notice and retain all applicable Lessee
insurance proceeds excepting those specifically attributable to Lessee's
furniture, fixtures, equipment, installations, and other personal property. No
election by Lessor of any remedy hereunder shall be deemed a limitation on
Lessee's liability.
18.05 If Lessor elects not to terminate this Lease, during the period
of repair, Lessee's rent will be temporarily abated or reduced in proportion to
the degree to which Lessee's use of the Premises is impaired, as determined by
Lessor in its sole discretion, beginning the date Lessor obtains knowledge of
the casualty and ending on the date all repairs affecting Lessee's use of the
Premises are substantially completed, as determined by Lessor in its sole
discretion. However, the total amount of such rent abatement or reduction shall
not exceed the total amount of insurance proceeds, directly attributable to
Lessee's Premises, Lessor may receive from any rental loss insurance coverage it
may carry free from any claim of Lessee. Except for the abatement of rent as
herein described, Lessee will not be entitled to any compensation or damages for
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the loss of or interference with Lessee's personal property (including but not
limited to, furniture, fixtures, equipment, and installations), or existing
improvements of the Premises, Lessee Improvements, Lessee Alterations or any
other improvements on or about any portion of the Property, or business, or use,
or access to all or any part of the Premises or the Property resulting from such
damage, destruction or repair, including but not limited to, any consequential
damages, opportunity costs or lost profits incurred or suffered by Lessee. In no
event, however, will Lessor be responsible for any abatement of rent if Lessee,
or its agents, contractors, employees, suppliers, licensees or invitees is the
cause of the casualty, or any part thereof.
19. TRANSFER (ASSIGNMENT/SUBLETTING)
19.01 Lessee will not assign, sell, mortgage, encumber, convey, pledge,
sublet or otherwise transfer all or any part of Lessee's right or interest in
this Lease, or allow any other person or entity to occupy or use all or any part
of the Premises (collectively called "Transfer") without first obtaining the
written consent of Lessor, which shall not be unreasonably withheld or delayed.
The following shall be deemed a "Transfer" for purposes of this section: (i) a
grant of a license, concession, or other right of occupancy of any portion of
the Premises, or (ii) the use of the Premises by any party other than Lessee.
Should Lessee desire a Transfer, Lessee will notify Lessor in writing of: (i)
Lessee's intent to Transfer; (ii) the name of the proposed transferee; (iii) the
nature of the proposed transferee's business to be conducted on the Premises;
(iv) the terms and provisions of the proposed Transfer, and (v) any other
information Lessor may reasonably request concerning the proposed Transfer;
including but not limited to, a statement of net worth, financial statements
covering a specified period of time, environmental reports and a completed
environmental questionnaire supplied by Lessor.
19.02 Lessee agrees, by way of example and without limitation, that
Lessor may withhold its consent to a proposed Transfer if Lessor in its
reasonable judgment determines that the proposed transferee: (a) is of a
character or is engaged in a business which is not in keeping with Lessor's
standards for the Property, as determined reasonably by Lessor; (b) has a use
which conflicts with a provision of this Lease or proposes an unacceptable risk
to health or safety, as determined by Lessor; (c) does not meet the then current
financial standards required by Lessor; (d) has been required by any prior
lessor, lender or governmental authority to take a remedial action in connection
with Hazardous Materials contaminating a property; (e) is unacceptable because
Lessee is in Default or Breach under this Lease at the time of the request for
Transfer or as of the effective date of the Transfer. Notwithstanding the
foregoing, Lessee's right to a Transfer is subject to Lessor's approval of
Lessee's financial condition at the time the Transfer is requested by Lessee.
19.03 In the event Lessor consents to a Transfer, the Transfer will not
be effective until Lessor is in receipt of a fully executed agreement to
Transfer, in a form and of substance acceptable to Lessor, and a Transfer fee of
two hundred and fifty dollars ($250.00) which shall represent Lessee's minimum
liability for such service. The receipt and cashing of any check by Lessor
wherein such check is in a name other than that of Lessee will not constitute a
Transfer. Lessor also reserves the right to collect any rents due under this
Lease directly from the transferee, and such direct collection will not
constitute recognition of the transferee as Lessee or release Lessee or any
guarantor of Lessee from any of its obligations under this Lease. Any
consideration received by Lessee in excess of Lessee's Base Rent (including
additional rent) as a result of a Lessor approved transfer shall be due and
payable to Lessor and any rights of first refusal, options or expansions under
the original lease shall be null and void.
19.04 Lessor may, within thirty (30) days after submission of Lessee's
written request for Lessor's consent to an assignment or subletting, cancel this
Lease (or, as to a subletting or assignment, cancel as to the portion of the
Premises proposed to be sublet or assigned) as of the date the proposed Transfer
was to be effective. If Lessor cancels this Lease as to any portion of the
Premises, then this Lease shall cease for such portion of the Premises, and
Lessee shall pay to Lessor all Base Rent and other amounts accrued through the
cancellation date relating to the portion of the Premises covered by the
proposed Transfer and all brokerage commissions paid or payable by Lessor in
connection with this Lease that are allocable to such portion of the Premises.
Thereafter, Lessor may lease such portion of the Premises to the prospective
transferee (or to any other person) without liability to Lessee.
19.05 If Lessor has not agreed in writing to a Transfer within thirty
(30) days of Lessee's request hereunder, Lessor will be deemed to have rejected
Lessee's request.
20. DEFAULT AND BREACH
20.01 Lessee's performance of each of Lessee's obligations under this
Lease is a condition as well as a covenant. Lessee's right to continue in
possession of the Premises is conditioned upon such performance. Time is of the
essence in the performance of all covenants and conditions. Lessee's failure to
perform any of its obligations shall put it in Default or Breach under this
Lease.
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20.02 A "Default" is a failure to fulfill any terms, conditions,
covenants or rules under this Lease. A "Breach" is a Default which has no cure
period, stated or otherwise, or a Default which is not cured within the stated
cure period provided under this Lease. Lessor and Lessee agree that if an
attorney is consulted by Lessor in connection with a Lessee Default or Breach,
$250.00 is a reasonable minimum sum to charge Lessee as Additional Rent to cover
Lessor's legal preparation and service costs. Unless otherwise stated in this
Lease, Lessee will be in Breach if at any time during the Lease Term:
(a) Lessee fails to make any payment of Base Rent, Additional
Rent, or any other monetary payment required to be made by
Lessee herein and Lessee does not cure such failure within
three (3) days after receipt of Lessor's written notice to
Lessee.
(b) Lessee fails to provide Lessor with proof of insurance or
performance or surety bond as required under this Lease; and
Lessee does not cure such failure within three (3) days after
Lessor's written notice to Lessee.
(c) Lessee, at any time during the Lease Term, fails to maintain,
in full force and effect, its required insurance coverage.
(d) If Lessee's conduct creates an imminent threat to health or
safety which is not susceptible to cure without occurrence of
such harm.
(e) Lessee vacates the Premises without the intention to reoccupy
same, or abandons the Premises as further described in
Paragraph 17.
(f) Lessee fails to observe, perform or comply with any of the
non-monetary terms, covenants, conditions, provisions or rules
and regulations applicable to Lessee under this Lease and such
failure is curable, in the sole opinion of Lessor, and then is
not cured within ten (30) days after Lessor's written notice
to Lessee; provided, however, that if the nature of Lessee's
obligation is such that more than ten (30) days are required
for performance, then Lessee will not be in Breach if Lessee
commences performance within such ten (30) day period and
thereafter diligently, in Lessor's sole opinion, pursues such
cure to completion.
(g) Lessor discovers that any financial statement of Lessee or of
any guarantor of this Lease given to Lessor, was materially
false.
(h) Lessee makes any general arrangement or assignment for the
benefit of creditors, becomes a "debtor" as defined in 11 U.
S. Code Section 101 or any successor statute, has
substantially all its assets located at the Premises or its
interest in this Lease appointed to a receiver or trustee,
indicates in Lessor's reasonable opinion an inability to pay
its debts or obligations as they occur, has an attachment, or
execution or other judicial seizure of substantially all of
its assets located at the Property or its interest in this
Lease.
(i) Lessee is in Breach of any other term or condition of this
Lease.
21. REMEDIES OF LESSOR
21.01 If Lessee fails to perform any duty or obligation of Lessee under
this Lease, Lessor may at its option perform any such duty or obligation on
Lessee's behalf. The costs and expenses of any such performance by Lessor will
be immediately due and payable by Lessee upon receipt from Lessor of the
reimbursement amount required. In the event of a Breach of this Lease by Lessee
as defined in Paragraph 20.02, with or without notice or demand, and without
limiting any other of Lessor's rights or remedies, Lessor may:
(a) Terminate Lessee's right to possession of the Premises, in
which case this Lease will terminate and Lessee will
immediately surrender possession of the Premises to Lessor.
Lessor reserves all right and remedies available to it
pursuant to the terms and conditions of this Lease as well as
under state law. Lessee hereby grants Lessor the full and free
right, to enter the Premises with process of law. Lessee
releases Lessor of any liability for any damage resulting
therefrom and waives any right to claim damage for such
re-entry. Lessee also agrees that Lessor's right to re-lease
or any other right given to Lessor as a consequence of
Lessee's breach hereunder or by operation of law is not
relinquished. On such termination, Lessor will be entitled to
recover from Lessee: (i) the worth at the time of the award of
the unpaid rent which had been earned at the time of the
termination; (ii) the worth at the time of the award of the
amount by which the unpaid rents which would have been earned
after termination until the time of award exceeds the amount
of such rental loss that Lessee proves could have been
avoided; (iii) the worth at the time of the award of the
amount by which the unpaid rents for the balance of the Lease
Term after the time of award
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exceeds the amount of such rental loss for such period that
Lessee proves could be reasonably avoided; and (iv) any other
amount necessary to compensate Lessor for all the damage
proximately caused by Lessee's failure to perform its
obligations under this Lease or which in the ordinary course
of events would likely result therefrom, including but not
limited to, all costs and expenses attributable to recovering
possession of the Premises, reletting expenses (including the
costs and expenses of any necessary repairs, renovations and
alterations to the Premises), costs of carrying the Premises
(including but not limited to, Lessor's payment of real
property taxes and insurance premiums), actual legal fees and
associated costs and expenses, any unearned brokerage
commissions paid in connection with this Lease, any
unamortized Lessee Improvements, and reimbursement of any
deferred rent or other Lease execution inducement.
(b) Continue the Lease and Lessee's right to possession and
recover rent as it becomes due. Acts of maintenance or
preservation, efforts to relet the Premises, removal or
storage of Lessee's personal property or the appointment of a
receiver to protect Lessor's interest under this Lease, will
not constitute a termination of Lessee's right to possession.
Lessor agrees to make reasonable efforts to mitigate its
damages provided however, Lessor shall not be required to
relet any or all of the Premises prior to leasing other vacant
space on the Project, nor shall Lessor be required to accept a
tenant of lesser financial quality than Lessee was as of the
commencement date of this Lease.
(c) Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the state
wherein the Premises are located.
21.02 In the event of bankruptcy of Lessee, or if Lessee becomes a
debtor as defined under the Bankruptcy Code, Lessee assigns to Lessor all its
rights, title and interest in the Premises as security for its obligations under
this Lease. The expiration or termination of this Lease, and/or the termination
of Lessee's right to possession, will not relieve Lessee from any liability
accruing during Lessee's Lease Term or by reason of Lessee's occupancy of the
Premises. Any efforts by Lessor to mitigate the damages caused by Lessee's
Breach of this Lease will not waive Lessor's right to recover damages.
21.03 The "worth at the time of award" referred to in 21.01(a) (i) and
21.01(a) (ii) will additionally include interest computed by allowing interest
at the maximum rate allowed by law. The "worth at the time of award" referred to
in 21.01(a) (iii) will be computed by discounting the amount at the discount
rate of the Federal Reserve Bank of San Francisco in effect at the time of
award, plus one percent (1%).
21.04 No right or remedy conferred upon or reserved to Lessor in this
Lease is intended to be exclusive of any right or remedy granted to Lessor by
statute or common law, and each and every such right and remedy will be
cumulative.
22. ARBITRATION
In the event any dispute arises regarding matters occurring before,
during or after the term of this agreement, the parties agree that in lieu of
judicial proceedings, the matter shall be submitted to arbitration, and if not
otherwise resolved, arbitrated in accordance with the rules of the American
Arbitration Association, in a venue nearest to the location of the Leased
Premises. The Lessor and Lessee further agree that such requirement of
arbitration shall not be limited to contractual disputes alone, but shall
pertain to any dispute between Lessor and Lessee, whether arising from contract,
tort, in equity, under statute or administrative resolution, or any other legal
basis. This agreement to arbitrate shall not, however, prohibit Lessor from
exercising its statutory and/or common law rights to proceed against Lessee for
possession of the Premises and damages related thereto, in the nature of
unlawful detainer, ejectment, or any other similar summary proceeding.
23. SURRENDER OF LEASE NOT MERGER
Unless specifically stated otherwise in writing by Lessor, the
voluntary or other surrender of this Lease by Lessee, the mutual termination or
cancellation of this Lease, or the termination of this Lease by Lessor due to a
Breach by Lessee, will not work as a merger, and will, at the option of Lessor,
terminate all or any Transfer of the Premises or operate as a Transfer to Lessor
of any or all such Transfers.
24. PROFESSIONAL FEES, COSTS AND EXPENSES
24.01 In the event that any party to this Lease initiates an action or
proceeding to enforce the terms of this Lease or to declare the rights of a
party to this Lease, the prevailing party will be entitled to all actual costs
and expenses, including but not limited to, all fees and costs and expenses of
appraisers, experts, accountants and attorneys, which obligations shall be
deemed to have accrued as of the
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commencement date of such action or proceeding. Should Lessor be named as a
defendant in any legal action or proceeding brought against Lessee in connection
with, or arising out of, Lessee's occupancy within the Property, Lessee will pay
to Lessor all of Lessor's actual costs and expenses incurred, including its
legal fees. Attorneys' fees will not be computed in accordance with any court
fee schedule, but will be the actual amount of any fees incurred.
24.02 If Lessor utilizes the services of any attorney with regard to
Lessee's occupancy or tenancy under this Lease, Lessor will be entitled to
reimbursement by Lessee of its legal fees, and all other costs and expenses,
whether or not a legal action is commenced by Lessor.
25. CONDEMNATION
If any portion of the Premises or any portion of the Building in which
the Premises is located, or any portion of the Property which would
substantially interfere with Lessor's ownership, or Lessor's or Lessee's ability
to conduct business is taken for any public or quasi-public purpose by any
governmental authority, including but not limited to, by exercise of the right
of appropriation, inverse condemnation, condemnation or eminent domain, or sold
to prevent such taking, Lessor, at its option, may terminate this Lease without
recourse by Lessee. Any award for such taking or payment made under such threat
of exercise of such power will be the property of Lessor, whether such award be
made as compensation for diminution of value of the leasehold or for the taking
of the fee, or as severance damages; however, Lessee will be entitled to any
compensation, separately awarded to Lessee for Lessee's relocation expenses. If
this Lease is not terminated, Lessor will promptly proceed to restore the
Premises and/or any portion of the Property used in common by all lessees to
substantially the same condition as prior to such taking allowing for any
reasonable effects of such taking. Should a partial taking directly affect a
portion of Lessee's Premises and Lessor does not exercise its right to terminate
this Lease, Lessor will make an appropriate allowance to Lessee for the rent
corresponding to the term during which, and to the part of the Premises which,
Lessee is deprived on account of such taking and restoration.
26. RULES AND REGULATIONS
Lessee agrees to abide by, keep and observe all rules and regulations
Lessor has set forth in Exhibit "D". Lessor reserves the right to modify and
amend them, upon prior notice to Lessee, as it deems necessary and will not be
responsible to Lessee for any nonperformance by any other lessee, occupant or
invitee of the Property of any said rules and regulations. Violation by Lessee,
its employees, agents, contractors, suppliers, invitees or licensees will be
deemed a Default under this Lease.
27. ESTOPPEL CERTIFICATE
Lessee will execute and deliver, in a form prepared by Lessor, to
Lessor within ten (10) days after written receipt of notice from Lessor, a
written statement certifying: (i) that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification);
(ii) the date to which rent and any other charges are paid in advance, if any;
(iii) acknowledgment that there are not, to Lessee's knowledge, any uncured
Defaults on the part of Lessor, or stating the nature of any uncured Defaults;
(iv) the current Base Rent amount and the amount and form of the Security
Deposit on deposit with Lessor; and (v) any other information as Lessor,
Lessor's agents, mortgagees and prospective purchasers may reasonably request,
including but not limited to, any requested information regarding Hazardous
Materials. Lessee's failure to deliver such statement within ten (10) days of
its receipt will be deemed as Lessee's conclusive confirmation that: (1) this
Lease (including specifically the Base Rent, Additional Rent and Lease Term) is
in full force and effect and without modification except as may be represented
by Lessor; (2) neither Lessor nor Lessee are in Default under the Lease; and (3)
not more than one (1) month's rent charges, if any, are paid in advance. Such
failure shall be deemed, at Lessor's option, a Breach of this Lease.
28. SALE BY LESSOR
Upon the sale or any other conveyance by Lessor of the Property, or any
portion thereof, Lessor will be relieved of all liability under any and all of
its covenants and obligations contained in or derived from this Lease or arising
out of any act, encumbrance, occurrence or omission occurring after the date of
such conveyance.
29. NOTICES
All written communications and notices required under this Lease shall
be considered sufficiently given and served if sent to: 1) Lessee by U.S. mail
(First Class, postage prepaid), personal delivery or by other reasonable method
(including posting on or about the Premises), unless otherwise required by law,
to
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the address indicated in Paragraph 1.05 and shall be deemed received three (3)
days after such mailing, personal delivery or posting; 2) Lessor by U.S. mail
(First Class, postage prepaid), registered or certified (unless otherwise
required by law) to the address indicated in Paragraph 1.06 and shall be deemed
received five (5) days after such mailing; and 3) either party by facsimile or
overnight delivery and shall be deemed received twenty-four (24) hours after
transmission of such facsimile or placement in an overnight depository. At any
time during the Lease Term, Lessor or Lessee may specify a different Notice
Address by providing written notification to the other.
30. WAIVER
No waiver by Lessor of a Default or Breach of any term, covenant or
condition of this Lease by Lessee, will be deemed a waiver of any other term,
covenant or condition of this Lease, or of any subsequent Default or Breach of
Lessee of the same or any other term, covenant or condition of this Lease, nor
will any delay or omission by Lessor to seek a remedy for any Lessee Default or
Breach of this Lease be deemed a waiver by Lessor of its remedies or rights with
respect to such Default or Breach. Additionally, regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor whether on account of monies or damages due Lessor, or
otherwise, will not constitute a waiver by Lessor of any Default or Breach by
Lessee.
