<PAGE>
Filed Pursuant to Rule 424(b)(1)
Registration File No.: 333-28539
PROSPECTUS
JULY 30, 1997
$148,400,000
[DECISIONONE LOGO]
DECISIONONE HOLDINGS CORP.
(AS SUCCESSOR OBLIGOR BY MERGER TO QUAKER HOLDING CO.)
148,400 UNITS CONSISTING OF
11 1/2% SENIOR DISCOUNT DEBENTURES DUE 2008 AND
148,400 WARRANTS TO PURCHASE 281,960 SHARES OF COMMON STOCK
The 148,400 units (the "Units"), each consisting of $1,000 principal amount
at maturity of 11 1/2% Senior Discount Debentures due 2008 (the "Debentures")
and one warrant (collectively, the "Warrants") to purchase 1.9 shares of
common stock, par value $.01 per share (the "Common Stock"), of Quaker Holding
Co. ("Quaker") are being offered (the "Offering") by Quaker, a corporation
formed by the DLJMB Funds (as defined herein) to acquire an interest in
DecisionOne Holdings Corp. ("Holdings") by means of the Merger (as defined
herein). Upon consummation of the Merger, Holdings will succeed to the
obligations of Quaker with respect to the Debentures and the Warrants, and the
Warrants will by their terms become exercisable for an equal number of shares
of common stock of Holdings, par value $.01 per share ("Holdings Common
Stock").The Debentures and the Warrants will not be separately transferable
until the earliest to occur of (i) February 7, 1998, (ii) the occurrence of a
Change of Control (as defined herein) and (iii) the date specified by
Donaldson, Lufkin & Jenrette Securities Corporation (the "Underwriter").
The issue price of the Units will be $572.80 per Unit. The Debentures will
mature on August 1, 2008. The issue price of the Debentures represents a yield
to maturity of 11 1/2% (computed on a semi-annual bond equivalent basis)
calculated from August 7, 1997. The Debentures will accrete at a rate of 11
1/2%, compounded semi-annually, to an aggregate principal amount at maturity
of approximately $148.4 million by August 1, 2002. Cash interest will not
accrue on the Debentures prior to August 1, 2002. Commencing on February 1,
2003, cash interest on the Debentures will be payable, at a rate of 11 1/2%
per annum, semi-annually in arrears on each February 1 and August 1. See
"Description of Debentures" and "Certain Federal Income Tax Considerations."
The Debentures will be redeemable at the option of the Issuer (as defined
herein), in whole or in part, at any time on or after August 1, 2002, in cash
at the redemption prices set forth herein, plus accrued and unpaid interest,
if any, thereon to the redemption date. In addition, at any time prior to
August 1, 2000, the Issuer may, at its option, on any one or more occasions,
redeem up to 35% of the aggregate principal amount at maturity of the
Debentures originally issued at a redemption price equal to 111.50% of the
Accreted Value (as defined herein) thereof, with the net proceeds of one or
more Equity Offerings (as defined herein); provided that at least 65% of the
original aggregate principal amount at maturity of the Debentures will remain
outstanding immediately following each such redemption. Upon the occurrence of
a Change of Control, each Holder of the Debentures will have the right to
require the Issuer to repurchase Debentures at a price in cash equal to 101%
of the Accreted Value thereof, in the case of any such purchase prior to
August 1, 2002, or 101% of the aggregate principal amount at maturity thereof,
plus accrued and unpaid interest, if any, thereon to the date of repurchase in
the case of any such purchase on or after August 1, 2002. See "Description of
Debentures."
The Debentures will be senior obligations of the Issuer. The Debentures
will rank pari passu in right of payment with all future senior indebtedness
of the Issuer and will rank senior in right of payment to all future
indebtedness of the Issuer that is subordinated to the Debentures. The
Debentures will be effectively subordinated to all liabilities of the Issuer's
subsidiaries. On a pro forma basis after giving effect to the Merger,
including the Merger Financing and the application of the proceeds therefrom,
as of March 31, 1997, the Company would have had outstanding approximately
$736.9 million of Indebtedness (as defined herein) and the Issuer's
subsidiaries would have had $847.7 million of liabilities outstanding,
including Indebtedness under the Senior Subordinated Notes (as defined herein)
and the New Credit Facility (as defined herein) and including trade payables.
Each Warrant will entitle the holder thereof, subject to certain
conditions, to purchase 1.9 shares of Common Stock at an exercise price of
$23.00 per share, subject to adjustment under certain circumstances. Upon
exercise, the holders of Warrants would be entitled, in the aggregate, to
purchase Holdings Common Stock representing approximately 2% of the Holdings
Common Stock on a fully diluted basis on the date hereof, after giving effect
to the Merger. The Warrants will be exercisable at any time on or after the
Separation Date (as defined herein). Unless earlier exercised, the Warrants
will expire on August 1, 2007. See "Description of Warrants."
Consummation of the Offering will occur concurrently with and is
conditioned upon, consummation of the Merger and Merger Financing. As part of
the Merger Financing, DecisionOne Corporation, a wholly owned subsidiary of
Holdings ("DecisionOne Corp."), is offering pursuant to a separate prospectus
$150 million principal amount of 9 3/4% Senior Subordinated Notes due 2007
(the "Senior Subordinated Notes") and will enter into the New Credit Facility.
See "The Merger and Merger Financing."
SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE UNITS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT AT PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO THE
MATURITY OF THE DEBENTURES PUBLIC(1) AND COMMISSIONS(2) COMPANY(1)(3)
- ----------- -------------------------- ------------- ---------------------- ---------------
<S> <C> <C> <C> <C>
Per Unit .. 100% 57.280% 2.291% 54.989%
Total ...... $148,400,000 $85,003,520 $3,400,141 $81,603,379
- ----------- -------------------------- ------------- ---------------------- ---------------
</TABLE>
(1) Plus accrued original issue discount, if any, on the Debentures.
(2) See "Underwriting" for indemnification arrangements with the
Underwriter (as defined herein).
(3) Before deducting expenses payable by the Issuer, estimated at $700,000.
The Units are being offered by the Underwriter, subject to prior sale,
when, as and if delivered to and accepted by them, and subject to various
prior conditions, including the right to reject orders in whole or in part.
It is expected that delivery of the Units will be made in New York, New York,
on or about August 7, 1997.
Donaldson, Lufkin & Jenrette
Securities Corporation
<PAGE>
FOR CALIFORNIA RESIDENTS ONLY
WITH RESPECT TO SALES OF THE UNITS CONSISTING OF 11 1/2% SENIOR DISCOUNT
DEBENTURES DUE 2008 AND WARRANTS TO PURCHASE COMMON STOCK OF QUAKER HOLDING
CO. BEING OFFERED HEREBY TO CALIFORNIA RESIDENTS, SUCH SECURITIES MAY BE SOLD
ONLY TO: (1) "ACCREDITED INVESTORS" WITHIN THE MEANING OF REGULATION D UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, (2) BANKS, SAVINGS AND LOAN
ASSOCIATIONS, TRUST COMPANIES, INSURANCE COMPANIES, INVESTMENT COMPANIES
REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940, PENSION AND PROFIT
SHARING TRUSTS, ANY CORPORATIONS OR OTHER ENTITIES, WHICH, TOGETHER WITH SUCH
CORPORATION'S OR OTHER ENTITY'S AFFILIATES WHICH ARE UNDER COMMON CONTROL,
HAVE A NET WORTH ON A CONSOLIDATED BASIS ACCORDING TO THEIR MOST RECENT
REGULARLY PREPARED FINANCIAL STATEMENTS (WHICH SHALL HAVE BEEN REVIEWED BUT
NOT NECESSARILY AUDITED, BY OUTSIDE ACCOUNTANTS) OF NOT LESS THAN $14,000,000
AND SUBSIDIARIES OF THE FOREGOING, (3) ANY PERSON (OTHER THAN A PERSON FORMED
FOR THE SOLE PURPOSE OF PURCHASING THE SECURITIES OFFERED HEREBY) WHO
PURCHASES AT LEAST $1,000,000 AGGREGATE AMOUNT OF THE SECURITIES OFFERED
HEREBY, OR (4) ANY NATURAL PERSON WHO (A) HAS AN INCOME OF $65,000 AND A NET
WORTH OF $250,000, OR (B) HAS A NET WORTH OF $500,000 (IN EACH CASE EXCLUDING
HOME, HOME FURNISHINGS AND PERSONAL AUTOMOBILES). EACH CALIFORNIA RESIDENT
PURCHASING THE SECURITIES OFFERED HEREBY AGREES THAT IT WILL NOT SELL OR
OTHERWISE TRANSFER SUCH SECURITY TO A CALIFORNIA RESIDENT UNLESS THE
TRANSFEREE COMES WITHIN ONE OF THE AFOREMENTIONED CATEGORIES AND THAT IT WILL
ADVISE THE TRANSFEREE OF THIS CONDITION WHICH TRANSFEREE, BY BECOMING SUCH,
WILL BE BOUND BY THE SAME RESTRICTIONS ON RESALE.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES
OFFERED HEREBY. SPECIFICALLY, THE UNDERWRITER MAY OVERALLOT IN CONNECTION
WITH THE OFFERING AND MAY BID FOR AND PURCHASE THE SECURITIES IN THE OPEN
MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
AVAILABLE INFORMATION
Quaker has filed a registration statement on Form S-1 (together with all
amendments, supplements and exhibits thereto, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with the
Securities and Exchange Commission (the "Commission") with respect to the
Units, the Debentures and the Warrants (the "Securities") offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which have been omitted in
accordance with the rules and regulations of the Commission, and reference is
hereby made to the Registration Statement and the exhibits and schedules
thereto for further information. Summary and other statements contained
herein concerning the provisions of any document are not necessarily
complete, and in each instance reference is hereby made to the copy of the
document filed as an exhibit to the Registration Statement. Each such
statement is qualified in its entirety by such reference.
Holdings, which will succeed to the obligations of Quaker under the
Securities following the Merger, is subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
in accordance therewith files reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information
filed by Holdings may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following regional
offices: Seven World Trade Center, 13th Floor, New York, New York 10048; and
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material can be obtained from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. In addition, such material can
also be obtained from the Commission's Web site at http://www.sec.gov.
2
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Investors are urged to read this Prospectus in
its entirety. As used in this Prospectus, the term "Quaker" means Quaker
Holding Co., the term "Issuer" means Quaker Holding Co. before the Merger and
DecisionOne Holdings Corp. after the Merger, the term "Holdings" means
DecisionOne Holdings Corp., the terms "DecisionOne" and the "Company" mean
DecisionOne Holdings Corp., its predecessors and subsidiaries, and the term
"DecisionOne Corp." means "DecisionOne Corporation", a wholly owned and the
principal operating subsidiary of DecisionOne Holdings Corp. References to
industry size and statistics contained herein, unless otherwise indicated,
are derived from information provided by Dataquest Incorporated
("Dataquest").
THE COMPANY
OVERVIEW
The Company is the largest independent provider of multivendor computer
maintenance and technology support services in the United States. 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 it is the
most comprehensive independent (i.e., not affiliated with an original
equipment manufacturer ("OEM")) provider of these services across a broad
range of computing environments, including mainframes, midrange and
distributed systems, workgroups, personal computers ("PCs") and related
peripherals. The Company provides support for over 15,000 hardware products
manufactured by more than 1,000 OEMs. The Company also supports most major
operating systems and over 150 off-the-shelf ("shrink-wrapped") software
applications. The Company delivers its services through an extensive field
service organization of approximately 4,000 field technicians in over 150
service locations throughout the United States and Canada and strategic
alliances in selected international markets.
DecisionOne has emerged as the leading independent, multivendor provider
of computer maintenance and technology support services by (i) consummating
over 35 complementary acquisitions since the beginning of fiscal 1993, (ii)
expanding maintenance capabilities and introducing new technology support
services, (iii) increasing sales to existing customers by increasing
equipment under contract and by selling existing customers new technology
support services, (iv) adding new corporate customers and (v) providing
outsourcing services for OEMs, software publishers, system integrators and
other independent service organizations. As a result, the Company's revenues
have grown at a compound annual rate of 69.2% to approximately $820.4 million
for the annualized quarter ended March 31, 1997 from $114.1 million in fiscal
1993. Over the same period, the Company's Adjusted EBITDA (as defined herein)
has grown at a 74.2% compound annual rate to approximately $120.3 million for
the annualized quarter ended March 31, 1997 from $15.0 million in fiscal
1993.
In 1996, based on Dataquest projections, the Company estimates it had a 9%
market share of the $8.8 billion independent, multivendor segment of the
$40.5 billion U.S. hardware maintenance and technology support services
market. The independent, multivendor segment is projected by Dataquest to
grow at a 14% compound annual rate from $8.8 billion in 1996 to $14.8 billion
in 2000. The Company believes this growth is being driven by the
proliferation of computer equipment as well as outsourcing trends, including:
(i) the outsourcing by corporate customers of hardware maintenance and
technical support requirements and (ii) the outsourcing by major hardware
OEMs and software publishers of maintenance services (including warranty and
post-warranty services) and end-user technical support requirements. In
addition, the Company believes that demand for its services is being driven
by the increasing complexity of computing environments which has resulted
from the migration of computer systems from single OEM, centralized systems
to multivendor, decentralized systems. The Company believes that this
increased complexity has generally surpassed the technical capabilities of
many in-house support staffs and has accelerated the pace of outsourcing. The
Company believes that customers are increasingly turning to independent
service providers when outsourcing due to the increased use of multiple
vendors for hardware and the perception that OEM service providers are biased
toward specifying their own
3
<PAGE>
equipment as computer purchase requirements arise. Furthermore, many OEMs
such as Sun Microsystems, Inc. ("Sun") and Compaq Computer Corporation
("Compaq") are outsourcing certain non-core customer service activities,
including maintenance services (including warranty and post-warranty
services) and product support services (such as end-user help desk services)
to independent service organizations such as the Company.
COMPETITIVE STRENGTHS
The Company believes that it possesses a number of competitive strengths
that have allowed it to become the leading independent provider of
multivendor computer maintenance and technology support services, including:
EXTENSIVE SERVICE INFRASTRUCTURE. The Company provides customers with
high quality service through an extensive infrastructure including: (i)
approximately 4,000 highly trained field technicians, (ii) over 150
geographic locations throughout the United States and Canada, (iii) a
substantial spare parts inventory to ensure supply and rapid response times,
(iv) a broad service offering which enhances the Company's ability to provide
customers with a single source solution, (v) an extensive proprietary
database of historical failure rates for over 15,000 hardware products
manufactured by over 1,000 OEMs, (vi) a detailed record of major customers'
hardware and software assets and a record of such customers' maintenance
patterns and (vii) proprietary dispatch systems to ensure rapid customer
response times.
INDEPENDENT, MULTIVENDOR SERVICE PROVIDER. The Company provides customers
with an independent, multivendor solution for their computer maintenance and
technology support needs. As an independent service provider, the Company
believes it is viewed by customers as impartial to any particular OEM's
products. As a multivendor service provider, the Company supports over 15,000
hardware products manufactured by more than 1,000 OEMs as well as most major
operating systems and over 150 shrink-wrapped software applications. OEM,
specialty and local service providers do not offer either the breadth of
services or the geographic presence throughout the United States and Canada
provided by the Company.
CONTRACT-BASED REVENUES. Approximately 85% of the Company's revenues in
fiscal 1996 were derived from contracts, under which equipment and services
may be added and deleted. Furthermore, the Company believes that its
extensive service infrastructure and its unique knowledge of its customers'
hardware and software service requirements enhance the Company's ability to
provide superior service. The Company believes that the resulting track
record of service to existing customers affords it a competitive advantage in
renewing existing contracts and winning new contracts. Although many of the
Company's existing customer contracts are currently terminable on short
notice, 49 out of the Company's top 50 customers in fiscal 1994 are still
customers today.
DIVERSIFIED AND STABLE FORTUNE 1000 CUSTOMER BASE. The Company services
over 51,000 customers at over 182,000 sites across the United States and
Canada. In fiscal 1996, the Company's top 10 customers represented 23% of
revenues and the top 100 customers represented 47% of revenues. The Company's
customers include a diverse group of national and multinational corporations,
including SABRE Group, Inc. (an affiliate of American Airlines, Inc.), Sun,
Compaq, NationsBank, DuPont Company ("DuPont"), Chevron Corporation, and
Netscape Communications Corporation ("Netscape"). The Company believes that
the scope of its service offerings and the breadth of its geographic presence
in the United States and Canada allow it to serve this diverse group of
national and multinational customers as well as thousands of smaller
customers who also require customized services.
MITIGATED TECHNOLOGY AND RECESSION RISKS. The Company provides services
across a broad range of computing environments, including mainframes,
midrange and distributed systems, workgroups, PCs and related peripherals.
Consequently, although each segment of the computer hardware and software
industry is subject to shifts in technology, the Company believes that the
diversity of computing environments for which it provides services mitigates
the potential adverse effects of technological changes in any one segment.
Furthermore, the Company believes that because computer maintenance
requirements are based primarily on usage, the Company's hardware maintenance
business may be insulated from the adverse effects of declines in spending
during recessionary periods, so long as computer usage continues to
necessitate maintenance spending.
4
<PAGE>
BUSINESS STRATEGY
DecisionOne has developed a business strategy which it believes will
enable it to profitably grow future revenue and cash flow and which includes
the following elements:
PROVIDE A SINGLE SOURCE TECHNOLOGY SUPPORT SOLUTION. The Company intends
to continue its strategy of offering its customers a broad and expanding
range of computer technology support services in a single interface format.
The Company believes it meets the customer's preference for a single
interface by offering maintenance and technology support services across most
leading brands of hardware and software within virtually all computing
environments. In addition, the Company's single source solution enables the
Company to retain customers when customers change, substitute or upgrade
their computing environments.
OFFER ADDITIONAL SERVICES TO EXISTING CUSTOMERS. The Company generates new
revenues from existing customers by adding new equipment to existing hardware
maintenance contracts and by providing existing customers with additional
support services. Recent revenue growth attributable to the expansion of
additional support services has been derived primarily from (i) end-user
support services such as help desk services, (ii) network support services
such as local area networks ("LAN") administration, security management and
fault management, (iii) logistics services such as parts repair, inventory
and asset management, and warranty parts management and (iv) program
management services such as technology deployment and computer and software
moves, adds and changes. The Company believes that the breadth of its
additional support services has permitted, and will continue to permit, the
Company to leverage its historic strength in hardware maintenance to increase
revenues from existing customers and has enabled the Company to grow sales to
its top 50 customers in fiscal 1994 by 33.3% through fiscal 1996.
LEVERAGE EXISTING SERVICE INFRASTRUCTURE. The Company believes that, due
to the large scale of the Company's service infrastructure, the Company
enjoys substantial operating leverage and has positioned itself to increase
productivity and profitability whether the Company grows internally or
through acquisitions. The principal areas in which the Company expects to
realize the benefits of operating leverage include: (i) increased customer
call density in a region permitting field service technicians in the region
to complete a greater number of service calls per day, (ii) increased
comparable equipment density allowing the Company to operate with
proportionally lower inventory of spare parts and (iii) productivity gains
driven by new services such as end-user support services which reduce
unnecessary trips by field technicians to existing customers and by the
addition of new equipment under existing maintenance contracts. The Company
intends to further improve the productivity of its existing infrastructure by
investing in upgrades of its management information systems.
PURSUE COMPLEMENTARY ACQUISITIONS. The Company believes it is well
positioned strategically to participate in the further consolidation of the
computer maintenance and technology support services market and expects to
continue to evaluate complementary acquisitions. Further, the Company
believes that pursuing complementary acquisitions is an attractive growth
strategy due to the significant synergies which the Company may achieve when
it successfully consolidates acquisitions into its service infrastructure.
Since the beginning of fiscal 1993, the Company has completed over 35
acquisitions. The Company's typical acquisition consists principally of
customer maintenance and support contracts as well as the accompanying spare
parts inventory. The Company generally reduces the cost structure necessary
to service the acquired customer contracts by leveraging DecisionOne's
extensive service infrastructure, spare parts inventory and administrative
function. For example, the Company was able to service the contracts acquired
from Memorex Telex Corporation and certain of its affiliates ("Memorex
Telex") in November 1996 with approximately 36% fewer employees than
previously required by Memorex Telex. In addition, the Company seeks to
increase sales and profitability by offering acquired customers additional
services.
5
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CAPITALIZE ON OUTSOURCING TREND AMONG OEMS, SOFTWARE PUBLISHERS AND
SYSTEMS INTEGRATORS. The Company expands its marketing reach by offering its
services through outsourcing arrangements and indirect channels. For fast
growing hardware OEMs and software publishers concerned with cost savings and
time-to-market issues such as Sun, Netscape and Compaq, the Company provides
outsourced customer support services such as help desk services, warranty and
post-warranty maintenance services, and technical product support services.
For systems integrators, the Company provides maintenance and technology
support services on a subcontract basis to several large outsourcing clients
of Electronic Data Systems Corp. ("EDS") and Computer Sciences Corp.
STRATEGIC INITIATIVES
During fiscal 1997, the Company has implemented several strategic
initiatives designed to rationalize its cost structure and capitalize on
economies of scale. These initiatives included:
o the acquisition of complementary contracts and assets which the Company
has been able to service with fewer employees than the prior owners by
leveraging the Company's existing infrastructure. For example, during
fiscal 1997, the Company acquired contracts and assets of Memorex Telex
and Xerox Canada and reduced the number of service personnel required
to support such contracts from 1,192 to 768 and 160 to 120,
respectively;
o ongoing initiatives to enhance the efficiency of the Company's field
technician service force, including the addition of functionalities to
the Company's information systems which enable the Company to match
field technician skill sets with call productivity history and workload
requirements and the implementation of best practices, benchmarking and
targeted training programs across the Company's over 150 branch
locations; and
o the renegotiation of certain vendor contracts on more favorable terms,
including the Company's data center outsourcing contract with EDS and
the Company's telecommunications contracts with several providers.
As a result of these strategic initiatives and the Company's increased
operating leverage, the Company's Adjusted EBITDA has increased in each
successive quarter of fiscal 1997. Adjusted EBITDA for the quarter ended
March 31, 1997 increased to $30.1 million from $20.6 million for the quarter
ended September 30, 1996. Over the same period, Adjusted EBITDA margin
increased to 14.7% from 11.7%. In addition, these initiatives enabled the
Company to reduce 203 employees from its core business in November and
December of 1996 without impacting service levels and resulted in improved
revenue per employee from $30,700 in the quarter ended September 30, 1996 to
$32,400 in the quarter ended March 31, 1997. Certain quarterly data for
fiscal 1997 are shown in the table below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1996 MARCH 31, 1997
------------------ ----------------- --------------
(DOLLARS IN THOUSANDS)
---------------------------------------------------
<S> <C> <C> <C>
Revenues................................ $176,426 $191,253 $205,070
Sequential growth...................... 3.2% 8.4% 7.2%
Gross profit............................ $ 41,861 $ 48,221 $ 54,698
% of revenues.......................... 23.7% 25.2% 26.7%
Adjusted EBITDA(1)...................... $ 20,589 $ 25,386 $ 30,063
% of revenues.......................... 11.7% 13.3% 14.7%
Revenue per average number of
employees.............................. $ 30.7 $ 31.6 $ 32.4
</TABLE>
- ------------
(1) As defined in Note 8 to the Summary Historical and Unaudited Pro Forma
Condensed Consolidated Financial Data.
6
<PAGE>
RECENT DEVELOPMENTS
The Company's 1997 fiscal year ended on June 30, 1997. While the final
results of the quarter ended June 30, 1997 are not yet available, the Company
currently estimates that it recorded revenues of approximately $213.2 million
during the fourth quarter, and during such quarter realized operating income
of approximately $22.7 million and net income of approximately $11.2 million.
Based upon an estimated weighted average number of shares outstanding during
the quarter ended June 30, 1997 of approximately 30,266,000 shares, net
income per share for the fourth quarter is currently estimated to be
approximately $0.37.
The Company currently estimates that revenues for the full fiscal year
ended June 30, 1997 were approximately $785.9 million and that it realized
operating income of approximately $67.8 million and net income of
approximately $31.1 million. Based upon an estimated weighted average number
of shares outstanding during the fiscal year ended June 30, 1997 of
approximately 30,110,000 shares, net income per share for the fiscal year
ended June 30, 1997 is currently estimated to be $1.03 per share. Results of
operations for the full fiscal year ended June 30, 1997 include the impact of
certain charges recorded during the second quarter of fiscal 1997.
The above information is preliminary in nature only, and is subject in all
respects to completion of various internal analyses and procedures necessary
to finalize the Company's financial statements, and to completion of the
audit of the Company's financial statements for the fiscal year ended June
30, 1997.
HISTORY
Founded in 1969, the Company began operations as a provider of key punch
machines under the tradename Decision Data. During fiscal 1993, the Company
decided to focus principally on providing computer maintenance and technology
support services and sold its computer hardware products business. The
Company established a major presence in the servicing of midrange computer
systems through the successful acquisition and integration of assets and
contracts of over 35 complementary businesses from the beginning of fiscal
1993. In October 1995, the Company significantly expanded its computer
maintenance presence by acquiring Bell Atlantic Business Systems Services,
Inc. ("BABSS"). Prior to the acquisition, BABSS established a strong record
of internal growth, growing revenues from $338.4 million in 1991 to $486.1
million in 1994, representing a compound annual growth rate of 12.8%.
QUAKER
Quaker was incorporated on April 30, 1997 and has not carried on any
activities to date other than those incident to its formation and the
transactions contemplated by the Merger Agreement. All of the outstanding
capital stock of Quaker is owned by DLJMB and certain affiliated funds and
entities (the "Funds"). Certain additional funds affiliated with DLJMB (the
"Additional Funds") are expected to acquire a portion of the securities of
Quaker immediately prior to the Merger. As used herein, all references to the
"DLJMB Funds" prior to the time of the acquisition of securities of Quaker by
the Additional Funds shall refer to the Funds, and thereafter, to the Funds
and the Additional Funds. Immediately prior to the Merger, the DLJMB Funds
expect to purchase 9,782,508 shares of Common Stock and may acquire up to
1,417,180 warrants to purchase 1,417,180 shares of Common Stock at an
exercise price of not less than $0.01 per share (the "DLJMB Warrants") for
approximately $225 million (the "DLJMB Equity Investment"). The DLJMB Funds
expect that a limited number of institutional investors (the "Institutional
Investors") may acquire a portion of the securities of Quaker that would
otherwise be purchased by the DLJMB Funds in the DLJMB Equity Investment.
Upon the effectiveness of the Merger ("Effective Time"), the proceeds of the
DLJMB Equity Investment and any such purchase will become an asset of
Holdings, each share of Common Stock will become a share of Holdings Common
Stock and each warrant to acquire Common Stock will by its terms become
exercisable for an equal number of shares of Holdings Common Stock. In no
event would any such purchases by the Institutional Investors reduce the
fully diluted ownership by the DLJMB Funds of Holdings Common Stock after the
Effective Time to below a majority, or limit the rights of the DLJMB Funds as
described in "Certain Relationships and Related Transactions."