31. LESSEE'S INTENT; HOLDOVER
Unless otherwise specified in this Lease, Lessee will give Lessor, not
less than ninety (90) days prior to the expiration date of this Lease
Term, written notice of its intent to remain or vacate the Premises on
the expiration date of this Lease. If Lessee remains in possession of
all or any part of the Premises with Lessor's written consent after the
expiration of the Lease Term, such possession will constitute a
month-to-month tenancy, which may be terminated by either Lessor or
Lessee with thirty (30) days written notice and will not constitute a
renewal or extension of the Lease Term. If Lessee remains in possession
after the Lease Term without Lessor's written permission, such
possession will constitute a tenancy-at-will terminable upon
forty-eight (48) hour notice by either Lessee or Lessor. In the event
of a month-to-month tenancy or tenancy-at-will, Lessee's Base Rent will
be one hundred fifty percent (150%) of the Base Rent payable during the
last month of the Lease Term, and any other sums due under this Lease
will be payable in the amounts and at the times specified in this Lease
and all options, rights of refusal, expansions and/or renewals shall be
null and void. Such tenancy will be subject to every other term,
condition and covenant contained in this Lease.
32. DEFAULT BY LESSOR; LIMITATION OF LIABILITY; REAL ESTATE INVESTMENT TRUST
32.01 In the event Lessor is deemed in Default or Breach in the
performance of any obligation required to be performed under this Lease, Lessee
will notify Lessor in writing, pursuant to the provisions of Paragraph 29, of
Lessor's Default or Breach at Lessor's Notice Address as specified in Paragraph
1.06, and within thirty (30) days of receipt of such notice, Lessor will
commence to make a good faith effort to cure the Default or Breach and in a
diligent and prudent manner continue to do so until completion.
32.02 The obligations of Lessor under this Lease shall be binding only
on Lessor and not upon any of the individual partners, investors, trustees,
directors, officers, employees, agents, shareholders, advisors or managers of
Lessor in their individual capacities, and with respect to any obligations of
Lessor to Lessee, Lessee's sole and exclusive remedy shall be against Lessor.
32.03 In consideration of the benefits accruing hereunder, Lessee on
behalf of itself and all of its Transferees covenants and agrees that, in the
event of any actual or alleged failure, Default or Breach of this Lease by
Lessor, Lessee's recourse against Lessor for any monetary damages will be
limited to the lesser of Lessor's interest in the Property including, subject to
the prior rights of any mortgagee, Lessor's interest in the rents of the
Property, or Lessor's equity interest in the Property if the Property were
encumbered by debt in an amount equal to eighty percent (80%) of its value of
the Property as of the initial date Lessee notifies Lessor of the actual or
alleged failure, Default or Breach, and any insurance proceeds payable to
Lessor. Any action by Lessee will be limited to actual damages only and will
not, under any circumstances, include future profits or consequential damages.
32.04 If Lessor is a real estate investment trust, and if Lessor in
good faith determines that its status as a real estate investment trust under
the applicable provisions of the Internal Revenue Code of 1986, as heretofore or
hereafter amended, will be jeopardized because of any provision of this Lease,
Lessor may require reasonable amendments to this Lease and Lessee shall not
unreasonably withhold or delay its consent thereto, provided that such
modifications do not in any way, (i) increase the obligations of Lessee under
this Lease or (ii) adversely affect any rights or benefits to Lessee under this
Lease. Lessor shall pay all reasonable costs incurred by Lessee, including
without limitation, legal fees incurred for reviewing any such proposed
modifications.
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33. SUBORDINATION
Without the necessity of any additional document being executed by
Lessee for the purposes of effecting a subordination, and at the election of
Lessor or any mortgagee or any ground lessor with respect to the land of which
the Premises are a part, this Lease will be subject and subordinate at all times
to: (i) all ground leases or underlying leases which may now exist or hereafter
be executed affecting the Property and (ii) the lien of any mortgage or deed of
trust which may now exist or hereafter be executed in any amount for which the
Property, ground leases or underlying leases, or Lessor's interest or estate in
any of said items is specified as security. Lessor or any mortgagee or ground
lessor will have the right, at its election, to subordinate or cause to be
subordinated any ground lessee or underlying leases or any such liens to this
Lease. If Lessor's interest in the Premises is acquired by any ground lessor or
mortgagee, or in the event any proceedings are brought for the foreclosure of,
or in the event of exercise of power of sale under, any mortgage or deed of
trust made by Lessor covering the Premises, or in the event a conveyance in lieu
of foreclosure is made for any reason, Lessee will, notwithstanding any
subordination and upon the request of such successor in interest to Lessor,
attorn to and become the Lessee of the successor in interest to Lessor and
recognize such successor in interest as the Lessor under this Lease. Lessee
acknowledges that although this Paragraph 34 is self-executing, Lessee covenants
and agrees to execute and deliver, upon demand by Lessor and in the form
requested by Lessor, or any other mortgagee or ground lessor, any additional
documents evidencing the priority or subordination of this Lease with respect to
any such ground leases or underlying leases or the lien of any such mortgage or
deed of trust. Lessee's failure to timely execute and deliver such additional
documents will, at Lessor's option, constitute a Breach of this Lease.
34. FORCE MAJEURE
Lessor will have no liability to Lessee, nor will Lessee have any right
to terminate this Lease or abate rent or assert a claim of partial or
constructive eviction, because of Lessor's failure to perform any of its
obligations under this Lease if the failure is due in part or in full to reasons
beyond Lessor's reasonable control; Provided however, that Lessor's liability
shall be reduced in proportion to the extent that its failure to perform is
beyond its reasonable control. Such reasons will include but not be limited to:
strike, other labor trouble, fuel, labor or supply shortages, utility failure or
defect, the inability to obtain any necessary governmental permit or approval
(including building permits and certificates of occupancy), war, riot, mandatory
or prohibitive injunction issued in connection with the enforcement of the
Americans with Disabilities Act of 1990, civil insurrection, accidents, acts of
God, any governmental preemption in connection with a national emergency or any
other cause, whether similar or dissimilar, which is beyond the reasonable
control of Lessor. If this Lease specifies a time period for performance of an
obligation by Lessor, that time period will be extended by the period of any
delay in Lessor's performance caused by such events as described herein.
35. MISCELLANEOUS PROVISIONS
35.01 Whenever the context of this Lease requires, the neuter, the
masculine and the feminine gender shall include the other, and the word person
shall include partnership or corporation or joint venture, and the singular
shall include the plural and the plural shall include the singular.
35.02 If more than one person or entity is Lessee, the obligations
imposed on each such person or entity will be joint and several.
35.03 The captions and headings of this Lease are used for the purpose
of convenience only and shall not be construed to interpret, limit or extend the
meaning of any part of this Lease.
35.04 This Lease contains all of the agreements and conditions made
between Lessor and Lessee and may not be modified in any manner other than by a
written agreement signed by both Lessor and Lessee. Any statements, promises,
agreements, warranties or representations, whether oral or written, not
expressly contained herein will in no way bind either Lessor or Lessee, and
Lessor and Lessee expressly waive all claims for damages by reason of any
statements, promises, agreements, warranties or representations, if any, not
contained in this Lease. No provision of this Lease shall be deemed to have been
waived by Lessor unless such waiver is in writing signed by a regional vice
president or higher of Lessor or the management company, and no custom or
practice which may develop between the parties during the Lease Term shall waive
or diminish the Lessor's right to enforce strict performance by Lessee of any
terms of the Lease.
35.05 Time is of the essence for the performance of each term,
condition and covenant of this Lease.
35.06 Except as otherwise expressly noted, each payment required to be
made by Lessee is in addition to and not in substitution for other payments to
be made by Lessee.
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35.07 Subject to Section 19, the terms, conditions and provisions of
this Lease will apply to and bind the heirs, successors, executors,
administrators and assigns of Lessor and Lessee.
35.08 If any provision contained herein is determined to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality, or
unenforceability will not affect any other provision of this Lease.
35.09 In consideration of Lessor's covenants and agreements hereunder,
Lessee hereby agrees not to disclose any terms, covenants or conditions of this
Lease to any non-related party other than its officers, directors, attorneys or
accountants without the prior written consent of Lessor. Additionally, Lessee
shall not record this Lease or any short form memorandum hereof without the
prior written consent of Lessor, which Lessor may withhold in its sole
discretion.
35.10 The rights and obligations of the parties under this Lease shall
survive its termination.
35.11 The duties and warranties of Lessor are limited to those
expressly stated in this Lease and does not and shall not include any implied
duties or implied warranties, now or in the future. No representations or
warranties have been made by Lessor other than those contained in this Lease.
35.12 Lessee promises and it is a condition to the continuance of this
Lease that there will be no discrimination against or segregation of any person
or group of persons on the basis of race, color, sex, creed, national origin or
ancestry in the leasing, subleasing, transferring occupancy, tenure, or use of
the Property, the Premises, or any portion thereof.
35.13 Lessor and Lessee each warrant to the other that it has not dealt
with any broker or agent in connection with this Lease, other than the person(s)
listed in Paragraph 1.15 above. Except for any broker(s) who shall be
compensated in accordance with the provisions of a separate agreement, Lessor
and Lessee each agree to indemnify the other against all costs, expenses, legal
fees and other liability for commissions or other compensation claimed by any
other broker or agent.
36. EXAMINATION OF LEASE; GOOD FAITH DEPOSITS
Submission of this document for examination and signature by Lessee
does not create a reservation or option to lease. Lessee hereby agrees that
Lessor will be entitled to immediately endorse and cash any good faith check(s)
forwarded by Lessee along with this document. It is further agreed that such
cashing of good faith checks by Lessor will not guarantee acceptance of this
document by Lessor, but, in the event Lessor does not accept or execute this
document, the amount of such good faith check(s) will be refunded to Lessee.
This document will become this "Lease" and be effective and binding only upon
full execution by authorized representatives of both Lessee and Lessor as
defined in this Lease. Thereafter, a fully executed copy of this Lease will be
deemed an original for all purposes.
37. GOVERNING LAW
This Lease is governed by and construed in accordance with the laws of
the state in which the Premises are located, and venue of any legal action will
be in the county where the Premises are located.
38. LESSOR'S LIEN
LESSOR HEREUNDER WILL HAVE THE BENEFIT OF, AND THE RIGHT TO, ANY AND
ALL LESSOR'S LIENS PROVIDED UNDER THE LAW BY WHICH THIS LEASE IS GOVERNED.
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39. SPECIAL PROVISIONS AND EXHIBITS
Special provisions of this Lease number 40 through 42 are attached
hereto and made a part hereof. The following Exhibits are attached to this Lease
and by this reference made a part hereof: "A", "A1", "A2", "B", "C", and "D".
IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease as of
the day and year indicated by Lessor's execution date as written below.
If Lessee is a corporation, each person signing this Lease on behalf of
Lessee represents and warrants that he or she has full authority to do so and
that this Lease binds the corporation. Prior to the execution of this Lease,
Lessee shall deliver to Lessor a certified copy of a resolution of Lessee's
Board of Directors authorizing the execution of this Lease or other evidence of
such authority reasonably acceptable to Lessor. If Lessee is a partnership or
limited liability company, each person or entity signing this Lease for Lessee
represents and warrants that he, she or it is a general partner of the
partnership or limited liability company, as applicable. Lessee shall give
written notice to Lessor of any general partner's or member's withdrawal or
addition. Simultaneous with the delivery of Lessee's signed lease, Lessee shall
deliver to Lessor a copy of Lessee's recorded statement of partnership or
certificate of limited partnership or articles of organization, as applicable.
THIS LEASE, WHETHER OR NOT EXECUTED BY LESSEE, IS SUBJECT TO ACCEPTANCE
BY LESSOR, ACTING BY ITSELF OR BY ITS AGENT BY THE SIGNATURE ON THIS LEASE OF
ITS SENIOR VICE PRESIDENT, VICE PRESIDENT, REGIONAL MANAGER OR DIRECTOR OF
LEASING.
LESSOR: LESSEE:
PS BUSINESS PARKS, L.P. DECISIONONE CORPORATION
A Delaware Corporation
PS Business Parks, Inc.
By: ______________________________________
OWNER ENTITY
By: _______________________________________ By:____________________
LISA FREITAS - ASSISTANT VICE PRESIDENT THOMAS J. FITZPATRICK
Date: _______________________________________ EXECUTIVE VP, COO, CFO
_______________________
LEASE EXECUTION DATE TITLE
Lessor Fed. ID # 95-4661839
____________________________
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<PAGE> 1
Exhibit 10.14
LEASE AMENDMENT
THIS LEASE AMENDMENT is made this day
of 1998, by and between VICTOR J. MAGGITTI, JR.
("LESSOR") and DECISIONONE CORPORATION ("LESSEE") against the following
background.
BACKGROUND
On or about October, 1994, LESSOR leased to General Diagnostics, Inc.
approximately 45,000 square feet of space in the Maggitti Building located at
400 Devon Park Drive, Wayne, Pennsylvania through December 31, 1999.
Subsequent thereto, LESSEE, through a Lease Assignment and Assumption
Agreement with General Diagnostics, Inc. dated March 3, 1998, assumed the
rights and obligations of General Diagnostics, Inc. under said Lease.
A clause within said Lease allows LESSEE a Right of Renewal for an
additional five year period with fixed rental rates upon the Lease termination
date of December 31, 1999.
LESSEE has proposed a reconfiguration of their existing space while
extending the term of the Lease through the aforementioned renewal period.
NOW THEREFORE, in order to amend that certain Lease Agreement dated
October, 1994 as amended ("LEASE") and intending to be legally bound hereby, the
parties hereto agree as follows:
1 The term of the LEASE, is hereby amended to be for a term of seven years
and four months commencing September 1, 1998 and ending December 31, 2005.
<PAGE> 2
2 LESSOR and LESSEE hereby confirm and agree that the rentable area of the
Demised Premises equals 45,000 square feet as marked on the drawing
attached as SCHEDULE "A" hereto and incorporated herein by reference.
LESSOR and LESSEE hereby further confirm and agree that the rentable area
of the Maggitti Building of which the Demised Premises are a part equals
130,998 square feet.
3 From and after September 1, 1998, LESSEE shall pay minimum annual rent as
set forth on the Schedule of Rents attached hereto and marked SCHEDULE "B"
and incorporated herein by reference. In addition, LESSEE shall pay, as
additional rent, LESSEE'S proportionate share of the service charges
incurred by LESSOR for the Maggitti Building, also based on 45,000 square
feet or 34.35% of the total service charges for the building. For the
months of October, November and December 1998, LESSOR agrees to abate the
minimum rent by a total of $36,562.50 or $12,187.50 for each month. During
the abatement period, LESSEE will continue to pay operating costs for the
entire 45,000 square feet as set forth in SCHEDULE "B". Said operating
costs shall contain an allowance for management of the premises which
shall equal 5% of the "BASE RENTAL" for the Demised Premises.
4 LESSOR will provide up to $750,000.00 for a Leasehold Incentive Fund for
the purposes hereinafter set forth in this Lease Amendment. The sums
expended from the Leasehold Incentive Fund will be repaid to LESSOR in the
form of additional rent payable in monthly installments as an additional
part of the monthly rent in an amount equal to the sum necessary to
amortize the entire Leasehold Incentive Fund over the entire LEASE term
including interest at an annual rate of 9%.
2
<PAGE> 3
5 LESSEE is currently entitled to use 70 parking spaces as part of their
allotted parking ratio. LESSOR shall provide LESSEE full use of an
additional 35 parking spaces which shall be so designated and reserved
bringing the total parking spaces allotted to LESSEE to 105 spaces.
6 LESSOR will provide from the above described Leasehold Incentive Fund for
any/all of the following costs which may be associated with the existing
space including both hard and soft costs associated with construction and
tenant finishes (tenant improvements) to existing space, including voice
and data cabling, voice and data equipment, fixtures, moving, leasing
commissions, project management, and the like. The following items shall
be paid for from the Leasehold Incentive Fund but the total costs of such
items shall be limited so that the maximum allowance (including sales
taxes and delivery charges, if any) for all of these items shall be
$365,000.00 which was arrived at using the amounts set forth below. Any
excess costs above $365,000.00 for all of these items shall be paid by
LESSEE.
<TABLE>
<S> <C>
Allowance for Voice and Data Cable $ 35,000.00
Allowance for Furniture $170,000.00
Allowance for Telecom Equipment $ 50,000.00
Allowance for Security $ 20,000.00
Allowance for Commissions $ 45,000.00
Allowance for Moving $ 20,000.00
Allowance for Project Management $ 25,000.00
</TABLE>
LESSEE, shall arrange the purchase of each of the above items and submit
the final bills to LESSOR for payment.
The remaining portion of the $750,000.00 Leasehold Incentive Fund or
$385,000.00 shall be applied towards the total construction costs,
estimated to be $625,000.00, necessary to "turnkey" the facility for
business as presented in the plans and specifications hereafter
3
<PAGE> 4
described. The portion of the construction costs which exceeds the
LESSEE'S portion of the construction allowance shall be the responsibility
of the LESSOR, and not passed on to the LESSEE.
7 LESSEE has provided plans and specifications covering the desired
modifications to the premises to be funded from the Leasehold Incentive
Fund. Said plans and specifications have been approved by the parties and
are incorporated herein by reference as if they were set forth herein at
length.
8 LESSOR shall provide for the construction and improvements to the demised
premises in accordance with said plans and specifications. LESSOR shall
use his best efforts to complete said construction and improvements within
sixty (60) days from the date of execution of this Lease Amendment. LESSEE
shall have the right to approve the selection of any and all contractors,
subcontractors, architects or engineers associated with the construction
or acquisition of improvements to be paid from the Leasehold Incentive
Fund. LESSEE's approval shall not be unreasonably withheld. Any delays
caused by this approval process shall be added to the aforesaid sixty (60)
day period.
9 LESSOR agrees that if at any time during the term of the LEASE, as
amended, LESSOR wishes to lease all or any portion of the space not
occupied by LESSEE within the Maggitti Building but contiguous to the
Demised Premises to third party tenants (other than tenants presently in
the Maggitti Building), then LESSOR shall offer in writing ("OFFER") to
lease such space to LESSEE which OFFER shall identify the portion of the
Maggitti Building subject to the OFFER ("OFFERED SPACE") and the date on
which the OFFERED SPACE will become available. If any space in the
Maggitti Building is currently subject to existing
4
<PAGE> 5
options or rights of first refusal, this present right shall accrue only
after the lapse of such pre-existing option or right. After delivery of an
OFFER, LESSEE shall have ten business days to respond to such OFFER. Rent
and other terms and conditions for LESSEE's leasing of the OFFERED SPACE
shall be the same rent and the same terms and conditions as then
applicable to the Demised Premises under the LEASE, as amended. If LESSEE
shall accept the OFFER, the OFFERED SPACE shall become part of the Demised
Premises at the same rate and upon the same terms and conditions as then
applicable to the remainder of the Demised Premises under the LEASE, as
amended. If LESSEE shall reject the offer, or shall fail to accept it in
writing within ten business days after the receipt thereof, then LESSOR
shall be free to lease the OFFERED SPACE to third parties free and clear
of LESSEE's option and rights under this Paragraph 12. The fact that
LESSEE rejects an offer or fails to accept it in a timely fashion shall
have no affect on LESSEE's ongoing right of first offer for any
subsequently available space in the Maggitti Building which is contiguous
to the Demised Premises.
10 LESSEE agrees that simultaneously with the execution of this LEASE
AMENDMENT, it will execute and deliver to LESSOR a "SUBORDINATION,
NON-DISTURBANCE AND ATTORNMENT AGREEMENT" and "LESSEE'S ESTOPPEL
CERTIFICATE" in the form attached hereto and marked SCHEDULE "C".
11 The terms and conditions set forth on the attached and marked up "RIDER
TO LEASE BETWEEN DECISIONONE CORPORATION AND VICTOR J. MAGGITTI, JR. DATED
- September 1998" (marked "SCHEDULE D") are hereby incorporated herein by
reference as fully as if they were expressly set forth at length.
5
<PAGE> 6
12 LESSEE is hereby given the option to extend the term of this Lease for an
additional term of five (5) years (RENEWAL TERM) upon the same terms and
conditions as set forth in this Lease, except for the adjustment for
"ADDITIONAL RENTAL" set forth on SCHEDULE B. LESSEE agrees to give LESSOR
written notice of election to exercise this option not less than six
months prior to the expiration of the then current term hereof. If the
LESSEE exercises its option to so renew the Term, then the annual rent for
the RENEWAL TERM shall be as set forth on the Remittance Schedule attached
hereto as SCHEDULE B for the years set forth thereon.
13 Except as modified hereby, all other terms and conditions of the LEASE, as
amended, shall continue in full force and effect.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals
the day and the year first above written.
WITNESS:__________________________ _____________________________(SEAL)
VICTOR J. MAGGITTI, JR.
DECISIONONE CORPORATION
ATTEST:___________________________ BY:__________________________(SEAL)
Name: Name:
Title: Title:
6
<PAGE> 7
SCHEDULE A
DRAWING OF
DEMISED PREMISES
FOR
DECISIONONE CORPORATION
<PAGE> 8
SCHEDULE C
SUBORDINATION, NON-DISTURBANCE
AND
ATTORNMENT AGREEMENT
LESSEE'S ESTOPPEL CERTIFICATE
<PAGE> 9
SCHEDULE D
RIDER TO LEASE
BETWEEN
DECISIONONE CORPORATION
AND
VICTOR J. MAGGITTI, JR.
DATED - September 1998
<PAGE> 10
LEASE AMENDMENT
THIS LEASE AMENDMENT is made this day
of May, 1999, by and between VICTOR J. MAGGITTI, JR. ("LESSOR") and
DECISIONONE CORPORATION ("LESSEE") against the following background.
BACKGROUND
On or about October, 1994, LESSOR leased to General Diagnostics, Inc.
approximately 45,000 square feet of space in the Maggitti Building located at
400 Devon Park Drive, Wayne, Pennsylvania through December 31, 1999.
Subsequent thereto, LESSEE, through a Lease Assignment and Assumption
Agreement with General Diagnostics, Inc. dated March 3, 1998, assumed the
rights and obligations of General Diagnostics, Inc. under said Lease.
A clause within said Lease allows LESSEE a Right of Renewal for an
additional five year period with fixed rental rates upon the Lease termination
date of December 31, 1999.
On or about September 25, 1998, the parties reconfigured the leased space
while extending the term of the Lease to December 31, 2005.
The LESSEE has now requested additional space in the building and certain
renovations to the new and existing leased space and the LESSOR has agreed to
amend the Lease.
NOW THEREFORE, in order to amend that certain Lease Agreement dated
October, 1994 as amended ("LEASE") and intending to be legally bound hereby, the
parties hereto agree as follows:
<PAGE> 11
1 Beginning July 1, 1999 and extending through December 31, 2005, LESSOR
will lease to LESSEE an additional fifty-four hundred (5,400) square feet
of space in the Maggitti Building and LESSOR and LESSEE hereby confirm and
agree that the rentable area of the Demised Premises now equals 50,400
square feet as marked on the drawing attached hereto as "EXHIBIT 99-A" and
incorporated herein by reference. LESSOR and LESSEE hereby further confirm
and agree that the rentable area of the Maggitti Building of which the
Demised Premises are a part equals 130,998 square feet.
2 From and after July 1, 1999, LESSEE shall pay minimum annual rent as set
forth on the Schedule of Rents attached hereto and marked "EXHIBIT 99-B"
and incorporated herein by reference. In addition, LESSEE shall pay, as
additional rent, LESSEE'S proportionate share of the service charges
incurred by LESSOR for the Maggitti Building, also based on 50,400 square
feet or 38.474% of the total service charges for the building. Said
operating costs shall contain an allowance for management of the premises
which shall equal 6% of the "BASE RENTAL" for the Demised Premises.
3 LESSOR will make the necessary renovations called for in the plans and
specifications quoted upon by Veneesa Construction Co., Inc. by written
quote dated May 5, 1999, a copy of which is attached hereto as "EXHIBIT
99-C". The sums expended by LESSOR will be repaid to LESSOR in the form of
additional rent payable in monthly installments as an additional part of
the monthly rent as set forth on EXHIBIT 99-B.
4 LESSEE is currently entitled to use 105 parking spaces as part of their
allotted parking ratio. LESSOR shall provide LESSEE full use of an
additional 15 parking spaces including 4
2
<PAGE> 12
handicapped spaces which shall be so designated and reserved bringing the
total parking spaces allotted to LESSEE to 120 spaces.
5 In addition to the "fit out" costs referred to above, LESSOR will provide
LESSEE allowances for any/all of the following costs which may be
associated with either the new space or the existing space including both
hard and soft costs associated with construction and tenant finishes
(tenant improvements) to existing space. These additional costs or
allowances which LESSOR shall provide shall include voice and data
cabling, voice and data equipment, fixtures, moving, leasing commissions,
project management, and the like to a maximum cost of $150,000.00. LESSEE,
shall arrange the purchase of each of the above items and submit the final
bills to LESSOR for payment. It is not contemplated that the construction
cost shall exceed the above described quotation. The cost of any change
orders to the construction "fit-out" agreed to herein which are requested
after the date of this Amendment shall be the responsibility of LESSEE.
6 LESSEE has provided plans and specifications covering the desired
modifications to the premises to be funded by LESSOR. Said plans and
specifications have been approved by the parties and are incorporated
herein by reference as if they were set forth herein at length.
7 LESSOR shall provide for the construction and improvements to the demised
premises in accordance with said plans and specifications. LESSOR shall
use his best efforts to complete said construction and improvements within
sixty (60) days from the date of execution of this Lease Amendment. If
construction is not complete by July 1, 1999, the rental schedule set
forth herein shall never-the-less be paid.
3
<PAGE> 13
8 LESSEE agrees that simultaneously with the execution of this LEASE
AMENDMENT, it will execute and deliver to LESSOR a "SUBORDINATION,
NON-DISTURBANCE AND ATTORNMENT AGREEMENT" and "LESSEE'S ESTOPPEL
CERTIFICATE" in the form attached hereto and marked "EXHIBIT 99-D".
9 LESSEE'S option, set forth in the previous Lease Amendment, to extend the
term of this Lease for an additional term of five (5) years (RENEWAL TERM)
upon the same terms and conditions as set forth in this Lease, except for
the adjustment for "ADDITIONAL RENTAL" set forth on "EXHIBIT 99-B", is
hereby extended to include the additional space. LESSEE agrees to give
LESSOR written notice of election to exercise this option not less than
six months prior to the expiration of the then current term hereof. If the
LESSEE exercises its option to so renew the Term, then the annual rent for
the RENEWAL TERM shall be as set forth on the Remittance Schedule attached
hereto as "EXHIBIT 99-B" for the years set forth thereon.
10 Except as modified hereby, all other terms and conditions of the LEASE, as
amended, shall continue in full force and effect.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals
the day and the year first above written.
WITNESS:__________________________ ____________________(SEAL)
VICTOR J. MAGGITTI, JR.
DECISIONONE CORPORATION
ATTEST:___________________________ BY:__________________(SEAL)
Name: Name:
4
<PAGE> 14
Title: Title:
5
<PAGE> 15
EXHIBIT 99-A
DRAWING OF
DEMISED PREMISES
FOR
DECISIONONE CORPORATION
<PAGE> 16
EXHIBIT 99-D
SUBORDINATION, NON-DISTURBANCE
AND
ATTORNMENT AGREEMENT
LESSEE'S ESTOPPEL CERTIFICATE
<PAGE> 1
Exhibit 10.15
LEASE AGREEMENT
THIS LEASE AGREEMENT, made this ______day of ______________, 1999, by
and between the BRYAN-COLLEGE STATION ECONOMIC DEVELOPMENT CORPORATION, a Texas
non-profit corporation (hereinafter referred to as "LANDLORD"), and DECISIONONE
CORPORATION , a Delaware Corporation (hereinafter referred to as "TENANT").
WHEREAS, the LANDLORD owns or will own certain real property located in
Brazos County, Texas; and
WHEREAS, the LANDLORD wishes to lease to TENANT and TENANT wishes to
lease from LANDLORD, the premises more particularly described herein for
economic development purposes.
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the LANDLORD, and TENANT agree as follows:
1. Definitions: As used herein, the terms defined in this Section shall
have the meanings set forth herein.
a. Land: Being a 9.999 acre tract of land
lying and being situated in the
Richard Carter Survey, Abstract No.
8, Bryan, Texas, and being more
particularly described on Exhibit
"A" attached hereto and made a part
hereof for all purposes, together
with all the rights of way,
privileges and appurtenances
thereunto belonging or in anywise
appertaining thereto.
b. Improvements: All buildings, parking facilities
and other improvements on the above
mentioned land and containing
approximately 50,096 square feet.
c. Premises: The land and the Improvements as
defined herein.
2.Term of Lease: The original term of this Lease shall be for a period
of 10 years, commencing on the date specified at the beginning of the Lease with
two (2) five (5) year options to renew at TENANT's discretion on the same terms
and conditions described herein.
Thereafter beginning with the twenty-first (21st) year of this Lease at
TENANT's sole discretion, the Lease term shall automatically be renewed on a
year-to-year basis on the same terms and conditions described herein; provided
however, the rental rate shall be equal to fifty percent (50%) of the then
current commercial rental rate in Bryan-College Station. Beginning with the
twenty-first (21st) year of this Lease the Lease structure will become a triple
net lease rather than an absolute net lease and the LANDLORD shall assume full
responsibility for all cost of structural repairs and replacements including but
not limited to the roof and roof membrane,
<PAGE> 2
building structure, including loading dock, foundation and concrete slab,
parking lot and driveways, HVAC and exterior glass.
3. Rent: TENANT agrees to pay to LANDLORD, in lawful money of the
United States of America throughout the term of this Lease a lease payment of
One Dollar ($1.00) per year payable in advance.
4. Alternative Performance Payment: TENANT agrees to employ the
following number of employees at a payroll amount listed below (the "Performance
Standards"):
<TABLE>
<CAPTION>
LEASE TERM EMPLOYEES ANNUAL PAYROLL
---------- --------- --------------
<S> <C> <C>
Commencing at the 12th month 200 employees $ 4,800,000.00
to the 24th month of occupancy
25th month to 36th month 350 employees $ 8,400,000.00
37th month to end of Lease Term 500 employees $12,000,000.00
</TABLE>
Should TENANT fall below these Performance Standards in any one
quarter, TENANT shall pay that percentage of Alternative Performance Payment (as
defined below) which is in effect in the quarter wherein said payments are due,
which equals the percentage of TENANT's performance which falls below the
Performance Standards.
Alternative Performance Payment shall equal the value, on the execution
date of the Lease, agreed by the parties to be $12.00 per square foot per year,
payable in monthly installments of $1.00 / SF, increased, after year five (5) of
the Lease Term, on an annual basis by three percent (3%); provided, however,
such Alternative Performance Payment shall never exceed two and no/100 dollars
($2.00) per square foot per month.
BY WAY OF EXAMPLE ONLY: Assume Alternative Performance Payment is
required in the first quarter of year eight (8) of Lease Term. Alternative
Performance Payment shall be calculated as follows:
<TABLE>
<CAPTION>
<S> <C>
Quarterly Payroll Commitment: $3,000,000.00 = $12,000,000.00 / 4 quarters
Year 8 - 1st Quarter Actual Payroll: $2,000,000.00
</TABLE>
$3,000,000.00 - $2,000,000.00 = $1,000,000.00
$1,000,000.00 / $3,000,000.00 = 33%
Alternative Performance Payment calculation:
Year 8 Monthly Rental = $1.0927 / SF per month
$1.0927 / SF per month x 50,096 SF = $54,739.90 per month
2
<PAGE> 3
33% x $54,739.90 per month = $18,064,17 per month for the 1st
quarter of year 8 of the lease term
TENANT's payroll portion of the Performance Standards is to be
calculated on a quarterly basis based upon the last day of the month of the
quarter following twelve (12) months from the date of occupancy of the Premises
by TENANT. TENANT agrees, upon written request from Landlord, to provide to
LANDLORD all employment records reasonably necessary to verify TENANT's
compliance with the provisions of this paragraph.
Notwithstanding anything herein to the contrary, should TENANT fail to
achieve, or having achieved fail to maintain, employee numbers and payroll
amounts at a level equal to or greater than thirty-three percent (33%) of the
Performance Standards described above in any quarter, LANDLORD may notify TENANT
in writing of a default under this provision. Upon receipt of said written
notice TENANT shall have 30 days in which to cure said default. In the absence
of a cure, LANDLORD in its sole discretion may terminate this Lease and TENANT
shall surrender the Premises on ninety (90) days written notice by the LANDLORD
given as required by paragraph 35 hereof. TENANT's correction of this failure
during the ninety (90) day notice provision described above shall not entitle it
to reinstatement of the Lease, unless LANDLORD agrees to such reinstatement, in
its sole discretion.
5. Insurance: Throughout the term of this Lease Agreement, TENANT
shall, at its sole cost and expense, keep the Improvements insured against loss
or damage by fire and against all loss or damage by other risks now or hereafter
embraced by the standard form of extended coverage endorsement regularly
available from major insurers of fire and other hazards, in an amount not less
than one hundred percent (100%) of the then full replacement cost, subject to a
deductible not greater than Fifty Thousand Dollars ($50,000.00) throughout the
term of this Lease. LANDLORD and TENANT shall be named as the insured on the
above described policy.
TENANT, at its sole cost and expense, shall maintain personal injury
and property damage liability insurance against claims for personal injury,
death or property damage occurring in or about the Premises providing protection
during the term of this Lease for not less than One Million Dollars
($1,000,000.00) per occurrence. Such policies issued hereunder shall name the
LANDLORD as an additional insured.
TENANT shall, at all times during the Term of this Lease at its sole
cost and expense, obtain and keep in force Worker's Compensation and Employer
Liability Insurance.
All fire and extended coverage insurance and other insurance carried by
TENANT covering losses arising out of destruction or damage to the Premises or
its contents and all insurance carried covering liability arising from personal
injury, death or property damage shall provide for a waiver of rights and
subrogation against LANDLORD and TENANT on the part of the insurance carrier.
3
<PAGE> 4
6. Quiet Enjoyment: So long as the TENANT shall pay the rent, and an
Alternative Performance Payment if applicable, provided for in this Lease, and
shall not have breached any of its material obligations under this Lease, the
LANDLORD covenants that the TENANT may peaceably and quietly have, hold, and
enjoy the Premises for the entire term without hindrance, interruption or
disruption by LANDLORD, LANDLORD's creditors, or any other person having claims
against the LANDLORD or the Premises as a result of LANDLORD's actions. LANDLORD
shall do everything necessary, including taking appropriate legal measures, to
remove any impediment to TENANT's quiet and peaceable enjoyment, so long as such
impediment is the result of LANDLORD's actions and not TENANT's, or any other
person or persons claiming by, through, or under LANDLORD, subject,
nevertheless, to the terms of this Lease.
7. No Guarantees or Warranties: LANDLORD makes no implied or express
warranty of any kind including but not limited to the warranty of fitness for a
particular purpose, warranty of habitability, warranty of merchantability or
warranty of commercial suitability.
8. Taxes and Assessments: In addition to rent, TENANT agrees to pay, as
they become due and payable, and before they become delinquent, all ad valorem
taxes, both general and special assessments and governmental charges lawfully
levied or assessed against the Premises or any part thereof, including
improvements, during the term of this Lease and dues and assessments by means of
deed restrictions and/or owners' associations. TENANT shall pay, in addition to
the amount set forth in the preceding sentence, all taxes and assessments which
are not presently in effect but which may hereinafter be enacted and which would
be chargeable to TENANT as a consequence of the ownership of the Premises if in
fact TENANT were the owner thereof in fee simple at the time of such assessment
of levy. Any exemptions from taxation that the Premises may qualify for shall be
for the TENANT's account. In the event TENANT fails to pay any taxes and
assessments as required by this section, LANDLORD may, at its option, pay such
taxes and assessments, and the amount of such taxes and assessments shall be
charged to TENANT as additional rent and shall become due and payable by TENANT
within thirty days from receipt of LANDLORD's invoice.
9. Triple Net Lease : It is the purpose and intent of LANDLORD and
TENANT that the rent provided in this Lease shall be absolutely net to LANDLORD,
and that TENANT shall pay, without notice or demand, and without abatement,
deduction or setoff and save LANDLORD harmless from and against all costs, taxes
(ad valorem and personal), insurance (including the cost of the insurance set
forth in paragraph 5), expenses of maintenance, repair and replacement, and
other charges and expenses and obligations of every kind and nature whatsoever
relating to the Premises which may arise or become due during the term of this
Lease. If TENANT is required to make any payment or incur any expense as
provided in this Lease and fails to do so, then LANDLORD, at its option, may
make the payment or incur the expense on TENANT's behalf, and the cost thereof
shall be charged to TENANT as additional rent and shall be due and payable by
TENANT within thirty days from receipt of LANDLORD's invoice.