7
<PAGE>
THE MERGER AND MERGER FINANCING
Holdings and Quaker (which as of the date hereof is a wholly owned
subsidiary of the DLJMB Funds) have entered into an Agreement and Plan of
Merger, as amended (the "Merger Agreement"), dated as of May 4, 1997. The
Merger Agreement provides, among other things, for the merger of Quaker with
and into Holdings, with Holdings continuing as the surviving corporation (the
"Merger"). The Merger contemplates that approximately 5.3% (or 1,474,345 as
of April 21, 1997) of the outstanding shares of Holdings Common Stock will be
retained by existing Holdings stockholders.
In order to fund the payment of the cash portion of the Merger
Consideration (as defined herein), the Option Cash Proceeds (as defined
herein) and the Warrant Cash Proceeds (as defined herein), to refinance
outstanding indebtedness of DecisionOne Corp. and pay expenses incurred in
connection with the Merger, DecisionOne Corp. is issuing the Senior
Subordinated Notes and will enter into a syndicated senior secured loan
facility providing for term loan borrowings in the aggregate principal amount
of approximately $470 million and revolving loan borrowings of $105 million
(the "New Credit Facility"). At the Effective Time, DecisionOne Corp. is
expected to borrow all term loans available thereunder and approximately $8.3
million of revolving loans. The remaining revolving loans will, subject to a
borrowing base, be available to fund the working capital requirements of
DecisionOne Corp. The proceeds of such financings will, in part, be
distributed to Holdings in the form of a dividend and, in part, lent to
Holdings pursuant to an intercompany note. On May 4, 1997, DLJMB Inc., an
affiliate of DLJMB, received an executed commitment letter from DLJ Capital
Funding, Inc. ("DLJ Capital Funding") to provide the New Credit Facility,
which will be syndicated by DLJ Capital Funding. Additionally, on May 4,
1997, DLJMB Inc. received a letter from DLJSC (as defined herein) with
respect to the underwriting, purchase or private placement of the Senior
Subordinated Notes in which DLJSC indicated that it was highly confident of
its ability to sell the Senior Subordinated Notes in the public market. Each
of the commitments is subject to customary conditions, including the
negotiation, execution and delivery of definitive documentation with respect
to such commitment. See "Description of the New Credit Facility," "The Merger
and Merger Financing" and "Certain Relationships and Related Transactions."
Quaker expects to raise an additional $85 million through the concurrent
issuance of the Units in the Offering. At the Effective Time, Holdings will
succeed to the obligations of Quaker with respect to the Securities, and the
Warrants will, by their terms, become exercisable for an equal number of
shares of Holdings Common Stock. The DLJMB Funds (and certain Institutional
Investors) also expect to purchase 9,782,508 shares of Common Stock and may
acquire up to 1,417,180 DLJMB Warrants for approximately $225 million. In
lieu of acquiring the DLJMB Warrants, the DLJMB Funds (and certain
Institutional Investors) may acquire directly those shares of Common Stock
(up to 1,417,180 shares) for which such DLJMB Warrants would have been
exercisable, at a price that would be equivalent to the exercise price of the
DLJMB Warrants (the "Direct Shares"). The number of DLJMB Warrants issued or
Direct Shares purchased will be reduced by the number of Public Warrants
issued (if any). Upon the Effective Time, the proceeds of such purchase will
become an asset of Holdings, each share of Common Stock, including the Direct
Shares, if any, will become a share of Holdings Common Stock and each warrant
to acquire Common Stock will by its terms become exercisable for an equal
number of shares of Holdings Common Stock.
8
<PAGE>
The following table sets forth the estimated cash sources and uses of
funds as if the Merger and Merger Financing, including the application of the
proceeds therefrom, occurred and were completed at the Effective Time.
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
TOTAL SOURCES:
New Credit Facility:
Revolving credit facility ...................... $ 8.3
Term loans...................................... 470.0
Senior Subordinated Notes........................ 150.0
Units offered hereby ............................ 85.0
DLJMB Equity Investment.......................... 225.0
-------------
Total cash sources............................. $938.3
=============
TOTAL USES:
Cash Merger Consideration ....................... $605.9
Option Cash Proceeds and Warrant Cash Proceeds . 58.4
Repayment of existing revolving credit facility 221.2
Estimated transaction fees and expenses ......... 52.8
-------------
Total cash uses................................ $938.3
=============
</TABLE>
9
<PAGE>
THE OFFERING
Units Offered ................. 148,400 Units, each consisting of $1,000
principal amount at maturity of 11 1/2%
Senior Discount Debentures due 2008 and one
Warrant to purchase 1.9 shares of Common
Stock. The Debentures and the Warrants will
not be separately transferable until the
earliest to occur of (i) February 7, 1998,
(ii) the occurrence of a Change of Control
and (iii) the date specified by the
Underwriter (the "Separation Date").
Issue Price ................... $572.80 per unit.
Gross Proceeds ................ $85,003,520.
Use of Proceeds ............... The net proceeds from the Offering, together
with the initial borrowings under the New
Credit Facility, the DLJMB Equity Investment
and the issuance of the Senior Subordinated
Notes, will be used to fund payment of the
cash portion of the Merger Consideration,
the Option Cash Proceeds and the Warrant
Cash Proceeds, to refinance outstanding
indebtedness of DecisionOne Corp. and to pay
the expenses incurred in connection with the
Merger.
THE DEBENTURES
Maturity Date ................. August 1, 2008.
Yield and Interest ............ 11 1/2% (computed on a semi-annual bond
equivalent basis) calculated from August 7,
1997. The Debentures will accrete at a rate
of 11 1/2%, compounded semi-annually, to an
aggregate principal amount of $148.4 million
by August 1, 2002. Cash interest will not
accrue on the Debentures prior to August 1,
2002. Commencing August 1, 2002, cash
interest on the Debentures will accrue and
be payable, at a rate of 11 1/2% per annum,
semi-annually in arrears on each February 1
and August 1, commencing February 1, 2003.
Optional Redemption ........... The Debentures will be redeemable at the
option of the Issuer, in whole or in part,
at any time on or after August 1, 2002, in
cash at the redemption prices set forth
herein, plus accrued and unpaid interest, if
any, thereon to the redemption date. In
addition, at any time prior to August 1,
2000, the Issuer may, at its option, on any
one or more occasions, redeem up to 35% of
the aggregate principal amount at maturity
of the Debentures originally issued at a
redemption price equal to 111.5% of the
Accreted Value thereof, with the net cash
proceeds of one or more Equity Offerings;
provided that at least 65% of the original
aggregate principal amount at maturity of
the Debentures will remain outstanding
immediately following each such redemption.
Change of Control ............. Upon the occurrence of a Change of Control,
each Holder of the Debentures will have the
right to require the Issuer to
10
<PAGE>
repurchase Debentures at a price in cash
equal to 101% of the Accreted Value thereof,
in the case of any such purchase prior to
August 1, 2002, or 101% of the aggregate
principal amount at maturity thereof, plus
accrued and unpaid interest, if any, thereon
to the date of repurchase in the case of any
such purchase on or after August 1, 2002.
The Issuer does not have, and may not in the
future have, any assets other than common
stock of DecisionOne Corp. As a result, the
Issuer's ability to repurchase all or any
part of the Debentures upon the occurrence
of a Change of Control will be dependent
upon the receipt of dividends or other
distributions from its direct and indirect
subsidiaries. The New Credit Facility and
the Senior Subordinated Notes restrict
DecisionOne Corp. from paying dividends and
making any other distributions to the
Issuer. If the Issuer does not obtain the
consent of the lenders under agreements
governing outstanding Indebtedness of its
Subsidiaries, including under the New Credit
Facility and the Senior Subordinated Notes,
to permit the repurchase of the Debentures
or does not refinance such Indebtedness, the
Issuer will likely not have the financial
resources to purchase Debentures upon the
occurrence of a Change of Control and the
Issuer's Subsidiaries will be restricted by
the terms of such Indebtedness from paying
dividends to the Issuer or otherwise lending
or distributing funds to the Issuer for the
purpose of such purchase. In any event,
there can be no assurance that the Issuer's
Subsidiaries will have the resources
available to pay any such dividend or make
any such distribution. Furthermore, the New
Credit Facility will provide that certain
change of control events will constitute a
default thereunder and the Senior
Subordinated Notes will provide that, in the
event of a Change of Control, DecisionOne
Corp. will be required to offer to
repurchase the Senior Subordinated Notes at
the price specified therefor. The Issuer's
failure to make a Change of Control offer
when required or to purchase tendered
Debentures when tendered would constitute an
Event of Default under the Debenture
Indenture (as defined herein). See
"Description of Debentures."
Ranking ....................... The Debentures will be senior obligations of
the Issuer. The Debentures will rank pari
passu in right of payment with all future
senior indebtedness of the Issuer and will
rank senior in right of payment to all
future indebtedness of the Issuer that is
subordinated to the Debentures. The
Debentures will be effectively subordinated
to all liabilities of the Issuer's
subsidiaries. On a pro forma basis, as of
March 31, 1997, after giving effect to the
Merger, including the Merger Financing and
the application of the proceeds therefrom,
the Company would have had outstanding
approximately $736.9 million of Indebtedness
and the Issuer's subsidiaries would have had
$847.7 million of total liabilities
outstanding, including Indebtedness under
the Senior Subordinated Notes and the New
Credit Facility and including trade
payables.
11
<PAGE>
Original Issue Discount ....... The Debentures are being offered at an
original issue discount for United States
federal income tax purposes. Thus, although
cash interest will not accrue on the
Debentures prior to August 1, 2002, original
issue discount (i.e., the difference between
the sum of all principal and interest
payable on the Debentures and the portion of
the issue price of the Units allocable to
the Debentures) will accrue from the issue
date of the Debentures and will be included
as interest income periodically (including
for periods ending prior to August 1, 2002)
in a holder's gross income for United States
federal income tax purposes in advance of
receipt of the cash payments to which the
income is attributable. See "Certain Federal
Income Tax Considerations."
Certain Covenants ............. The Debenture Indenture will contain certain
covenants that, among other things, limit
the ability of the Issuer and its Restricted
Subsidiaries to: incur indebtedness and
issue preferred stock, repurchase Capital
Stock (as defined herein) and certain
Indebtedness, engage in transactions with
affiliates, incur or suffer to exist certain
liens, pay dividends or other distributions,
engage in sales of accounts receivable, make
certain investments, sell assets and engage
in certain mergers and consolidations.
THE WARRANTS
Warrants ...................... 148,400 Warrants which will initially be
exercisable for Common Stock and,
immediately following the Merger, will
entitle the holders thereof to purchase an
aggregate of 281,960 shares of Holdings
Common Stock (the "Warrant Shares"),
representing approximately 2% of Holdings
Common Stock on a fully diluted basis after
giving effect to the Merger.
Registration Rights ........... Pursuant to the warrant agreement (the
"Warrant Agreement") relating to the
Warrants, Quaker has agreed, subject to
certain limitations, that from the earlier
of (i) the later of the Separation Date and
120 days following the Closing Date and (ii)
45 days after the occurrence of a Change in
Control until the expiration of all
Warrants, it will maintain the effectiveness
of a registration statement with respect to
the issuance of the Common Stock upon
exercise of the Warrants (the "Shelf
Registration Statement"). At the Effective
Time, Holdings will succeed to the
obligations of Quaker under the Warrant
Agreement, including the obligations
relating to the Shelf Registration
Statement.
Exercise ...................... At the Effective Time, each Warrant will
entitle the holder thereof, subject to
certain conditions, to purchase 1.9 shares
of Holdings Common Stock at an exercise
price of $23.00 per share, subject to
adjustment under certain circumstances. The
Warrants will be exercisable at any time on
or after the Separation Date and prior to
the expiration of the Warrants, as set forth
below. The exercise price and number of
shares of
12
<PAGE>
Holdings Common Stock issuable upon exercise
of the Warrants will be subject to
adjustment from time to time upon the
occurrence of certain changes with respect
to the Holdings Common Stock, including
certain distributions of shares of Holdings
Common Stock, issuances of options or
convertible securities, dividends and
distributions and certain changes in options
and convertible securities of Holdings. A
Warrant does not entitle the holder thereof
to receive any dividends paid on shares of
Holdings Common Stock.
Expiration .................... August 1, 2007.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in connection with an investment in the Units.
13
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL DATA
The summary historical consolidated financial data for and as of the end
of each of the years in the three-year period ended June 30, 1996 set forth
below have been derived from the audited consolidated financial statements of
the Company. The summary historical consolidated financial data set forth
below for and as of the end of the nine-month and the three-month periods
ended March 31, 1996 and March 31, 1997 have been derived from the unaudited
condensed consolidated financial statements of the Company. The historical
condensed consolidated results of operations of the Company for the nine
months and three months ended March 31, 1996 and 1997 are unaudited and are
not necessarily indicative of the Company's results of operations for the
full year. The unaudited historical consolidated financial data reflects all
adjustments (consisting of normal, recurring adjustments) which are, in the
opinion of management, necessary for a fair summary of the Company's
financial position, results of operations and cash flows for and as of the
end of the periods presented.
The unaudited summary consolidated pro forma financial data of the Company
set forth below are based on historical consolidated financial statements of
the Company, as adjusted to give effect to the Company's acquisition of BABSS
which occurred on October 20, 1995 and the Merger, including the Merger
Financing and the application of the proceeds thereof. The pro forma
statement of operations for the year ended June 30, 1996 gives effect to the
BABSS acquisition and the Merger, including the Merger Financing and the
application of the proceeds thereof, as if they had occurred as of July 1,
1995. The pro forma statements of operations for the nine-month and
three-month periods ended March 31, 1997 give effect to the Merger, including
the Merger Financing and the application of the proceeds thereof, as if they
had occurred as of July 1, 1996. The pro forma balance sheet gives effect to
the Merger, including the Merger Financing and the application of the
proceeds thereof, as if they had occurred at March 31, 1997. The pro forma
adjustments are based upon available information and upon certain assumptions
that management believes are reasonable under the circumstances. The pro
forma financial data do not purport to represent what the Company's actual
results of operations or actual financial position would have been if the
BABSS acquisition and the Merger, including the Merger Financing and the
application of the proceeds thereof, had occurred on such dates or to project
the Company's results of operations or financial position for any future
period or date.
The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Unaudited Condensed Consolidated Pro Forma Financial Data," "Selected
Consolidated Financial Data," and the Company's Consolidated Financial
Statements and Notes thereto, included elsewhere herein.
14
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
---------------------------------------------
PRO FORMA
1994 1995 1996 1996
---------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues................................ $108,416 $163,020 $ 540,191 $697,676
Gross profit............................ 31,436 49,537 137,875 180,432
Operating income(2)(3).................. 15,983 20,779 49,373 68,687
Interest expense........................ (4,979) (2,521) (14,953) (69,803)
Interest income......................... 132 53 239 291
Income (loss) from continuing
operations(4)(5) ...................... 10,112 41,415 20,789 (495)
Net income (loss)....................... 10,112 42,528 18,862 (2,422)
CONSOLIDATED BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash equivalents............... $ 978 $ 2,659 $ 8,221
Inventory............................... 4,459 4,024 30,130
Repairable parts(6)..................... 9,473 27,360 154,970
Total assets............................ 35,496 135,553 514,510
Total debt(7)........................... 4,539 25,571 190,903
Total stockholders' equity (deficit) ... (27,627) 14,677 180,793
CONSOLIDATED CASH FLOWS DATA:
Net cash provided by operations......... $ 28,722 $ 38,415 $ 51,894
Net cash (used in) investing
activities............................. (3,348) (54,271) (346,354)
Net cash (used in) provided by
financing activities................... (24,946) 17,537 300,022
OTHER DATA:
EBITDA(8)............................... $ 22,672 $ 37,021 $ 114,816 $147,805
Amortization of repairable parts ....... 5,929 7,688 37,869 48,467
---------- ---------- ----------- -----------
Adjusted EBITDA(8)...................... 16,743 29,333 76,947 99,338
Adjusted EBITDA margin(9)............... 15.4% 18.0% 14.2% 14.2%
Depreciation and amortization of
intangibles............................ $ 7,161 $ 8,554 $ 23,982 $ 30,651
Repairable parts purchases.............. 1,857 12,154 63,514 74,287
Capital expenditures.................... 304 2,786 7,278 11,243
Cash interest expense................... 1,232 2,314 14,743 57,031
Total interest expense.................. 4,979 2,521 14,953 69,803
Revenue per average number of
employees(10).......................... 105.8 113.8 119.6 120.0
</TABLE>
15
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
----------------------- ---------------------
1996 1997 1996 1997
----------- ----------- ---------- ----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues............................. $ 369,167 $ 572,749 $172,673 $205,070
Gross profit......................... 96,459 144,780 42,711 54,698
Operating income(2)(3)............... 29,323 45,041 15,536 20,080
Interest expense..................... (11,289) (11,097) (5,855) (4,005)
Interest income...................... 69 393 54 316
Income (loss) from continuing
operations(5) ...................... 10,866 19,916 5,842 9,507
Net income (loss).................... 10,866 19,916 5,842 9,507
CONSOLIDATED BALANCE SHEET DATA
(AT PERIOD END):
Cash and cash equivalents............ $ 12,886
Inventory............................ 35,186
Repairable parts(6).................. 195,656
Total assets......................... 641,677
Total debt........................... 246,671
Total stockholders' equity
(deficit)........................... 201,095
CONSOLIDATED CASH FLOWS DATA:
Net cash provided by operations ..... $ 35,489 $ 57,654 $ 20,590 $ 36,667
Net cash (used in) investing
activities.......................... (308,771) (105,329) (20,713) (34,569)
Net cash provided by financing
activities.......................... 276,032 52,388 4,933 2,510
OTHER DATA:
EBITDA(8)............................ $ 75,568 $ 121,680 $ 34,308 $ 46,419
Amortization of repairable parts ... 23,017 45,642 11,214 16,356
----------- ----------- ---------- ----------
Adjusted EBITDA(8)................... 52,551 76,038 23,094 30,063
Adjusted EBITDA margin(9)............ 14.2% 13.3% 13.4% 14.7%
Depreciation and amortization of
intangibles......................... $ 16,228 $ 26,697 $ 7,558 $ 9,983
Repairable parts purchases........... 31,715 64,803 19,560 28,815
Capital expenditures................. 3,331 6,093 1,153 2,261
Cash interest expense................ 11,134 10,578 5,803 3,642
Total interest expense............... 11,289 11,097 5,855 4,005
Ratio of Adjusted EBITDA to cash
interest expense.................... 4.72x 7.19x 3.98x 8.25x
Ratio of Adjusted EBITDA to total
interest expense.................... 4.66 6.85 3.94 7.51
Revenue per average number of
employees(10)....................... $ 90.3 $ 94.7 $ 29.8 $ 32.4
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
----------------------------- -----------------------------
NINE MONTHS THREE MONTHS NINE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, 1997 MARCH 31, 1997 MARCH 31, 1997 MARCH 31, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues............................. $572,749 $ 205,070 $572,749 $ 205,070
Gross profit......................... 144,780 54,698 144,780 54,698
Operating income(2)(3)............... 45,041 20,080 45,041 20,080
Interest expense..................... (52,060) (17,379) (52,060) (17,379)
Interest income...................... 393 316 393 316
Income (loss) from continuing
operations(5) ...................... (3,843) 1,750 (3,843) 1,750
Net income (loss).................... (3,843) 1,750 (3,843) 1,750
CONSOLIDATED BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash equivalents............ $ 12,886 $ 12,886
Inventory............................ 35,186 35,186
Repairable parts(6).................. 195,656 195,656
Total assets......................... 670,716 670,716
Total debt........................... 738,771 738,771
Total stockholders' equity
(deficit)........................... (261,966) (261,966)
CONSOLIDATED CASH FLOWS DATA:
Net cash provided by operations ....
Net cash (used in) investing
activities .........................
Net cash provided by financing
activities .........................
OTHER DATA:
EBITDA(8)............................ $121,680 $ 46,419 $121,680 $ 46,419
Amortization of repairable parts ... 45,642 16,356 45,642 16,356
-------------- -------------- -------------- --------------
Adjusted EBITDA(8)................... 76,038 30,063 76,038 30,063
Adjusted EBITDA margin(9)............ 13.3% 14.7% 13.3% 14.7%
Depreciation and amortization of
intangibles......................... $ 26,697 $ 9,983 $ 26,697 $ 9,983
Repairable parts purchases........... 64,803 28,815 64,803 28,815
Capital expenditures................. 6,093 2,261 6,093 2,261
Cash interest expense................ 42,119 13,875 42,119 13,875
Total interest expense............... 52,060 17,379 52,060 17,379
Ratio of Adjusted EBITDA to cash
interest expense.................... 1.81x 2.17x 1.81x 2.17x
Ratio of Adjusted EBITDA to total
interest expense.................... 1.46 1.73 1.46 1.73
Revenue per average number of
employees(10)....................... $ 94.7 $ 32.4 $ 94.7 $ 32.4
</TABLE>
16
<PAGE>
- ------------
(1) The Summary Statement of Operations Data excludes the effects of
discontinued operations. See Note 3 of the Notes to the Company's
Consolidated Financial Statements.
(2) Operating income includes a $5.8 million charge and a $6.4 million
credit arising from unused lease liabilities for the years ended June
30, 1993 and 1994. During the nine months ended March 31, 1997 the
Company recorded a $4.3 million charge for estimated future employee
severance costs of $3.4 million and unutilized lease costs of $0.9
million.
(3) Operating income includes a $7.0 million charge for future employee
severance costs and unutilized lease costs, incurred in connection
with the BABSS acquisition, for the nine months ended March 31, 1996.
The year ended June 30, 1996 includes a reversal of $3.4 million of
this charge due to the Company's ability to utilize and sublease
various facilities identified in the original charge. See Note 17 of
the Notes to the Company's Consolidated Financial Statements.
(4) Income from continuing operations for the years ended June 30, 1992
through 1994 reflects interest expense arising from the Company's
senior and junior subordinated debt which was refinanced as a part of
the 1994 Restructuring. See Note 10 of the Notes to the Company's
Consolidated Financial Statements.
(5) Income from continuing operations for the years ended June 30, 1992
through 1994 include income taxes based on an effective tax rate
substantially less than the effective tax rates used for the years
ended June 30, 1995 and 1996, and the three and nine months ended
March 31, 1996 and 1997. The year ended June 30, 1995 includes a
$23.1 million net benefit arising from the recognition of future tax
benefits of tax loss carryforwards and temporary timing differences.
See Note 11 of the Notes to the Company's Consolidated Financial
Statements.
(6) Repairable parts represent parts that can be repaired and reused and
are required in order to meet the requirements of the contracts with
the Company's maintenance customers. These parts are principally
purchased from equipment manufacturers and other third parties. As
these parts are purchased, they are capitalized at cost and amortized
using the straight-line method over three to five years, the
estimated useful life of these repairable parts. Costs to refurbish
these parts are charged to expense as incurred.
(7) Total debt excludes redeemable preferred stock of $6.4 million and
$6.8 million at June 30, 1994 and 1995, respectively.
(8) "EBITDA" represents income (loss) from continuing operations before
interest expense, interest income, income taxes, depreciation,
amortization of repairable parts, amortization of intangibles,
amortization of discounts and capitalized expenses related to
indebtedness and non-recurring employee severance charges and
provisions for unutilized leases. The Company's historical results
include amortization of repairable parts which is unique to the
industry in which the Company competes. "Adjusted EBITDA" represents
EBITDA reduced by amortization of repairable parts. Neither EBITDA
nor Adjusted EBITDA is intended to represent cash flow from
operations as defined by generally accepted accounting principles and
should not be considered as an alternative to net income as an
indicator of the Company's operating performance or to cash flows as
a measure of liquidity and may not be comparable to similarly titled
measures of other companies. Adjusted EBITDA is presented because it
is relevant to certain covenants expected to be contained in the
agreements relating to the Merger Financing and the Company believes
that Adjusted EBITDA is a more consistent indicator of the Company's
ability to meet its debt service, capital expenditure and working
capital requirements than EBITDA.
(9) Adjusted EBITDA margin measures Adjusted EBITDA as a percentage of
revenues.
(10) Revenue per average number of employees is calculated by dividing
revenues for applicable periods by the average number of employees
during the respective periods.
17
<PAGE>
RISK FACTORS
In addition to the other information set forth herein, prospective
investors should carefully consider the following information in evaluating
the Company and its business before making an investment in the Debentures.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
The information herein contains forward-looking statements that involve a
number of risks and uncertainties. A number of factors could cause actual
results, performance, achievements of the Company, or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These factors
include, but are not limited to, the competitive environment in the computer
maintenance and technology support services industry in general and in the
Company's specific market areas; changes in prevailing interest rates and the
availability of and terms of financing to fund the anticipated growth of the
Company's business; inflation; changes in costs of goods and services;
economic conditions in general and in the Company's specific market areas;
demographic changes; changes in or failure to comply with federal, state
and/or local government regulations; liability and other claims asserted
against the Company; changes in operating strategy or development plans; the
ability to attract and retain qualified personnel; the significant
indebtedness of the Company; labor disturbances; changes in the Company's
acquisition and capital expenditure plans; and other factors referenced
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" or "anticipates," "intends" or
the negative of any thereof, or other variations thereon or comparable
terminology, or by discussions of strategy or intentions. Given these
uncertainties, prospective investors are cautioned not to place undue
reliance on such forward-looking 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.
SUBSTANTIAL LEVERAGE; STOCKHOLDERS' DEFICIT; LIQUIDITY
In connection with the Merger and the Merger Financing, including the
application of the proceeds therefrom, the Issuer and DecisionOne Corp. will
incur a significant amount of indebtedness. As of March 31, 1997, after
giving pro forma effect to the Merger, including the Merger Financing and the
application of the proceeds thereof, the Company would have had (i) total
consolidated indebtedness of approximately $736.9 million, (ii) $78.0 million
of additional borrowings available under the New Credit Facility and (iii) a
stockholder's deficit of $260.1 million. In addition, subject to the
restrictions in the New Credit Facility and the indentures governing the
Debentures and the Senior Subordinated Notes, the Company may incur
additional indebtedness from time to time.
The level of the Company's indebtedness could have important consequences
to the Company, including: (i) limiting cash flow available for general
corporate purposes including acquisitions because a substantial portion of
the Company's cash flow from operations must be dedicated to debt service;
(ii) limiting the Company's ability to obtain additional debt financing in
the future for working capital, repairable parts purchases, capital
expenditures or acquisitions; (iii) limiting the Company's flexibility in
reacting to competitive and other changes in the industry and economic
conditions generally; and (iv) exposing the Company to risks inherent in
interest rate fluctuations because certain of the Company's borrowings may be
at variable rates of interest, which could result in higher interest expense
in the event of increases in interest rates.