4
<PAGE> 5
10. Use: TENANT warrants and represents to LANDLORD that the Premises
shall be used and occupied only for the purpose of a computer hardware and
software technical service support center. Specifically, TENANT will employ
managers, supervisors, and trained service support technicians in the computer
hardware and software field to provide "help desk" functions. These functions
will occur in an "inbound call center environment." The purpose for which the
Premises may be used may be altered, expanded or restricted, provided the
Performance Standards are met, with the prior written consent of the LANDLORD.
TENANT shall occupy the Premises, conduct its business and control its agents,
employees, invitees and visitors in such a manner as is lawful, reputable and
will not create a nuisance. TENANT's use of the Premises shall comply with all
laws, ordinances and regulations applicable thereto. TENANT shall obtain all
governmental licenses and permits necessary to utilize the Premises for its
intended use.
11. Inspection: LANDLORD or its authorized agents shall be allowed
reasonable access to the building, for legitimate purposes, with forty-eight
(48) hours prior notice. LANDLORD shall have the right to use any and all means
which LANDLORD may deem proper to open any door in an emergency .
12. Building Services: TENANT shall pay the cost of all utility
services, including, but not limited to, initial connection charges, all charges
for gas, electricity, water, sanitary and storm sewer service, refuse or garbage
collection and for all electric lights. LANDLORD shall not be required to pay
for any utility services, supplies or upkeep in connection with the Premises.
13. LANDLORD Repairs: LANDLORD shall not be required to maintain or
make any improvements, replacements or repairs of any kind or character to the
Premises during the first twenty years of the term of this Lease. LANDLORD shall
in all instances pursue all remedies for warranty repairs of any nature and if
necessary file appropriate legal action to effectuate said remedies.
14. TENANT Repairs: TENANT shall, for the first twenty years of the
term of this Lease, at its sole cost and expense, maintain, repair and replace
all parts of the Premises and keep the same in good repair and condition,
including, but not limited to, roof, foundation, parking areas, structural
soundness of exterior walls, windows, plate glass, doors, heating, ventilating
and air conditioning systems, down spouts, fire sprinkler system, dock bumpers,
lawn maintenance, pest control and extermination, trash pick-up and removal, and
painting the building and exterior doors.
15. LANDLORD Improvements: Prior to TENANT's occupancy, TENANT will
manage as LANDLORD's agent the construction of all Improvements as set forth in
the Preliminary Plans approved by LANDLORD and TENANT simultaneously with the
execution of this Lease. Within thirty (30) days from the date of this Lease,
TENANT shall have architect prepare and deliver to LANDLORD final plans and
specifications for the construction of the Improvements described in the
preliminary plans. Within five (5) days from receipt by LANDLORD of the final
plans and specifications, LANDLORD shall execute a copy of the final
5
<PAGE> 6
plans and specifications and any change orders, if applicable. LANDLORD's total
contribution shall be Four Million Dollars ($4,000,000.00) and shall be
available to pay any fees and hard and soft costs associated with the
construction of the Project, but excluding by way of example such costs as
marketing, promotion, transportation costs and any employee salaries or
benefits. The TENANT agrees to deposit Three Hundred Thousand Dollars
($300,000.00) into LANDLORD's construction escrow fund to be utilized by
LANDLORD to fund items associated with the construction of the Project, as
described in the preceding sentence. Any expenses over and above $4,000,000.00
due to change orders requested by the TENANT, cost overruns, or original design
costs, shall be at TENANT's cost. Any changes or modifications to the final
plans and specifications after they have been bid shall be made and accepted
only by written change order or agreement signed by LANDLORD and TENANT and
shall constitute an amendment to this Lease. The preliminary plans and the final
plans and specifications (when approved by LANDLORD and TENANT) are incorporated
in this Lease by reference. TENANT, as LANDLORD'S agent, agrees that the
construction of the improvements will be substantially in accordance with the
final plans and specifications. TENANT will make reasonable efforts to assure
that contractor performs its work, in a good and workmanlike manner and in full
compliance with all provisions of federal, state and local authorities having
jurisdiction over the Premises.
16. TENANT's Commitment: The TENANT, prior to occupancy, shall install
in the Premises trade fixtures and personal property valued at approximately Two
Million Two Hundred Thousand and No/100 Dollars ($2,200,000.00).
17. No Transfer: No portion of the Premises or of TENANT's interest in
this Lease may be acquired by any other person or entity, without the express
written permission of LANDLORD, such permission shall not be unreasonably
withheld.
18. LANDLORD's Assignment: LANDLORD shall have the right to sell,
transfer or assign, in whole or in part, its rights and obligations under this
Lease and in the Premises; provided however, TENANT shall have a right of first
refusal in all such contemplated sales, transfers and assignments, except if
such sale, transfer and assignment is to the City of Bryan, Texas and/or Brazos
County, Texas. The LANDLORD shall give written notice to the TENANT of its
intent to sell the Premises (other than to the City of Bryan or Brazos County).
Such notice shall specify the price and sales terms of such contemplated sale.
The TENANT shall have thirty (30) days from receipt of notice in which to
exercise its option to purchase on the same sale and purchase terms. Failure by
TENANT to respond within thirty (30) days of such notice shall be deemed a
waiver of such right of first refusal. Any such sale, transfer or assignment
shall operate to release LANDLORD from any and all liabilities arising out of
any act, occurrence or omission relating to the Premises or this Lease arising
after the date of such sale, assignment or transfer. Any subsequent holder of
LANDLORD's estate, whether partial or complete, shall be subject to the terms
and conditions of this Lease.
19. Eminent Domain and Condemnation: If the Premises is taken by
condemnation or the right of eminent domain during the pendency of this Lease
Agreement, either party, upon
6
<PAGE> 7
written notice to the other, shall be entitled to terminate the Lease as of the
date of the taking of possession by Condemnor.
It is understood in the event of the termination of this Lease due to
said condemnation, TENANT shall have no claim against LANDLORD for the value of
any unexpired term of its Lease. LANDLORD shall have no claim against TENANT for
any rental payments for the unexpired term of the Lease. LANDLORD shall be
entitled to receive and retain the amounts awarded for the Condemnation of the
Premises as the fee owner. TENANT shall have the right to claim and recover from
the condemning authority, such compensation as may be separately awarded or
recoverable by TENANT in TENANT's own right to compensate it for its leasehold
interest.
20. Signs: LANDLORD shall permit TENANT to erect any signs designating
its business or products on the Premises as long as such signs shall conform to
applicable public zoning, city ordinances or other laws and covenants of record.
21. RELEASE: TENANT AND ITS ASSIGNS ASSUME FULL RESPONSIBILITY FOR THE
USE OF THE PREMISES, AND HEREBY INDEMNIFIES AND HOLDS HARMLESS THE LANDLORD, ITS
OFFICERS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS FROM AND AGAINST ANY AND ALL
CLAIMS, DEMANDS, AND CAUSES OF ACTION OF EVERY KIND AND CHARACTER, INCLUDING THE
COST OF DEFENSE THEREOF, ATTORNEYS' FEES AND EXPENSES, FOR ANY INJURY TO OR
DEATH OF ANY PERSON (WHETHER EMPLOYEES OF EITHER PARTY OR OTHER THIRD PARTIES)
AND ANY LOSS OF OR DAMAGE TO PROPERTY OR BUSINESS (WHETHER PROPERTY OF EITHER OF
THE PARTIES HERETO, THEIR EMPLOYEES, OR OF THIRD PARTIES) THAT IS CAUSED BY OR
ALLEGED TO BE CAUSED BY, ARISING OUT OF, OR IN CONNECTION WITH AN ACT OR
OMISSION OF TENANT, ITS OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS RELATIVE TO
THE USE OF THE PREMISES, THE CONDITION OF THE PREMISES, WHETHER PATENT OR
LATENT, OR ANY BREACH OR DEFAULT IN PERFORMANCE OF ANY OBLIGATION OF TENANT
HEREUNDER.
Insurance covering this indemnity requirement shall be provided by
TENANT. Such insurance shall provide for bodily injury or death in the minimum
amount of $1,000,000.00 per occurrence along with property damage insurance in
the minimum amount of $1,000,000.00 per occurrence. LANDLORD agrees that the
TENANT's obligation to indemnify the LANDLORD herein shall be limited to the
insurance policy amounts stated herein. Such insurance coverage will name the
LANDLORD, its officers and directors, as additional insureds. The TENANT shall
present to LANDLORD a policy or certificate of such insurance with endorsements
reflecting this contractual indemnity, a waiver of subrogation and additional
insured/loss payee as provided for herein. There shall be no exclusion in the
policy for LANDLORD having secured its own insurance. The policy shall require
written notice to be given the LANDLORD at least fifteen (15) days prior to any
cancellation of the policy before its expiration.
22. Partial Damage to Premises: TENANT shall notify LANDLORD in writing
as soon as practicable upon the occurrence of any damage to the Premises. If the
Premises are only
7
<PAGE> 8
partially damaged, partially damaged being defined as thirty percent (30%) or
less of the full insurable value of the Improvements immediately prior to the
casualty, and if the proceeds received by LANDLORD from the insurance policies
described in paragraph 5 are sufficient to pay for the necessary repairs to the
Improvements, this Lease shall remain in effect and TENANT shall repair the
damage as soon as reasonably possible. LANDLORD shall assign all insurance
proceeds received as a result of such damage to TENANT to be used to rebuild the
Premises. LANDLORD shall have no obligation to repair or rebuild Tenant's
furniture, fixtures, equipment or personal property contained within the
Premises. If the insurance proceeds received by LANDLORD are insufficient to
cover the entire cost of repair of the Premises, or if the damage was due to a
cause not covered by the insurance policies which TENANT maintains pursuant to
paragraph 5, LANDLORD may elect either to (a) have the TENANT repair the damage
with reasonable diligence in which case this Lease shall remain in full force
and effect, or (b) terminate this Lease as of the date the damage occurred.
LANDLORD shall notify TENANT of its election within sixty (60) days after
receipt of notice of the damage. In the event that LANDLORD elects to have the
damage repaired, LANDLORD shall assign the insurance proceeds to the TENANT and
TENANT shall pay the difference between the actual cost of repair and any
insurance proceeds received by LANDLORD. If LANDLORD elects to terminate the
Lease, LANDLORD shall be entitled to any insurance proceeds paid for such damage
to the Improvements.
23. Total or Substantial Destruction: In the event that the Premises
are totally or substantially destroyed by any cause whatsoever, total or
substantial damage being defined as in excess of thirty percent (30%) of the
full insurable value of the Improvements prior to the casualty, this Lease shall
terminate as of the date the destruction occurred regardless of whether LANDLORD
receives any insurance proceeds. If the Premises can be rebuilt within six (6)
months following the date of destruction, and TENANT desires to have the
Improvements rebuilt, LANDLORD may elect to have the TENANT rebuild the
Premises, to the extent of any proceeds received by LANDLORD from policies of
insurance, in which case, this Lease shall remain in full force and effect. In
such event, LANDLORD shall assign to TENANT any such insurance proceeds.
LANDLORD shall notify TENANT of such election within thirty (30) days after the
occurrence of total or substantial destruction. TENANT shall pay the difference
between the actual cost of rebuilding and any insurance proceeds received by
LANDLORD and assigned to TENANT. Should LANDLORD elect not to rebuild, all
insurance proceeds from policies described in paragraph 5 insuring the
Improvements hereof shall be paid to LANDLORD.
In the event that this Lease is terminated pursuant to the provisions
of paragraphs 22 and 23, the rent due by TENANT shall be abated for the
unexpired portion of the Lease, effective as of the date the destruction
occurred.
24. Holding Over: In the event TENANT remains in possession of the
Premises after the twentieth year of the Lease term without the execution of a
Lease Amendment, TENANT shall be deemed to be occupying the Premises as a tenant
from month to month at a rental rate in the year of the holdover plus fifty
percent (50%) of such amount and otherwise subject to all the conditions,
provisions and obligations of this lease insofar as the same are applicable to a
month to month tenancy.
8
<PAGE> 9
25. Default and Remedies by TENANT: The following shall be deemed to be
events of default by TENANT under this Lease:
(a) TENANT shall fail to pay when due any installment of
rent, an Alternative Performance Payment or any other
payment required pursuant to this Lease.
(b) TENANT shall vacate or abandon the Premises.
(c) TENANT shall file a petition or be adjudged bankrupt
or insolvent under any applicable federal or state
bankruptcy or insolvency law or admit that it cannot
meet its financial obligations as they become due, or
a receiver or trustee shall be appointed for all or
substantially all of the assets of TENANT.
(d) TENANT shall make a transfer in fraud of creditors or
shall make an assignment for the benefit of
creditors.
(e) TENANT shall do or permit to be done any act which
results in a lien being filed against the Premises,
which is not removed within thirty (30) days of its
filing. TENANT shall immediately notify LANDLORD of
any lien filing and provide a recorded Release of
Lien within the time provided above.
(f) The liquidation, termination or dissolution, (but not
sale, merger or consolidation) of TENANT.
(g) TENANT shall be in default of any other term,
provision or covenant of this Lease, other than as
specified in subparagraph (a) through (f) above, and
if such default is not cured within thirty (30) days
after written notice thereof from LANDLORD to TENANT.
26. Remedies for TENANT's Defaults: Upon the occurrence of any event of
default set forth in this Lease, which is not cured within thirty days after
receipt of written notice of said alleged default by TENANT from LANDLORD,
providing said default can be cured within said thirty day period. LANDLORD
shall have the option to pursue any one or more of the following In the event
that TENANT is making reasonable efforts to cure a default which cannot be cured
within a thirty day period the cure period will be extended as appropriate. :
(a) LANDLORD may enter upon and take possession of the
Premises and expel or remove TENANT and any other
person who may be occupying all or any part of the
Premises and relet the Premises on behalf of TENANT
and receive the rent directly by reason of such
reletting. TENANT agrees to pay LANDLORD upon demand
any deficiency that
9
<PAGE> 10
may arise by reason of any reletting of the Premises
at a rental rate less than the rent in effect in the
year of default; further, TENANT agrees to reimburse
LANDLORD for any expenditures made by it in order to
relet the Premises, including, but not limited to,
repair costs Arising from occurrences other than
normal wear and tear.
(b) LANDLORD may enter upon the Premises and perform
TENANT's obligations under the Lease. TENANT agrees
to reimburse LANDLORD on demand for any expenses
which LANDLORD may incur in effecting compliance with
TENANT's obligations under this Lease; further,
TENANT agrees that LANDLORD shall not be liable for
any damages resulting to TENANT from effecting
compliance with TENANT's obligations under this
Lease.
(c) LANDLORD may terminate this Lease, in which event
TENANT shall immediately surrender the Premises to
LANDLORD, and if TENANT fails to surrender the
Premises, LANDLORD may, without prejudice to any
other remedy which it may have for possession or
arrearages in rent and/or Alternative Performance
Payment, enter upon and take possession of the
Premises and expel or remove TENANT and any other
tenant who may be occupying all or any part of the
Premises . TENANT agrees to pay on demand the amount
of all loss and damage which LANDLORD may suffer due
to the termination of this Lease under this paragraph
26 including, without limitation, loss and damage due
to the failure of TENANT to maintain and/or repair
the Premises as required hereunder and/or due to the
inability of LANDLORD to relet the Premises on
satisfactory terms or otherwise.
(d) Provided that TENANT's default under paragraph 25
above is for failure to pay rent and/or Alternative
Performance Payment, LANDLORD may, prevent TENANT
from entering the Premises by changing the door
locks. If LANDLORD changes the door locks, LANDLORD
shall place a written notice on the front door of the
Premises, stating the name and address or telephone
number of an individual or company from which a new
key may be obtained by TENANT; provided, however,
that (i) the new key needs to be provided only during
LANDLORD's regular business hours, and (ii) LANDLORD
may condition delivery of the new key upon TENANT's
payment of all rent then due. Costs and expenses
incurred by LANDLORD in exercise of its right
pursuant to this paragraph 26(d) shall be deemed to
be expenditures and damages recoverable from TENANT
Pursuant to (a), (b) or (c) of this paragraph 26.
Notwithstanding anything contained in this Lease to the contrary, this
Lease may be terminated by LANDLORD, only by written notice of such termination
to TENANT given in
10
<PAGE> 11
accordance with paragraph 35 below, and no other act or omission of LANDLORD
shall be construed as a termination of this Lease.
27. Remedies Cumulative: All rights and remedies of LANDLORD and TENANT
herein or existing at law or in equity are cumulative and the exercise of one or
more rights or remedies shall not be taken to exclude or waive the right to the
exercise of any other.
28. Mitigation of Damages: With respect to the provisions of any laws
of the State of Texas or of this Lease which require that Landlord use
reasonable efforts to relet the Premises, it is understood and agreed that the
following shall apply in determining whether such efforts by LANDLORD to relet
are reasonable:
(a) LANDLORD may elect to lease other comparable,
available space it may own before reletting the
Premises;
(b) LANDLORD may decline to incur out-of-pocket costs to
relet the Premises, other than customary leasing
commissions and legal fees for the negotiation of a
lease with a new tenant;
(c) LANDLORD may decline to relet the Premises to a
prospective tenant if the nature of such prospective
tenant's business is not consistent with the zoning
for the area in which the Premises is situated or
with the type of business in that area;
(d) LANDLORD may decline to relet the Premises to a
prospective tenant, the nature of whose business may
have an adverse impact upon the manner in which the
Premises is operated even though such prospective
tenant may have a good credit rating;
(e) Before reletting the Premises to a prospective
tenant, LANDLORD may require the prospective tenant
to demonstrate the same financial capacity that
LANDLORD would require as a condition to leasing
other space it may own to the prospective tenant; and
(f) Listing the Premises with a broker in a manner
consistent with subsections (a) through (f) above
shall constitute prima facie evidence of reasonable
efforts on the part of LANDLORD to relet the
Premises.
29. Default by LANDLORD: The following shall be deemed events of default
by the LANDLORD under this Lease:
(a) LANDLORD shall fail to construct the Improvements
(for a reason not the fault, in whole or in part, of
TENANT); provided however, failure to complete the
Improvements on the time schedule set
11
<PAGE> 12
forth in the construction documents for a reason not
the fault of the LANDLORD, shall not be deemed a
default.
(b) LANDLORD shall fail to perform its obligations
pursuant to paragraph 6 hereof.