The Company's ability to make scheduled payments of principal of, to pay
interest on or to refinance its indebtedness and to satisfy its other debt
obligations will depend upon its future operating performance, which will be
affected by general economic, financial, competitive, legislative,
regulatory, business and other factors beyond its control. The Company
anticipates that its operating cash flow, together with borrowings under the
New Credit Facility, will be sufficient to meet its anticipated future
operating expenses, capital expenditures and to service its debt requirements
as they become due.
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However, 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 repairable parts or capital
expenditures, sell assets or reduce operating expenses, including, but not
limited to, investment spending such as selling and marketing expenses,
expenditures on management information systems and expenditures on new
products. If the Company were 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. In
addition, subject to the restrictions and limitations contained in the
agreements relating to the Merger Financing, the Company may incur
significant additional indebtedness to finance future acquisitions, which
could adversely affect the Company's operating cash flows and its ability to
service its indebtedness. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
LIMITATIONS ON ACCESS TO CASH FLOW OF SUBSIDIARIES; HOLDING COMPANY STRUCTURE
The Issuer is a holding company, and its ability to pay interest on the
Debentures is dependent upon the receipt of dividends from its direct and
indirect subsidiaries. The Issuer does not have, and may not in the future
have, any assets other than the common stock of DecisionOne Corporation.
DecisionOne Corporation and its subsidiaries are parties to the New Credit
Facility and the Senior Subordinated Note Indenture, each of which imposes
substantial restrictions on DecisionOne Corp.'s ability to pay dividends to
the Issuer. Any payment of dividends will be subject to the satisfaction of
certain financial conditions set forth in the Senior Subordinated Note
Indenture and the New Credit Facility. The ability of DecisionOne Corp. and
its subsidiaries to comply with such conditions in the Senior Subordinated
Note Indenture may be affected by events that are beyond the control of the
Issuer. The breach of any such conditions could result in a default under the
Senior Subordinated Note Indenture and/or the New Credit Facility, and in the
event of any such default, the holders of the Senior Subordinated Notes or
the lenders under the New Credit Facility could elect to accelerate the
maturity of all the Senior Subordinated Notes or the loans under such
facility. If the maturity of the Senior Subordinated Notes or the loans under
the New Credit Facility were to be accelerated, all such outstanding debt
would be required to be paid in full before DecisionOne Corp. or its
subsidiaries would be permitted to distribute any assets or cash to the
Issuer. There can be no assurance that the assets of the Company would be
sufficient to repay all of such outstanding debt and to meet its obligations
under the Debenture Indenture. Future borrowings by DecisionOne Corp. can be
expected to contain restrictions or prohibitions on the payment of dividends
by such subsidiaries to the Issuer. In addition, under Delaware law, a
subsidiary of a company is permitted to pay dividends on its capital stock,
only out of its surplus or, in the event that it has no surplus, out of its
net profits for the year in which a dividend is declared or for the
immediately preceding fiscal year. Surplus is defined as the excess of a
company's total assets over the sum of its total liabilities plus the par
value of its outstanding capital stock. In order to pay dividends in cash,
DecisionOne Corp. must have surplus or net profits equal to the full amount
of the cash dividend at the time such dividend is declared. In determining
DecisionOne Corp.'s ability to pay dividends, Delaware law permits the Board
of Directors of DecisionOne Corp. to revalue its assets and liabilities from
time to time to their fair market values in order to create surplus. The
Issuer cannot predict what the value of its subsidiaries' assets or the
amount of their liabilities will be in the future and, accordingly, there can
be no assurance that the Issuer will be able to pay its debt service
obligations on the Debentures.
As a result of the holding company structure of the Company, the Holders
of the Debentures will be structurally junior to all creditors of the
Issuer's subsidiaries, except to the extent that the Issuer is itself
recognized as a creditor of any such subsidiary, in which case the claims of
the Issuer would still be subordinate to any security in the assets of such
subsidiary and any indebtedness of such subsidiary senior to that held by the
Issuer. In the event of insolvency, liquidation, reorganization, dissolution
or other winding-up of the Issuer's subsidiaries, the Issuer will not receive
any funds available to pay to creditors of the subsidiaries. As of March 31,
1997, on a pro forma basis after giving effect to the Merger and Merger
Financing, including the application of net proceeds therefrom, the aggregate
amount of indebtedness and other obligations of the Issuer's subsidiaries
(including trade payables) would have been approximately $847.7 million.
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POSSIBLE INABILITY TO REPURCHASE DEBENTURES UPON CHANGE OF CONTROL
In the event of a Change of Control, each Holder of Debentures will have
the right to require the Issuer to repurchase all or any part of such
Holder's Debentures at the offer price specified therefor in the Debenture
Indenture. Under the Debenture Indenture, a Change of Control will occur upon
the happening of certain events, including among others: (i) any sale, lease,
transfer, conveyance or other disposition (other than by way of merger or
consolidation) in one or a series of related transactions, of all or
substantially all of the assets of the Issuer and its Subsidiaries taken as a
whole to any "person" (as defined in Section 13(d) of the Exchange Act) or
"group" (as defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act)
other than the Principals (as defined herein) and their Related Parties (as
defined herein); (ii) the Issuer effects certain consolidations or mergers;
(iii) the Issuer consummates any transaction or series of related
transactions (including, without limitation, by way of merger or
consolidation) the result of which is that any "person" (as defined above) or
"group" (as defined above) other than the Principals and their Related
Parties becomes the "beneficial owner" (as defined above) of more than 50% of
the voting power of the Voting Stock of the Issuer or any parent holding
company of the Issuer or (iv) the first day on which a majority of the
members of the Board of Directors of the Issuer or any parent holding company
of the Issuer are not Continuing Directors. The Issuer does not have, and may
not in the future have, any assets other than common stock of DecisionOne
Corp. As a result, the Issuer's ability to repurchase all or any part of the
Debentures upon the occurrence of a Change of Control will be dependent upon
the receipt of dividends or other distributions from its direct and indirect
subsidiaries. The New Credit Facility and the Senior Subordinated Notes
restrict DecisionOne Corp. from paying dividends and making any other
distributions to the Issuer. If the Issuer does not obtain the consent of the
lenders under agreements governing outstanding Indebtedness of its
Subsidiaries, including under the New Credit Facility and the Senior
Subordinated Notes, to permit the repurchase of the Debentures or does not
refinance such Indebtedness, the Issuer will likely not have the financial
resources to purchase Debentures upon the occurrence of a Change of Control
and the Issuer's Subsidiaries will be restricted by the terms of such
Indebtedness from paying dividends to the Issuer or otherwise lending or
distributing funds to the Issuer for the purpose of such purchase. In any
event, there can be no assurance that the Issuer's Subsidiaries will have the
resources available to pay such dividend or make any such distribution.
Furthermore, the New Credit Facility will provide that certain change of
control events will constitute a default thereunder and the Senior
Subordinated Notes will provide that, in the event of a Change of Control,
DecisionOne Corp. will be required to offer to repurchase the Senior
Subordinated Notes at the price specified therefor. The Issuer's failure to
make a Change of Control offer when required or to purchase tendered
Debentures when tendered would constitute an Event of Default under the
Debenture Indenture. See "Description of Debentures."
ORIGINAL ISSUE DISCOUNT; LIMITATIONS ON HOLDERS' CLAIMS
The Debentures will be issued at a substantial original issue discount
from their principal amount at maturity. Consequently, purchasers of the
Debentures will be required to include amounts in gross income for federal
income tax purposes in advance of receipt of the cash payments to which the
income is attributable. See "Certain Federal Income Tax Consequences" for a
more detailed discussion of the federal income tax consequences to the
purchasers of the Debentures resulting from the purchase, ownership or
disposition thereof.
Under the Debenture Indenture, in the event of an acceleration of the
maturity of the Debentures upon the occurrence of an Event of Default, the
Holders of the Debentures may be entitled to recover only the amount which
may be declared due and payable pursuant to the Debenture Indenture, which
will be less than the principal amount at maturity of such Debentures. See
"Description of the Debentures--Events of Default and Remedies."
If a bankruptcy case is commenced by or against the Issuer under the
Bankruptcy Code, the claim of a Holder of Debentures with respect to the
principal amount thereof may be limited to an amount equal to the sum of (i)
the issue price of the Debentures as set forth on the cover page hereof and
(ii) that portion of the original issue discount (as determined on the basis
of such issue price) which is not deemed to constitute "unmatured interest"
for purposes of the Bankruptcy Code (as defined herein). Accordingly,
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Holders of the Debentures under such circumstances may, even if sufficient
funds are available, receive a lesser amount than they would be entitled to
under the express terms of the Debenture Indenture. In addition, there can be
no assurance that a bankruptcy court would compute the accrual of interest
under the same rules as those used for the calculation of original issue
discount under federal income tax law and, accordingly, a Holder might be
required to recognize gain or loss in the event of a distribution related to
such a bankruptcy case.
ABSENCE OF PUBLIC MARKET
The Securities are new securities for which no public market exists. The
Securities will not be listed on a securities exchange. There can be no
assurance that an active public market will develop or be sustained upon
completion of the Offering or at what prices Holders of the Securities would
be able to sell such securities, if at all. In addition, prevailing interest
rate levels, market fluctuations and general economic and political
conditions may adversely affect the liquidity and the market price of the
Securities, regardless of the Company's financial and operating performance.
The market for "high yield" securities, such as the Debentures, and markets
for the Units and the Warrants are volatile and unpredictable, which may have
an adverse effect on the liquidity of, and prices for, such securities. The
Company has been advised by the Underwriter that it currently intends to make
a market in the Securities after consummation of the Offering as permitted by
applicable laws and regulations; however, the Underwriter is not obligated to
do so and may discontinue doing so without notice at any time. Accordingly,
no assurance can be given that a liquid trading market of the Securities will
develop or be sustained. In addition, because the Underwriter may be deemed
to be an affiliate of the Company, the Underwriter will be required to
deliver a current "market-maker" prospectus and otherwise to comply with the
registration requirements of the Securities Act in connection with any
secondary market sale of the Debentures, which may affect its ability to
continue market-making activities. The Underwriter's ability to engage in
market-making transactions will therefore be subject to the availability of a
current "market-maker" prospectus. For so long as any of the Securities are
outstanding and, in the reasonable judgment of the Underwriter and its
counsel, the Underwriter or any of its affiliates is required to deliver a
prospectus in connection with the sale of the Debentures, the Company has
agreed to make a "market-maker" prospectus available to the Underwriter to
permit it to engage in market-making transactions.
FRAUDULENT TRANSFER STATUTES
Under federal or state fraudulent transfer laws, if a court were to find
that, at the time the Debentures were issued, the Issuer (i) issued the
Debentures with the intent of hindering, delaying or defrauding current or
future creditors or (ii)(A) received less than fair consideration or
reasonably equivalent value for incurring the indebtedness represented by the
Debentures and (B)(1) was insolvent or was rendered insolvent by reason of
the issuance of the Debentures, (2) was engaged, or about to engage, in a
business or transaction for which its assets were unreasonably small or (3)
intended to incur, or believed (or should have believed) it would incur,
debts beyond its ability to pay as such debts mature (as all of the foregoing
terms are defined in or interpreted under such fraudulent transfer statutes),
such court could avoid all or a portion of the Issuer's obligations to the
Holders of the Debentures, subordinate the Issuer's obligations to the
Holders of the Debentures to other existing and future indebtedness of the
Issuer, the effect of which would be to entitle such other creditors to be
paid in full before any payment could be made on the Debentures, and take
other action detrimental to the Holders of the Debentures, including in
certain circumstances, invalidating the Debentures. In that event, there
would be no assurance that any repayment on the Debentures would ever be
recovered by the Holders of the Debentures.
The definition of insolvency for purposes of the foregoing considerations
varies among jurisdictions depending upon the federal or state law that is
being applied in any such proceeding. However, the Issuer generally would be
considered insolvent at the time it incurs the indebtedness constituting the
Debentures, if (i) the fair market value (or fair saleable value) of its
assets is less than the amount required to pay its total existing debts and
liabilities (including the probable liability on contingent liabilities) as
they become absolute or matured or (ii) it is incurring debts beyond its
ability to pay as such debts mature.
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There can be no assurance as to what standard a court would apply in order to
determine whether the Issuer was "insolvent" as of the date the Debentures
were issued, or that, regardless of the method of valuation, a court would
not determine that the Issuer was insolvent on that date. Nor can there be
any assurance that a court would not determine, regardless of whether the
Issuer was insolvent on the date the Debentures were issued, that the
payments constituted fraudulent transfers on another ground. To the extent
that proceeds from the sale of the Debentures are used to repay indebtedness
under existing indebtedness of DecisionOne Corp., or to fund the cash portion
of the Merger Consideration, a court may find that the Issuer did not receive
fair consideration or reasonably equivalent value for the incurrence of the
indebtedness represented by the Debentures.
CONTROL BY THE DLJMB FUNDS
Following the Merger, up to 86.9% of the outstanding shares of Holdings
Common Stock (or 77.2% on a fully diluted basis) (or, if the DLJMB Funds
purchase the Direct Shares, 88.4% of the outstanding shares of Holdings
Common Stock) will be held by the stockholders of Quaker. As of the date
hereof, all of the outstanding capital stock of Quaker is owned in the
aggregate by the DLJMB Funds. While the DLJMB Funds expect that the
Institutional Investors may acquire a portion of the securities of Quaker
that would otherwise be purchased by the DLJMB Funds in the DLJMB Equity
Investment, in no event would any such purchases reduce the fully diluted
ownership by the DLJMB Funds of Holdings Common Stock after the Effective
Time to below a majority, or limit the rights of the DLJMB Funds as described
in "Certain Relationships and Related Transactions."
It is expected that at the Effective Time, the DLJMB Funds, the
Institutional Investors and any members of the Company's management who
choose to purchase shares of Common Stock will enter into a stockholders'
agreement (the "Investors' Agreement") which will contain provisions that,
among other things, will entitle the DLJMB Funds to appoint a majority of the
members of the Board of Directors of Holdings following the Merger. As a
result of its stock ownership and the Investors' Agreement, following the
Effective Time the DLJMB Funds will control Holdings and have the power to
elect a majority of its directors, appoint new management and approve any
action requiring the approval of the holders of Holdings Common Stock,
including adopting certain amendments to Holdings' certificate of
incorporation and approving mergers or sales of all or substantially all of
Holdings' assets. The directors elected by the DLJMB Funds will 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.
The general partners of each of the DLJMB Funds and the members of DLJ
First are affiliates or employees of Donaldson, Lufkin & Jenrette, Inc.
("DLJ, Inc."). DLJ Capital Funding Inc., which has committed to DLJMB to
provide the New Credit Facility in connection with the Merger, is also an
affiliate of DLJ, Inc. Donaldson, Lufkin & Jenrette Securities Corporation,
which is underwriting the Units and the Senior Subordinated Notes, is also an
affiliate of DLJ, Inc.
POTENTIAL DELISTING AND LOSS OF LIQUIDITY
As a result of the Merger, the Holdings Common Stock will no longer meet
the listing requirements of The NASDAQ National Market System ("NASDAQ"), and
NASDAQ may unilaterally act to delist the Holdings Common Stock. Pursuant to
NASDAQ rules, Holdings will seek a dispensation from such listing
requirements to permit the Holdings Common Stock to continue to be listed on
NASDAQ, or, alternatively, Holdings may seek to be listed on a national
exchange. No assurance can be given that such dispensation will be granted or
that such listing will be achieved. Whether or not the Holdings Common Stock
is delisted, the volume of shares traded is expected to decline substantially
because of the significant ownership by the DLJMB Funds.
Upon any delisting, shares of Holdings Common Stock would trade only in
the over-the-counter market. Although prices in respect of trades would be
published by the National Association of Securities Dealers, Inc.
periodically in the "pink sheets," quotes for such shares would not be
readily available. As a result, it is anticipated that the shares of Holdings
Common Stock would trade much less frequently
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relative to the trading volume of Holdings Common Stock prior to the Merger
and holders may experience difficulty selling such shares or obtaining prices
that reflect the value thereof.
CURRENT REGISTRATION REQUIRED TO EXERCISE WARRANTS
Following the Merger, Holders of Warrants will be able to exercise their
Warrants only if a registration statement relating to the shares of Holdings
Common Stock underlying the Warrants is then in effect, or the exercise of
such Warrants is exempt from the registration requirements of the Securities
Act, and such securities are qualified for sale or exempt from qualification
under the applicable securities laws of the states in which the various
holders of the Warrants reside. Although Holdings will be required under the
terms of the Warrant Agreement to file and use its best efforts to make
effective by the earlier of (i) the later of the Separation Date and 120 days
following the Closing Date and (ii) 45 days after the occurrence of a Change
in Control until the expiration of all Warrants, a shelf registration
statement on an appropriate form under the Securities Act covering the
issuance of Holdings Common Stock upon the exercise of the Warrants, there
can be no assurance that Holdings will be able to do so in a timely manner.
Holdings will be unable to issue shares of Holdings Common Stock to those
persons desiring to exercise their Warrants if a registration statement
covering the securities issuable upon the exercise of the Warrants is not
effective (unless the sale and issuance of shares upon the exercise of such
Warrants is exempt from the registration requirements of the Securities Act)
or if such securities are not qualified or exempt from qualification in the
states in which the holders of the Warrants reside. See "Description of
Warrants."
LOSS OF CONTRACT-BASED REVENUE; FIXED FEE CONTRACTS
Over 85% of the Company's revenues during fiscal 1996 were contract-based.
As is customary in the computer services industry, the Company experiences
reductions in its contract-based revenue 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 Company believes 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 to utilize a competitor's services
or to move technical support services in-house. While the Company
historically has been able to offset the reduction of contract-based revenue
and maintain revenue growth through acquisitions and new contracts,
notwithstanding the reduction in contract-based revenue, there can be no
assurance it will continue to do so in the future, and any failure to
consummate acquisitions, enter into new contracts or add additional services
and equipment to existing contracts could have a material adverse effect on
the Company's profitability.
Under many of the Company's contracts, the customer pays a fixed fee for
customized bundled services which 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. While the Company believes it
has historically been able to estimate these factors accurately enough to be
able to price these fixed-fee contracts on terms favorable to the Company,
there can be no assurance the Company will be able to continue to do so in
the future.
MANAGEMENT AND FUNDING OF GROWTH
Any future growth of the Company will require the Company to manage its
expanding domestic operations and international affiliations and to adapt its
operational and financial systems to respond to changes in its business
environment, while maintaining a competitive cost structure. The acquisition
strategy of the Company and the expansion of the Company's service offerings
have placed and will continue to place significant demands on the Company and
its management to improve the Company's operational, financial and management
information systems, to develop further the management skills of the
Company's managers and supervisors, and to continue to retain, train,
motivate and effectively manage the Company's employees. For example, the
Company's acquisition and integration of BABSS resulted in the loss of
certain members of its finance and accounting organization which resulted in a
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difficulty in the timely performance of certain internal reconciliations and
account analyses. In response to these difficulties, the Company has taken
various personnel and procedural actions, including, among other things,
increasing the size of, and restructuring, its accounting staff, instituting
an internal audit function and enhancing its accounting systems, policies and
procedures. The failure of the Company to manage its prior or any future
growth effectively could have a material adverse effect on the Company.
Additionally, the Company's ability to maintain and increase its revenue
base and to respond to shifts in customer demand and changes in industry
trends will be partially dependent on its ability 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
repairable parts, which are classified as non-current assets. There can be no
assurance 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 Merger Financing and any future indebtedness) to fund
the Company's future growth.
ACQUISITION GROWTH STRATEGY
The Company has historically pursued an aggressive acquisition strategy,
acquiring certain contracts and assets in 35 transactions from the beginning
of fiscal 1993 through March 31, 1997. Future acquisitions and/or internal
revenue growth will be necessary to offset expected declines in
contract-based revenues. As a result, the Company expects to continue to
evaluate acquisitions that can provide meaningful benefits by expanding the
Company's existing and future hardware maintenance and technology support
capabilities and leveraging its existing and future infrastructure. However,
there are various risks associated with pursuing an acquisition strategy of
this nature. The risks include problems inherent in integrating new
businesses, including potential loss of customers and key personnel and
potential disruption of operations. There can be no assurance that contracts
acquired by the Company will generate significant revenues or that customers
covered by such acquired contracts will not choose to terminate such
contracts. The rate at which any such contracts are terminated may be higher
than the rates at which the Company's contracts have historically been
terminated. There also can be no assurance that suitable acquisition
candidates will be available, that acquisitions can be completed on
reasonable terms, that the Company will successfully integrate the operations
of any acquired entities or that the Company will have access to adequate
funds to effect any desired acquisitions. Future acquisitions may be limited
by restrictions in the Company's indebtedness.
COMPETITION; COMPETITIVE ADVANTAGES OF OEMS
Competition among computer support service providers, both original
equipment manufacturer and independent service organizations, is intense. The
Company believes 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, workgroups and PCs. The remainder of the 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,
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
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first develop or acquire from another 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
OEMs choose, for marketing reasons or otherwise, to expand their warranty
periods or terms, the Company's business may be adversely affected.
In June 1994, International Business Machines Corporation ("IBM") filed in
the United States District Court for the Southern District of New York (the
"Court") a motion to terminate a 1956 consent decree (the "IBM Consent
Decree") that, among other things, requires IBM to provide repairable 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 ("DOJ") 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 (the "Joint Motions"). On May 1, 1997 the Court granted the Joint
Motion. The order granting the Joint Motion is subject to appeal.
Consequently, certain of the remaining provisions of the IBM Consent Decree
(primarily relating to sales and marketing restrictions on IBM) terminate
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 it 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.
INVENTORY AND REPAIRABLE PARTS MANAGEMENT
In order to service its customers, the Company is required to maintain a
high level of inventory and repairable 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 inventory and repairable
parts becoming excess, obsolete or otherwise unusable. In addition, rapid
changes in technology could render significant portions of the Company's
inventory and repairable parts obsolete, thereby giving rise to write-offs
and a reduction in profitability. The inability of the Company to manage its
inventory and repairable 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.
Inventory and repairable parts purchases are made from OEMs and other
vendors. The Company typically has more than a single source of supply for
each part and component, but from time to time it will have only a single
supplier for a particular part. In some cases, the Company's OEM customer may
be the only source of supply for a repair part or component. 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 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.
25
<PAGE>
COPYRIGHT ISSUES
In connection with the Company's performance of most hardware maintenance,
the computer system which is being serviced must be turned on for the purpose
of service or repair. When the computer is turned on, the resident operating
system software and, in some cases diagnostic software, is transferred from a
peripheral storage device or a hard disk drive into the computer's random
access memory. Within the past several years, several OEMs have been involved
in litigation with independent service organizations, including the Company,
in which they have claimed such transfer constitutes the making of an
unauthorized "copy" of such software by the independent service organization
which infringes on the software copyrights held by the OEMs. The Company is
aware of three cases in this area which have been decided in favor of the
OEM. Although the Company was not a party in any of these cases, three
similar claims have been asserted against the Company, each of which has been
resolved. Litigation of this nature can be time consuming and expensive, and
there can be no assurance the Company will not be a party to similar
litigation in the future, or that such litigation would be resolved on terms
that do not have a material adverse effect on the Company.
DEPENDENCE ON COMPUTER INDUSTRY TRENDS; RISK OF TECHNOLOGICAL CHANGE
The Company's future success is dependent upon 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. The Company believes these trends have resulted in
a movement by both end-users and OEMs 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 these trends
will continue into the future.
Additionally, 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 maintain aging hardware, and
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 could not be serviced by the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's continued success depends, to a large extent, upon the
efforts and abilities of key managerial employees, particularly the Company's
executive officers. See "Management." Competition for qualified management
personnel in the industry is intense. There are not currently any employment
contracts which would ensure the continued employment of any executive
officer following the Merger. The loss of the services of certain of these
key employees or the failure to retain qualified employees when needed could
have a material adverse effect on the Company's business. The Company does
not currently maintain key man insurance.
POTENTIAL ENVIRONMENTAL 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 of three 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 fourth, related site, but has
not received any other communication with respect to that site. 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
26
<PAGE>
to date and the nature of involvement of the Company's predecessor at the
sites, it is management's opinion that the Company currently has sufficient
reserves for its share, if any, of the cost of clean-up of these sites and to
the extent current reserves prove inadequate, any payments in excess of the
reserved amounts will not be material to the consolidated financial position,
results of operations or liquidity of the Company. See "Business--Legal
Proceedings" and Note 18 of the Notes to the Company's Consolidated Financial
Statements.
27
<PAGE>
THE MERGER AND MERGER FINANCING
THE MERGER FINANCING
In order to fund the payment of the cash portion of the Merger
Consideration, the Option Cash Proceeds and the Warrant Cash Proceeds, to
refinance outstanding indebtedness of DecisionOne Corp. and pay expenses
incurred in connection with the Merger, DecisionOne Corp. is issuing the
Senior Subordinated Notes and will enter into a syndicated senior secured
loan facility providing for term loan borrowings in the aggregate principal
amount of approximately $470 million and revolving loan borrowings of $105
million. At the Effective Time, DecisionOne Corp. is expected to borrow all
term loans available thereunder and approximately $8.3 million of revolving
loans. The remaining revolving loans will, subject to a borrowing base, be
available to fund the working capital requirements of DecisionOne Corp. The
proceeds of such financings will, in part, be distributed to Holdings in the
form of a dividend and, in part, lent to Holdings pursuant to an intercompany
note. On May 4, 1997, DLJMB Inc., an affiliate of DLJMB, received an executed
commitment letter from DLJ Capital Funding to provide the New Credit
Facility, which will be syndicated by DLJ Capital Funding. Additionally, on
May 4, 1997, DLJMB Inc. received a letter from DLJSC with respect to the
underwriting, purchase or private placement of the Senior Subordinated Notes
in which DLJSC indicated that it was highly confident of its ability to sell
the Senior Subordinated Notes in the public market. Each of the commitments
is subject to customary conditions, including the negotiation, execution and
delivery of definitive documentation with respect to such commitment. See
"Description of the New Credit Facility" and "Certain Relationships and
Related Transactions."
Quaker expects to raise an additional $85 million through the concurrent
issuance of the Units in the Offering. At the Effective Time, Holdings will
succeed to the obligations of Quaker with respect to the Securities, and the
Warrants will, by their terms, become exercisable for an equal number of
shares of Holdings Common Stock. The DLJMB Funds and certain Institutional
Investors also expect to purchase 9,782,508 shares of Common Stock and may
acquire the DLJMB Warrants immediately prior to the Effective Time for
approximately $225 million. In lieu of acquiring the DLJMB Warrants, the
DLJMB Funds and certain Institutional Investors may acquire directly those
shares of Common Stock (up to 1,417,180 shares) for which such DLJMB Warrants
would have been exercisable, at a price that would be equivalent to the
exercise price of the DLJMB Warrants (the "Direct Shares"). The number of
DLJMB Warrants issued or Direct Shares purchased will be reduced by the
number of Public Warrants issued (if any). At the Effective Time, the
proceeds of such purchase will become an asset of Holdings, each share of
Common Stock including the Direct Shares, if any, will become a share of
Holdings Common Stock and each warrant to acquire the Common Stock if any,
will by its terms become exercisable for an equal number of shares of
Holdings Common Stock.
THE MERGER AGREEMENT
The Merger Agreement provides, among other things, for the merger of
Quaker with and into Holdings, with Holdings continuing as the surviving
corporation (the "Merger"). Pursuant to the Merger Agreement, at the
Effective Time, each share of Holdings Common Stock held by Holdings as
treasury stock or owned by Quaker immediately prior to the Effective Time
will be cancelled, and no payment will be made with respect thereto; each
share of Common Stock outstanding immediately prior to the Effective Time
will be converted into and become one share of common stock of the surviving
corporation with the same rights, powers and privileges as the shares so
converted; each outstanding warrant to purchase shares of Common Stock will,
pursuant to its terms, become exercisable for an equal number of shares of
Holdings Common Stock on the same terms and conditions; and each share of
Holdings Common Stock outstanding immediately prior to the Effective Time
will, except as otherwise provided with respect to shares as to which
appraisal rights have been exercised, be converted into the following (the
"Merger Consideration"): for each such share with respect to which an
election to retain Holdings Common Stock has been effectively made, revoked
or lost ("Stock Electing Shares"), the right to retain one share of Holdings
Common Stock, and for each such share (other than Stock Electing Shares), the
right to receive in cash from Holdings an amount equal to $23.00 (the "Cash
Merger Consideration"). The Merger contemplates that approximately 94.7% of
the presently issued and outstanding shares of Holdings Common Stock will be
converted, at the election of the holder, into cash, as described above, and
that approximately 5.3% (or 1,474,345 as of April 21, 1997) of such shares
will be retained by existing
28
<PAGE>
stockholders. Because 5.3% of the shares outstanding after the Merger must be
retained by existing stockholders of Holdings, the right to receive $23.00
per share or retain shares of Holdings Common Stock is subject to proration.
The shares which are to be retained will represent approximately 13.1% of the
shares of Holdings Common Stock (or 11.6% on a fully diluted basis) expected
to be issued and outstanding immediately after the Merger. If the Merger is
approved, 9,782,609 shares of Common Stock will be converted into Holdings
Common Stock that will represent approximately 86.9% of Holdings Common Stock
(or 77.2% on a fully diluted basis) (or, if the DLJMB Funds purchase the
Direct Shares, 88.4% of the outstanding Holdings Common Stock) after the
Merger. The DLJMB Funds expect that the Institutional Investors may acquire a
portion of the securities of Quaker that would otherwise be purchased by the
DLJMB Funds in the DLJMB Equity Investment. In no event would any such
purchases by the Institutional Investors reduce the fully diluted ownership
by the DLJMB Funds of Holdings Common Stock after the Effective Time to below
a majority, or limit the rights of the DLJMB Funds as described in "Certain
Relationships and Related Transactions."
The DLJMB Warrants will be exercisable for a maximum of 1,417,180 shares
of Common Stock at an exercise price of not less than $.01 per share;
however, the number of DLJMB Warrants (or if issued the Direct Shares) will
be decreased by the number of Warrants that are issued together with the
Debentures. All such DLJMB Warrants will, by their terms, become exercisable
for an equal number of shares of Holdings Common Stock on identical terms
following the Effective Time or in the case of Direct Shares will become
shares of Holdings Common Stock. As a result, following the Effective Time,
the DLJMB Warrants and the Warrants will permit the holders thereof to
purchase up to an additional 1,417,180 shares of Holdings Common Stock which
would represent, when exercised, approximately 11.2% of the Holdings Common
Stock (on a fully diluted basis) after the Merger.
At the Effective Time, each outstanding option to acquire shares of
Holdings Common Stock granted to employees and directors, whether vested or
not (the "Options"), will be cancelled and, in lieu thereof, as soon as
reasonably practicable as of or after the Effective Time, the holders of such
Options will receive, with respect to each Option, a cash payment in an
amount equal to the product of (x) the excess, if any, of $23.00 over the
exercise price of such Option multiplied by (y) the number of shares of
Holdings Common Stock subject to such Option (the "Option Cash Proceeds").
Alternatively, a portion of the Options may be converted into options to
purchase Holdings Common Stock following the Effective Time.
Holdings will use its reasonable best efforts to cause holders of all
outstanding warrants to purchase Holdings Common Stock (the "Existing
Warrants") to surrender such Existing Warrants to Holdings prior to the
Effective Time in exchange for a cash payment immediately after the Effective
Time of an amount equal to the (x) excess, if any, of $23.00 over the
exercise price of such Existing Warrant, multiplied by (y) the number of
shares of Holdings Common Stock subject to such Existing Warrant (the
"Warrant Cash Proceeds"), and upon such other terms and conditions
satisfactory to Quaker.
Holdings will submit the Merger Agreement to its stockholders for approval
and adoption at a special meeting of stockholders of Holdings, which is
expected to be held August 7, 1997 (the "Special Meeting"). Approval of the
Merger Agreement requires an affirmative vote of the outstanding shares of
Holdings Common Stock. J.H. Whitney & Co. and certain partnerships associated
with Welsh, Carson, Anderson & Stowe have entered into a Voting Agreement and
Irrevocable Proxy, dated as of May 4, 1997, pursuant to which they have
agreed upon the terms set forth therein to vote shares constituting
approximately 30% of the outstanding Holdings Common Stock in favor of
approval and adoption of the Merger Agreement.
The obligations of Quaker and Holdings to effect the Merger are further
subject to, certain customary conditions, including approval of the Merger
Agreement by the stockholders of Holdings.
The Merger Agreement contains customary representations, warranties and
covenants of Holdings and Quaker, and may be terminated at any time prior to
the Effective Time (notwithstanding any approval of the Merger Agreement by
the stockholders of Holdings) under certain circumstances, including by
either Holdings or Quaker, if the Merger has not been consummated by the
later of (x) the earlier of September 15, 1997 and ten business days after
the Special Meeting, and (y) August 15, 1997, provided that the party seeking
to exercise such right is not then in breach in any material respect of any
of its obligations under the Merger Agreement.
29
<PAGE>
USE OF PROCEEDS
The proceeds from the sale of the Units, after deducting expenses of the
Offering, including discounts to the Underwriter, are estimated to be
approximately $80.9 million. The proceeds from the Offering, together with
the borrowings under the New Credit Facility, the DLJMB Equity Investment,
and the issuance of Senior Subordinated Notes will be used to finance the
conversion into cash of approximately 94.7% of the shares of Holdings Common
Stock currently outstanding, to refinance the outstanding indebtedness of
DecisionOne Corp. under the existing bank credit facility (approximately
$239.9 million outstanding at an interest rate of 6.44% as of March 31, 1997
and which matures April 26, 2001), fund payments of the Option Cash Proceeds
and the Warrant Cash Proceeds, and finance the expenses and fees incurred in
connection with the Merger. See "The Merger and Merger Financing."
The following table sets forth the estimated cash sources and uses of
funds as if the Merger and Merger Financing, including the application of the
proceeds therefrom, occurred and were completed at the Effective Time.
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
TOTAL SOURCES:
New Credit Facility:
Revolving credit facility....................... $ 8.3
Term loans...................................... 470.0
Senior Subordinated Notes ....................... 150.0
Units offered hereby............................. 85.0
DLJMB Equity Investment ......................... 225.0
-------------
Total cash sources............................. $938.3
=============
TOTAL USES:
Cash Merger Consideration ....................... $605.9
Option Cash Proceeds and Warrant Cash Proceeds . 58.4
Repayment of existing revolving credit facility 221.2
Estimated transaction fees and expenses ......... 52.8
-------------
Total cash uses................................ $938.3
=============
</TABLE>
30
<PAGE>
CAPITALIZATION
The following table sets forth the historical consolidated capitalization
of the Company as of March 31, 1997, and on a pro forma basis to give effect
to the Merger, including the Merger Financing and the application of proceeds
therefrom, as if they had occurred on March 31, 1997. See "Use of Proceeds."
The information contained in this table should be read in conjunction with
the Company's Unaudited Condensed Consolidated Pro Forma Financial Data, the
Company's Consolidated Financial Statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
------------------------
HISTORICAL PRO FORMA
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............... $ 12,886 $ 12,886
============ ===========
Total debt (including current portion):
New Credit Facility:
Revolving credit facility (1) ......... $ -- $ 26,950
Term loan facility..................... -- 470,000
Existing revolving credit facility (1) 239,850 --
Senior Subordinated Notes............... -- 150,000
Debentures offered hereby (2) .......... -- 83,124
Notes payable and other debt............ 5,398 5,398
Capitalized lease obligations........... 1,423 1,423
------------ -----------
Total debt............................ 246,671 736,895
Stockholders' equity (deficit)(3) ..... 201,095 (260,090)
------------ -----------
Total capitalization.................. $447,766 $ 476,805
============ ===========
</TABLE>
- ------------
(1) It is assumed that, at the Effective Time, actual borrowings under the
existing revolving credit facility will be approximately $221.2
million. Any variation in the actual borrowings outstanding under the
existing revolving credit facility at the Effective Time will result in
a corresponding change in borrowings under the New Credit Facility.
(2) Reflects the allocation of approximately $1.9 million of the proceeds
from the issuance of the Units to the Warrants based on their estimated
fair value. Such amount has been recorded as additional original issue
discount (OID) with respect to the Debentures and will be amortized
over the life of the Debentures, using the effective interest method.
(3) For a description of the pro forma adjustments, see Note 5 to the Notes
to Unaudited Condensed Consolidated Pro Forma Balance Sheet Data.
31
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL DATA
The following unaudited condensed consolidated pro forma financial data
(the "Pro Forma Financial Data") of the Company are based on historical
consolidated financial statements of the Company as adjusted to give effect
to the Company's acquisition of BABSS on October 20, 1995 and the Merger,
including the Merger Financing and the application of the proceeds thereof.
The unaudited condensed consolidated pro forma statement of operations data
for the year ended June 30, 1996 gives effect to the BABSS acquisition and
the Merger, including the Merger Financing and the application of the
proceeds thereof, as if they had occurred as of July 1, 1995. The unaudited
condensed consolidated pro forma statements of operations data for the
nine-month and three-month periods ended March 31, 1997 give effect to the
Merger, including the Merger Financing and the application of the proceeds
thereof, as if it had occurred as of July 1, 1996. The pro forma balance
sheet gives effect to the Merger, including the Merger Financing and the
application of the proceeds thereof, as if it had occurred as of March 31,
1997. The pro forma adjustments are based upon available information and upon
certain assumptions that management believes are reasonable under the
circumstances. The Pro Forma Financial Data and accompanying notes should be
read in conjunction with the historical consolidated financial statements of
the Company, including the notes thereto, and other financial information
pertaining to the Company. The Pro Forma Financial Data do not purport to
represent what the Company's actual results of operations or actual financial
position would have been if the Merger, including the Merger Financing and
the application of the proceeds thereof, and BABSS acquisition in fact
occurred on such dates or to project the Company's results of operations or
financial position for any future period or date. The Pro Forma Financial
Data do not give effect to any transactions other than the BABSS acquisition
and the Merger, including the Merger Financing and the application of the
proceeds thereof, discussed in the notes to the Pro Forma Financial Data
included elsewhere herein.
As a result of the proposed Merger, the Company and Quaker will incur
various costs currently estimated to range between $95 million and $105
million (pretax) in connection with consummating the transaction. These costs
consist primarily of professional fees, registration costs, compensation
costs and other expenses. While the exact timing, nature and amount of these
costs are subject to change the Company anticipates that a one-time pretax
charge of approximately $76 million ($69 million after tax) will be recorded
in the quarter in which the Merger is consummated. As a result of the
foregoing, the Company expects to record a significant net loss in the
quarter in which the Merger is recorded. Because this loss will result
directly from the one-time charge incurred in connection with the Merger, and
this charge will be funded entirely through the proceeds of the Merger
Financing, the Company does not expect this loss to materially impact its
liquidity, ongoing operations or market position. For a discussion of the
consequences of the incurrence of indebtedness in connection with the Merger
Financing, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
The pro forma adjustments were applied to the respective historical
consolidated financial statements of the Company to reflect and account for
the Merger as a recapitalization; accordingly, the historical basis of the
Company's assets and liabilities has not been impacted thereby.
32
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1996
--------------------------------------------------
HISTORICAL RESULTS BABSS ACQUISITION
------------------------ -------------------------
THE COMPANY BABSS ADJUSTMENTS PRO FORMA
------------- ---------- ------------- -----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C>
Revenues............................... $540,191 $157,485 -- $697,676
Cost of revenues....................... 402,316 127,049 $ (9,549)(1) 517,244
(1,250)(2)
83 (3)
(1,405)(4)
------------- ---------- ------------- -----------
Gross profit........................... 137,875 30,436 12,121 180,432
Operating Expenses:
Selling, general, and administrative
expenses............................. 69,237 27,152 (1,701)(1) 92,211
(500)(2)
83 (3)
(997)(4)
(1,063)(5)
Amortization and write off of
intangibles.......................... 15,673 625 (625)(6) 19,534
3,861 (7)
Employee severance and unutilized
lease cost........................... 3,592 (3,592)(8)
------------- ---------- ------------- -----------
Operating income....................... 49,373 2,659 16,655 68,687
Interest expense....................... (14,953) (539) 539 (9) (20,570)
(5,617)(10)
Interest income........................ 239 52 291
------------- ---------- ------------- -----------
Income (loss) from continuing
operations before income taxes, and
extraordinary item.................... 34,659 2,172 11,577 48,408
(Provision) benefit for income taxes .. (13,870) 250 (5,743) (11) (19,363)
------------- ---------- ------------- -----------
Income (loss) from continuing
operations before extraordinary item . 20,789 2,422 5,834 29,045
Extraordinary item--early retirement
of debt............................... (1,927) (1,927)
------------- ---------- ------------- -----------
Net income (loss)...................... $ 18,862 $ 2,422 $ 5,834 $ 27,118
============= ========== ============= ===========
Primary income (loss) per
common share:
Continuing operations ................ $ 0.83 $ 1.15
Net income ........................... 0.75 1.08
Weighted average number of common and
common equivalent shares outstanding 25,196 25,196
Fully diluted income (loss) per
common share:
Continuing operations................. $ 0.82 $ 1.14
Net income ........................... 0.74 1.07
Weighted average number of
common and common equivalent shares
outstanding ......................... 25,430 25,430
OTHER DATA:
EBITDA (14)............................ $114,816 $ 16,524 $147,805
Amortization of repairable parts ..... 37,869 10,598 48,467
------------- ---------- ------------- -----------
Adjusted EBITDA (14)................... 76,947 5,926 99,338
Adjusted EBITDA margin (15)............ 14.2% 3.8% 14.2%
Depreciation and amortization of
intangibles........................... $ 23,982 $ 3,267 $ 30,651
Repairable parts purchases ............ 63,514 10,773 74,287
Capital expenditures .................. 7,278 3,965 11,243
Cash interest expense.................. 14,743 539 20,360
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
THE MERGER
----------------------------
PRO FORMA,
ADJUSTMENTS AS ADJUSTED
-------------- -------------
<S> <C> <C>
Revenues............................... $697,676
Cost of revenues....................... 517,244
-------------- -------------
Gross profit........................... 180,432
Operating Expenses:
Selling, general, and administrative
expenses............................. 92,211
Amortization and write off of
intangibles.......................... 19,534
Employee severance and unutilized
lease cost...........................
-------------- -------------
Operating income....................... 68,687
Interest expense....................... (68,873)(12) (69,803)
19,640 (13)
Interest income........................ 291
-------------- -------------
Income (loss) from continuing
operations before income taxes, and
extraordinary item.................... (49,233) (825)
(Provision) benefit for income taxes .. 19,693 (11) 330
-------------- -------------
Income (loss) from continuing
operations before extraordinary item . (29,540) (495)
Extraordinary item--early retirement
of debt............................... (1,927)
-------------- -------------
Net income (loss)...................... $(29,540) $ (2,422)
============== =============
Primary income (loss) per
common share:
Continuing operations ................ $ (0.04)
Net income ........................... (0.19)
Weighted average number of common and
common equivalent shares outstanding 12,674
Fully diluted income (loss) per
common share:
Continuing operations................. $ (0.04)
Net income ........................... (0.19)
Weighted average number of
common and common equivalent shares
outstanding ......................... 12,674
OTHER DATA:
EBITDA (14)............................ $147,805
Amortization of repairable parts ..... 48,467
-------------- -------------
Adjusted EBITDA (14)................... 99,338
Adjusted EBITDA margin (15)............ 14.2%
Depreciation and amortization of
intangibles........................... $ 30,651
Repairable parts purchases ............ 74,287
Capital expenditures .................. 11,243
Cash interest expense.................. 57,031
</TABLE>
33
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31, 1997
--------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------- -----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C>
Revenues........................................... $572,749 $572,749
Cost of revenues .................................. 427,969 427,969
------------ ------------- -----------
Gross profit....................................... 144,780 144,780
Operating Expenses:
Selling, general, and administrative expenses .... 78,578 78,578
Amortization and write off of intangibles ........ 16,861 16,861
Employee severance and unutilized lease cost ..... 4,300 4,300
------------ ------------- -----------
Operating income................................... 45,041 45,041
(51,655)(12)
Interest expense................................... (11,097) 10,692 (13) (52,060)
Interest income.................................... 393 393
------------ ------------- -----------
Income (loss) before income taxes.................. 34,337 (40,963) (6,626)
(Provision) benefit for income taxes............... (14,421) 17,204 (11) 2,783
------------ ------------- -----------
Net income (loss).................................. $ 19,916 $(23,759) $ (3,843)
============ ============= ===========
Primary income (loss) per common share:
Net income ....................................... $ 0.66 $ (0.30)
Weighted average number of common and common
equivalent shares outstanding ................... 30,066 12,674
Fully diluted income (loss) per common share:
Net income ....................................... $ 0.66 $ (0.30)
Weighted average number of common and common
equivalent shares outstanding ................... 29,958 12,674
OTHER DATA:
EBITDA (14)........................................ $121,680 $121,680
Amortization of repairable parts................... 45,642 45,642
------------ -----------
Adjusted EBITDA (14)............................... 76,038 76,038
Adjusted EBITDA margin (15)........................ 13.3% 13.3%
Depreciation and amortization of intangibles ...... $ 26,697 $ 26,697
Repairable parts purchases......................... 64,803 64,803
Capital expenditures............................... 6,093 6,093
Cash interest expense.............................. 10,578 42,119
Total interest expense............................. 11,097 52,060
Ratio of Adjusted EBITDA to cash interest expense . 7.19x 1.81x
Ratio of Adjusted EBITDA to total interest
expense........................................... 6.85 1.46
</TABLE>
34
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
---------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
------------ -------------- -----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C>
Revenues........................................... $205,070 $205,070
Cost of revenues .................................. 150,372 150,372
------------ -------------- -----------
Gross profit....................................... 54,698 54,698
Operating Expenses:
Selling, general, and administrative expenses .... 28,228 28,228
Amortization and write off of intangibles ........ 6,390 6,390
------------ -------------- -----------
Operating income................................... 20,080 20,080
Interest expense................................... (4,005) (17,219)(12) (17,379)
3,845 (13)
Interest income.................................... 316 316
------------ -------------- -----------
Income before income taxes......................... 16,391 (13,374) 3,017
(Provision) benefit for income taxes............... (6,884) 5,617 (11) (1,267)
------------ -------------- -----------
Net income......................................... $ 9,507 $ (7,757) $ 1,750
============ ============== ===========
Primary income per common share:
Net income ....................................... $ 0.32 $ 0.14
Weighted average number of common and common
equivalent shares outstanding ................... 30,062 12,674
Fully diluted income per common share:
Net income ....................................... $ 0.32 $ 0.14
Weighted average number of common and common
equivalent shares outstanding ................... 29,976 12,674
OTHER DATA:
EBITDA (14)........................................ $ 46,419 $ 46,419
Amortization of repairable parts................... 16,356 16,356
------------ -----------
Adjusted EBITDA (14)............................... 30,063 30,063
Adjusted EBITDA margin (15)........................ 14.7% 14.7%
Depreciation and amortization of intangibles ...... $ 9,983 $ 9,983
Repairable parts purchases......................... 28,815 28,815
Capital expenditures............................... 2,261 2,261
Cash interest expense.............................. 3,642 13,875
Total interest expense............................. 4,005 17,379
Ratio of Adjusted EBITDA to cash interest expense . 8.25x 2.17x
Ratio of Adjusted EBITDA to total interest
expense........................................... 7.51 1.73
</TABLE>
35
<PAGE>
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED PRO FORMA STATEMENTS OF OPERATIONS DATA
(1) To reflect employee-related cost savings associated with the
redundancies created by the combination of the Company and BABSS.
Components of savings include, but are not limited to, salaries,
fringe benefits (except for those separately accounted for in Note 4
to the Pro Forma Combined Financial Data), travel and other.
Personnel reductions, totaling 405 employees, were implemented in the
field (260), operations support (90), sales (10) and administration
(45). These personnel reductions were announced and substantially
effected by December 31, 1995. The reductions were spread throughout
the United States with the only area of concentration being at the
respective headquarters locations in Horsham and Frazer,
Pennsylvania.
(2) To reflect rental expense reductions associated with facilities that
have been deemed "unutilized" as a result of the combination of the
Company and BABSS. See Note 17 of the Notes to the Company's
Consolidated Financial Statements. Included in such facilities are
the Company's former corporate headquarters, several large repair
depots (identified as surplus) as well as numerous duplicate field
offices throughout the United States. All remaining lease liabilities
associated with this unutilized space have either been included in
the purchase accounting of the BABSS acquisition or have been
expensed as part of the Company's net charge of $3.6 million recorded
in the results of operations for the twelve months ended June 30,
1996.
(3) To reflect additional depreciation resulting from a $2 million
increase in property and equipment valuation recorded as part of the
overall purchase price allocation of the BABSS acquisition, assuming
an estimated four-year depreciable life.
(4) To eliminate BABSS benefit expenses associated with pension and
postemployment benefits that are not part of the Company's benefit
package and have not, therefore, been incurred subsequent to the
acquisition. See Notes 3 and 11 of the Notes to DecisionOne Corp.'s
(formerly BABSS) Consolidated Financial Statements included elsewhere
herein. Both of these benefit programs ceased to exist as of the
acquisition date.
(5) To eliminate redundant corporate overhead allocations recorded in the
historical BABSS financial statements which have not been incurred
subsequent to the acquisition. BABSS was predominantly a
self-sufficient operation. The parent company of BABSS charged
corporate overhead to BABSS; these charges are not a component of the
ongoing expense structure of the Company.
(6) To eliminate intangible amortization expense recorded in the
historical BABSS financial statements.
(7) To reflect amortization expense resulting from the adjustments to
intangible assets recorded as part of the purchase price allocation
of BABSS. See Note 8 of the Notes to the Company's Consolidated
Financial Statements.
(8) To eliminate the non-recurring charge for employee severance and
unutilized lease costs.
(9) To eliminate intercompany interest expense charged by Bell Atlantic
Corporation, the parent company of BABSS, to BABSS.
(10) To reflect interest expense associated with the financing of the
BABSS acquisition. The assumed borrowing level associated with this
adjustment was $242.0 million, which is comprised of $212.0 million
of term loan debt and $30.0 million of notes to Significant
Stockholders (the "Affiliate Notes"). In April 1996, Holdings used
the proceeds of its initial public offering to reduce the term loan
debt by $70.0 million and repay the Affiliate Notes. The interest
rate on the term loan was 8.75% per annum, and the effective interest
rate on the Affiliate Notes was 12.9% per annum. The interest rate
swap agreements entered into by the Company have not been given
effect in the calculation of these adjustments, based on
immateriality.
36
<PAGE>
The pro forma interest adjustment has been computed as follows:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 1996
---------------
(IN THOUSANDS)
<S> <C>
Term loan interest.............................................. $ 17,019
Affiliate Notes interest:
Stated rate (10.101% per annum)................................ 2,273
Amortization of original issue discount........................ 354
Less actual interest expense included in the historical results (14,029)
---------------
Pro forma interest adjustment................................... $ 5,617
===============
</TABLE>
(11) To adjust the income tax (provision) benefit for effect of all pro
forma entries above at an effective tax rate of 40% and 42% for the
year ended June 30, 1996 and nine-month and three-month periods ended
March 31, 1997, respectively. Utilization of the Company's net
operating loss ("NOLs") tax carryforwards have not been reflected in
the pro forma income tax expense. The recognition of the Company's
NOLs have been recorded in the historical financials, see Note 11 of
the Notes to the Company's Consolidated Financial Statements.
(12) To reflect the additional interest expense attributable to the Merger
Financing, as follows:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
JUNE 30, 1996 MARCH 31, 1997 MARCH 31, 1997
--------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
New Credit Facility:
Term Loan A and revolving credit
facility............................. $18,311 $13,733 $ 4,578
Term Loan B........................... 23,375 17,531 5,844
Senior Subordinated Notes.............. 14,625 10,969 3,656
Senior Discount Debentures............. 9,775 7,332 2,444
Amortization of deferred financing
costs................................. 2,787 2,090 697
--------------- -------------- --------------
$68,873 $51,655 $17,219
=============== ============== ==============
</TABLE>
The amounts and assumed interest rates of the Merger Financing are as
follows:
<TABLE>
<CAPTION>
ASSUMED
RATE
AMOUNT PER ANNUM
-------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
New Credit Facility:
Term Loan A and revolving credit
facility.................................. $221,950 LIBOR + 2.50%
Term Loan B................................ 275,000 LIBOR + 2.75%
Senior Subordinated Notes................... 150,000 9.75%
Senior Discount Debentures.................. 85,004 11.50%
</TABLE>
The interest rates for the New Credit Facility are variable. The effect of
a 1/4% change in interest rates on the above New Credit Facility would be
$1.2 million, $0.9 million, and $0.3 million for the year ended June 30,
1996, nine months ended March 31, 1997 and the three months ended
March 31, 1997, respectively.
For purposes of pro forma interest expense, approximately $1.9 million of
the proceeds of the Offering has been attributed to the Warrants based on
their estimated fair value. Such amount has been recorded as additional
original issue discount (OID) and will be amortized over the life of the
Debentures, using the effective interest method.
37
<PAGE>
(13) To reflect the elimination of interest expense (including
amortization of deferred financing costs, which are not considered to
be material) attributable to indebtedness to be paid in connection
with the Merger as follows:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
JUNE 30, 1996 MARCH 31, 1997 MARCH 31, 1997
--------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Existing revolving credit facility
(including BABSS pro forma) ............. $19,640 $10,692 $3,845
</TABLE>
(14) "EBITDA" represents income (loss) from continuing operations before
interest expense, interest income, income taxes, depreciation,
amortization of repairable parts inventory, amortization of
intangibles, amortization of discounts and capitalized expenses
related to indebtedness, and non-recurring employee severance charges
and provisions for unutilized leases. The Company's historical
financial results include amortization of repairable parts which is
unique to the industry in which the Company competes. "Adjusted
EBITDA" represents EBITDA reduced by amortization of repairable
parts. Neither EBITDA nor Adjusted EBITDA is intended to represent
cash flow from operations as defined by generally accepted accounting
principles and should not be considered as an alternative to net
income as an indicator of the Company's operating performance or to
cash flows as a measure of liquidity and may not be comparable to
similarly titled measures of other companies. Adjusted EBITDA is
presented because it is relevant to certain covenants expected to be
contained in the agreements relating to the Merger Financing and the
Company believes that Adjusted EBITDA is a more consistent indicator
of the Company's ability to meet its debt service, capital
expenditure and working capital requirements than EBITDA.