(c) The City of Bryan, Texas and Brazos County, Texas
fail to approve tax abatement for the TENANT in the
following amounts:
<TABLE>
<CAPTION>
Tax Year Percentage of Increased Value over
January 1, 1999 Value to be Abated
----------------------------------
<S> <C>
2000 90%
2001 80%
2002 70%
2003 60%
2004 50%
2005 40%
2006 30%
2007 20%
2008 10%
2009 10%
</TABLE>
30. Remedies of TENANT: Upon an event of default as defined in paragraph
29 above, TENANT shall have the following remedies:
(a) Should LANDLORD fail to construct the Premises, for a
reason not the fault, in whole or in part, of the
TENANT, as outlined in paragraph 29(a) hereof, or
breach its obligation under paragraph 6 hereof,
TENANT shall have a right to terminate the Lease and
shall be entitled to recover direct, but not
incidental, consequential or special damages
notwithstanding their foreseeability, from the
LANDLORD.
(b) If the TENANT is unable to secure tax abatement as
described above, LANDLORD shall pay to the taxing
authorities, during the first ten (10) years of this
Lease, ad valorem taxes equal to that percentage of
taxes, as indicated in paragraph 29 (c) above, that
would have been abated had such tax abatement been
approved.
31. Default Prior to Completion: Damages: TENANT acknowledges and agrees
(1) that LANDLORD would not purchase the Premises and construct the improvements
thereon except for TENANT's agreement to occupy the Premises pursuant to this
Lease and to pay the rent and satisfy the Performance Standards provided herein,
and (2) that the improvements to be constructed on the Premises have been
designed by TENANT for its own particular and unique
12
<PAGE> 13
use. Therefore, if TENANT breaches this Lease prior to TENANT's occupancy of the
Premises, TENANT shall pay to LANDLORD monthly, the sum of one dollar ($1.00)
per square foot per month calculated on the completed building size, until such
time as (i) LANDLORD can relet the Premises to a tenant of financial capacity
similar to TENANT that (a) can meet the Performance Standards set forth herein
or (b) will enter into a long term lease at the then prevailing commercial
rental rates for space in Bryan-College Station or (ii) LANDLORD sells the
Premises to a third party for an amount that exceeds the then unpaid balance on
the Note the EDC executed to finance the construction of the Premises.
32. LANDLORD's Lien: LANDLORD shall have at all times a valid security
interest to secure payment of all rentals, Alternative Performance Payments, and
other sums of money becoming due hereunder from TENANT and to secure payment of
any damages or loss which LANDLORD may suffer by reason of the breach by TENANT
of any covenant, agreement or condition contained herein, upon all goods, wares,
equipment, fixtures, furniture, improvements and other personal property (herein
the "Personalty") of TENANT presently, or which may hereafter be, situated in
the Premises, and all proceeds therefrom, and such Personalty shall not be
removed therefrom without the consent of LANDLORD until all arrearages in rent
or Alternative Performance Payments as well as any and all other sums of money
then due to LANDLORD hereunder shall first have been paid and discharged and all
covenants, agreements and conditions hereof have been fully compiled with and
performed by TENANT. Upon the occurrence of an event of default by TENANT,
LANDLORD may, in addition to any other remedies provided herein or by law, enter
upon the Premises and take possession of the Personalty situated in the
Premises, without liability for trespass or conversion, and sell the same at
public or private sale, with or without having the Personalty at the sale, after
giving TENANT reasonable notice of the time and place of any public sale or of
the time after which any private sale is to be made, at which sale LANDLORD may
purchase unless otherwise prohibited by law. Unless otherwise provided by law,
and without intending to exclude any other manner of giving TENANT reasonable
notice, the requirement of reasonable notice shall be met if such notice is
given in the manner prescribed in paragraph 35 of this Lease at least ten (10)
days before the time of sale. Any public sale made pursuant to the provisions of
this paragraph shall be deemed to have been a public sale conducted in a
commercially reasonable manner if held in the Premises or where the Personalty
is located after the time, place and method of sale and a general description of
the types of property to be sold have been advertised in a daily newspaper
published in Brazos County, Texas, for five (5) consecutive days before the date
of the sale. The proceeds from any such disposition, less any and all expenses
connected with the taking of possession, holding and selling of the Personalty
(including reasonable attorney's fees and expenses), shall be applied as a
credit against the indebtedness secured by the security interest granted in this
paragraph. Any surplus shall be paid to TENANT or as otherwise required by law;
TENANT shall pay any deficiencies forthwith. Upon request by LANDLORD, TENANT
agrees to execute and deliver to LANDLORD a financing statement in form
sufficient to perfect the security interest of LANDLORD in the aforementioned
Personalty and proceeds thereof under the provisions of the Uniform Commercial
Code in force in the State of Texas.
33. Waiver: No failure by either party to insist upon the other party's
strict performance of any provision hereof or to exercise any right, power, or
remedy, and no
13
<PAGE> 14
acceptance of full or partial rent during the continuance of any such breach,
shall constitute a waiver of any such breach or of the right then or thereafter
to enforce such provision. No provision of this Lease, and no breach hereof,
shall be waived, altered, or modified except by written instrument executed by
both parties. No waiver of any breach shall affect or alter this Lease, but each
and every provision hereof shall continue in full force and effect with respect
to any other existing or subsequent breach thereof.
34. End of Term: TENANT shall, at the termination of this Lease,
whether by lapse of time or otherwise, peaceably and quietly deliver to the
LANDLORD all of the Premises in good condition less wear and tear.
35. Notices: Any notice required, under the terms of this Lease or
under any legal requirement, shall be in writing and mailed by overnight or
certified mail, return receipt requested, postage prepaid, addressed to the
party intended to be notified at the following address (or such other address as
the receiving party may notify to the sending party), and notice given as
aforesaid shall be sufficient service thereof and shall be deemed given as of
the date of receipt.
All notices to the LANDLORD shall be sent to:
President/CEO
Bryan-College Station Economic Development Corporation
4001 E. 29th Street, Suite 180
Bryan, Texas 77802
All notices to the TENANT shall be sent to:
DecisionOne Corporation
50 East Swedesford Road
Frazer, PA 19355
Attn: Corporate Real Estate
36. Signature Corporate or Partnership Authority: Both TENANT and
LANDLORD shall be required to deliver adequate assurances, such as a Certificate
of Incumbency, to certify that the signatories to this Lease possess the
necessary authority to bind the entity which they represent. TENANT shall
deliver to LANDLORD a Certificate of the Secretary of State of the State of
Texas evidencing it is licensed to do business in the State of Texas.
37. Originals: The parties hereto shall execute seven original
signature copies of this Lease.
38. Governing Law: This Lease shall be construed under and in
accordance with the laws of the State of Texas and the laws of the United States
Of America as applicable to transactions within the State of Texas.
This Lease is performable in Brazos County, Texas.
39. Amendment: This Lease may not be altered, waived, amended or
extended except by an instrument in writing signed by LANDLORD and TENANT.
14
<PAGE> 15
40. Attorneys' Fees: In the event TENANT or LANDLORD defaults in the
performance of any of the terms, agreement or conditions contained in this Lease
and TENANT or LANDLORD commences legal action of any kind to enforce the terms
and conditions of the Lease, the prevailing party in such litigation shall be
entitled to collect from the other party all costs, expenses and attorney's fees
incurred in connection with such action.
41. Publication: TENANT hereby agrees that LANDLORD shall have the
right, but not the obligation, at no cost to TENANT, to publicize and/or
advertise the execution of this Lease and the related transaction.
42. Miscellaneous Provisions: If any provision of this Lease shall be
determined to be void by any court of competent jurisdiction, then such
determination shall not affect any other provision of this Lease, all of which
shall remain in full force and effect. This Lease Agreement shall be binding
upon and inure to the benefit of the LANDLORD and TENANT and their respective
successors and assigns.
BRYAN-COLLEGE STATION ECONOMIC DECISIONONE CORPORATION
DEVELOPMENT CORPORATION
By:
- ---------------------------------- --------------------------------
Lewis N. Newman, Chairman Printed Name:
----------------------
Title:
-----------------------------
15
<PAGE> 1
EXHIBIT 10.16
LEASE ADDENDUM
This Lease Addendum is made by and between WILMINGTON COMMERCE PARK
PARTNERSHIP ("WCPP") as Landlord and DJ&J SOFTWARE CORPORATION ("EGGHEAD") as
Tenant pursuant to a certain Lease (the "Lease") entered into by the parties in
August 1995 for 83,200 square feet of space in Building 12, Airborne Commerce
Park, State Route 73, Wilmington, Ohio.
WCPP has agreed to construct certain additional improvements in the
Leased Premises at Egghead's expense. The cost of these improvements is
$226,002.00 and Egghead shall pay it as follows:
Egghead shall pay the cost of the improvements as Additional Rent in
monthly installments of $4,646.12 (representing the principal amount of the
improvements amortized over the life of the Lease at 11% interest per annum)
beginning March 1, 1996 and on the first day of each month of the Lease
thereafter, in advance, without demand, at the office of WCPP until paid in
full. This sum shall be in addition to the Basic Annual Rent and any and all
other amounts due from Egghead to WCPP under the Lease.
IN WITNESS WHEREOF, the parties hereto have set their hands to
triplicates hereof, this _____ day of _______________, 1996 as to WCPP and this
_____ day of _______________, 1996 as to Egghead.
Signed and acknowledged LANDLORD: WILMINGTON COMMERCE
in the presence of: PARK PARTNERSHIP
_________________________________ By:_________________________________
Its:________________________________
_________________________________
TENANT: DJ & J SOFTWARE CORPORATION
_________________________________ By:_________________________________
Terence M. Strom, President
and C.E.O.
_________________________________
<PAGE> 2
STATE OF OHIO, COUNTY OF ___________________, SS:
The foregoing instrument was acknowledged before me this _____ day of
_______________, 1996, by ______________________, ________________________, on
behalf of WILMINGTON COMMERCE PARK PARTNERSHIP.
____________________________________
Notary Public
STATE OF WASHINGTON, COUNTY OF KING, SS:
The foregoing instrument was acknowledged before me this _____ day of
_______________, 1996, by Terence M. Strom, President and C.E.O., on behalf of
DJ & J SOFTWARE CORPORATION.
____________________________________
Notary Public
<PAGE> 3
SECOND ADDENDUM TO LEASE
This Second Addendum to Lease is entered into by Wilmington Commerce
Park Partnership ("WCPP" or "Landlord") as landlord and DecisionOne Holdings
Corp. ("DecisionOne" or "Tenant") as tenant.
A. Pursuant to a certain lease (the "Lease") dated August 17, 1995,
amended by an addendum (the "Addendum") dated April 16, 1996, DJ&J Software
Corporation (Egghead") leased from WCPP certain real property consisting of
83,200 square feet of space (the "Leased Premises") in a warehouse located at
3262 State Route 73 South, Wilmington, Ohio which warehouse is sometimes
referred to as Building 12 of the Airborne Commerce Park.
B. By instrument dated July _____, 1996, (the "Assignment") Egghead
assigned to DecisionOne all of its right, title and interest as tenant under the
Lease and Addendum, and DecisionOne accepted the assignment and has succeeded to
such rights, title and interest.
C. Under Article 37 of the Lease, the Tenant has a right of first
refusal to lease available additional space in Building 12. There is currently
available 19,200 square feet of space in the building and DecisionOne wishes to
rent all of such space.
NOW, THEREFORE, for valuable consideration paid, receipt of which is
hereby acknowledged, the parties agree as follows:
1. EXERCISE OF RIGHT. DecisionOne hereby exercises its right of first
refusal to lease 19,200 square feet of space in Building 12. WCPP accepts such
exercise of the right of first refusal to lease according to the terms set forth
herein.
2. EFFECTIVE DATE. The effective date of this Second Addendum to Lease
shall be February 1, 1998.
3. REVISED LEASE. Article 1 of the Lease is hereby amended so that the
Lease Term begins February 1, 1998 and ends January 31, 2003, both dates
inclusive.
4. TENANT IMPROVEMENTS. DecisionOne shall be allowed up to $50,000 for
tenant improvements. It shall be responsible for all necessary permits and
construction. WCPP will reimburse DecisionOne for amounts expended up to the
allowed amount upon receipt of paid bills for materials or equipment installed
and work completed.
DecisionOne shall provide WCPP with a copy of any occupancy permit issued.
5. RENT. Article 3 of the Lease shall be revoked and the following
shall be
<PAGE> 4
substituted in its place.
<PAGE> 5
RENT.
Section 1. Tenant shall pay to the Landlord as BASIC ANNUAL
RENT for the Leased Premises for each year of the period of February 1,
1998 through January 31, 2003, the sum of Four Hundred Seventy-Nine
Thousand Two Hundred Thirty-Two Dollars ($479,232.00) which shall be
paid in equal monthly installments of Thirty-Nine Thousand Three
Hundred Thirty-Six Dollars and 00/100ths Dollars ($39,336.00), due and
payable on the first day of each month, in advance. Said rent shall be
paid to the Landlord, or to the duly authorized agent of the Landlord,
at its office at 3800 Red Bank Road, Cincinnati, Ohio 45227. Checks
should be made payable to WILMINGTON COMMERCE PARK PARTNERSHIP. Any
Basic Annual Rent payment not received by the Landlord by the tenth day
of the month shall be past due. If the commencement date of this Lease
is other than the first day of the month, any rental adjustment or
additional rents hereinafter provided for shall be prorated
accordingly. The Tenant will pay the rent as herein provided, without
deduction whatsoever, and without any obligation of the Landlord to
make demand for it. Any installment of rent accruing hereunder and any
other sum payable hereunder, if not paid within ten days of when due,
shall bear interest at the rate of eighteen percent (18%) per annum
until paid. Late Fee. Provided, however, that Tenant shall be entitled
to two (2) written notices from Landlord in a given Lease Year that
such rent, additional rent or other charge is due and payable within
five (5) days of Tenant's receipt of such notice before a service
charge will be assessed. After four (4) such notices have been give to
Tenant during the term of this Lease then no further notices shall be
give and Tenant shall pay any service charges as otherwise provided
herein. The Basic Annual Rent of $479,232.00 shall be adjusted annually
based on the Consumer Price Index beginning January 1, 1999, the
adjustment date for that year and each year thereafter, whether during
the term of this Lease or any renewal or extension thereof. Increases
in the Basic Annual Rent shall be made in accordance with the following
procedure:
a. The index to be used for this adjustment shall be the
Consumer Price Index (North Central Region, All Urban
Consumers, All Items, 1982-84 equaling a base of 100, from the
U.S. Department of Labor, Bureau of Labor Statistics,
Washington, D.C.).
b. The Consumer Price Index of 1997 for the month of December
shall be the "Base Period Consumer Price Index." The Consumer
Price Index for the month of December prior to each adjustment
date in each adjustment year shall be the "Adjustment Period
Consumer Price Index."
<PAGE> 6
c. The Base Period Consumer Price Index shall be subtracted
from the Adjustment Period Consumer Price Index; the
difference shall be divided by the Base Period Consumer Price
Index. This quotient shall then be multiplied by the
$479,232.00 (Basic Annual Rent amount) and the result shall
then be added to the $479,232.00 (Basic Annual Rent amount).
The resulting sum shall be the Adjusted Annual Rent for such
immediately succeeding leasehold period which shall be paid in
equal monthly installments.
d. If the said Consumer Price Index is, at any time during the
term of this Lease, discontinued by the Government, then the
most nearly comparable index shall be substituted for the
purpose of the aforesaid calculations.
e. The rental amount shall not be increased more than five
percent (5%) on any one annual adjustment and shall never be
increased more than twenty percent (20%) over the initial rent
during the term of this lease.
Section 2. Rent Commencement Date: Base Annual Rent shall
commence February 1, 1998, PROVIDED, HOWEVER, that DecisionOne shall
receive a six-month Rent-Free Period on only the 19,200 square feet of
additional space running from February 1, 1998 through July 31, 1998.
For that period, the monthly installment of rent shall be $32,448.00
each.
Section 3. The Tenant shall reimburse the Landlord for the
costs of water, gas, and electricity, including electricity costs for
exterior lighting, or any other utilities paid by Landlord in
connection with the Leased Premises. Said reimbursement shall be
additional rent due on the first day of the calendar month next
following rendition of a bill therefor. If any services are separately
metered, the cost shall be paid directly by the Tenant to the utility
service. The heating and other utilities except water, not separately
metered will be prorated on the basis of the square footage serviced by
a given meter and paid to Landlord as billed. The total cost of water
shall be paid by Tenant currently in occupancy and costs thereof shall
be prorated on the basis of square footage occupied by each Tenant (if
more than one). In the event that any occupant of the building uses a
disproportionate amount of said utilities, an adjustment shall be made
so that each tenant pays for their entire share but not a portion of
the utilities used by other tenants of the building.
Section 4. The Tenant agrees to pay any increased real estate
<PAGE> 7
taxes over and above the real estate taxes paid by the Landlord during
the first year of the term of this Lease. Said amount shall be deemed
to be additional rent and shall be due and payable on the first of the
month following delivery to Tenant of a receipt for Landlord's payment
of said real estate taxes. The Tenant shall pay its share of expenses
that the Landlord shall incur by reason of compliance with new laws,
orders, special rent/use taxes, ordinances and new regulations of
Federal, State, County and Municipal authorities, and with any lawful
direction of any public officer or officers, which lawful direction
shall be imposed upon the Landlord for the common good of the occupants
of the Airborne Commerce Park. Capital improvement which are the
responsibility of Landlord shall not be deemed to be prorated to be
passed through to Tenant hereunder.
Section 5. None of the following acts or omissions by the
Landlord shall in any way affect the payment of the rent at the time
specified in this Lease; if the Landlord at any time enters into a
contract for any alterations, additions, repairs or improvements; if
the Landlord fails to make such alterations, additions, repairs or
improvements. The Landlord may discontinue all facilities and services
rendered by it or its agents or contractors that are not expressly
covenanted for herein; such facilities and services shall constitute no
part of the consideration for this Lease.
Section 6. Tenant has deposited with Landlord the sum of Six
Thousand Five Hundred Sixty and no/100ths ($6,560.00), as security for
its performance of its lease of part of Building 2. These funds shall
continue to be held by Landlord, without interest, and may be
commingled with Landlord's other funds, as security for the performance
by Tenant of all the terms and conditions of this Lease. If a default
should occur, Landlord, at its option, may apply the deposit, in whole
or in part to cure the default. If any part of the deposit is so
applied by Landlord, Tenant shall, upon Landlord's request, remit to
Landlord the amount necessary to restore the full security deposit.
Tenant's failure to do so within five (5) days after receipt of
Landlord's demand shall be a default. If at the end of the Lease,
Tenant is not in default, the security deposit shall be returned to
Tenant.
6. RATIFICATION OF EXISTING LEASE TERMS. In all other respects, except
as specifically modified herein all the terms and conditions of the existing
Lease, Addendum, Assignment and Assumption are hereby ratified and confirmed by
the parties hereto.