(15) Adjusted EBITDA margin measures Adjusted EBITDA as a percentage of
revenues.
38
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET DATA
AS OF MARCH 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------ -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................$ 12,886 $ -- (1)$ 12,886
Accounts receivable, net................. 136,401 136,401
Inventories.............................. 35,186 35,186
Other.................................... 7,637 7,637
------------ -------------- -----------
Total current assets..................... 192,110 192,110
Repairable parts, net...................... 195,656 195,656
Property & equipment, net.................. 33,283 33,283
Intangibles, net and other assets.......... 220,628 7,000 (2) 249,667
22,275 (3)
(236)(4)
------------ -------------- -----------
Total assets...............................$641,677 $ 29,039 $ 670,716
============ ============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt........$ 4,756 $ 4,756
Accounts payable and accrued expenses.... 101,516 101,516
Deferred revenues........................ 72,096 72,096
Other.................................... 3,691 3,691
------------ -------------- -----------
Total current liabilities................ 182,059 182,059
New Credit Facility:
Revolving credit facility................. -- $ 26,950 (1) 26,950
Term loans................................ -- 470,000 (1) 470,000
Senior Subordinated Notes ................. -- 150,000 (1) 150,000
Senior Discount Debentures................. -- 83,124 (1) 83,124
Existing revolving credit facility ........ 239,850 (239,850)(1) --
Other long term debt....................... 2,065 2,065
Other liabilities.......................... 16,608 16,608
------------ -------------- -----------
Total liabilities......................... 440,582 490,224 930,806
------------ -------------- -----------
Total stockholders' equity (deficit)..... 201,095 (461,185) (5) (260,090)
------------ -------------- -----------
Total liabilities and stockholders'
equity.....................................$641,677 $ 29,039 $ 670,716
============ ============== ===========
</TABLE>
39
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET DATA
(1) The net effect on cash and cash equivalents of the Merger, including
the Merger Financing and the application of the proceeds thereof as
of March 31, 1997, is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
TOTAL SOURCES:
New Credit Facility:
Revolving credit facility(a)................... $ 26,950
Term loans..................................... 470,000
Senior Subordinated Notes....................... 150,000
Units offered hereby............................ 85,004
DLJMB Equity Investment ........................ 225,000
--------------
Total sources................................. $956,954
==============
TOTAL USES:
Cash Merger Consideration ...................... $605,900
Option Cash Proceeds ........................... 45,400
Warrant Cash Proceeds........................... 13,000
Repayment of existing revolving credit
facility....................................... 239,850
Estimated transaction fees and expenses ........ 52,804
--------------
Total uses.................................... $956,954
==============
</TABLE>
(2) Represents the anticipated tax benefit related to the transaction
fees and expenses. The anticipated tax benefit is limited due to the
expected non-deductibility of certain Merger transaction fees and
expenses and limitations on the recognition of deferred tax benefits
resulting from net operating losses expected to be reported in the
fiscal year ended June 30, 1998.
(3) Represents the portion of estimated transaction fees and expenses
attributable to the New Credit Facility, the Senior Subordinated
Notes and the Debentures, which will be recorded as deferred debt
issuance costs and will be amortized over the life of the debt to be
issued. Such estimated deferred debt issuance costs include estimated
fees and expenses payable to banks, and advisors and underwriting
discounts and commissions.
(4) The adjustment reflects the write-off deferred debt issuance costs
associated with the existing revolving credit financing.
(5) Represents the net change in stockholders' equity as a result of the
Merger, including the Merger Financing and the application of the
proceeds thereof:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Cash Merger Consideration ................... $(605,900)
DLJMB Equity Investment ..................... 225,000
Transaction fees and expenses(b)............. (30,529)
Write-off of deferred debt issuance costs ... (236)
Option Cash Proceeds (c) .................... (45,400)
Warrant Cash Proceeds ....................... (13,000)
Offering proceeds attributed to the
Warrants.................................... 1,880
Tax benefit of above expense adjustments .... 7,000
--------------
Total...................................... $(461,185)
==============
</TABLE>
(a) Based on borrowings of $239.9 million that were outstanding
under the existing revolving credit facility as of March 31,
1997. Any variation in the actual borrowings outstanding
under the existing revolving credit facility on the closing
date will result in a corresponding change in borrowings
under the New Credit Facility.
(b) Represents the portion of the total $52.8 million of
estimated transaction fees and expenses which will be
recorded as an expense immediately upon consummation of the
Merger and related transactions; the remainder of such
transaction fees and expenses are recorded in Note (3) above
as deferred debt issuance costs.
(c) Represents compensation costs of the Company resulting from
the cancellation of options which will be recorded as an
expense immediately upon consummation of the Merger and
related transactions.
40
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the periods and
dates indicated set forth below have been derived from the audited
consolidated financial statements and the unaudited condensed consolidated
financial statements of the Company. The condensed consolidated results of
operations of the Company for the nine months and three months ended March
31, 1996 and 1997 are unaudited and are not necessarily indicative of the
Company's results of operations for the full year. The unaudited condensed
consolidated financial data reflects all adjustments (consisting of normal,
recurring adjustments) which are, in the opinion of management, necessary for
a fair summary of the Company's financial position, results of operations and
cash flows for and as of the end of the periods presented.
The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and Notes thereto, included
elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
-------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- -----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues............................. $112,773 $114,060 $108,416 $163,020 $ 540,191
Gross profit......................... 27,753 27,575 31,436 49,537 137,875
Operating income(2)(3)............... 11,288 4,406 15,983 20,779 49,373
Interest expense..................... (9,881) (9,353) (4,979) (2,521) (14,953)
Interest income...................... 178 25 132 53 239
Income (loss) from continuing
operations(4)(5) ................... 1,441 (5,234) 10,112 41,415 20,789
Net income (loss).................... 2,524 (10,590) 10,112 42,528 18,862
Primary income (loss) per common
share:
Continuing operations............... $ 0.11 $ (0.25) $ 0.45 $ 1.81 $ 0.83
Net income (loss) .................. 0.19 (0.50) 0.45 1.86 0.75
Weighted average number of common
and common equivalent shares
outstanding........................ 13,544 21,215 22,595 22,843 25,196
Fully diluted income (loss) per
common share:
Continuing operations............... $ 0.11 $ (0.25) $ 0.45 $ 1.79 $ 0.82
Net income (loss)................... 0.19 (0.50) 0.45 1.84 0.74
Weighted average number of common
and common equivalent shares
outstanding ....................... 13,544 21,215 22,595 23,149 25,430
Ratio of earnings to fixed
charges(6)(7)....................... 1.13x -- 2.67x 5.09x 2.79x
CONSOLIDATED BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash equivalents............ $ 737 $ 550 $ 978 $ 2,659 $ 8,221
Inventory............................ 14,787 7,146 4,459 4,024 30,130
Repairable parts(8).................. 19,657 13,545 9,473 27,360 154,970
Total assets......................... 84,846 44,721 35,496 135,553 514,510
Total debt(9)........................ 72,972 51,530 4,539 25,571 190,903
Total stockholders' equity
(deficit)........................... (47,477) (58,146) (27,627) 14,677 180,793
CONSOLIDATED CASH FLOWS DATA:
Net cash provided by operations .... $ 16,550 $ 17,137 $ 28,722 $ 38,415 $ 51,894
Net cash (used in) provided by
investing activities ............... (8,226) 11,779 (3,348) (54,271) (346,354)
Net cash (used in) provided by
financing activities ............... (8,905) (29,103) (24,946) 17,537 300,022
OTHER DATA:
EBITDA(10)........................... $ 27,871 $ 24,361 $ 22,672 $ 37,021 $ 114,816
Amortization of repairable parts .... 12,016 9,375 5,929 7,688 37,869
---------- ---------- ---------- ---------- -----------
Adjusted EBITDA(10).................. 15,855 14,986 16,743 29,333 76,947
Adjusted EBITDA margin(11)........... 14.1% 13.1% 15.4% 18.0% 14.2%
Depreciation and amortization of
intangibles......................... $ 4,567 $ 4,769 $ 7,161 $ 8,554 $ 23,982
Repairable parts purchases........... 4,939 3,263 1,857 12,154 63,514
Capital expenditures................. 1,752 681 304 2,786 7,278
Cash interest expense................ 4,474 3,428 1,232 2,314 14,743
Total interest expense............... 9,881 9,353 4,979 2,521 14,953
Revenue per average number of
employees(12)....................... 70.9 82.3 105.8 113.8 119.6
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
----------------------- ---------------------
1996 1997 1996 1997
----------- ----------- ---------- ----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues........................................ $ 369,167 $ 572,749 $172,673 $205,070
Gross profit.................................... 96,459 144,780 42,711 54,698
Operating income(2)(3).......................... 29,323 45,041 15,536 20,080
Interest expense................................ (11,289) (11,097) (5,855) (4,005)
Interest income................................. 69 393 54 316
Income from continuing operations(5) ........... 10,866 19,916 5,842 9,507
Net income...................................... 10,866 19,916 5,842 9,507
Primary income (loss) per common share:
Continuing operations.......................... $ 0.46 $ 0.66 $ 0.25 $ 0.32
Net income (loss) ............................. 0.46 0.66 0.25 0.32
Weighted average number of common and common
equivalent shares outstanding................. 23,424 30,066 23,469 30,062
Fully diluted income (loss) per common share:
Continuing operations.......................... $ 0.46 $ 0.66 $ 0.25 $ 0.32
Net income (loss).............................. 0.46 0.66 0.25 0.32
Weighted average number of common and common
equivalent shares outstanding ................ 23,483 29,958 23,527 29,976
Ratio of earnings to fixed charges(6)(7) ....... 2.34x 3.17x 2.31x 3.90x
CONSOLIDATED BALANCE SHEET DATA (AT PERIOD
END):
Cash and cash equivalents....................... $ 12,886
Inventory....................................... 35,186
Repairable parts(8)............................. 195,656
Total assets.................................... 641,677
Total debt...................................... 246,671
Total stockholders' equity...................... 201,095
CONSOLIDATED CASH FLOWS DATA:
Net cash provided by operations ................ $ 35,489 $ 57,654 $ 20,590 $ 36,667
Net cash (used in) investing activities ....... (308,771) (105,329) (20,713) (34,569)
Net cash provided by financing activities ..... 276,032 52,388 4,933 2,510
OTHER DATA:
EBITDA(10)...................................... $ 75,568 $ 121,680 $ 34,308 $ 46,419
Amortization of repairable parts ............... 23,017 45,642 11,214 16,356
----------- ----------- ---------- ----------
Adjusted EBITDA(10)............................. 52,551 76,038 23,094 30,063
Adjusted EBITDA margin(11)...................... 14.2% 13.3% 13.4% 14.7%
Depreciation and amortization of intangibles ... $ 16,228 $ 26,697 $ 7,558 $ 9,983
Repairable parts purchases...................... 31,715 64,803 19,560 28,815
Capital expenditures............................ 3,331 6,093 1,153 2,261
Cash interest expense........................... 11,134 10,578 5,803 3,642
Total interest expense.......................... 11,289 11,097 5,855 4,005
Ratio of Adjusted EBITDA to cash interest
expense........................................ 4.72x 7.19x 3.98x 8.25x
Ratio of Adjusted EBITDA to total interest
expense........................................ 4.66 6.85 3.94 7.51
Revenue per average number of employees(12) .... $ 90.3 $ 94.7 $ 29.8 $ 32.4
</TABLE>
42
<PAGE>
- ------------
(1) The Summary Statement of Operations Data excludes the effects of
discontinued operations. See Note 3 of the Notes to the Company's
Consolidated Financial Statements.
(2) Operating income includes a $5.8 million charge and a $6.4 million
credit arising from unused lease liabilities for the years ended June
30, 1993 and 1994. During the nine months ended March 31, 1997 the
Company recorded a $4.3 million charge for estimated future employee
severance costs of $3.4 million and unutilized lease costs of $0.9
million.
(3) Operating income includes a $7.0 million charge for future employee
severance costs and unutilized lease costs, incurred in connection
with the BABSS acquisition, for the nine months ended March 31, 1996.
The year ended June 30, 1996 includes a reversal of $3.4 million of
this charge due to the Company's ability to utilize and sublease
various facilities identified in the original charge. See Note 17 of
the Notes to the Company's Consolidated Financial Statements.
(4) Income (loss) from continuing operations for the years ended June 30,
1992 through 1994 reflects interest expense arising from the
Company's senior and junior subordinated debt which was refinanced as
a part of the 1994 Restructuring. See Note 10 of the Notes to the
Company's Consolidated Financial Statements.
(5) Income (loss) from continuing operations for the years ended June 30,
1992 through 1994 include income taxes based on an effective tax rate
substantially less than the effective tax rates used for the years
ended June 30, 1995 and 1996, and the three and nine months ended
March 31, 1996 and 1997. The year ended June 30, 1995 includes a
$23.1 million net benefit arising from the recognition of future tax
benefits of tax loss carryforwards and temporary timing differences.
See Note 11 of the Notes to the Company's Consolidated Financial
Statements.
(6) In calculating this ratio, "earnings" represents income from
continuing operations before provision for income taxes and
extraordinary items plus fixed charges. Fixed charges consist of
interest and amortization of discounts and capitalized expenses
related to indebtedness and one-third of rent expense, which is
representative of the interest factor.
(7) For the year ended June 30, 1993, earnings were insufficient to cover
fixed charges by $4.9 million. Accordingly, such ratio has not been
presented.
(8) Repairable parts represent parts that can be repaired and reused and
are required in order to meet the requirements of the contracts with
the Company's maintenance customers. These parts are principally
purchased from equipment manufacturers and other third parties. As
these parts are purchased, they are capitalized at cost and amortized
using the straight-line method over three to five years, the
estimated useful life of these repairable parts. Costs to refurbish
these parts are charged to expense as incurred.
(9) Total debt excludes redeemable preferred stock of $6.4 million and
$6.8 million at June 30, 1994 and 1995, respectively.
(10) "EBITDA" represents income (loss) from continuing operations before
interest expense, interest income, income taxes, depreciation,
amortization of repairable parts, amortization of intangibles,
amortization of discounts and capitalized expenses related to
indebtedness and non-recurring employee severance charges and
provisions for unutilized leases. The Company's historical results
include amortization of repairable parts which is unique to the
industry in which the Company competes. "Adjusted EBITDA" represents
EBITDA reduced by amortization of repairable parts. Neither EBITDA
nor Adjusted EBITDA is intended to represent cash flow from
operations as defined by generally accepted accounting principles and
should not be considered as an alternative to net income as an
indicator of the Company's operating performance or to cash flows as
a measure of liquidity and may not be comparable to similarly titled
measures of other companies. Adjusted EBITDA is presented because it
is relevant to certain covenants expected to be contained in the
agreements relating to the Merger Financing and the Company believes
that Adjusted EBITDA is a more consistent indicator of the Company's
ability to meet its debt service, capital expenditure and working
capital requirements than EBITDA.
(11) Adjusted EBITDA margin measures Adjusted EBITDA as a percentage of
revenues.
(12) Revenue per average number of employees is calculated by dividing
revenues for applicable periods by the average number of employees
during the respective periods.
43
<PAGE>
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 including the notes thereto.
This discussion contains forward-looking statements 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."
COMPANY HISTORY
Founded in 1969, the Company began operations as a provider of key punch
machines under the tradename "Decision Data." During the 1980s, its
operations expanded to include the sale of midrange computer hardware and
related maintenance services. During fiscal 1993, the Company decided to
focus on providing computer maintenance and support services and sold its
computer hardware products business.
Since the beginning of fiscal 1993, the Company established a major
presence in the computer maintenance and technology support services industry
through the acquisition and integration of assets and contracts of over 35
complementary businesses. The most significant of these were IDEA Servcom,
Inc. ("Servcom"), certain assets and liabilities of which were acquired in
August 1994 for cash consideration of $29.5 million, BABSS which was acquired
in October 1995 for cash consideration of approximately $250.0 million and
certain assets of the U.S. computer service business of Memorex Telex which
were acquired in November 1996 for cash consideration of approximately $24.4
million after certain purchase price adjustments. These acquisitions were
accounted for as purchase transactions.
At the time of its acquisition by the Company, BABSS was among the largest
independent, multivendor service organizations servicing end-user
organizations and OEMs. Prior to the acquisition of BABSS, the Company had
higher gross margins than BABSS principally because approximately 30% of the
Company's revenues in fiscal 1995 were attributable to higher margin
contracts involving systems that can be serviced by a limited number of
service providers ("proprietary systems"), whereas BABSS had limited revenues
from proprietary systems. Prior to the acquisition, BABSS established a
strong record of internal revenue growth, growing revenues from $338.4
million in 1991 to $486.1 million in 1994, representing a compound annual
rate of 12.8%.
The Company's primary source of revenues is contracted services for
multivendor computer maintenance and technology support services, including
hardware support, end-user and software support, network support and other
support services. Approximately 85% of the Company's revenues during the last
fiscal year were derived from maintenance contracts covering a broad spectrum
of computer hardware. These contracts typically have a stipulated monthly fee
over a fixed initial term (typically one year) and continue thereafter unless
cancelled 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 other 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
44
<PAGE>
in-house. The Company must more than offset this revenue "reduction" to grow
its revenues and seeks revenue growth from two principal sources: internally
generated sales from its direct and indirect sales force and the acquisition
of contracts and assets of other service providers. While the Company
historically has been able to offset the erosion of contract-based revenue
and maintain revenue growth through acquisitions and new contracts,
notwithstanding the reduction in contract based revenue, there can be no
assurance it will continue to do so in the future, and any failure to
consummate acquisitions, enter into new contracts or add additional services
and equipment to existing contracts could have a material adverse effect on
the Company's profitability.
Cost of revenues is comprised principally of personnel-related costs
(including fringe benefits), inventory cost recognition, amortization of
repairable parts and facilities costs and related expenses.
The acquisition of contracts and assets has generally provided the Company
with an opportunity to realize economies of scale because the Company
generally does not increase its costs related to facilities, personnel and
repairable parts in the same proportion as increases in acquired revenues.
The proposed Merger, which will be recorded as a recapitalization for
accounting purposes, is subject to a number of conditions, including
regulatory approvals and approval by Holdings' stockholders. The transaction
is estimated to have an aggregate value of approximately $957 million,
including refinancing of the Company's existing revolving credit facility
balance at March 31, 1997. The Company expects the Merger to close by
September 1997.
As a result of the proposed Merger, including the Merger Financing and the
application of the proceeds thereof, the Company and Quaker will incur
various costs currently estimated to range between $95 million and $105
million (pretax) in connection with consummating the transaction. These costs
consist primarily of compensation costs, underwriting discounts and
commissions, professional and advisory fees and other expenses. While the
exact timing, nature and amount of these costs are subject to change, the
Company anticipates that a one-time pretax charge of approximately $76
million ($69 million after tax) will be recorded in the quarter in which the
Merger is consummated. As a result of the foregoing, the Company expects to
record a significant net loss in the quarter in which the Merger is recorded.
Because this loss will result directly from the one-time charge incurred in
connection with the Merger, and this charge will be funded entirely through
the proceeds of the Merger Financing, the Company does not expect this loss
to materially impact its liquidity, ongoing operations or market position.
For a discussion of the consequences of the incurrence of indebtedness in
connection with the Merger Financing, see "--Liquidity and Capital
Resources".
RECENT DEVELOPMENTS
The Company's 1997 fiscal year ended on June 30, 1997. While the final
results of the quarter ended June 30, 1997 are not yet available, the Company
currently estimates that it recorded revenues of approximately $213.2 million
during the fourth quarter, and during such quarter realized operating income
of approximately $22.7 million and net income of approximately $11.2 million.
Based upon an estimated weighted average number of shares outstanding during
the quarter ended June 30, 1997 of approximately 30,266,000 shares, net
income per share for the fourth quarter is currently estimated to be
approximately $0.37.
The Company currently estimates that revenues for the full fiscal year
ended June 30, 1997 were approximately $785.9 million and that it realized
operating income of approximately $67.8 million and net income of
approximately $31.1 million. Based upon an estimated weighted average number
of shares outstanding during the fiscal year ended June 30, 1997 of
approximately 30,110,000 shares, net income per share for the fiscal year
ended June 30, 1997 is currently estimated to be $1.03 per share. Results of
operations for the full fiscal year ended June 30, 1997 include the impact of
certain charges recorded during the second quarter of fiscal 1997, as
discussed below.
The above information is preliminary in nature only, and is subject in all
respects to completion of various internal analyses and procedures necessary
to finalize the Company's financial statements, and to completion of the
audit of the Company's financial statements for the fiscal year ended
June 30, 1997.
45
<PAGE>
RESULTS OF OPERATIONS
The following discussion of results of operations is presented for the
three and nine month periods ended March 31, 1997, and fiscal years ended
June 30, 1996, 1995 and 1994. The results of operations of the Company
include the operations of Memorex Telex from November 15, 1996, BABSS from
October 20, 1995 and Servcom from September 1, 1994.
The following table sets forth, for the periods indicated, certain
operating data expressed in dollar amounts and as a percentage of revenues:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
FISCAL YEARS ENDED JUNE 30, MARCH 31, MARCH 31,
-------------------------------- --------------------- ---------------------
1994 1995 1996 1996 1997 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $108,416 $163,020 $540,191 $369,167 $572,749 $172,673 $205,070
Cost of revenues........... 76,980 113,483 402,316 272,708 427,969 129,962 150,372
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit............... 31,436 49,537 137,875 96,459 144,780 42,711 54,698
Operating Expenses:
Selling, general and
administrative expenses .. 16,474 21,982 69,237 49,519 78,578 22,303 28,228
Amortization and write-off
of intangibles............ 5,380 6,776 15,673 10,617 16,861 4,872 6,390
Employee severance and
unutilized lease costs
(credit).................. (6,401) -- 3,592 7,000 4,300 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income........... 15,983 20,779 49,373 29,323 45,041 15,536 20,080
OTHER DATA:
EBITDA..................... 22,672 37,021 114,816 75,568 121,680 34,308 46,419
Adjusted EBITDA (1)........ 16,743 29,333 76,947 52,551 76,038 23,094 30,063
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE NINE MONTHS ENDED THREE MONTHS
30, MARCH 31, ENDED MARCH 31,
-------------------------- ----------------- -----------------
1994 1995 1996 1996 1997 1996 1997
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........... 71.0 69.6 74.5 73.9 74.7 75.3 73.3
-------- -------- -------- -------- -------- -------- --------
Gross profit............... 29.0 30.4 25.5 26.1 25.3 24.7 26.7
Operating Expenses:
Selling, general and
administrative expenses .. 15.2 13.5 12.8 13.4 13.7 12.9 13.8
Amortization and write-off
of intangibles............ 5.0 4.2 2.9 2.9 2.9 2.8 3.1
Employee severance and
unutilized lease costs
(credit).................. (5.9) -- 0.7 1.9 0.8 -- --
-------- -------- -------- -------- -------- -------- --------
Operating income........... 14.7 12.7 9.1 7.9 7.9 9.0 9.8
OTHER DATA:
EBITDA..................... 20.9 22.7 21.3 20.5 21.2 19.9 22.6
Adjusted EBITDA (1)........ 15.4 18.0 14.2 14.2 13.3 13.4 14.7
</TABLE>
- ------------
(1) As defined in Note 8 to the Summary Historical and Unaudited Pro Forma
Condensed Consolidated Financial Data.
46
<PAGE>
THREE AND NINE MONTHS ENDED MARCH 31, 1997
The following discussion of results of operations is presented for the
Company for the fiscal quarters ended March 31, 1997 and 1996 (the "1997
Quarter" and "1996 Quarter", respectively), and for the nine-month periods
then ended (the "1997 Period" and the "1996 Period", respectively).
Revenues: Revenues for the 1997 Quarter increased by $32.4 million, or
18.8%, to $205.1 million as compared to revenues for the 1996 Quarter of
$172.7 million. This increase is attributable primarily to the acquisition of
Memorex Telex in November 1996, which resulted in increased revenues of
approximately $25 million as compared to the 1996 Quarter.
For the 1997 Period, revenues increased to $572.7 million, as compared to
revenues of $369.2 million for the 1996 Period. This 55.1% increase was due
primarily to the BABSS acquisition, which occurred on October 20, 1995.
Gross Profit: Gross profit increased by $12.0 million, or 28.1%, from
$42.7 million for the 1996 Quarter to $54.7 million for the 1997 Quarter.
This increase is principally attributable to the Memorex Telex acquisition,
which occurred during the second quarter of fiscal 1997. As a percentage of
revenues, gross profit increased from 24.7% in the 1996 Quarter to 26.7% in
the 1997 Quarter.
The improvement in gross profit margin was primarily attributable to (i)
increased revenues from both acquisitions (including contract and asset
acquisitions from Memorex Telex, Xerox Canada and EMC) during the 1997 Period
and internal sales growth without a proportionate increase in personnel and
other operating expenses, (ii) head count reductions in the Company's field
technician force effected in November 1996 and (iii) more efficient
utilization of the Company's field service personnel and resources to service
the increased revenues referred to above.
Gross profit increased by $48.3 million, or 50.1%, from $96.5 million in
the 1996 Period to $144.8 million in the 1997 Period. The increase was due
primarily to the increase in revenues during the 1997 Period attributable to
the full period effect of the BABSS acquisition and, to a lesser extent, the
Memorex Telex acquisition. As a percentage of revenues, gross profit
decreased from 26.1% in the 1997 Period to 25.3% in the 1996 Period. The
decrease in gross margin was attributable to the full period effect in the
1997 Period of the change in mix of the Company's services resulting from the
BABSS acquisition, partially offset by improved gross profit margins
attributable to the efficiencies and productivity improvements described
above during the second and third quarters of the 1997 Period. As a result of
the BABSS acquisition, a significantly smaller portion of the Company's
revenues was derived from proprietary systems which typically generate higher
profit margins than services for non-proprietary systems.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased by $5.9 million, or 26.5%, from $22.3
million for the 1996 Quarter to $28.2 million for the 1997 Quarter. This
increase was attributable primarily to the Memorex Telex acquisition,
including increased sales force salaries and commissions, as well as
increased travel and bad debt expenses. As a percentage of revenues, selling,
general and administrative expenses increased from 12.9% for the 1996 Quarter
to 13.8% for the 1997 Quarter. Selling, general and administrative expenses
increased by $29.1 million, or 58.8% from $49.5 million in the 1996 Period to
$78.6 million in the 1997 Period. This increase was due primarily to the
acquisition of BABSS in October 1995. Selling, general and administrative
expenses as a percentage of revenue increased from 13.4% for the 1996 Period
to 13.7% for the 1997 Period.
Amortization of Intangibles: Amortization of intangible assets increased
by $1.5 million, or 30.6%, from $4.9 million for the 1996 Quarter to $6.4
million for the 1997 Quarter. This increase was attributable principally to
the amortization of intangibles, primarily goodwill, arising from
acquisitions during the 1997 Period, principally Memorex Telex in November,
1996.
Amortization of intangible assets increased by $6.3 million, or 59.4%,
from $10.6 million for the 1996 Period to $16.9 million for the 1997 Period.
This increase was attributable principally to the amortization of intangibles
resulting from the BABSS and Memorex Telex acquisitions.
47
<PAGE>
Employee severance and unutilized lease costs (credit): The Company
recorded charges of $4.3 million and $7.0 million, respectively, in the
second quarter of 1997 and 1996 for estimated future employee severance costs
and unutilized lease/contract losses in connection with specific
acquisitions. See Note 4 to the Unaudited Condensed Consolidated Financial
Statements.
Interest Expense: Interest expense, net of interest income, decreased by
$2.1 million, or 36.2%, from $5.8 million for the 1996 Quarter to $3.7
million for the 1997 Quarter. This decrease was primarily attributable to the
Company's reduced average borrowing rate on long-term indebtedness, which
equaled approximately 9.0% and 6.4%, respectively, for the corresponding
periods. The decrease in the average borrowing rate resulted from the
refinancing of the Company's revolving credit facility in April, 1996. This
interest rate-related decrease, coupled with lower average outstanding
borrowings in the 1997 Quarter resulted in decreased overall interest
expense.
Interest expense, net of interest income, decreased by $0.5 million, or
4.6%, from $11.2 million for the 1996 Period to $10.7 million for the 1997
Period. This decrease was also due primarily to the factors noted above.
Income Taxes: The Company's income tax provisions for the 1997 Quarter and
the 1997 Period reflect an estimated effective income tax rate of
approximately 42%, while the effective income tax rate for the 1996 Quarter
and the 1996 Period was approximately 40%. This increase in the Company's
anticipated effective income tax rate was due primarily to the prior-year
impact of certain non-recurring foreign income tax benefits relating to net
operating loss carryforwards.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues: Revenues increased by $377.2 million, or 231.4%, from $163.0
million for the fiscal year ended June 30, 1995 to $540.2 million for the
fiscal year ended June 30, 1996. The increase is largely a result of
acquisitions, principally the BABSS acquisition in October 1995 which
accounted for approximately $350 million of the increase.
Gross profit: Gross profit increased by $88.4 million, or 178.6%, from
$49.5 million during the fiscal year ended June 30, 1995 to $137.9 million
for the fiscal year ended June 30, 1996. As a percentage of revenues, gross
profit decreased from 30.4% to 25.5%, reflecting the change in mix of
services resulting from the acquisition of BABSS. As a result of that
acquisition, a smaller portion of revenues was derived from proprietary
systems which typically generate higher profit margins than services for
non-proprietary systems.
Selling, general and administrative expenses: Selling, general and
administrative expenses increased by $47.2 million, from $22.0 million for
the fiscal year ended June 30, 1995 to $69.2 million for the fiscal year
ended June 30, 1996, principally as a result of the additional expenses
relating to the revenue growth discussed above. As a percentage of revenues,
selling, general and administrative decreased from 13.5% to 12.8%,
respectively, reflecting economies of scale.
Amortization and write-off of intangibles: Amortization of intangibles
increased by $8.9 million, from $6.8 million for the fiscal year ended June
30, 1995 to $15.7 million for the fiscal year ended June 30, 1996,
principally due to the amortization of intangibles arising from the BABSS
acquisition.
Employee severance and unutilized lease costs (credit): During fiscal
1996, the Company recorded $3.6 million (net of adjustments recording during
the year) in employee severance and unutilized lease costs. These costs were
related principally to future rent obligations and related costs for
facilities of the Company that the Company determined were no longer required
as a result of the acquisition of BABSS.
Interest expense: Interest expense increased by $12.2 million, from $2.5
million for the fiscal year ended June 30, 1995 to $14.7 million for the
fiscal year ended June 30, 1996, principally as a result of the indebtedness
incurred to finance the acquisition of BABSS. See Note 10 of the Notes to the
Company's Consolidated Financial Statements.
Provision for income taxes: The income tax provision for the fiscal year
ended June 30, 1996 was based on an effective tax rate of approximately 40%.
For the fiscal year ended June 30, 1995, the Company
48
<PAGE>
reported an income tax benefit equivalent of approximately 126%, arising
primarily from the recognition of future tax benefits of tax loss
carry-forwards and temporary timing differences. See Note 11 of the Notes to
the Company's Consolidated Financial Statements.
Extraordinary item--early extinguishment of debt: Upon consummation of its
initial public offering in April 1996, the Company was required to pay the
total outstanding principal amount of its $30 million of 10.101% subordinated
debentures due October 20, 2001. This prepayment resulted in the write-off of
unamortized original issue discount of approximately $1.9 million, net of
income tax effect of $1.3 million, related to warrants issued with the
debentures.
FISCAL 1995 COMPARED TO FISCAL 1994
Revenues: Revenues increased by $54.6 million, or 50.4%, from $108.4
million for fiscal 1994 to $163.0 million for fiscal 1995. The increase
principally reflected the benefit throughout the period of the Company's
acquisition of certain assets and liabilities of Servcom in August 1994.
Servcom had a monthly revenue base of approximately $5 million at the time of
the acquisition.
Gross profit: Gross profit increased by $18.1 million, or 57.6%, from
$31.4 million in fiscal 1994 to $49.5 million in fiscal 1995. As a percentage
of revenues, gross profit increased from 29.0% to 30.4%, principally as a
result of increased revenues from service contracts without a proportionate
increase in personnel costs.
Selling, general and administrative: Selling, general and administrative
expenses increased by $5.5 million, from $16.5 million in fiscal 1994 to
$22.0 million in fiscal 1995. The increase is related predominantly to the
Servcom acquisition, which required additional administrative and selling
support for the Servcom customer contracts. As a percentage of revenues,
selling, general and administrative expenses decreased from 15.2% to 13.5%,
due to economies of scale.
Amortization and write-off of intangibles: Amortization of intangibles
increased by $1.4 million, from $5.4 million in fiscal 1994 to $6.8 million
in fiscal 1995. The amortization in fiscal 1994 included a $2.9 million
write-off of intangibles relating to acquisitions in prior years.
Furthermore, amortization of intangibles arising from acquisitions made in
1991 and 1992 ended during fiscal 1994, offsetting, in part, the additional
amortization of intangibles recorded during fiscal 1995 as a result of the
August 1994 acquisition of Servcom.
Employee severance and unutilized lease costs (credit): During fiscal
1994, the Company recorded a benefit of $6.4 million arising from the
settlement of lease obligations for facilities no longer used in the
Company's business, which obligations had previously been accrued in fiscal
1993. During fiscal 1995, there were no comparable lease settlements.
Interest expense: Interest expense decreased $2.3 million, from $4.8
million in fiscal 1994 to $2.5 million in fiscal 1995, due to the
restructuring of indebtedness of the Company in 1994 (see Note 10 of the
Notes to the Company's Consolidated Financial Statements) and a decrease in
the prevailing interest rates on bank loans.
Income taxes: During fiscal 1995, the Company recorded a $23.1 million
income tax benefit related to the expected utilization of tax loss
carryforwards (which is net of a $10 million offsetting charge for potential
limitations on their use) and the future tax benefit of other deductible
temporary differences. As of June 30, 1995, based on its ability to generate
taxable income, the Company recorded the appropriate deferred taxes. See Note
11 of the Notes to the Company's Consolidated Financial Statements. The
effective tax rate in 1994 was approximately 9.2%, which resulted from
application of alternative minimum income tax and state taxes.
Discontinued operations: During fiscal 1995, the Company revised its
estimates of certain accruals created as a result of the disposal of its
computer products division during fiscal 1993. The reversal of certain
accruals resulted in $1.1 million in additional net income in fiscal 1995.
See Note 3 of the Notes to the Company's Consolidated Financial Statements.
49
<PAGE>
LIMITATION ON USE OF NET OPERATING LOSS CARRYFORWARDS AND OTHER TAX CREDITS
As of June 30, 1996, the Company had tax loss carryforwards of
approximately $38.1 million and $15.2 million for Federal and state income
tax purposes, respectively, which are scheduled to expire between 1997 and
2009. The Company also had minimum tax credits of approximately $1.2 million
as of June 30, 1996, with no applicable expiration period. These
carryforwards and credits may be utilized, as applicable, to reduce future
taxable income. The Company's initial public offering resulted in an
"ownership change" pursuant to Section 382 of the Code, which in turn
resulted in the usage, for U.S. federal income tax purposes, of these
carryforwards and credits during any future period being limited to
approximately $20 million per annum. See Note 11 to the Company's
Consolidated Financial Statements for the year ended June 30, 1996. In
addition, the Merger will cause another "ownership change" under Section 382
of the Code, and the Company, therefore, estimates that, for U.S. federal
income tax purposes, the limitation on its use of tax loss carryforwards and
other credits in any post-Merger period will be reduced to approximately $9.0
million per annum. The Company anticipates that fees and expenses incurred in
connection with the Merger will result in additional tax loss carryforwards
arising in fiscal 1998. For financial reporting purposes, the anticipated tax
benefit associated with these carryforwards will be limited due primarily to
the length of the period during which the anticipated tax benefit is expected
to be realized.
LIQUIDITY AND CAPITAL RESOURCES
Post-Merger
Following the Merger, the Company's principal sources of liquidity will be
cash flow from operations and borrowings under the New Credit Facility. The
Company's principal uses of cash will be debt service requirements, capital
expenditures, purchases of repairable parts and acquisitions, and working
capital. The Company expects that ongoing requirements for debt service,
capital expenditures, repairable parts and working capital will be funded
from operating cash flow and borrowing under the New Credit Facility. In
connection with future acquisitions, the Company may require additional
funding which may be provided in the form of additional debt, equity
financing or a combination thereof.
The Company will incur substantial indebtedness in connection with the
Merger and the Merger Financing. On a pro forma basis, after giving effect to
the Merger, the Merger Financing and the application of the proceeds thereof,
the Company would have had approximately $736.9 million of indebtedness
outstanding as of March 31, 1997 as compared to $246.7 million of
indebtedness outstanding as of March 31, 1997. In addition, on the same pro
forma basis, the Company would have a stockholders' deficit of $260.1 million
at March 31, 1997 as compared to a stockholders' equity of $201.1 million as
of March 31, 1997. The Company's significant debt service obligations
following the Merger could, under certain circumstances, have material
consequences to security holders of the Company. See "Risk Factors."
In connection with the Merger, the Issuer expects to raise $85 million
through the issuance of the Units. At the Effective Time, Holdings will
succeed to the obligations of Quaker with respect to the Debentures. In
addition, DecisionOne Corp. expects to issue the Senior Subordinated Notes
for approximately $150 million of gross proceeds, and expects to enter into
the New Credit Facility providing for term loans of $470 million and
revolving loans of up to $105 million. At the Effective Time, DecisionOne
Corp. is expected to borrow all term loans available thereunder and
approximately $8.3 million of revolving loans. The remaining revolving loans
will, subject to a borrowing base, be available to fund the working capital
requirements of DecisionOne Corp. after the Merger. The proceeds of such
financings will, in part, be distributed to Holdings in the form of a
dividend and, in part, as an intercompany note. Each financing is subject to
customary conditions, including the negotiation, execution and delivery of
definitive documentation with respect to such financing.
Immediately prior to the Merger, the DLJMB Funds and certain Institutional
Investors also expect to purchase approximately 9,782,508 shares of Common
Stock and are committed to purchase the DLJMB Warrants (or the Direct Shares)
for approximately $225 million. Upon the effectiveness of the
50
<PAGE>
Merger, the proceeds of such purchase will become an asset of Holdings. The
proceeds of the Debentures, the Senior Subordinated Notes, the initial
borrowings under the New Credit Facility and the DLJMB Equity Investment will
be used to finance the payment of the cash portion of the Merger
Consideration, the Option Cash Proceeds and the Warrant Cash Proceeds, to
refinance outstanding indebtedness of the Company and to pay expenses
incurred in connection with the Merger.
The term loan facility under the New Credit Facility will consist of (i) a
$195 million Term Loan A and (ii) a $275 million Term Loan B. Term Loan A
will mature six years after the closing date and Term Loan B will mature
eight years after the closing date. Commitments under the revolving credit
facility of the New Credit Facility will terminate six years after the
closing date.
Borrowings under the New Credit Facility will bear interest based on a
margin over, at DecisionOne Corp.'s option, the base rate or LIBOR. The
applicable margin will vary based on DecisionOne Corp.'s ratio of
consolidated indebtedness to Adjusted EBITDA. DecisionOne Corp.'s obligations
under the New Credit Facility will be secured by substantially all of the
assets of DecisionOne Corp., including a pledge of the capital stock of all
of its direct material subsidiaries, subject to certain limitations with
respect to foreign subsidiaries. In addition, Holdings will guarantee the
obligations of the DecisionOne Corp. under the New Credit Facility. Such
guarantee will only be recourse to Holdings' pledge of all of the outstanding
capital stock of DecisionOne Corp. to secure the obligations of DecisionOne
Corp. under the New Credit Facility. The New Credit Facility will contain
customary covenants and events of default, including substantial restrictions
on DecisionOne Corp.'s ability to make dividends or other distributions to
Holdings.
The Senior Subordinated Notes will be issued by DecisionOne Corp. and,
upon issuance, will not be guaranteed by Holdings or any of DecisionOne
Corp.'s subsidiaries. The Senior Subordinated Notes will mature in 2007.
Interest on the Senior Subordinated Notes will be payable semi-annually in
cash. The Senior Subordinated Notes will contain customary covenants and
events of default, including covenants that limit the ability of DecisionOne
Corp. and its subsidiaries to incur debt, pay dividends and make certain
investments.
The Debentures will be issued by Quaker, will become obligations of
Holdings following the Merger and will not be guaranteed by DecisionOne Corp.
nor by any of Holdings' consolidated subsidiaries. The Debentures will mature
in 2008. No interest will accrue or be payable on the Debentures until August
1, 2002. Thereafter, interest on the Debentures will be payable semi-annually
in cash. The Debentures will contain customary covenants and events of
default, including covenants that limit the ability of the Issuer and its
subsidiaries to incur debt, pay dividends and make certain investments.
Holdings is a holding company, and its ability to pay interest on the
Debentures is dependent upon the receipt of dividends from its direct and
indirect subsidiaries. Holdings does not have, and may not in the future
have, any assets other than the common stock of DecisionOne Corp. DecisionOne
Corp. and its subsidiaries are parties to the New Credit Facility and the
Senior Subordinated Note Indenture, each of which imposes substantial
restrictions on DecisionOne Corp.'s ability to pay dividends to Holdings.
As of March 31, 1997, the Company had no material commitments for
purchases of repairable parts or for capital expenditures.
The Company has budgeted approximately $10 million in incremental
expenditures for information systems to be incurred in fiscal 1998. The
initiatives to be funded include the following: (i) enhancements to the
Company's service entitlement process which will further ensure that
customers are billed for all work performed; (ii) improvements to the
Company's dispatch system and field engineer data collection and technical
support tools which are designed to increase productivity; (iii) enhancements
to the Company's help desk and central dispatch systems to provide an
integrated support solution to the customer base, and (iv) improvements to
the Company's field inventory tracking system which will facilitate increased
transfer of inventory among field locations and reduce purchases of
repairable parts. There can be no assurance that these amounts will be so
expended by the Company, nor when these amounts will be so expended.
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The Company anticipates that its operating cash flow, together with
borrowings under the New Credit Facility, will be sufficient to meet its
anticipated future operating expenses, capital expenditures and to service
its debt requirements as they become due. However, the Company's ability to
make scheduled payments of principal of, to pay interest on or to refinance
its indebtedness and to satisfy its other debt obligations will depend upon
its future operating performance, which will be affected by general economic,
financial, competitive, legislative, regulatory, business and other factors
beyond its control. See "Risk Factors."
Historical
Financing: Until its initial public offering in April 1996, the Company's
principal sources of capital had been borrowings from banks (primarily to
finance acquisitions), private placements of equity and debt securities with
principal stockholders and cash flow generated by operations. In April 1996,
the Company (i) completed an initial public offering, which raised
approximately $106 million and (ii) refinanced its bank debt, each of which
is more fully discussed below.
The Company has relied on banks as the primary source of funds required
for larger acquisitions, such as the August 1994 acquisition of certain
assets and liabilities of Servcom and the October 1995 acquisition of BABSS.
Since July 1993, the Company's smaller acquisitions have been funded
primarily through a combination of seller financing, cash and the assumption
of liabilities under acquired prepaid service contracts.
In April 1996, the Company completed an initial public offering raising
$106 million through the issuance of 6.3 million shares of common stock. The
Company used the proceeds to repay approximately $70 million of its then
existing term loan (the "1995 Term Loan") and the Affiliate Notes. Concurrent
with the initial public offering, the Company's Preferred Stock (Series A, B
and C) was converted into common stock in accordance with the terms thereof.
In April 1996, the Company converted the 1995 Term Loan and an existing
$30 million revolving credit facility into a $225 million variable rate,
unsecured revolving credit facility (the "1996 Revolving Credit Facility").
During November 1996, in connection with the acquisition of certain assets of
the U.S. computer service business of Memorex Telex, the Company's lender
approved a $75 million increase to the 1996 Revolving Credit Facility,
raising the total loan commitment to $300 million. See Note 3 to the
unaudited Condensed Consolidated Financial Statements.
The 1996 Revolving Credit Facility provides for revolving borrowings up to
$300 million. The commitments thereunder terminate on April 26, 2001. The
interest rate applicable to the 1996 Revolving Credit Facility varies, at the
Company's option, based upon LIBOR (plus an applicable margin not to exceed
1%) or the prime rate. The Company has entered into interest rate swap
agreements resulting in fixed Euro dollar interest rates of 5.4% on $40.0
million through December 1997 and 5.5% on another $40.0 million through
December 1998. See Notes 2 and 10 to the Company's audited Consolidated
Financial Statements. Although it may be exposed to losses in the event of
nonperformance by counterparties to such swap agreements, the Company does
not expect such losses, if any, to be material. As of March 31, 1997, the
interest rate applicable to loans under the 1996 Revolving Credit Facility
was LIBOR plus .75%, or an effective rate of approximately 6.5%, and
available borrowings under the 1996 Revolving Credit Facility were $55.5
million.
Borrowings incurred under the 1996 Revolving Credit Facility in the 1997
Quarter and the 1997 Period were approximately $2.6 million and $52.9
million, respectively. Borrowings incurred during the 1997 Period included
substantially all of the funding required with respect to the Memorex Telex
acquisition.
The borrower under the 1996 Revolving Credit Facility is DecisionOne Corp.
The obligations of DecisionOne Corp. thereunder are guaranteed by Holdings
and certain of its subsidiaries, except for its Canadian subsidiary. In
connection with the Merger, the Merger Financing and the application of the
proceeds thereof, all indebtedness outstanding under the 1996 Revolving
Credit Facility will be repaid.
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Cash Flow and Leverage: Cash flow from operating activities for the 1997
Quarter was approximately $36.7 million. These funds, together with
borrowings under the 1996 Revolving Credit Facility, provided the required
capital to fund capital expenditures of approximately $31.0 million, as well
as the acquisition of assets from complementary businesses for approximately
$3.5 million. Cash flow from operating activities for the 1997 Period was
approximately $57.7 million. These funds, together with borrowings under the
1996 Revolving Credit Facility, provided the capital required to fund capital
expenditures of approximately $70.9 million, as well as the acquisition of
assets from complementary businesses for approximately $34.4 million.
Reducing cash flow from operating activities for the 1997 Quarter and the
1997 Period was a $1.8 million payment to the Internal Revenue Service in
full satisfaction of certain interest liabilities related to prior tax
periods. See Note 9 to the Company's audited consolidated financial
statements for the fiscal year ended June 30, 1996. The Company had
adequately accrued for this liability prior to payment, and no further
amounts are due with regard to these matters.
In fiscal years 1996, 1995, and 1994, the Company generated net cash flow
from operating activities of $51.9 million, $38.4 million, and $28.7 million,
respectively. Cash required to fund the purchase of repairable parts and for
capital expenditures totaled $70.8 million, $14.9 million and $2.2 million,
during fiscal 1996, 1995 and 1994, respectively.
The majority of the Company's capital expenditures have historically
consisted of purchases of repairable parts needed to meet the service
requirements of customers under computer maintenance contracts. These
repairable parts are generally purchased from OEMs and other third parties.
The Company expended $86.4 million for the purchase of repairable parts in
fiscal 1997 including purchases relating to the Company's Compaq "End of
Life" Program. As of March 31, 1997, the Company had no material commitments
for purchases of repairable parts or for capital expenditures other than
those in the ordinary course of business.
The Company maintains a significant inventory of expendable and repairable
parts. Expendable parts are expensed as they are used in the operations of
the business. Repairable parts are recorded at cost at the time of their
acquisition and amortized over five years. The Company maintains a high level
of inventories due to the wide range of products serviced, ranging from
mainframe to personal computers.
The Company provides for obsolescence when accounting for expendable
inventories and reviews obsolescence as it applies to its repairable parts.
The Company believes it has provided adequate reserves for obsolescence for
expendable inventories. The Company believes that accumulated amortization on
repairable parts renders the need for an obsolescence reserve with respect to
repairable parts unnecessary.
The most significant of the Company's acquisitions during the 1997 Period
was the Memorex Telex acquisition on November 15, 1996. The base purchase
price was $50.4 million, comprised of the Company's assumption of $26.0
million of liabilities under acquired customer maintenance contracts, and
$24.4 million in cash after taking into account certain purchase price
adjustments.
The balance sheet reflects working capital (deficiency) as of March 31,
1997 of $10.1 million, and as of June 30, 1996, 1995, and 1994, of $12.9
million, ($51.8) million and ($34.0) million, respectively, which deficits
for 1995 and 1994 were primarily attributable to the use of short-term
liabilities to fund the purchase of long-term assets.
The allowance for uncollectible accounts at March 31, 1997 and 1996
amounted to 7.9% and 9.4% of trade receivables, respectively. The allowance
for uncollectible accounts at June 30, 1996 and 1995 amounted to 9.4% and
19.2% of trade receivables, respectively, because of the Company's write-off
experience with respect to accounts receivable obtained by acquisition and
the potential offset against an OEM's trade receivable in respect of
unreturned, unused and replaced parts.
The Company, or certain businesses as to which it is alleged that the
Company is a successor, have been identified as potentially responsible
parties in respect of three waste disposal sites that have been identified by
the U.S. Environmental Protection Agency as Superfund sites. In addition, the
Company received a notice several years ago that it may be a potentially
responsible party in respect of a fourth,
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related site, but has not received any other communication in respect of that
site. The Company has estimated that its share of the costs of the clean-up
of one of the sites will be approximately $500,000, which has been provided
for in liabilities related to the discontinued products division in the
Company's financial statements. Complete information as to the scope of
required 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 share, if any, of 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 of
the Notes to the Company's Consolidated Financial Statements. See "Risk
Factors--Potential Environmental Liabilities."
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.
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BUSINESS
OVERVIEW
The Company is the largest independent provider of multivendor computer
maintenance and technology support services in the United States, based on
Dataquest estimates for calendar year 1996. 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 it is the most
comprehensive independent (i.e., not affiliated with an OEM) provider of
these services across a broad range of computing environments, including
mainframes, midrange and distributed systems, workgroups, PCs and related
peripherals. The Company provides support for over 15,000 hardware products
manufactured by more than 1,000 OEMs. The Company also supports most major
operating systems and over 150 shrink-wrapped software applications. The
Company delivers its services through an extensive field service organization
of approximately 4,000 field technicians in over 150 service locations
throughout the United States and Canada and strategic alliances in selected
international markets.
DecisionOne has emerged as the leading independent, multivendor provider
of computer maintenance and technology support services by (i) consummating
over 35 complementary acquisitions since the beginning of fiscal 1993, (ii)
expanding maintenance capabilities and introducing new technology support
services, (iii) increasing sales to existing customers by increasing
equipment under contract and by selling existing customers new technology
support services, (iv) adding new corporate customers and (v) providing
outsourcing services for OEMs, software publishers, system integrators and
other independent service organizations. As a result, the Company's revenues
have grown at a compound annual rate of 69.2% to approximately $820.4 million
for the annualized quarter ended March 31, 1997 from $114.1 million in fiscal
1993. Over the same period, the Company's Adjusted EBITDA has grown at a
74.2% compound annual rate to approximately $120.3 million for the annualized
quarter ended March 31, 1997 from $15.0 million in fiscal 1993.
In 1996, based on Dataquest projections, the Company estimates it had a 9%
market share of the $8.8 billion independent, multivendor segment of the
$40.5 billion U.S. hardware maintenance and technology support services
market. The independent, multivendor segment is projected by Dataquest to
grow at a 14% compound annual rate from $8.8 billion in 1996 to $14.8 billion
in 2000. The Company believes this growth is being driven by the
proliferation of computer equipment as well as outsourcing trends, including:
(i) the outsourcing by corporate customers of hardware maintenance and
technical support requirements and (ii) the outsourcing by major hardware
OEMs and software publishers of maintenance services (including warranty and
post-warranty services) and end-user technical support requirements. In
addition, the Company believes that demand for its services is being driven
by the increasing complexity of computing environments which has resulted
from the migration of computer systems from single OEM, centralized systems
to multivendor, decentralized systems. The Company believes that this
increased complexity has generally surpassed the technical capabilities of
many in-house support staffs and has accelerated the pace of outsourcing. The
Company believes that customers are increasingly turning to independent
service providers when outsourcing due to the increased use of multiple
vendors for hardware and the perception that OEM service providers are biased
toward specifying their own equipment as computer purchase requirements
arise. Furthermore, many OEMs such as Sun and Compaq are outsourcing certain
non-core customer service activities, including maintenance services
(including warranty and post-warranty services) and product support services
(such as end-user help desk services) to independent service organizations
such as the Company.
COMPETITIVE STRENGTHS
The Company believes that it possesses a number of competitive strengths
that have allowed it to become the leading independent provider of
multivendor computer maintenance and technology support services, including:
EXTENSIVE SERVICE INFRASTRUCTURE. The Company provides customers with
high quality service through an extensive infrastructure including: (i)
approximately 4,000 highly trained field technicians, (ii)
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over 150 geographic locations throughout the United States and Canada, (iii)
a substantial spare parts inventory to ensure supply and rapid response
times, (iv) a broad service offering which enhances the Company's ability to
provide customers with a single source solution, (v) an extensive proprietary
database of historical failure rates for over 15,000 hardware products
manufactured by over 1,000 OEMs, (vi) a detailed record of major customers'
hardware and software assets and a record of such customers' maintenance
patterns and (vii) proprietary dispatch systems to ensure rapid customer
response times.