In Witness Whereof the parties have hereunto set their hand to one or
more counterparts hereof this ____ day of __________________, 1998 as to WCPP
and this ____ day of __________________, 1998, as to DecisionOne.
<PAGE> 8
Signed and acknowledged (1) WILMINGTON COMMERCE PARK
in the presence of: PARTNERSHIP
____________________________________ By__________________________________
(as to 1)
Its_________________________________
____________________________________
(as to 1)
<PAGE> 9
(2) DECISIONONE HOLDINGS CORP.
____________________________________ By__________________________________
(as to 2)
Its_________________________________
____________________________________
(as to 2)
STATE OF OHIO, HAMILTON COUNTY, ss:
The foregoing instrument was signed and acknowledged before me by
Wilmington Commerce Park Partnership by and through ___________________________,
its __________________________ who acknowledged that he did sign the foregoing
instrument and the same is his free act an deed as such officer and the free act
and deed of said Wilmington Commerce Park Partnership.
In Testimony Whereof, I have hereunto set my hand and official seal at
______________________, Ohio, this _____ day of _________________________, 1998.
____________________________________
Notary Public
STATE OF PENNSYLVANIA, ___________________________ COUNTY, ss:
The foregoing instrument was signed and acknowledged before me by
DecisionOne Holdings Corp. by and through __________________________________,
its __________________________ who acknowledged that he did sign the foregoing
instrument and the same is his free act an deed as such officer and the free act
and deed of said DecisionOne Holdings Corp.
In Testimony Whereof, I have hereunto set my hand and official seal at
______________________, Ohio, this _____ day of _________________________, 1998.
____________________________________
Notary Public
<PAGE> 10
WAIVER OF FIRST RIGHT TO SUBLEASE
ABX AIR, Inc. hereby waives, for this Second Addendum only, its right
pursuant to Article 6, Section 1 of said Lease (as amended) to a first right to
sublease the premises leased to DecisionOne by the foregoing. This waiver shall
not for any purpose constitute a future waiver of its right to sublease under
the Lease (as amended).
Signed and acknowledged ABX AIR, INC.
in the presence of:
____________________________________ By__________________________________
Joseph C. Hete
Senior Vice President
____________________________________
STATE OF OHIO, CLINTON COUNTY, ss:
The foregoing instrument was signed and acknowledged before me by ABX
AIR, Inc. by and through Joseph C. Hete, its Senior Vice President who
acknowledged that he did sign the foregoing instrument and the same is his free
act an deed as such officer and the free act and deed of said ABX AIR, Inc..
In Testimony Whereof, I have hereunto set my hand and official seal at
Wilmington, Ohio, this _____ day of _________________________, 1998.
____________________________________
Notary Public
<PAGE> 11
This instrument prepared by Karen Buckley of Buckley, Miller & Wright, Attorneys
at Law, Wilmington, Ohio. (comm1/lc)
<PAGE> 12
ASSIGNMENT AND ASSUMPTION OF LEASE
This ASSIGNMENT AND ASSUMPTION OF LEASE is made as of __________ __,
1996, by and between DJ&J SOFTWARE CORPORATION ("EGGHEAD") as Assignor and
DECISIONONE HOLDINGS CORP. ("DECISIONONE") as Assignee under the following
circumstances:
A. Pursuant to a certain lease (the "Lease") dated August 17, 1995, and
amended by an addendum (the "Addendum") dated April 15, 1996, Egghead leased
from Wilmington Commerce Park Partnership ("WCPP") certain real property
consisting of 83,200 square feet of space in a warehouse located at 3262 State
Route 73 South, Wilmington, Ohio, which warehouse building is sometimes
designated as Building 12 of the Airborne Commerce Park.
B. Egghead wishes to assign all of its right, title and interest under
the Lease and Addendum to DecisionOne and DecisionOne is willing to assume all
of Egghead's liabilities and obligations under the Lease and Addendum.
NOW, THEREFORE, for valuable consideration paid, receipt of which is
hereby acknowledged, effective as of __________ __, 1996, the parties agree as
follows:
1. Egghead assigns to DecisionOne all of its right title and interest
in the Lease and Addendum, together with all rights arising under or by virtue
of the Lease and Addendum.
2. Egghead represents and warrants to DecisionOne that a) the Lease and
Addendum are in full force and effect and have not been further modified or
amended; b) neither Egghead nor WCPP is in default under the Lease and Addendum,
nor to Egghead's knowledge has any event or condition occurred which, with the
giving of notice, the passage of time, or both, would constitute a default by
either party; c) WCPP is holding a security deposit in the amount of $6,560.00,
no amount of which has been applied by WCPP to Egghead's
<PAGE> 13
obligations and all rights to such security deposit are hereby assigned to
DecisionOne by this Assignment.
3. DecisionOne accepts this Assignment and assumes and agrees to
perform all of the obligations of Egghead arising or accruing under the Lease
and Addendum on or after the effective date of this Assignment.
4. Egghead shall indemnify and hold DecisionOne harmless from and
against all loss, damage, cost and expense that may be claimed against, imposed
upon or incurred by DecisionOne by reason of Egghead's failure to perform any of
its obligations under the Lease or Addendum prior to the effective date of this
Assignment.
5. DecisionOne shall indemnify and hold Egghead harmless from and
against all loss, damage, cost and expense that may be claimed against, imposed
upon or incurred by Egghead by reason of DecisionOne's failure to perform any of
the obligations under the Lease or Addendum assumed by DecisionOne pursuant to
Paragraph 3.
SIGNED as of the date first written above.
Signed and acknowledged DJ&J SOFTWARE
in the Presence of: CORPORATION
_____________________________ By______________________________
Name____________________________
_____________________________ Title___________________________
DECISIONONE HOLDINGS
CORP.
_____________________________ By______________________________
Name____________________________
_____________________________ Title___________________________
STATE OF WASHINGTON, COUNTY OF KING, SS:
<PAGE> 14
The foregoing instrument was acknowledged before me this _____ day of
___________, 1996, by _______________________, ____________________, on behalf
of DJ&J SOFTWARE CORPORATION, a __________________ corporation.
___________________________________
Notary Public
STATE OF PENNSYLVANIA, COUNTY OF ___________________, SS:
The foregoing instrument was acknowledged before me this _____ day of
____________, 1996, by ______________________, _______________________, on
behalf of DECISIONONE HOLDINGS CORP., a ____________________ corporation.
___________________________________
Notary Public
<PAGE> 15
WILMINGTON COMMERCE PARK PARTNERSHIP
WAREHOUSE/DISTRIBUTION
AGREEMENT OF LEASE
LEASE FOR BUILDING 12
PROPERTY LOCATED AT State Route 73 South, Wilmington, Ohio 45177
<PAGE> 16
WILMINGTON COMMERCE PARK PARTNERSHIP
WAREHOUSE/DISTRIBUTION
AGREEMENT OF LEASE
THIS LEASE made this _____ day of __________________, 199___,
by and between WILMINGTON COMMERCE PARK PARTNERSHIP hereinafter referred to as
the Landlord, and DJ & J SOFTWARE CORPORATION, A WASHINGTON CORPORATION DOING
BUSINESS AS EGGHEAD SOFTWARE/EGGHEAD, hereinafter referred to as the Tenant.
Tenant's business enterprise is organized as a corporation and is admitted to do
business in the State of Ohio.
W I T N E S S E T H:
The Landlord does hereby lease and let to the Tenant and the
Tenant accepts from the Landlord under the terms and conditions of this Lease,
the following described Premises:
83,200 square feet, more or less, located at State Route 73 South,
Wilmington, Ohio 45177 and sometimes designated as Building 12,
hereinafter referred to as the Leased Premises.
ARTICLE 1. TERM.
TO HAVE AND TO HOLD unto the Tenant for a term of Five (5)
years, commencing on the 1st day of February, 1996, ("commencement date") and
ending on the 31st day of January, 2001 both dates inclusive.
EARLY ENTRY: Upon execution of this Lease, Landlord shall give Tenant
and its agents free access to the Premises at all reasonable times upon request
to the Landlord for the purpose of conducting tests and inspections, altering
and constructing leasehold improvements, installing trade fixtures and
equipment, and otherwise preparing the Premises for operation of Tenant's
business.
PERMIT DROP-DEAD: Tenant is responsible for obtaining all necessary
construction, and occupancy permits for office build-out, if any. If Tenant is
unable to obtain such permits, despite diligent efforts, then Tenant shall so
notify Landlord in writing and Landlord shall have the option to obtain such
permits, on behalf of Tenant, at Tenant's expense. If Landlord is unable to
obtain said permits within 30 days from the date of Tenant's written notice,
then this Lease shall terminate and Landlord shall pay to Tenant all sums
previously paid by Tenant to Landlord under this Lease within ten days of such
termination.
ARTICLE 2. ACCEPTANCE OF LEASED PREMISES.
2
<PAGE> 17
Section 1. The Leased Premises shall be constructed with the
dimensions, ceiling heights, slab thickness, insulation, gas unit heaters,
electrical services, loading docks, paved parking areas and other specifications
described in Exhibit A hereto and shall be delivered to the Tenant in Shell
condition which shall include a Certificate of Occupancy.
Section 2. Landlord will provide, in addition to the above,
one men's and one women's restroom at a total cost not to exceed $15,000. Said
restrooms may be completed before or after delivery of the Leased Premises and
such completion shall not delay Tenant's obligations to pay rent hereunder.
Section 3. Pre-Existing Defects: Tenant's acceptance of the
Premises does not extend to any defects which are not readily ascertainable
during the course of Tenant's visual inspection.
ARTICLE 3. RENT.
Section 1. Tenant shall pay to the Landlord as BASIC ANNUAL
RENT for the Leased Premises for each year of the period of February 1, 1996
through January 31, 2001, the sum of Three Hundred Forty-One Thousand One
Hundred Twenty Dollars ($341,120.00) which shall be paid in equal monthly
installments of Twenty-Eight Thousand Four Hundred Twenty-Six Dollars and
66/100ths Dollars ($28,426.66), due and payable on the first day of each month,
in advance. Said rent shall be paid to the Landlord, or to the duly authorized
agent of the Landlord, at its office at 3800 Red Bank Road, Cincinnati, Ohio
45227. Checks should be made payable to WILMINGTON COMMERCE PARK PARTNERSHIP.
Any Basic Annual Rent payment not received by the Landlord by the tenth day of
the month shall be past due. If the commencement date of this Lease is other
than the first day of the month, any rental adjustment or additional rents
hereinafter provided for shall be prorated accordingly. The Tenant will pay the
rent as herein provided, without deduction whatsoever, and without any
obligation of the Landlord to make demand for it. Any installment of rent
accruing hereunder and any other sum payable hereunder, if not paid within ten
days of when due, shall bear interest at the rate of eighteen percent (18%) per
annum until paid. Late Fee. Provided, however, that Tenant shall be entitled to
two (2) written notices from Landlord in a given Lease Year that such rent,
additional rent or other charge is due and payable within five (5) days of
Tenant's receipt of such notice before a service charge will be assessed. After
four (4) such notices have been given to Tenant during the term of this Lease
then no further notices shall be given and Tenant shall pay any service charges
as otherwise provided herein. The Basic Annual Rent of $341,120.00 shall be
adjusted annually based on the Consumer Price Index beginning February 1, 1997,
the adjustment date which shall commence in the second year of lease and each
year thereafter, whether during the term of this Lease or any renewal or
extension thereof. Increases in the Basic Annual Rent shall be made in
accordance with the following procedure:
a. The index to be used for this adjustment shall be the Consumer Price
Index
3
<PAGE> 18
(North Central Region, All Urban Consumers, All Items, 1982-84 equaling
a base of 100, from the U.S. Department of Labor, Bureau of Labor
Statistics, Washington, D.C.).
b. The Consumer Price Index of 1996 for the month of January shall be
the "Base Period Consumer Price Index." The Consumer Price Index for
the month of January prior to each adjustment date in each adjustment
year shall be the "Adjustment Period Consumer Price Index."
c. The Base Period Consumer Price Index shall be subtracted from the
Adjustment Period Consumer Price Index; the difference shall be divided
by the Base Period Consumer Price Index. This quotient shall then be
multiplied by the $341,120.00 (Basic Annual Rent amount) and the result
shall then be added to the $341,120.00 (Basic Annual Rent amount). The
resulting sum shall be the Adjusted Annual Rent for such immediately
succeeding leasehold period which shall be paid in equal monthly
installments.
d. If the said Consumer Price Index is, at any time during the term of
this Lease, discontinued by the Government, then the most nearly
comparable index shall be substituted for the purpose of the aforesaid
calculations.
e. The rental amount shall not be increased more than five percent (5%)
on any one annual adjustment and shall never be increased more than
twenty percent (20%) over the initial rent during the term of this
lease.
Section 2. Rent Commencement Date: Base Annual Rent shall
commence sixty (60) days after the Commencement Date; PROVIDED, HOWEVER, that if
the Leased Premises becomes operational before the expiration of the sixty day
period, Base Annual Rent shall commence immediately upon such operation.
Section 3. The Tenant shall reimburse the Landlord for the
costs of water, gas, and electricity, including electricity costs for exterior
lighting, or any other utilities paid by Landlord in connection with the Leased
Premises. Said reimbursement shall be additional rent due on the first day of
the calendar month next following rendition of a bill therefor. If any services
are separately metered, the cost shall be paid directly by the Tenant to the
utility service. The heating and other utilities except water, not separately
metered will be prorated on the basis of the square footage serviced by a given
meter and paid to Landlord as billed. The total cost of water shall be paid by
Tenant currently in occupancy and costs thereof shall be prorated on the basis
of square footage occupied by each Tenant (if more than one). In the event that
any occupant of the building uses a disproportionate amount of said utilities,
an adjustment shall be made so that each tenant pays for their entire share but
not a portion of the utilities used by other tenants of the building.
4
<PAGE> 19
Section 4. The Tenant agrees to pay any increased real estate
taxes over and above the real estate taxes paid by the Landlord during the first
year of the term of this Lease. The Tenant's proportionate share of any increase
shall be a fraction thereof, the numerator of which is the number of square feet
in the leased premises and the denominator of which is 121,600 square feet (the
total square feet of floor area in the building or buildings located on the tax
parcel for which taxes are increasing). Said amount shall be deemed to be
additional rent and shall be due and payable on the first of the month following
delivery to Tenant of a receipt for Landlord's payment of said real estate
taxes. The Tenant shall pay its share of expenses that the Landlord shall incur
by reason of compliance with new laws, orders, special rent/use taxes,
ordinances and new regulations of Federal, State, County and Municipal
authorities, and with any lawful direction of any public officer or officers,
which lawful direction shall be imposed upon the Landlord for the common good of
the occupants of the Airborne Commerce Park. Capital improvements which are the
responsibility of Landlord shall not be deemed to be prorated to be passed
through to Tenant hereunder.
Section 5. None of the following acts or omissions by the
Landlord shall in any way affect the payment of the rent at the time specified
in this Lease; if the Landlord at any time enters into a contract for any
alterations, additions, repairs or improvements; if the Landlord fails to make
such alterations, additions, repairs or improvements. The Landlord may
discontinue all facilities and services rendered by it or its agents or
contractors that are not expressly covenanted for herein; such facilities and
services shall constitute no part of the consideration for this Lease.
Section 6. Tenant has deposited with Landlord the sum of SIX
THOUSAND FIVE HUNDRED SIXTY AND NO/100THS ($6,560.00), as security for its
performance of its lease of part of Building 2. Upon Lessee's relocation from
Building 2, these funds shall continue to be held by Landlord, without interest,
and may be commingled with Landlord's other funds, as security for the
performance by Tenant of all the terms and conditions of this Lease. If a
default should occur, Landlord, at its option, may apply the deposit, in whole
or in part to cure the default. If any part of the deposit is so applied by
Landlord, Tenant shall, upon Landlord's request, remit to Landlord the amount
necessary to restore the full security deposit. Tenant's failure to do so within
five (5) days after receipt of Landlord's demand shall be a default. If at the
end of the Lease, Tenant is not in default, the security deposit shall be
returned to Tenant.
ARTICLE 4. COMMON AREA.
For the purpose of this Lease, the term "common area" is
defined for all purposes of this Lease as facilities that are intended for the
common use of all tenants. For purposes of this definition, facilities include
the parking area, driveways, private streets and alleys, landscaping, curbs,
loading area, sidewalks and exterior lighting facilities intended for the common
use of the tenant. Not included are spaces in existing or future buildings or
vacant land designed for commercial rental purposes and exclusive to a given
tenant. The Landlord may from time to time change the dimensions of the common
area, provided that access by trucks to the loading docks is maintained. Tenant
and its employees, customers, licensees and invitees
5
<PAGE> 20
shall have the nonexclusive right to use the common area as constituted from
time to time. The use shall be in common with the Landlord or other tenants in
Landlord's buildings and other persons permitted by the Landlord to use the
common area. The use shall be subject to all reasonable nondiscriminatory rules
and regulations prescribed by Landlord and as amended from time to time,
including the designation of specific areas within the common area for parking
automobiles owned by the Tenant, its employees, licensees and invitees. If
automobiles or other vehicles are parked in part of the common area not
specifically designated for employee parking, Tenant shall pay Landlord, as
additional rent, an amount equal to the daily or hourly charge established by
Landlord for each automobile or vehicle so parked. Such parking use shall not be
permitted unless approved by Landlord in writing. Tenant shall not solicit
business within the common area or take any action which would interfere with
the rights of other persons to use of the common area. The Tenant shall have no
right to use the common area for storage of pallets or other storage purposes,
and trash shall be stored only in such containers and in such place as approved
by the Landlord. The Landlord shall maintain the common area and keep the same
in good order and repair including lighting and landscaping. The Landlord may
temporarily close any part of the common area for any period necessary to make
repairs or alterations or to prevent the public from obtaining prescriptive
rights. The cost of exterior lighting and ice and snow removal, general
cleaning, asphalt sealing and restriping and landscape maintenance will be
prorated among the Tenants in accordance with the percentage that the square
footage of the Leased Premises bears to the total square footage of all
buildings adjacent to the Leased Premises. The share of such cost will be deemed
to be additional rent and shall be due the first of the month following the
invoice thereof by Landlord to the Tenant of the amount due, whichever is later.
Notwithstanding the foregoing, Tenant shall not be obligated to pay costs of
parking lot restriping more frequently than every seven (7) years unless unusual
weather conditions cause substantial deterioration in markings within the seven
year period.