INDEPENDENT, MULTIVENDOR SERVICE PROVIDER. The Company provides customers
with an independent, multivendor solution for their computer maintenance and
technology support needs. As an independent service provider, the Company
believes it is viewed by customers as impartial to any particular OEM's
products. As a multivendor service provider, the Company supports over 15,000
hardware products manufactured by more than 1,000 OEMs as well as most major
operating systems and over 150 shrink-wrapped software applications. OEM,
specialty and local service providers do not offer either the breadth of
services or the geographic presence throughout the United States and Canada
provided by the Company.
CONTRACT-BASED REVENUES. Approximately 85% of the Company's revenues in
fiscal 1996 were derived from contracts, under which equipment and services
may be added and deleted. Furthermore, the Company believes that its
extensive service infrastructure and its unique knowledge of its customers'
hardware and software service requirements enhance the Company's ability to
provide superior service. The Company believes that the resulting track
record of service to existing customers affords it a competitive advantage in
renewing existing contracts and winning new contracts. Although many of the
Company's existing customer contracts are currently terminable on short
notice, 49 out of the Company's top 50 customers in fiscal 1994 are still
customers today.
DIVERSIFIED AND STABLE FORTUNE 1000 CUSTOMER BASE. The Company services
over 51,000 customers at over 182,000 sites across the United States and
Canada. In fiscal 1996, the Company's top 10 customers represented 23% of
revenues and the top 100 customers represented 47% of revenues. The Company's
customers include a diverse group of national and multinational corporations,
including SABRE Group, Inc. (an affiliate of American Airlines, Inc.), Sun,
Compaq, NationsBank, DuPont, Chevron Corporation and Netscape. The Company
believes that the scope of its service offerings and the breadth of its
geographic presence in the United States and Canada allow it to serve this
diverse group of national and multinational customers as well as thousands of
smaller customers who also require customized services.
MITIGATED TECHNOLOGY AND RECESSION RISKS. The Company provides services
across a broad range of computing environments, including mainframes,
midrange and distributed systems, workgroups, PCs and related peripherals.
Consequently, although each segment of the computer hardware and software
industry is subject to shifts in technology, the Company believes that the
diversity of computing environments for which it provides services mitigates
the potential adverse effects of technological changes in any one segment.
Furthermore, the Company believes that because computer maintenance
requirements are based primarily on usage, the Company's hardware maintenance
business may be insulated from the adverse effects of declines in spending
during recessionary periods, so long as computer usage continues to
necessitate maintenance spending.
BUSINESS STRATEGY
DecisionOne has developed a business strategy which it believes will
enable it to profitably grow future revenue and cash flow and which includes
the following elements:
PROVIDE A SINGLE SOURCE TECHNOLOGY SUPPORT SOLUTION. The Company intends
to continue its strategy of offering its customers a broad and expanding
range of computer technology support services in a single interface format.
The Company believes it meets the customer's preference for a single
interface by offering maintenance and technology support services across most
leading brands of hardware and software within virtually all computing
environments. In addition, the Company's single source solution enables the
Company to retain customers when customers change, substitute or upgrade
their computing environments.
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OFFER ADDITIONAL SERVICES TO EXISTING CUSTOMERS. The Company generates new
revenues from existing customers by adding new equipment to existing hardware
maintenance contracts and by providing existing customers with additional
support services. Recent revenue growth attributable to the expansion of
additional support services has been derived primarily from (i) end-user
support services such as help desk services, (ii) network support services
such as LAN administration, security management and fault management, (iii)
logistics services such as parts repair, inventory and asset management, and
warranty parts management and (iv) program management services such as
technology deployment and computer and software moves, adds and changes. The
Company believes that the breadth of its additional support services has
permitted, and will continue to permit, the Company to leverage its historic
strength in hardware maintenance to increase revenues from existing customers
and has enabled the Company to grow sales to its top 50 customers in fiscal
1994 by 33.3% through fiscal 1996.
LEVERAGE EXISTING SERVICE INFRASTRUCTURE. The Company believes that, due
to the large scale of the Company's service infrastructure, the Company
enjoys substantial operating leverage and has positioned itself to increase
productivity and profitability whether the Company grows internally or
through acquisitions. The principal areas in which the Company expects to
realize the benefits of operating leverage include: (i) increased customer
call density in a region permitting field service technicians in the region
to complete a greater number of service calls per day, (ii) increased
comparable equipment density allowing the Company to operate with
proportionally lower inventory of spare parts and (iii) productivity gains
driven by new services such as end-user support services which reduce
unnecessary trips by field technicians to existing customers and by the
addition of new equipment under existing maintenance contracts. The Company
intends to further improve the productivity of its existing infrastructure by
investing in upgrades of its management information systems.
PURSUE COMPLEMENTARY ACQUISITIONS. The Company believes it is well
positioned strategically to participate in the further consolidation of the
computer maintenance and technology support services market and expects to
continue to evaluate complementary acquisitions. Further, the Company
believes that pursuing complementary acquisitions is an attractive growth
strategy due to the significant synergies which the Company may achieve when
it successfully consolidates acquisitions into its service infrastructure.
Since the beginning of fiscal 1993, the Company has completed over 35
acquisitions. The Company's typical acquisition consists principally of
customer maintenance and support contracts as well as the accompanying spare
parts inventory. The Company generally reduces the cost structure necessary
to service the acquired customer contracts by leveraging DecisionOne's
extensive service infrastructure, spare parts inventory and administrative
function. For example, the Company was able to service the contracts acquired
from Memorex Telex in November 1996 with approximately 36% fewer employees
than previously required by Memorex Telex. In addition, the Company seeks to
increase sales and profitability by offering acquired customers additional
services.
CAPITALIZE ON OUTSOURCING TREND AMONG OEMS, SOFTWARE PUBLISHERS AND
SYSTEMS INTEGRATORS. The Company expands its marketing reach by offering its
services through outsourcing arrangements and indirect channels. For fast
growing hardware OEMs and software publishers concerned with cost savings and
time-to-market issues such as Sun, Netscape and Compaq, the Company provides
outsourced customer support services such as help desk services, warranty and
post-warranty maintenance services, and technical product support services.
For systems integrators, the Company provides maintenance and technology
support services on a subcontract basis to several large outsourcing clients
of EDS and Computer Sciences Corp.
INDUSTRY BACKGROUND
The United States market for computer hardware maintenance and technology
support services is large and growing. According to Dataquest projections,
the hardware maintenance and technology support services market was
approximately $40.5 billion in 1996 and is projected to grow at a compound
annual rate of 5.6% to $50.3 billion by the year 2000. Within the market
surveyed by Dataquest, Dataquest estimates that the independent, multivendor
segment was approximately $8.8 billion in 1996 and projects the segment to
grow at a 14% compound annual rate to $14.8 billion by the year 2000.
According to Dataquest, independent, multivendor service providers such as
the Company are taking market share
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from the OEM service providers faster than OEMs are contracting new business.
The Company believes that this is occurring for several reasons including:
(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 71% of 1996 revenues, with technology
support services, including software support, network support and end-user
training, comprising the remaining 29% of 1996 revenues.
The independent, multivendor segment is also fragmented and consolidating.
According to Dataquest, the top 10 participants accounted for less than 50%
of the market in 1995. Participants in the independent multivendor segment
include: (i) several large 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 provides a comprehensive range of core technology support
services to customers across a broad range of computing environments,
including mainframes, midrange and distributed systems, workgroups, PCs and
related peripherals. The Company customizes its service offerings to the
individual customer's needs in response to the nature of the customer's
requirements, the term of the contract and the combination of services that
are provided. Services are bundled to match the support requirements of
customers and include hardware support, end-user and software support,
network support, management information services, program management,
planning support and ancillary support services.
Hardware Support
Hardware support services consist of remedial and preventive maintenance
for computers and computer peripheral devices. The Company supports over
15,000 different hardware products manufactured by more than 1,000 OEMs. The
Company's customer support centers ("CSCs") handle over 330,000 calls per
month regarding hardware support. The Company maintains and manages an
inventory of over 3.5 million parts representing more than 300,000 part
numbers. The Company also has access to a network of computer equipment
vendors, brokers and highly skilled repair suppliers, as well as access to
certain IBM Designated Parts Sales Locations.
In addition to its on-site diagnostic tools, the Company uses industry and
proprietary software diagnostic capabilities to monitor system performance on
a remote basis. Also, large customers are provided remote, on-line access to
certain of the Company's systems to log service requests and track service
delivery.
The Company prices its products and services on either a fixed fee or per
incident basis. Pricing is based on various factors including equipment
failure rates, cost of repairable parts and labor expenses.
End-User and Software Support
The Company's CSCs handle over 90,000 calls per month for help desk and
software support. Levels of support range from basic and network support for
corporate end-users to advanced operating system support for systems
administrators. Customized support also is available for vertical market
applications and OEM accounts. Operational services are available seven days
per week, twenty-four hours a day.
The Company currently provides support for PC/workstation operating
systems such as Windows(Registered Trademark) 95, Windows(Registered
Trademark), MS-DOS(Registered Trademark), and Sun Microsystems'
Solaris(Registered Trademark), as well as support on network operating
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systems such as Novell Netware(Registered Trademark) and Windows(Registered
Trademark) NT. Groupware products like Lotus Notes and Internet browsers such
as Netscape also are fully supported. Additionally, over 100 PC software
products ranging from spreadsheets and word processing to communications and
graphics are supported, as are numerous on-line services.
The Company is a Microsoft Authorized Support Center, providing help desk
support for a broad range of Microsoft business software applications and
operating systems. Technical support is delivered through the Company's
network of CSCs and ranges from basic end-user software support to second
level professional support, and work in conjunction with Microsoft desktop
applications and operating systems, like Microsoft Windows(Registered
Trademark) 95 and Windows(Registered Trademark) NT.
Network Support
The Company provides support services for networked computing
environments, including management, administration, and operations support
for both local area networks and wide area networks ("WANs"). Network support
services are designed to reduce the cost of ownership of networked computing,
improve productivity of network users, and supplement customers' internal
support staffs. The Company's remote network management services provide
monitoring of fault and performance data in customers' networks and problem
resolution from the Company's network management center. The Company also
provides on-site network services to assist customers with network
administration, operations, and remedial support. Network specialists may be
resident at the customer site or dispatched as necessary.
Logistics Services
The Company also repairs and refurbishes computer parts and assemblies at
seven depot repair centers in the United States. In addition to supporting
its own business, these services are provided primarily for OEMs,
distributors and other third-party maintenance companies. Subassemblies
repaired include system logic boards, hard disk drive assemblies,
peripherals, power supplies and related equipment. The Company's depot repair
facilities located in Malvern, Pennsylvania; Boston, Massachusetts;
Milwaukee, Wisconsin; and San Francisco, California are certified to ISO-9002
standards.
The Company also provides logistics services, including the planning and
forecasting of parts requirements and parts sourcing, inventory and warranty
management, for Compaq and other manufacturers. Under terms of the Compaq
logistics service contract, the Company handles orders from customers,
dealers and distributors in North America for parts that are no longer
produced by Compaq. The parts are used to repair Compaq desktops, laptops and
servers and include such components as flat panels (LCDs), motherboards,
monitors, power supplies and related parts. In addition to repair and
replacement work, the Company manages the program's logistics requirements
and parts warranty reimbursement activities.
Program Management
The Company provides ongoing management services for companies that wish
to outsource all or a portion of their services management requirements.
Typical services include third-party vendor management, on-site personnel
support and program evaluation, as well as a variety of support capabilities
required to prepare a system for operation and improve its efficiency. These
support capabilities include support for system installation,
de-installation, moves, upgrades, reconfigurations, system configuration
audits, inventory tracking services and data restoration assistance.
Planning Support
The Company assists customers in defining their enterprise service
requirements, establishing service delivery benchmarks, recommending process
improvements and auditing the results of implemented programs over time. The
objective of these consulting services is to assist customers in reducing the
total cost of ownership and improving operating efficiency in their service
environments.
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Information Services
The Company makes service improvement recommendations to customers based
on information accumulated from its hardware, network and end-user support
services. Management information services allow customers to make informed
decisions relating to hardware and software procurements as well as the need
for increased employee training. The Company believes these services
differentiate it from OEMs and software developers that may favor their own
products.
The Company's AssetOne(Trademark) service tracks customers' desktop assets
and provides information on hardware configuration, software utilization,
warranty status, equipment location and user profiles. This information can
then be used to improve the way customers' assets are deployed, serviced, and
used in order to reduce costs and increase end-user productivity.
Support Partner Programs
The Company maintains strategic alliances with several significant
companies in order to provide customers with comprehensive technology support
solutions. The Company does not receive revenues for services provided by its
strategic partners. Key relationships include: General Electric Computer
Leasing Corp., which provides computer acquisition, disposition and financing
services; SunGard Recovery Services Inc., which provides disaster recovery
services; and MicroAge, Inc., which supplies hardware products such as
personal computers, peripherals, network products and related devices.
SALES AND MARKETING
The Company's core product capabilities are bundled to match the support
requirements of customers. Individual service portfolios exist for data
center, mid-range and desktop environments. In addition, a product portfolio
exists for OEMs who seek support for parts sourcing and repair, inventory
management and related logistics services.
The Company sells its services through both direct and indirect sales
channels. The Company's direct sales force consists of approximately 275
sales professionals who are organized into a general commercial sales group
as well as into several dedicated groups including: a Federal Group, which
sells to the Federal Government; a National Accounts Group, which focuses on
large and multinational corporate customers; and a Telesales Group, which
focuses on small accounts.
The Company also sells its services through its indirect sales force
comprised of approximately 25 sales professionals. Product support
relationships exist with OEMs such as Sequent Computer Corporation, EMC(2)
Corporation ("EMC"), Sun and Compaq, and software developers such as
Netscape, Novell, Inc., Microsoft Corporation and SunSoft, Inc.
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 FBA Computer
Technology Services ("FBA"). The Company licenses many of its proprietary
multivendor support tools to FBA and to ICL Sorbus Ltd. ("ICL Sorbus"), which
is ICL's multivendor services group in Western Europe. As a result, the
Company is able to offer 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, the ICL Sorbus companies provide multivendor services in 17 countries
with approximately 250 service locations and about 5,000 employees. Several
of the Company's major customers, including SABRE Group, Inc. and DuPont
benefit from the agreement between the Company and ICL Sorbus, whereby ICL
Sorbus agrees to provide services at the European locations of the Company's
multinational customers. Through ICL Sorbus, 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.
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<PAGE>
FBA, an affiliate of Fujitsu Ltd., provides multivendor services in
Australia and New Zealand from 21 locations with 150 employees. In addition
to providing technical support to FBA, the Company has supplied various
management and sales support personnel to FBA. FBA also provides services to
certain of the Company's multinational customers, including Sun.
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; Bloomington,
Minnesota; and Tulsa, Oklahoma. Customers can reach the CSCs by calling one
toll-free telephone number. The CSCs currently are staffed with over 575 CSRs
and 29 staff/operations managers. There is a duty manager on call in each
center at all times. CSCs are available on a 24 hour, 7 day per week basis.
Redundancy for disaster recovery purposes is designed into the CSC system
through the three locations' use of automatic telecommunications switching.
Inventory Logistics. In order to meet customer computer repair
requirements, the Company maintains a tiered approach to inventory
management. 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 Dallas, Texas. The Company also maintains six
regional distribution centers in Atlanta, Georgia; Newark, New Jersey; Los
Angeles, California; San Francisco, California; Chicago, Illinois; and
Wilmington, Ohio for critical parts needed more frequently throughout the
United States. 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 inventory and repairable parts assigned to its field workforce and
located at seven distribution centers, field offices or at customer sites.
Parts information processed through FIS is integrated with the Company's
other key systems, including DDG and International Support Information System
("ISIS").
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 the 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 its requirements are being met.
The Company's proprietary service technologies include ISIS, SERVICE EDGE
and MAXwatch(Trademark). The Company licenses certain of these technologies
and provides other technical support to certain foreign multivendor service
providers, including ICL Sorbus in Europe, FBA in Australia and New Zealand,
and PT Metrodata Electronics in Indonesia.
International Support Information Systems. ISIS is a database accessible
to the Company's customer service engineers that is comprised of diagnostic
and symptom fix data for thousands of products, service updates, and service
planning information, such as machine performance and parts usage
information,
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<PAGE>
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 PC-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.
MAXwatch(Trademark). MAXwatch(Trademark) is an on-site program for
products of Digital Equipment Corporation ("Digital") 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, AssetOne(Trademark), ISIS, SERVICE EDGE and
MAXwatch(Trademark) 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 engineers 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 a broad exposure to various computer system
technologies.
The Company's training facilities include 26 classrooms, 23,000 square
feet of hands-on lab space, 26 full-time instructors and video specialists
and a curriculum of over 80 courses. The Company has five training centers
and labs located in Frazer, Pennsylvania; Malvern, Pennsylvania; Bloomington,
Minnesota; Milwaukee, Wisconsin; and Phoenix, Arizona. Six months following
course work, the Company surveys the engineers to gauge the effectiveness and
applicability of its training curriculum.
CUSTOMERS
The Company services over 51,000 customers at over 182,000 sites across
the United States and Canada. The Company sells services to five types of
customers: large businesses that have complex computing support needs and
typically maintain a data center, distributed computing and work group
environments; medium-sized businesses that rely primarily on distributed
systems for their computing needs; small businesses that principally use LANs
and WANs for computing; individuals who use stand-alone computing systems;
and OEMs and software developers that contract with the Company for warranty
services, logistic support services or help desk support. A significant
portion 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,
workgroups and PCs. The remainder of the 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 and its
affiliate Technology Service Solutions, Digital, and Wang Laboratories, Inc.,
the multivendor service divisions of certain other OEMs, other national
independent service organizations that are not affiliated with OEMs such as
Vanstar Corporation, Entex Corporation and Stream International, 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
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<PAGE>
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--Competition; Competitive Advantages of OEMs."
FACILITIES
The Company leases certain office and warehouse facilities under operating
leases and subleases that expire at various dates through November 30, 2005.
The Company's executive offices are located at the Frazer, Pennsylvania
facilities listed below. The principal facilities currently leased or
subleased by the Company are as follows:
<TABLE>
<CAPTION>
SQUARE
LOCATION FOOTAGE LEASE EXPIRATION
- ------------------------------------------ --------- ----------------
<S> <C> <C>
Frazer, Pennsylvania (Office) ............. 109,800 November 2005
Frazer, Pennsylvania (Office) ............. 35,968 April 2003
Malvern, Pennsylvania (Depot/Call Center) 200,000 May 2000
Horsham, Pennsylvania (Warehouse) ........ 100,000 December 1999
Bloomington, Minnesota (Call Center) ...... 66,000 March 1998
Hayward, California (Depot) ............... 91,000 September 1999
Northborough, Massachusetts (Depot) ...... 52,778 July 1998
Wilmington, Ohio (Warehouse)............... 83,000 January 2001
Grove City, Ohio (Depot)................... 118,500 January 2002
</TABLE>
In addition, the Company owns two facilities located in Tulsa, Oklahoma
(multi-purpose) and the suburbs of Milwaukee, Wisconsin (logistics services).
The Company's management believes that its current facilities will be
adequate to meet its projected growth for the foreseeable future.
The Company's principal executive offices are located at 50 East
Swedesford Road, Frazer, Pennsylvania 19355, and the Company's telephone
number is (610) 296-6000.
EMPLOYEES
As of June 30, 1997, the Company had approximately 6,500 full-time and 60
part-time employees. None of the Company's employees is currently covered by
collective bargaining agreements. Management considers employee relations to
be good.
LEGAL PROCEEDINGS
The Company is a party, from time to time, to lawsuits arising in the
ordinary course of business. The Company believes it is not currently a party
to any material legal proceedings. However, within the past several years,
several OEMs have been involved in litigation with independent service
organizations, including the Company, in which such OEMs have claimed
infringement of software copyrights held by the OEMs. The Company currently
is not involved in any such litigation. See "Risk Factors--Copyright Issues."
The Company, or certain businesses as to which it is alleged that the
Company is a successor, have been identified as potentially responsible
parties in respect of three waste disposal sites that have been identified by
the 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; and (iii) Revere Chemical Site, Nockamixon,
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 has estimated that its share of the costs of the clean-up
of one of the sites will be approximately $500,000, which has been provided
for in liabilities
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<PAGE>
related to the discontinued products division in the accompanying
consolidated balance sheets as of June 30, 1996, 1995 and 1994. 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 share, if any, of
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 16 of the Notes to the Company's Consolidated Financial Statements.
REGULATION
Under the National Industrial Security Operating Manual, companies with
contracts or subcontracts with the U.S. government that involve access to
classified information must, if they will come under foreign ownership,
control or influence ("FOCI"), notify the U.S. Department of Defense. If they
wish to retain their security clearances such companies must propose a plan
of action to mitigate or negate the FOCI. DecisionOne Corp. currently
requires security clearances in order to perform services under certain
classified contracts. As a result, on May 13, 1997, the Company notified the
Defense Department of the proposed Merger, and on June 27, 1997, it submitted
to the Defense Department its plan to mitigate or negate FOCI through use of
a Special Security Agreement. Among other things, DecisionOne Corp. has
proposed to mitigate the FOCI by the addition of two independent directors to
the board of directors of DecisionOne Corp. There is no deadline by which the
Department of Defense must approve a plan. If no plan has been approved by
the date of the Merger, the status of existing contracts will be subject to
case-by-case review and DecisionOne Corp. will be unable to bid on new
classified government work until and unless such an approval is forthcoming.
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<PAGE>
MANAGEMENT
The following table sets forth certain information concerning the current
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------- ----- -------------------------------------------------
<S> <C> <C>
Kenneth Draeger ....... 56 Chairman and Chief Executive Officer and Director
Stephen J. Felice .... 40 President
Thomas J. Fitzpatrick 39 Vice President and Chief Financial Officer
Joseph S. Giordano ... 42 Senior Vice President--Operations
James J. Greenwell ... 38 Senior Vice President--Sales & Marketing
Thomas M. Molchan .... 42 General Counsel and Corporate Secretary
Dwight T. Wilson ...... 41 Vice President--Human Resources
Bruce K. Anderson .... 57 Director
Michael C. Brooks .... 52 Director
Thomas E. McInerney ... 55 Director
Arthur F. Weinbach .... 54 Director
</TABLE>
Kenneth Draeger has been the Chief Executive Officer and a Director of the
Company since July 1992 and Chairman of the Company since November 1995. From
1988 to 1991, Mr. Draeger was President of Agfa/Compugraphic, a manufacturer
of electronic pre-press equipment. Mr. Draeger is also a director of Galileo
Corporation.
Stephen J. Felice has been the President of the Company since October
1995. Mr. Felice joined BABSS in March 1987. He served as Vice President and
General Manager, Sales and Operations from January 1991 to October 1995 and
was responsible for all service delivery, sales activity, customer
management, and marketing channels with management responsibility over almost
3,000 employees.
Thomas J. Fitzpatrick has been the Vice President and Chief Financial
Officer of the Company since August 1996. 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 BABSS,
including over four years as Vice President and Chief Financial Officer.
Joseph S. Giordano has been Senior Vice President--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.
James J. Greenwell has been Senior Vice President--Sales & Marketing of
the Company since October 1995, and was Vice President Sales and Marketing of
the Company from 1993 to October 1995. From January 1992 to 1993, Mr.
Greenwell was Director of Operations of the Company's Qantel operation. Prior
to January 1992, he was Vice President, Sales and Marketing of Qantel
Corporation.
Thomas M. Molchan has been General Counsel and Corporate Secretary of the
Company since October 1995. From December 1986 to October 1995, he was Vice
President and General Counsel of BABSS.
Dwight T. Wilson has been Vice President--Human Resources of the Company
since October 1995. 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.
Bruce K. Anderson has been a Director of the Company since 1988. Mr.
Anderson has been a General Partner of certain Welsh affiliated partnerships
since 1979. Mr. Anderson is also a director of SEER Technologies and Broadway
& Seymour.
Michael C. Brooks has been a Director of the Company since 1988. Mr.
Brooks has been a General Partner of J.H. Whitney since January 1985 and
currently serves as Managing Partner. Mr. Brooks is also a director of
SunGard Data Systems, Inc. and Nitinol Medical Technologies, Inc.
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<PAGE>
Thomas E. McInerney has been a Director of the Company since 1988. From
1994 to 1995, Mr. McInerney served as Chairman of the Company. Mr. McInerney
has been a General Partner of certain Welsh Carson affiliated partnerships
since 1991. Mr. McInerney is also a director of Bisys Group, Inc. and Aurora
Electronics, Inc.
Arthur F. Weinbach has been a Director of the Company since 1996. Mr.
Weinbach is President and Chief Executive Officer and a Director of Automatic
Data Processing, Inc. ("ADP"). Since 1981, he has served in various executive
and managerial positions with ADP, including over nine years as Chief
Financial Officer and six years as a member of ADP's Board of Directors.
Prior to joining ADP, Mr. Weinbach was a Partner with Touche Ross & Co., a
predecessor of Deloitte & Touche LLP. Mr. Weinbach is also a director of
Health Plan Services Inc.
The following table sets forth the name, age and position with Holdings of
each person who is expected to serve as a director of Holdings following the
Effective Time.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ ----- -------------------------------------------------
<S> <C> <C>
Kenneth Draeger ......... 56 Chairman and Chief Executive Officer and Director
Peter T. Grauer ......... 51 Director
Lawrence M.v.D. Schloss 42 Director
Tom G. Greig ............ 49 Director
Kirk B. Wortman ......... 35 Director
</TABLE>
In addition, it is expected that two additional directors, not affiliated
with DLJMB or Holdings, will be appointed at the Effective Time.
Peter T. Grauer has been 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 thereto, Mr. Grauer was a Senior Vice President of
Donaldson, Lufkin & Jenrette Securities Corporation. Mr. Grauer is a director
of Doane Products Co., SDW Holdings, Inc. and Total Renal Care, Inc.
(NYSE:(TRL)).
Lawrence M.v.D. Schloss has been the Managing Partner of DLJ Merchant
Banking II, Inc. since November 1995. Prior to November 1995, he was Managing
Director of DLJ Merchant Banking, Inc. Mr. Schloss currently serves as
Chairman of the Board of McCulloch Corporation and as a director of Wilson,
Greatbatch, Inc. Mr. Schloss has previously served as a director of GTECH
Corporation (NYSE:GTK), Krueger International, Inc., OSi Specialties, Inc.
and MPB Corporation.
Tom G. Greig is a Managing Director in the Investment Banking Division of
DLJ and serves as co-head of the Technology Investment Banking Group. Mr.
Greig is a director of Manufacturers Services Limited, a contract electronics
manufacturer. Mr. Greig has over 20 years of experience in the investment
banking industry, the majority of which he has spent working with technology
based companies.