LANDLORD'S ACCOUNTING: Landlord must maintain books and records for all
operating expenses, utilities, insurance, taxes and other charges paid to
Landlord by Tenant in accordance with generally accepted accounting principles,
and provide to Tenant an accounting of such charges. Tenant has right to audit
Landlord's books and records for such charges. Landlord must pay for an audit of
its books and records if those charges are in error by more than three percent
(3%).
ARTICLE 5. USE OF LEASED PREMISES.
Section 1. The Leased Premises shall be used and occupied only
for direct mail and telemarketing activities, warehousing and distribution of
products and related activities and for no other purposes or purposes without
the written consent of the Landlord. Landlord warrants that Tenant's proposed
use of the Leased Premises complies with the requirements hereof.
Section 2. The Tenant shall operate its business in a safe and
proper manner as is
6
<PAGE> 21
normal, considering the uses of the Leased Premises above provided; and shall
not manufacture, store, display or maintain any products or materials that will
endanger the Leased Premises; shall do nothing that would increase the cost of
insurance on the building or invalidate existing policies; shall not obstruct
the sidewalks; shall not use the plumbing for any other purpose than for which
it was constructed; shall not make or permit any unreasonable noise and/or odor
objectionable to the public or adjacent occupants; shall not create a nuisance
on the Leased Premises; and shall commit no waste.
Section 3. The Tenant shall abide by all police and fire
regulations concerning the operation of its business; shall store all trash,
rubbish and debris in closed containers; and shall practice all proper
procedures and methods that are common to its business enterprise. The Tenant
shall maintain a minimum temperature in the Leased Premises of fifty-five (55)
degrees fahrenheit.
Section 4. The Tenant shall at all times keep all improvements
and any equipment facilities or fixtures in good order, condition and repair and
in a clean, sanitary and safe condition and in accordance with all applicable
laws, ordinances and regulations of any governmental authority having
jurisdiction. Tenant shall permit no waste, damage or injury to the Leased
Premises.
Section 5. Tenant shall forthwith at its own cost and expense
replace with glass of the same kind and quality any cracked or broken glass,
including plate glass or glass or other breakable materials used in structural
portions, and any interior and exterior windows and doors in the Leased
Premises.
ARTICLE 6. ASSIGNMENT AND SUBLETTING.
Section 1. Tenant shall not transfer, mortgage, or pledge this
lease, or sublease the subject premises or any portion thereof, without the
Landlord's prior written consent, which shall not be unreasonably withheld or
delayed. Tenant shall give ABX AIR, INC., the first right to sublease any or all
of the premises. The Landlord may deem any levy or sale or execution or other
legal process against the Tenant, or any assignment or sale in bankruptcy or
assignment or a receiver or insolvency of the Tenant, to be an assignment within
the meaning of this Article.
Section 2. Assignment: Notwithstanding anything contained
herein to the contrary, the following shall not be considered an assignment of
the Lease or other transfer for the purpose of this section: (a) any change in
ownership of tenant resulting from a public offering of stock of tenant for any
parent corporation of tenant; or (b) any transfer of stock or assets of tenant
to an affiliate or subsidiary corporation or other entity, or as a result of a
merger, consolidation or the reorganization of tenant or any parent of tenant so
long as tenant's permitted use of premises is unaltered. Tenant must provide
Landlord with written notice regarding any change in ownership or transfer to
affiliate or subsidiary corporation and receive written consent from Landlord
which consent shall not be unreasonably withheld.
7
<PAGE> 22
RELEASE UPON ASSIGNMENT: Tenant shall be released from its obligations
under this Lease if the subtenant or assignee approved by Landlord has
managerial experience and a financial net worth comparable to Tenant at time of
the execution of this Lease.
ARTICLE 7. Repairs.
Section 1. Landlord shall keep the foundations, exterior walls
(except plate glass or glass) roof, and sprinklers in good repair.
Section 2. Tenant shall contract for the maintenance of
mechanical equipment. The Tenant shall replace any hot water heater as the need
should arise with the same type and quality servicing the Leased Premises.
Landlord warrants the water heater and heating and air conditioning equipment
for one (1) year from the date Tenant occupies the premises. The Landlord shall
replace, as needed, the heating and air conditioning equipment, provided the
unit has been serviced annually and the cost of replacement shall be prorated
over the useful life for such equipment.
PRE-EXISTING DEFECTS: Tenant's acceptance of the Premises does not
extend to any defects which are not readily ascertainable during the course of
Tenant's visual inspection.
Section 3. Landlord shall not be liable for failure to keep
the Leased Premises in repair, unless notice of the need for repairs has been
given Landlord, after the same has come to the explicit attention of Tenant, a
reasonable time has elapsed and Landlord has failed to make such repairs.
Landlord shall not be liable for any damage done or occasioned by or from the
electrical system, the heating and/or air conditioning system, the plumbing and
sewer system in, above, upon or about the Leased Premises nor for damage
occasioned by water, snow or ice being upon or coming through the roof, walls,
windows, doors or otherwise, unless such damages are a result of Landlord's
negligence or intentional misconduct in performance or failure to perform as
above provided.
Section 4. Except as provided in Sections 1, 2 and 3 of this
Article, Landlord shall not be obligated to make repairs, replacements or
improvements or any kind upon said Leased Premises, or any equipment facilities
or fixtures therein contained, which shall at all times be kept in good order,
condition and repair by Tenant, and in a clean, sanitary and safe condition and
in accordance with all applicable laws, ordinances and regulations of any
governmental authority having jurisdiction. Tenant shall permit no waste,
damage, or injury to the Leased Premises.
8
<PAGE> 23
ARTICLE 8. INSTALLATIONS AND ALTERATIONS.
Section 1. Tenant shall not make any alterations or additions
to the Leased Premises which exceed in the aggregate $10,000.00 without first
procuring Landlord's written consent, which consent shall not be unreasonably
withheld, and delivering to Landlord the plans and specifications and copies of
the proposed contracts and necessary permits, and shall furnish indemnification
against liens, costs, damages and expenses as may be reasonably required by
Landlord. All alterations, additions improvements and fixtures, other than trade
fixtures, which may be made or installed by either of the parties hereto upon
the Leased Premises and which in any manner are attached to the floors, walls or
ceilings, at the termination of this Lease shall become the property of the
Landlord unless Landlord requests their removal and shall remain upon and be
surrendered with the Leased Premises as a part thereof, without damage or
injury; and linoleum or other floor covering which may be cemented or adhesively
affixed to the floor shall likewise become the property of Landlord, all without
compensation or credit to Tenant.
Section 2. Landlord may withhold consent reasonably to any
proposed alteration, addition or installation which Landlord believes, in the
Landlord's reasonable opinion and discretion, could be considered a safety
hazard by the Federal Aviation Administration ("FAA") or which Landlord believes
would delay compliance or increase the costs incurred by Landlord in complying
with any regulation or law administered or enforced by the FAA or similar
regulatory body.
Section 3. The Tenant shall not erect or install any signage
without first procuring Landlord's written consent, which consent shall not be
unreasonably withheld or delayed.
Section 4. The Tenant shall have no rights to use and shall
not use the roof of the Leased Premises for any purpose without the written
consent of the Landlord. The Tenant shall not use the roof for storage, for any
activity that will result in traffic on the roof, for anything that will
penetrate the roof, use the roof as an anchor or otherwise damage the roof. The
consent of the Landlord must be in writing for each specific use and must also
approve the method of installation of the permitted use. Should the Tenant break
this covenant, the Tenant shall be responsible for any damages caused to the
roof or other parts of the building and shall assume the cost of maintaining and
repairing the roof during the term of the Lease, including any renewals.
ARTICLE 9. RISK OF LOSS.
Section 1. The Landlord shall not be held responsible for and
is relieved from all liability by reason of, any injury or damage to any person,
persons or property in the demised premises, whether belonging to the Tenant or
any other person, caused by any fire or by any breakage or leakage in any part
or portion of the demised premises, or in any part or portions of the building
of which the demised premises are a part, unless such breakage, leakage, injury
or damage is caused by or results from the negligence or intentional misconduct
of the Landlord or its agents. The Tenant, in consideration of the rent, accepts
and assumes such responsibility and
9
<PAGE> 24
liability.
Section 2. The Landlord shall not be held responsible for and
is relieved from all liability by reason of, any injury or damage to any person,
persons or property in the demised premises, whether belonging to the Tenant or
any other person, from water, rain or snow that may leak into, issue, or flow
from any part of the premises or of the building of which the demised premises
are a part, from the pipes or plumbing work of the same or from any place or
quarter, unless such damage, leak or flow is caused by or results from the
negligence or intentional misconduct of the Landlord or its agents or any person
or persons. The Tenant, in consideration of the rent herein specified, accepts
and assumes such responsibility and liability.
Section 3. The Tenant releases the Landlord from all
liability, and assumes all liability, for damages which may arise from any kind
of injury to person, persons or property on account of the use, misuse or abuse
of all elevators, hatches, or openings of any kind that may exist or hereinafter
be erected or constructed on the premises or from any kind of injury that may
arise from any other cause on the premises, unless such damage, injury, use,
misuse or abuse is caused by or results from the negligence or intentional
misconduct of the Landlord or its agents.
ARTICLE 10. INSURANCE.
Section 1. Tenant shall not carry any stock of goods or do
anything in or about said Leased Premises which will in any way tend to increase
insurance rates on said Leased Premises or the building in which the same are
located. Landlord warrants that Tenant's proposed use of the Leased Premises
will not tend to increase insurance rates on the Leased Premises. If Landlord
shall consent to such use, Tenant agrees to reimburse Landlord, upon demand, all
increase or increases of premiums on insurance carried by the Landlord on all or
part of the Leased Premises, or on the building of which the Leased Premises are
a part, caused in any way by the Tenant's occupancy. If Tenant installs any
electrical equipment that overloads or may overload the power lines to the
building, Tenant shall make immediately, and at its own expense, whatever
changes are necessary to remedy such overload or possible overload and to avoid
the same in the future, and shall comply with all requirements of all
governmental authorities having jurisdiction and with the requirements of any
insurance underwriters and rating bureaus.
Section 2. Tenant agrees to procure and maintain a policy or
policies of insurance, at its own costs and expense, insuring from all claims,
demands or actions for injury to or death of more than one person in any one
accident and for damages to property in an aggregate amount of not less than
$2,000,000.00 made by or on behalf of any person or persons, firm or
corporation, arising from, related to, or connected with the conduct and
operation of Tenant's business in the Leased Premises. Landlord shall be named
an Additional Insured Party in said policy. Such insurance shall be primary
relative to any other valid and collectible insurance. Tenant may satisfy this
insurance requirement with appropriate coverage under its existing policies
which may be in the form of a blanket policy and shall not be obligated to
obtain a separate policy for the Leased Premises. Said insurance shall not be
subject to
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<PAGE> 25
cancellation except after at least thirty (30) days prior written notice to
Landlord, and certificates for the same, shall be deposited with Landlord at the
commencement of the term and renewals of such coverage. If Tenant fails to
comply with such requirement, Landlord may obtain such insurance and keep the
same in effect after written notice to Tenant, and Tenant shall pay Landlord the
premium cost thereof upon demand.
Section 3. All property of Tenant or those claiming under
Tenant which may be upon said Leased Premises during the term hereof or any
renewal thereof shall be at and upon the sole risk and responsibility of the
Tenant.
ARTICLE 11. DAMAGE BY FIRE OR OTHER CASUALTY.
Section 1. If the demised Premises are totally destroyed or so
damaged by fire or other casualty not occurring through fault or negligence of
the Tenant, or those employed by or acting for it, that they cannot be repaired
and restored, on the basis of normal working days and hours, within 90 days,
this lease shall terminate, and the rent shall abate for the balance of the
term; PROVIDED, HOWEVER, that should it be determined anytime that the aforesaid
fire or other casualty was caused by the negligence or willful misconduct of
Tenant, its employees or agents, then this lease shall not terminate, and should
it have been terminated prior to this determination, it shall be reinstated and
all amounts which would have accrued but for the termination shall be
immediately due to Landlord and all other duties hereunder shall be reinstated
in full.
Section 2. If the damage above is only partial and the
premises can be restored, on the basis of normal working days and hours, to the
present condition within 90 days, the Landlord shall restore them as speedily as
circumstances reasonable permit, including the time necessary and required by
the insurance companies to inspect the premises and to make an adjustment with
the Landlord. The Landlord may enter upon the premises for the purpose of doing
the restoration work. However, if such damage occurs during the final 12 months
of the then current term, the Landlord or the Tenant may terminate this lease by
giving written notice to the other party within 30 days after the damage occurs.
If Landlord either party exercises such option the rent shall abate for the
balance of the term. The Landlord also may enter upon the demised premises
whenever necessary to repair damage caused by fire or other casualty to the
building of which the demised premises are a part, even though the effect of
such entry is to render the demised premises or a part thereof untenantable. In
that event, the rent shall be prorated and suspended while the Landlord is in
possession, taking into account the proportion in area of the demised premises
rendered untenantable or unusable and the duration of the Landlord's possession.
If a dispute arises as to the amount of rent under this clause, the Tenant shall
pay the full amount claimed by the Landlord. The Tenant may, however, proceed by
law to recover any excess payment.
ARTICLE 12. EMINENT DOMAIN.
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Section 1. If any of the Leased Premises shall be taken by a
public authority under the power of eminent domain and Landlord is unable to
provide substitute space within the area of the Airborne Commerce Park, then the
term of this Lease shall cease as of the day possession shall be taken by such
public authority, and the rent shall be paid up to that date with a
proportionate refund by Landlord of such rent as shall have been paid in
advance.
Section 2. If less than substantially all of the floor area of
the Leased Premises shall be so taken, as of the day possession shall be taken
by such public authority, and the rent shall be paid up to that day with a
proportionate refund by Landlord of such rent as may have been paid in advance,
and thereafter the minimum rent shall be equitably abated, and Landlord shall at
its own cost and expense make all necessary repairs or alterations as to
constitute the remaining Leased Premises a complete architectural unit. If
Tenant shall not be able to reasonably operate its business, then Tenant shall
have the right to terminate this Lease on 60 days written notice.
Section 3. All damages awarded for such taking under the power
of eminent domain, whether for the whole or a part of the Leased Premises, shall
be the property of Landlord whether such damages shall be awarded as
compensation for diminution in value of the leasehold or to the fee of the
Leased Premises; provided, however, that the Landlord shall not be entitled to
any separate award made to Tenant for loss of business, depreciation to and cost
of removal of stock and fixtures.
ARTICLE 13. ACCESS TO LEASED PREMISES.
Tenant shall retain all keys to the Leased Premises for
security reasons. Tenant agrees to have accessible to Landlord for twenty-four
(24) hours each day, a person or persons who will be able to provide reasonable
access to the Leased Premises for Landlord. After 48 hours written notice,
except in cases of emergency, the Landlord or its agents shall have the right to
enter upon the Leased Premises at all reasonable hours for the purpose of
inspecting the same or of making repairs, additions or alterations thereto or to
the building in which the same are located. If Landlord must obtain access to
the premises in an emergency, and Tenant has not provided access as set forth
above, Landlord may use whatever reasonable means are necessary to obtain
access, and any costs to repair damage caused to the Leased Premises by Landlord
in obtaining access shall be paid by Tenant. During the final six months of the
Lease term, the Landlord shall have the right, upon 48 hours written notice, to
show the Leased premises to prospective Tenants, purchasers or others. Landlord
shall not be liable to Tenant in any manner for any expense, loss or damage by
reason thereof, nor shall the exercise of such right be deemed an eviction or
disturbance of Tenant's use and possession.
ARTICLE 14. INABILITY TO DELIVER PREMISES.
If this Lease is executed and the Landlord cannot deliver
possession of the Leased Premises before the commencement date (as defined in
Article 1), it shall not be deemed to be in
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default under the Lease, and Tenant shall accept possession of the Leased
Premises provided Landlord is able to tender them within 30 days, unless the
delay is caused by an act or acts of severe winter weather, in which case
Landlord shall have sixty(60) days to tender possession of the Leased Premises.
Landlord waives the payment of rent covering any period before possession is
tendered to Tenant.
ARTICLE 15. LANDLORD'S SUCCESSORS.
The term "Landlord" as used in this Lease shall be limited to
mean and include only the owner or owners, at the time, of the fee of the
building, their successors and assigns, so that in the event of any sale or
sales of the building, the previous Landlord shall be entirely released with
respect to the performance of all subsequently accruing covenants and
obligations on the part of Landlord. The retention of fee ownership by a
Landlord of the building or of the land on which it is located under an
underlying lease which is now or hereafter in effect, shall not be deemed to
impose on such underlying Landlord any liability, initial or continuing, for the
performance of the covenants and obligations of Landlord.
ARTICLE 16. SUBORDINATION.
This Lease shall be subject to and subordinate at all times to
the lien of any mortgages, now or hereafter made on the Leased Premises, to all
advances made or hereafter to be made thereunder, and to any easements granted
to or by Landlord which benefit or burden the Leased Premises. The Tenant agrees
to execute a subordination agreement should Landlord's lender request same.
ARTICLE 17. ATTORNMENT.
In the event the herein Leased Premises are sold due to any
sale, transfer or foreclosure, by virtue of judicial proceedings or otherwise,
this Lease shall continue in full force and effect, and Tenant agrees, upon
request, to attorn to and acknowledge the transferee(s) or purchaser(s) at such
transfer or sale as Landlord(s) hereunder; provided such transferee(s) or
purchaser will recognize this Lease, unless and until it is in default.
ARTICLE 18. LIMITATION ON LIABILITY.
Notwithstanding any other provision of this Lease, Tenant
agrees to look solely to Landlord's interest in the building (subject to any
mortgage on the building) for the recovery of any judgment requiring the payment
of money by Landlord; it being agreed that Landlord, and if Landlord is a
partnership, its partners whether general or limited, or if Landlord is a
corporation, its directors, officers, and shareholders, shall never be
personally liable for any such judgment, and no other assets of the Landlord
shall be subject to such levy, execution or other procedures for the
satisfaction of Tenant's judgment. The provision contained in the foregoing
sentence is not intended to, and shall not, limit any right that Tenant might
otherwise have to obtain
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injunctive relief against Landlord or Landlord's successors in interest, or to
maintain any other action not involving the personal liability of Landlord, or
to maintain any suit or action in connection with enforcement or collection of
amounts which may become owing or payable under or on account of insurance
maintained by Landlord.
ARTICLE 19. TENANT'S DEFAULT.
Section 1. The Tenant, ten (10) days after receipt of written
notice, shall be considered in default of this Lease upon failure to pay when
due the rent or any other sum required by the terms of the Lease. Tenant shall
also be considered in default thirty (30) days after receipt of written notice
for failure to perform any term, covenant or condition of this Lease; upon the
commencement of any action or proceeding for the dissolution, liquidation or
reorganization under the Bankruptcy Act, of Tenant, or for the appointment of a
receiver or trustee of the Tenant's property; upon making of any assignment for
the benefit of creditors by Tenant; upon suspension of business; or the
abandonment of the Leased Premises by the Tenant. Any defaults other than
nonpayment defaults shall have a thirty (30) day cure period.
Section 2. In the event of default of this Lease by either
party, then either party may pursue any and all remedies and rights available
under applicable Ohio law. Should Landlord elect to reenter, as herein provided,
or should it take possession pursuant to legal proceedings or pursuant to any
notice provided for by law, it may either terminate this Lease, or it may
without terminating this Lease relet said Leased Premises or any part thereof
for such term or terms and at such rental or rentals and upon such other terms
and conditions as Landlord may deem advisable, with the right to make
alterations and repairs to said Leased Premises for the purpose of rerental.
Should such rentals received from such reletting during any month be less than
required to be paid by Tenant as defined above, then Tenant shall immediately
pay such deficiency to Landlord.
Section 3. No such reentry or taking possession of said Leased
Premises by Landlord shall be construed as an election on its part to terminate
this Lease, unless a written notice of such intention be given to Tenant or
unless the termination thereof be decreed by a court of competent jurisdiction.
Notwithstanding any such reletting without termination, Landlord may at any time
thereafter elect to terminate this Lease for such previous breach or act of
default. Should Landlord at any time terminate this Lease for any breach or act
of default, in addition to any other remedy it may have, it may recover from
Tenant all damages it may incur by reason of such breach or act of default,
including the cost of recovering the Leased Premises, legal fees, and including
the worth at the time of such termination of the excess, if any, of the amount
of rent and charges equivalent to rent reserved in this Lease for the remainder
of the stated term over the then reasonable rental value of the Leased Premises
for the remainder of the stated term.
ARTICLE 20. SURRENDER OF LEASED PREMISES.
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Section 1. If Tenant holds possession of the Leased Premises
after the termination of this Lease for any reason not authorized by the
Landlord unless the parties are engaged in good faith negotiations for the
leasing of this or other space in the Wilmington Commerce Park, after sixty days
from the termination, Tenant shall pay Landlord one hundred fifty percent (150%)
of the rent provided for herein for such period that Tenant holds over, but such
payment of rent shall not create any Lease arrangement whatsoever between
Landlord and Tenant, unless expressly agreed to in writing by Landlord. It is
further understood that during such period that Tenant holds over, the Landlord
retains all of Landlord's rights under this Lease, including damages as a result
of the termination of this Lease and the right to immediate possession of the
Leased Premises. This paragraph shall not be construed to grant Tenant
permission to hold over.
Section 2. At the expiration of the tenancy created hereunder,
whether by lapse of time or otherwise, Tenant shall surrender the Leased
Premises broom clean, free of tire marks, free of all debris and in good
condition and repair, reasonable wear and tear and loss by fire or other
unavoidable casualty excepted.
Section 3. Prior to surrender of the Leased Premises, the
Leased Premises will be reviewed by a representative of the Landlord and Tenant
to determine if there is any deferred maintenance or unrepaired damage which is
the responsibility of Tenant. Tenant shall have the option to effect such
maintenance and repairs. In the event that there is deferred maintenance and/or
unrepaired damage not taken care of by Tenant, then Landlord may effect such
maintenance and repairs and Tenant will pay the cost thereof which cost shall
not exceed 10% of the Landlord's approved initial build-out.
Section 4. Upon the expiration of the tenancy hereby created,
if Landlord so requests in writing, Tenant shall promptly remove any additions,
signs, fixtures and installations placed in the Leased Premises by Tenant that
is designated in said request, and repair any damage occasioned by such removals
at its own expense, and in default thereof, Landlord may effect such removals
and repairs, and Tenant shall pay Landlord the cost thereof, with interest at
the rate of eight (8) percent per annum from the date of payment by Landlord.
Notwithstanding the foregoing, Tenant shall be able to leave in such additions,
signs, fixtures and installations in an amount up to ten (10%) of its original
build-out without a duty to remove the same.
ARTICLE 21. WAIVER OF SUBROGATION.
The Landlord and Tenant waive all rights, each against the
other, for damages caused by fire or other perils covered by insurance where
such damages are sustained in connection with the occupancy of the Leased
Premises.
ARTICLE 22. ZONING; PERMITS.
Notwithstanding anything herein elsewhere contained to the
contrary, this Lease
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and all the terms and conditions hereof are in all respects subject and
subordinate to all zoning restrictions and restricting covenants affecting the
Leased Premises, and the building in which they are located, and the Tenant
shall be bound by such restrictions. Landlord represents that to the best of its
knowledge and belief, the present zoning of the premises permit the activities
of Tenant as such are presently carried on. In the event that the present zoning
does not permit the activities of Tenant's present use then this Lease shall be
void. The Landlord further does not warrant that any licenses or permits which
may be required for the business to be conducted by the Tenant on the Leased
Premises will be granted, or, if granted, will be continued in effect or
renewed. Any failure to obtain the licenses, permits, or any revocation thereof
or failure to renew them, shall not release the Tenant from the terms of this
Lease.
ARTICLE 23. ENVIRONMENTAL PROVISIONS.
Section 1. The Landlord, to the best of its knowledge,
represents to the Tenant that no toxic, explosive or other dangerous materials
or hazardous substances have been concealed within, buried beneath, released on
or from, or removed from and stored off-site of the Property upon which the
Leased Premises is constructed.
Section 2. Tenant shall at all times during the term of this
Lease comply with all applicable federal, state, and local laws, regulations,
administrative rulings, orders, ordinances, and the like, pertaining to the
protection of the environment, including but not limited to, those regulating
the handling and disposal of waste materials. Further, during the term of this
Lease, neither Tenant nor any agent or party acting at the direction or with the
consent of Tenant shall treat, store, or dispose of any "hazardous substance,"
as defined in Section 101 (14) of the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA") (or any analogous
legislation), or petroleum (including crude oil or any fraction thereof) on or
from the Property.
Section 3. Tenant shall fully and promptly pay, perform,
discharge, defend, indemnify and hold harmless Landlord from any and all claims,
orders, demands, causes of action, proceedings, judgments, or suits and all
liabilities, losses, costs or expenses (including, without limitation, technical
consultant fees, court costs, expenses paid to third parties and reasonable
legal fees) and damages arising out of, or as a result of, (i) any "release" as
defined in Section 101 (22) of CERCLA (or any analogous legislation), of any
"hazardous substance," as defined in Section 101 (14) of CERCLA (or any
analogous legislation), or petroleum, (including crude oil or any fraction
thereof) or placed into, on or from the Property at any time after the date of
this Lease by Tenant, its agents, or employees; (ii) any contamination of the
Property's soil or groundwater or damage to the environment and natural
resources of the Property the result of actions occurring after the date of this
Lease, whether arising under CERCLA or other statutes and regulations, or common
law by Tenant, its agents, or employees; and (iii) any toxic, explosive or
otherwise dangerous materials or hazardous substances which have been buried
beneath, concealed within or released on or from the Property after the date of
this Lease.
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Section 4. Landlord agrees to indemnify and hold harmless
Tenant upon the same terms and conditions set forth above for any release which
is caused by any other tenant in the Airborne Commerce Park or by Landlord
itself, except to the extent that Tenant is determined to be partly or wholly
responsible for such release.
Section 5. Landlord hereby warrants to Tenant that the
Premises do not contain any asbestos. Landlord also represents and warrants that
it has not received notification of any kind from any governmental agency
regarding actual, potential, or threatened contamination of the Property by
Hazardous Substances. Landlord agrees to indemnify and hold Tenant harmless from
any and all costs of any governmentally required remedial action or cleanup
suffered or incurred by Tenant arising out of or related to any use of the
Premises, Shopping Center, Building or Property or presence of asbestos or
Hazardous Substances in any such areas or portion thereof occurring prior to the
Lease Commencement date. The term "Hazardous Substances" shall mean any and all
hazardous, toxic, infectious, or radioactive substances, wastes, or materials
listed or defined by any Environmental Law and specifically shall include
petroleum oil and its fractions, asbestos, urea formaldehyde and radon. The term
"Environmental Laws" means any and all federal, state, and local statutes,
regulations, and ordinances pertaining to the protection of human health or the
environment that are applicable to the Premises, including, without limitation,
the Comprehensive Environmental Response, Compensation and Recover Act of 1980,
as amended, the Resource Conversation and Recovery Act of 1976, and the
Hazardous Materials Transportation Act; all regulations pertaining thereto; and
all other statutes, laws and ordinances of the United States and of any state,
county or municipality in which the Premises are located.
ARTICLE 24. ESTOPPEL CERTIFICATE.
The Tenant agrees to execute an Estoppel Certificate on a form
to be supplied by Landlord for the benefit of Lender or any mortgage holder;
that wherein the Tenant acknowledges the terms and conditions of this Lease.
ARTICLE 25. ACCELERATION OF RENT.
If the Tenant becomes insolvent, bankrupt, or makes an
assignment for the benefit of creditors, or is levied upon or sold out by
Sheriff's or Marshall's sale, or if a receiver is appointed, the Landlord may
declare the rent for the balance of the term or any part thereof to be due and
payable as if by the terms of the lease it were payable in advance. If the rent
or any other sum payable hereunder is at any time unpaid when within 45 days
after due, the Landlord may then declare the rent for the balance of the term or
any part thereof to be immediately due and payable as if by the terms of the
Lease it were payable in advance, and the Landlord may immediately proceed to
distrain, collect, or bring action for the whole rent or any part thereof, as if
it were in arrears, or may enter judgment therefor, in an amicable action as
hereinabove provided in the case of rent in arrears.
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ARTICLE 26. RENT DEMAND.
Every demand for rent due wherever and whenever made shall
have the same effect as if made at the time it falls due and at the place of
payment, and after the service of any notice or commencement of any suit, or
final judgment therein, Landlord may receive and collect any rent due, and such
collection or receipt shall not operate as a waiver of nor affect such notice,
suit or judgment.
ARTICLE 27. NO REPRESENTATION BY LANDLORD.
Landlord and its agent have made no representations or
promises with respect to the Leased Premises or the building of which the same
form a part except as herein expressly set forth. Landlord represents that all
systems and Leased Premises will be in good working order and in full compliance
with law and provision of the certificate of occupancy upon commencement of the
Lease.
ARTICLE 28. WAIVER OF BREACH.
No waiver of any breach of the covenants, provisions or
conditions contained in this Lease shall be construed as a waiver of the
covenant itself or any subsequent breach itself, and if any breach shall occur
and afterwards be compromised, settled or adjusted, this Lease shall continue in
full force and effect as if no breach had occurred, unless otherwise agreed. The
acceptance of rent hereunder shall neither be or construed to be a waiver of any
breach of any term, covenant or condition of this Lease.
ARTICLE 29. QUIET ENJOYMENT.
Landlord hereby covenants and agrees that if Tenant shall
perform all the covenants and agreements herein stipulated to be performed on
Tenant's part, Tenant shall at all times during the continuance hereof have the
peaceable and quiet enjoyment and possession of the Leased Premises without any
manner of let or hindrance from Landlord or any person or persons lawfully
claiming the Leased Premises except as otherwise provided for herein.
ARTICLE 30. INTERPRETATION.
Section 1. Wherever either the word "Landlord" or "Tenant" is
used in this Lease, it shall be considered as meaning the singular and/or neuter
pronouns as used herein, and the same shall be construed as including all
persons and corporations designated respectively as Landlord or Tenant in the
heading of this instrument wherever the context requires.
ARTICLE 31. DEFINITIONS.
Pro rata share. Unless otherwise indicated, "pro rata share"
means the share of
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any costs, fees, or expenses Tenant is required to pay to Landlord under this
Agreement calculated by dividing the square footage of the Leased Premises by
the total square footage of the building or buildings as the case may be of
which the Leased Premises are a part.
Buildings. Unless otherwise indicated, "buildings" means the
buildings of which the leased premises are a part and to which any item of
expense is attributable or allocable.
ARTICLE 32. HEADINGS.
All headings preceding the text of the several Articles and
Sections hereof are inserted solely for convenience or reference and shall not
constitute a part of this Lease or affect its meaning, construction, or effect.
ARTICLE 33. NOTICE.
All notices under this Lease may be personally delivered; sent
by courier service, with receipt; or mailed to the address shown by certified
mail, return receipt requested. The effective date of any mailed notice shall be
three (3) days after delivery of the same to the United States Postal Service.
Landlord: WILMINGTON COMMERCE PARK PARTNERSHIP
Mail: Al. NEYER, INC.
3800 Red Bank Road
Cincinnati, Ohio 45227
Telephone: (513) 271-6400
FAX: (513) 271-1350
Tenant: DJ & J Software Corporation
Mail: Attn: Real Estate Department
22011 South East 51st Street
Issaquah, WA 98027
Telephone: (206) 391-0800
ARTICLE 34. FINANCIAL STATEMENTS.
The Tenant shall furnish the Landlord with Tenant's most
current audited financial statements. Tenant shall furnish Landlord with
Tenant's most current public information at Landlord's request during Lease
term.
ARTICLE 35. MEMORANDUM OF LEASE.
It is agreed by both parties that this instrument is not
recordable and if either party
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should record the same in the office of the Recorder of Clinton County, Ohio,
the recording shall have no effect. When possession of the Leased Premises has
been delivered to Tenant, the parties hereto may execute, acknowledge and
deliver a Memorandum of Lease in recordable form specifying the terms of this
Lease and renewal periods of this Lease. In the event they differ from the dates
herein, the date in the Memorandum shall control.
ARTICLE 36. TIME.
Time is of the essence in this Lease.
ARTICLE 37. RIGHT OF FIRST REFUSAL.
Tenant shall have the right of first refusal to lease
additional space in the building. Landlord must deliver written notice of such
offer to Tenant. Tenant shall have ten (10) days from the date such notice is
received by Tenant to respond to such offer. If Tenant fails to deliver written
notice to Landlord in ten (10) days, Landlord shall be free to lease the space
to the third party.
ARTICLE 38. AMERICANS WITH DISABILITIES ACT.
Landlord warrants that prior to Tenant's occupancy the
Premises will comply with the Americans with Disabilities Act of 1990 and any
related rules and regulations, as amended from time to time ("AD"). To the
extent applicable, Tenant shall perform and pay for compliance with the ADA
affecting the Premises that is required by actions taken by Tenant to alter or
remodel the Premises, and by changes to the ADA enacted or promulgated after the
Lease Commencement Date. Throughout the term of this Lease, Landlord shall
perform and pay for compliance with the ADA outside of the Premises, including
without limitation, provision of an accessible path of travel to the Premises.
ARTICLE 39. CONFIDENTIALITY.
The confidentiality of all business information provided by
either party to this Lease pursuant to the terms of this Lease shall be
preserved and protected by the party receiving such information, unless the
party providing the information has expressly stated in writing to the other
party that the information provided is not confidential.
ARTICLE 40. BROKERS.
Tenant is not liable for the fees of any brokers or agents
which were not engaged by Tenant. No broker or agent has the authority to make
any representation for or obligate
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Tenant in any manner.
ARTICLE 41. ENTIRE AGREEMENT.
This Lease contains the entire agreement between the parties;
it supersedes all previous understandings and agreements between the parties, if
any and no oral or implied representation of understandings shall vary its
terms; and it may not be amended except by a written instrument executed by both
parties hereto.
IN WITNESS WHEREOF, the parties hereto set their hands to triplicates
hereof, this _____ day of _____________________, 1995, as to Landlord , and this
_____ day of ___________________, 1995, as to Tenant.
Signed and acknowledged LANDLORD: WILMINGTON COMMERCE
in the presence of: PARK PARTNERSHIP
_________________________________ By:_________________________________
Its:_________________________________
_________________________________
TENANT: DJ & J SOFTWARE CORPORATION
_________________________________ By:_________________________________
Terence M. Strom, President
and C.E.O.
_________________________________
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STATE OF OHIO, COUNTY OF ___________________, SS:
The foregoing instrument was acknowledged before me this _____ day of
___________, 1995, by ______________________, ________________________, on
behalf of WILMINGTON COMMERCE PARK PARTNERSHIP.
____________________________________
Notary Public
STATE OF WASHINGTON, COUNTY OF KING, SS:
The foregoing instrument was acknowledged before me this _____ day of
____________, 1995, by Terence M. Strom, President and C.E.O., on behalf of DJ &
J SOFTWARE CORPORATION.
____________________________________
Notary Public
Prepared by BUCKLEY, MILLER & WRIGHT, Attorneys at Law, Wilmington, Ohio 45177
KB/JVG.WCPP1.EGG.KB('95)(5)
22
<PAGE> 1
EXHIBIT 10.20
DECISIONONE CORPORATION
EXECUTIVE SEVERANCE PLAN
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF DECISIONONE CORPORATION
1. Decision Data Investment Corporation, a Delaware Corporation
2. DecisionOne Supplies, a Delaware Corporation
3. Decision Data Computer International, S.A., incorporated in Switzerland.
4. DecisionOne Corporation, incorporated in Ontario Canada
5. Properties Holding Corporation, a Delaware Corporation.
6. Properties Development Corporation, a Delaware Corporation
7. IC Properties Corporation, a Delaware Corporation.
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-03267, 333-19095, 333-33043, 333-33045 on Form S-8 and 333-33057, 333-33061
on Form S-3 of DecisionOne Holdings Corp., of our reports dated September 1,
1999, appearing in the Annual Report on Form 10-K of DecisionOne Holdings Corp.
and DecisionOne Corporation for the year ended June 30, 1999.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
December 6, 1999
<PAGE> 1
EXHIBIT 24
The undersigned hereby makes, constitutes and appoints Karl R. Wyss, Thomas
J. Fogarty and Thomas M. Molchan, each of them acting alone, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him in his name, place and stead, in any and all capacities,
to execute and cause to be filed with the Securities and Exchange Commission the
Annual Report on Form 10-K for the fiscal year ended June 30, 1999 of
DecisionOne Corporation and any amendments thereto pursuant to the Securities
Exchange Act of 1934, with all exhibits thereto and other documents in
connection therewith, and hereby ratifies and confirms all that said
attorney-in-fact or his substitute or substitutes may do or cause to be done by
virtue hereof.
/s/ KIRK B. WORTMAN*
--------------------------------------
Kirk B. Wortman
Dated: November ,1999
* Identical powers-of-attorney (other than the signature blocks) were executed
by Karl R. Wyss, Lawrence M.v.D. Schloss, and Peter T. Grauer.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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