Kirk B. Wortman has been a Principal of DLJ Merchant Banking II, Inc.
since February 1997. For the five years prior to joining DLJ Merchant
Banking, Inc. he worked in the Leveraged Finance Group within DLJ's
Investment Banking Group, most recently as a Senior Vice President.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth for the years ended June 30, 1997, 1996 and
1995 certain compensation paid by the Company to its Chief Executive Officer
and the four other most highly paid executive officers of the Company whose
cash compensation exceeded $100,000 for the year ended June 30, 1997. Certain
members of management are expected to enter into new employment agreements at
the Effective Time which may alter their compensation arrangements.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------------- --------------
SECURITIES
OTHER UNDERLYING
SALARY BONUS ANNUAL OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#)
- ---------------------------------- ------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Kenneth Draeger 1997 425,000 -- (1) -- 50,000
Chief Executive Officer 1996 355,000 484,500 (2) -- 70,000
1995 250,625 375,000 -- --
Stephen J. Felice 1997 225,000 60,000 (1) -- 9,000
President 1996 157,500(3) 130,340 (3) -- 100,000
1995 -- -- -- --
Thomas J. Fitzpatrick 1997 168,077 (4) 59,866 (1)(4)224,908 (5) 100,000
Vice President and Chief 1996 -- -- -- --
Financial Officer 1995 -- -- -- --
Thomas M. Molchan 1997 139,300 27,500 (1) -- 10,000
General Counsel and Corporate 1996 90,020(3) 42,725 (3) -- 33,000
Secretary 1995 -- -- -- --
James J. Greenwell 1997 140,500 22,500 (1) -- --
Senior Vice President--Sales and 1996 131,000 58,460 -- 10,000
Marketing 1995 129,500 90,000 -- 40,000
</TABLE>
- ------------
(1) Final payment of bonuses for fiscal 1997 will be determined in August
1997. Therefore, there may be additional bonus payments for fiscal
1997 which have not been determined at the time of filing.
(2) Mr. Draeger's bonus for fiscal 1996 was paid in two parts. $357,000
of this bonus was paid on August 15, 1996. The remaining $127,500 was
paid on May 15, 1997 after completion of ten consecutive trading days
where the share price of Holdings Common Stock closed above $18.00.
(3) Messrs. Felice and Molchan joined the Company and were named
executive officers on October 21, 1995. The salaries and bonuses
shown reflect the amount earned after such date through June 30,
1996.
(4) 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.
(5) Of this amount, $223,908 is for relocation assistance. The other
$1,000 was for tax preparation assistance.
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<PAGE>
The following table summarizes stock options to purchase Holdings Common
Stock granted during fiscal 1997 to the persons named in the Summary
Compensation Table.
<TABLE>
<CAPTION>
HOLDINGS' OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------------------------------------------------
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------- VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
OPTION TERM(1)
NUMBER OF -----------------------
SECURITIES PERCENT OF
UNDERLYING TOTAL OPTIONS
OPTIONS GRANTED TO EXERCISE OF
GRANTED(1) EMPLOYEES IN BASE PRICE EXPIRATION
NAME(2) (#) FISCAL 1997 ($/SH) DATE 5%($) 10%($)
- --------------------- ------------ --------------- ------------- ------------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Kenneth Draeger....... 50,000 4.3% $16.750 12/04/06 $ 526,699 $1,334,759
Stephen J. Felice .... 9,000 0.8 16.750 12/04/06 94,806 240,257
Thomas J. Fitzpatrick 100,000 (3) 8.7 22.875 08/12/06 1,438,596 3,645,686
100,000 8.7 14.000 09/08/06 880,452 2,231,239
Thomas M. Molchan .... 10,000 0.9 16.750 12/04/06 105,340 266,952
James J. Greenwell ... -- -- -- -- -- --
</TABLE>
- ------------
(1) Options vest in four equal annual installments commencing on the
first anniversary of the date of grant. Unvested options are subject
to termination upon termination of the optionee's service with the
Company.
(2) Potential Realizable Values are based on an assumption that the share
price of the Holdings Common Stock starts equal to the exercise price
shown for each particular option grant and appreciates at the annual
rate shown (compounded annually) 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 actual value, if any,
an optionholder may realize will be a function of the extent to which
the share price exceeds the exercise price on the date the option is
exercised and also will depend on the optionholder's continued
employment through the vesting period. The actual value to be
realized by the optionholder may be greater or less than the values
estimated in this table.
(3) This grant which was issued on August 13, 1996 was subsequently
cancelled and, as shown in the table, replaced by another grant on
September 9, 1996.
The following table summarizes option exercises during fiscal 1997 and the
value of vested and unvested options for the persons named in the Summary
Compensation Table at June 30, 1997. Year-end values are based upon a price
of $22.75 per share, which was the closing market price of a share of
Holdings Common Stock on June 30, 1997, the last trading day of the fiscal
year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END HOLDINGS'
OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT JUNE 30, 1997 AT JUNE 30, 1997
----------------------------- -----------------------------
SHARES
ACQUIRED ON
EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) ($) (#) (#) ($) ($)
- ---------------------- ------------- -------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth Draeger........ 25,000 337,500 1,109,780 102,500 24,561,355 1,074,375
Stephen J. Felice .... 3,000 24,750 22,000 84,000 324,500 1,160,250
Thomas J. Fitzpatrick -- -- -- 100,000 -- 600,000
Thomas M. Molchan...... -- -- 8,250 34,750 121,688 425,063
James J. Greenwell .... 60,000 1,040,000 79,000 27,500 1,629,000 445,625
</TABLE>
The Company does not currently grant any long-term incentives, other than
stock options, to its executives or other employees, nor does it sponsor any
defined benefit or actuarial plans at this time.
Immediately prior to the Effective Time, all outstanding options granted
to employees and directors, whether or not vested, will be cancelled, and the
holders of such options will receive a cash payment in
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<PAGE>
respect of such options following the Effective Time. Alternatively, a
portion of such options may be converted into options to purchase shares of
Holdings Common Stock following the Merger.
EMPLOYMENT AND SEVERANCE AGREEMENTS
Mr. Draeger entered into an employment agreement with Decision Data Inc.,
the predecessor of a wholly owned subsidiary of the Company, in October 1992.
The employment agreement, which is terminable at will by either party,
provides for a base salary of not less than $250,000 plus an annual bonus
awarded pursuant to a target formula developed by the Board of Directors. The
employment agreement also provides for a bonus to be paid to Mr. Draeger in
the event of a change of control of Holdings, ranging from $300,000 if the
Equity Value (as defined in the employment agreement) of the transaction is
at least $40.0 million, to an amount equal to $2.0 million plus 2% of any
excess in Equity Value over $100.0 million for transactions with an Equity
Value in excess of $100.0 million. The amount payable to Mr. Draeger upon
consummation of the Merger is approximately $13.9 million. In addition,
severance benefits are payable to Mr. Draeger in the event that his
employment is terminated, other than for cause (as defined in the agreement),
death or disability, for a period of 18 months following such termination in
a monthly amount equal to one-twelfth of his annual salary. Mr. Draeger has
agreed not to compete with Holdings or any of its affiliates (as defined in
the agreement) for a one year period after termination of his employment for
any reason. Mr. Draeger is expected to enter into a new employment agreement
with the Company at the Effective Time.
Messrs. Felice, Fitzpatrick, Giordano, Greenwell, Molchan and Wilson have
severance arrangements with the Company which in various instances provide
for a severance payment of up to one times base annual salary, a pro-rata
portion of accrued bonus, and the continuation of certain benefits for up to
one year in the event of termination without cause.
COMPENSATION OF DIRECTORS
Non-employee directors receive an annual retainer of $10,000 as well as
$1,500 for attendance at any meeting of the Board of Directors or any meeting
of its Executive Committee, Audit Committee or Compensation Committee, except
telephonic meetings and committee meetings held on the same date as a Board
meeting.
Under the terms of the Company's Stock Option and Restricted Stock
Purchase Plan (the "Plan"), as amended in 1996, each non-employee director is
entitled to receive a one-time grant of options to purchase 4,000 shares of
Holdings Common Stock vesting 25% a year over four years. In addition, the
Plan provides for a one-time grant of options to purchase 1,000 shares of
Holdings Common Stock to each non-employee director elected on or after May
2, 1996, vesting immediately.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In connection with the financing of the Company's acquisition of BABSS,
the Company issued 181,145 shares, 109,532 shares, 848 shares and 1,695
shares of Series C Preferred Stock (subsequently converted into 3,751,486
shares of Holdings Common Stock in connection with the initial public
offering) to certain partnerships associated with WCAS, J.H. Whitney, Mr.
McInerney and Mr. Anderson, respectively, in each case at a price of $100 per
share. In addition, the Company issued to a partnership associated with WCAS
and a partnership associated with J.H. Whitney, respectively, warrants to
purchase 297,606 and 171,144 shares of Holdings Common Stock, at an exercise
price of $.10 per share, for a cash purchase price of $7.25333 per warrant.
Finally, the Company sold $19.1 million and $10.9 million aggregate principal
amount of the Affiliate Notes to a partnership associated with WCAS and a
partnership associated with J.H. Whitney, respectively. The Affiliate Notes
were repaid with proceeds from the Company's initial public offering. Messrs.
Anderson and McInerney are general partners of certain WCAS entities and Mr.
Brooks is a general partner of J.H. Whitney.
In December 1995, the Company paid J.H. Whitney $125,000 representing the
payment of past due amounts for financial consulting services rendered by
J.H. Whitney to the Company in a prior transaction. Mr. Brooks is a general
partner of J.H. Whitney.
Mr. McInerney previously served as Chairman of the Company from 1994 to
1995.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Holdings Common Stock immediately following the
consummation of the Merger by (i) any person or group who beneficially owns
more than five percent of Holdings Common Stock and (ii) all directors and
executive officers of Holdings as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED PERCENTAGE OF OUTSTANDING
AFTER THE RECAPITALIZATION COMMON STOCK
------------------------------ -----------------------------
<S> <C> <C>
NAME AND ADDRESS OF BENEFICIAL OWNER:
- --------------------------------------------------------
DLJ Merchant Banking Partners II, L.P.
and related investors (1)(2) ........................... 11,199,789 88.37%
Lawrence M.v.D. Schloss (3) ............................. -- --
DLJ Merchant Banking Partners II, Inc.
277 Park Avenue
New York, NY 10172
Peter T. Grauer (3) ..................................... -- --
DLJ Merchant Banking Partners II, Inc.
277 Park Avenue
New York, NY 10172
Thomas G. Greig (3) ..................................... -- --
Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, NY 10172
Kirk B. Wortman (3) ..................................... -- --
DLJ Merchant Banking Partners II, Inc.
277 Park Avenue
New York, NY 10172
All directors and officers as a group
(11 persons)(3)(4) ..................................... -- --
</TABLE>
(footnotes on following page)
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<PAGE>
- ------------
(1) Includes 1,417,180 shares of Holdings Common Stock issuable upon the
exercise of the DLJMB Warrants. The number of DLJMB Warrants will be
reduced by the number of Warrants issued, if any. See "The Merger and
the Merger Financing."
(2) Consists of shares held directly by the following investors related to
DLJ Merchant Banking Partners II, L.P. ("DLJMB"): 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"), 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" and "Underwriting." 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. The DLJMB Funds expect that the Institutional
Investors may acquire a portion of the securities of Quaker that would
otherwise be purchased by the DLJMB Funds. In no event would any such
purchases reduce the fully diluted ownership by the DLJMB Funds of
Holdings Common Stock after the Effective Time to below a majority, or
limit the rights of the DLJMB Funds under the Investors' Agreement. The
Institutional Investors include Apollo Advisors II, L.P. ("Apollo"),
Bain Capital, Inc. ("Bain Capital"), Thomas H. Lee Company ("THL"),
certain investment funds associated with DLJ Capital Corp. ("Sprout")
and Ontario Teacher's Pension Plan Board ("Teachers").
Any investment by Apollo in Quaker (expected to represent approximately
6.57% of the outstanding Holdings Common Stock) would be made 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.
Any investment by Bain Capital in Quaker (expected to represent
approximately 6.57% of the outstanding Holdings Common Stock) would be
made 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 business organizations, domestic and foreign. The address
of Bain Capital is Two Copley Place, Boston, Massachusetts 02116.
71
<PAGE>
Any investment by THL in Quaker (expected to represent approximately
6.57% of the outstanding Holdings Common Stock) would be made 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"), and 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 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.
DLJ Capital Corporation ("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, may also
acquire capital stock of Quaker. DLJCC is a wholly owned subsidiary of
DLJ. Sprout Growth II, L.P. has two general partners: DLJCC is also 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. At year end 1996, the fund assets
stood at a total of Cdn $51 billion. The address of Teachers is 5650
Yonge Street, 5th Floor, North York, Ontario M2M 4H5.
(3) Messrs. Schloss, Grauer and Wortman are officers of DLJ Merchant
Banking II, Inc., an affiliate of DLJMB and the Underwriter. Mr. Greig
is an officer of DLJSC. Share data shown for such individuals excludes
shares shown as held by the DLJMB Funds, as to which such individuals
disclaim beneficial ownership.
(4) Does not include Holdings Common Stock owned at the Effective Time or
options which may be issued to or retained by certain employees of
DecisionOne Corp. under Holdings' stock option plan or shares which may
be purchased by certain employees of DecisionOne Corp. under Holdings'
stock purchase plan.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Investors' Agreement restricts transfers of the shares of Holdings
Common Stock by the Management Shareholders, permits the Management
Shareholders to participate in certain sales of shares of Holdings Common
Stock by the DLJMB Funds, requires the Management Shareholders to sell shares
of Holdings Common Stock in certain circumstances should the DLJMB Funds
choose to sell any such shares owned by the DLJMB Funds, permit the
Management Shareholders and the Institutional Shareholders to purchase equity
securities proposed to be issued by the Company on a preemptive basis in the
event the DLJMB Funds choose to acquire any such equity securities, and
provides for certain registration rights. The Investors' Agreement also
provides that the DLJMB Funds have the right to appoint a majority of the
members of the Board of Directors of Holdings.
In addition, DLJ Capital Funding received customary fees and reimbursement
of expenses in connection with the arrangement and syndication of the New
Credit Facility and as a lender thereunder. DLJSC received customary fees in
connection with the underwriting of the Senior Subordinated Notes and the
Debentures. DLJSC will receive a merger advisory fee of $5.0 million in cash
from Quaker upon consummation of the Merger. It is also expected that DLJSC
will receive an annual fee from the Company for financial advisory services.
Each DLJMB Warrant, if any that is issued, will entitle the holder thereof
to purchase one share of Company Common Stock at an exercise price of not
less than $0.01 per share subject to customary antidilution provisions and
other customary terms. The DLJMB Warrants will be exercisable at any time
prior to 5:00 p.m., New York City time, on August 15, 2007. The exercise of
the DLJMB Warrants also will be subject to applicable federal and state
securities laws. Each Public Warrant will have the same terms as the DLJMB
Warrants, other than the exercise price and certain antidilution provisions.
The DLJMB Funds will be entitled to request six demand registrations with
respect to the DLJMB Warrants (together with all or any portion of the Senior
Preferred Stock owned by them) and the Company Common Stock owned by them,
which demand registration rights will be immediately exercisable subject to
customary deferral and cutback provisions. In addition, the holders of the
DLJMB Warrants will also be entitled to unlimited piggyback registration
rights with respect to such Warrants (together with all or any portion of the
Senior Preferred Stock) subject to customary cutback provisions. If the DLJMB
Warrants are sold in connection with a registered sale or a sale under Rule
144A of the Securities Act of the Senior Preferred Stock, the Company will
(not earlier than the time the Company registers the Senior Preferred Stock
(or exchange securities in the case of a Rule 144A offering)) file a shelf
registration statement covering the Company Common Stock underlying such
DLJMB Warrants.
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<PAGE>
DESCRIPTION OF NEW CREDIT FACILITY
The New Credit Facility will be provided by a syndicate of banks and other
financial institutions led by Donaldson, Lufkin & Jenrette Securities
Corporation, as arranger (the "Arranger"), DLJ Capital Funding, as
syndication agent (the "Syndication Agent") and NationsBank, N.A., as
administrative agent (the "Administrative Agent"). The New Credit Facility
will include a $470.0 million Term Loan Facility and a $105.0 million
Revolving Credit Facility (subject to adjustment as provided below), which
will provide for loans and up to $25.0 million of letters of credit. The Term
Loan Facility is comprised of a term A facility of $195.0 million (the "Term
A Facility"), which will have a maturity of six years and a term B facility
of $275.0 million (the "Term B Facility"), which will have a maturity of
eight years. The revolving facility will terminate six years after the date
of initial funding of the New Credit Facility and is subject to an increase
of up to $50.0 million at the Company's request at any time prior to the
revolving facility termination date.
The New Credit Facility will bear interest, at the option of DecisionOne
Corp., at the Administrative Agent's alternate base rate or reserve-adjusted
London Interbank Offered Rate ("LIBOR") plus, in each case, applicable
margins of (i) in the case of alternate base rate loans (x) 1.25% for
revolving and Term A loans and (y) 1.50% for Term B loans and (ii) in the
case of LIBOR loans (x) 2.50% for revolving and Term A loans and (y) 2.75%
for Term B loans.
DecisionOne Corp. will pay a commitment fee calculated at a rate of 1/2 of
1.00% per annum on the daily average unused commitment under the Revolving
Credit Facility (whether or not then available). Such fee will be payable
quarterly in arrears and upon termination of the Revolving Credit Facility
(whether at stated maturity or otherwise).
Beginning six months after the consummation of the Merger and the Merger
Financing, the applicable margins for the Term A Facility and the Revolving
Credit Facility, as well as the commitment fee, will be subject to reductions
based on the ratio of consolidated debt to Adjusted EBITDA (as defined in the
New Credit Facility).
DecisionOne Corp. will pay a letter of credit fee calculated at a rate per
annum equal to the then applicable margin for LIBOR loans under the Revolving
Credit Facility plus a fronting fee on the stated amount of each letter of
credit. Such fees will be payable quarterly in arrears. In addition,
DecisionOne Corp. will pay customary transaction charges in connection with
any letters of credit.
The Term Loan Facility will be subject to the following amortization
schedule:
<TABLE>
<CAPTION>
YEAR TERM LOAN A TERM LOAN B
- ------ ------------- -------------
<S> <C> <C>
1 $ 0.00 $ 2.75
2 9.75 2.75
3 19.50 2.75
4 39.00 2.75
5 48.75 2.75
6 78.00 2.75
7 -- 142.25
8 -- 116.25
------------- -------------
$195.00 $275.00
</TABLE>
The Term Loan Facility will be subject to mandatory prepayment: (i) with
100% of the net cash proceeds from the issuance of debt, subject to certain
exceptions, (ii) with 100% of the net cash proceeds of asset sales, subject
to certain exceptions, (iii) with 50% of DecisionOne Corp.'s excess cash flow
(as defined in the New Credit Facility) unless the Leverage Ratio (as defined
in the New Credit Facility) equals or is less than 3.5 to 1.0, and (iv) with
50% of the net cash proceeds from the issuance of equity. DecisionOne Corp.'s
obligations under the New Credit Facility will be secured by a first-priority
perfected lien on: (i) all property and assets, tangible and intangible, of
DecisionOne Corp., including a pledge of the capital stock of all of
DecisionOne Corp.'s direct material subsidiaries, and (ii) all intercompany
74
<PAGE>
indebtedness; provided, however, that no more than 65% of the equity
interests of the foreign subsidiaries will be required to be pledged as
security in the event that a pledge of a greater percentage would result in
material increased tax or similar liabilities for DecisionOne Corp. and its
subsidiaries on a consolidated basis. Holdings will guarantee the obligations
of DecisionOne Corp. under the New Credit Facility. Such guarantee will only
be recourse to Holdings' pledge of all of the outstanding capital stock of
DecisionOne Corp. to secure the obligations of DecisionOne Corp. under the
New Credit Facility. In addition, obligations under the New Credit Facility
will be guaranteed by all material (as defined in the New Credit Facility)
domestic subsidiaries of DecisionOne Corp. and all foreign subsidiaries of
DecisionOne Corp. if such foreign subsidiaries' guarantees will not have
material adverse tax consequences on DecisionOne Corp. Currently, the Company
has no material subsidiaries and therefore no such guarantees are required.
The New Credit Facility will contain customary covenants and restrictions
on the ability of DecisionOne Corp. to engage in certain activities,
including, but not limited to: (i) limitations on the incurrence of liens and
indebtedness, (ii) restrictions on sale lease-back transactions,
consolidations, mergers, sale of assets, capital expenditures, transactions
with affiliates and investments, and (iii) severe restrictions on dividends,
and other similar distributions.
The New Credit Facility will also contain financial covenants requiring
DecisionOne Corp. to maintain a minimum level of Adjusted EBITDA (as defined
in the New Credit Facility); a minimum Interest Coverage Ratio (as defined in
the New Credit Facility); a minimum Fixed Charge Coverage Ratio (as defined
in the New Credit Facility); and a maximum Leverage Ratio (as defined in the
New Credit Facility).
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<PAGE>
DESCRIPTION OF UNITS
Each Unit being offered hereby will consist of one $1,000 principal amount
Debenture and one Warrant to purchase 1.9 shares of Common Stock. The
Debentures and the Warrants will not be separately transferable until on or
after (i) February 7, 1998, (ii) such earlier date as the Underwriter may
determine and (iii) the occurrence of a Change of Control. The definitions of
certain terms used in the following summary are set forth below under
"--Certain Definitions."
DESCRIPTION OF DEBENTURES
GENERAL
The Debentures will be issued pursuant to the indenture (the "Debenture
Indenture") between the Issuer and State Street Bank and Trust Company, as
trustee (the "Trustee"). The terms of the Debentures include those stated in
the Debenture Indenture and those made part of the Debenture Indenture by
reference to the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). The Debentures are subject to all such terms, and Holders of
Debentures are referred to the Debenture Indenture and the Trust Indenture
Act for a statement thereof. The following summary of certain provisions of
the Debenture Indenture does not purport to be complete and is qualified in
its entirety by reference to the Debenture Indenture, including the
definitions therein of certain terms used below. A copy of the proposed form
of Debenture Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part and is available as set forth
below under "Additional Information."
The Debentures will be general unsecured obligations of the Issuer and
will be senior in right of payment to all future Indebtedness of the Issuer
that is subordinated to the Debentures and pari passu in right of payment
with all future Indebtedness of the Issuer that is not subordinated to the
Debentures. The Issuer will be the sole obligor with respect to the
Debentures; however the operations of the Issuer are conducted through its
Subsidiaries and, therefore, the Issuer is dependent upon the operations and
cash flow of its Subsidiaries to meet its obligations, including its
obligations under the Debentures. The New Credit Facility and the Senior
Subordinated Notes will restrict DecisionOne from paying any dividends or
making any other distributions to the Issuer. The ability of DecisionOne to
comply with the conditions in the Senior Subordinated Notes may be affected
by certain events that are beyond the Issuer's control. The Debentures will
be effectively subordinated to all Indebtedness and other liabilities
(including, without limitation, trade payables and lease obligations) of the
Issuer's Subsidiaries, including, without limitation, to DecisionOne Corp.'s
obligations under the New Credit Facility and the Senior Subordinated Notes.
Any right of the Issuer to receive assets of any of its Subsidiaries upon
such Subsidiary's liquidation or reorganization (and the consequent right of
Holders of the Senior Subordinated Notes to participate in those assets) will
be effectively subordinated to the claims of that Subsidiary's creditors
except to the extent that the Issuer itself is recognized as a creditor of
such Subsidiary, in which case the claims of the Issuer would still be
subordinate to the claims of such creditors who hold security in the assets
of such Subsidiary and to the claims of such creditors who hold Indebtedness
of such Subsidiary senior to that held by the Issuer. As of March 31, 1997,
on a pro forma basis giving effect to the Merger, including the Merger
Financing and the application of proceeds therefrom, the Issuer would have
had Indebtedness of approximately $83.1 million (all of which would have been
attributable to the Debentures) and the Issuer's Subsidiaries would have had
approximately $847.7 million of outstanding liabilities. The Debenture
Indenture will permit the incurrence of certain additional Indebtedness of
the Issuer and the Issuer's Subsidiaries in the future. See "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock."
As of the date of the Debenture Indenture, all of the Issuer's
Subsidiaries will be Restricted Subsidiaries. However, under certain
circumstances, the Issuer will be permitted to designate current or future
Subsidiaries (other than DecisionOne Corp.) as Unrestricted Subsidiaries.
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants set forth in the Debenture Indenture.
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<PAGE>
PRINCIPAL, MATURITY AND INTEREST
The Debentures will be limited in aggregate principal amount at maturity
to $148.4 million and will mature on August 1, 2008. The Debentures will be
issued at a substantial discount from their principal amount at maturity,
together with the Warrants, to generate gross proceeds of $85.0 million.
Until August 1, 2002, no interest will accrue on the Debentures, but the
Accreted Value will increase (representing amortization of original issue
discount) between the date of original issuance and August 1, 2002, on a
semi-annual bond equivalent basis using a 360-day year comprised of twelve
30-day months, such that the Accreted Value shall be equal to the full
principal amount at maturity of the Debentures on August 1, 2002. Beginning
on August 1, 2002, interest on the Debentures will accrue at the rate of 11
1/2% per annum and will be payable semiannually in cash on February 1 and
August 1, commencing on February 1, 2003, to Holders of record on the
immediately preceding January 15 and July 15. Interest on the Debentures will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from August 1, 2002. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months. Principal,
premium, if any, and interest on the Debentures will be payable at the office
or agency of the Issuer maintained for such purpose within the City and State
of New York or, at the option of the Issuer, payment of interest may be made
by check mailed to the Holders of the Debentures at their respective
addresses set forth in the register of Holders of Debentures; provided that
all payments with respect to Debentures represented by one or more permanent
global Debentures will be paid by wire transfer of immediately available
funds to the account of the Depository Trust Company or any successor
thereto. Until otherwise designated by the Issuer, the Issuer's office or
agency in New York will be the office of the Trustee maintained for such
purpose. The Debentures will be issued in minimum denominations of $1,000 and
integral multiples thereof.
OPTIONAL REDEMPTION
Except as provided in the next paragraph, the Debentures will not be
redeemable at the Issuer's option prior to August 1, 2002. Thereafter, the
Debentures will be subject to redemption at the option of the Issuer, in
whole or in part, upon not less than 30 nor more than 60 days' notice, at the
redemption prices (expressed as percentages of principal amount) set forth
below, together with accrued and unpaid interest thereon to the applicable
redemption date, if redeemed during the twelve-month period beginning on
August 1 of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR PRINCIPAL AMOUNT
- -------------------- ----------------
<S> <C>
2002 ................ 105.750%
2003 ................ 103.833%
2004 ................ 101.917%
2005 and thereafter 100.000%
</TABLE>
Prior to August 1, 2000, the Issuer may, at its option, on any one or more
occasions, redeem up to 35% of the aggregate principal amount at maturity of
Debentures originally offered in the Offering at a redemption price equal to
111.5% of the Accreted Value thereof, with the net cash proceeds of one or
more Equity Offerings; provided that at least 65% of the original aggregate
principal amount at maturity of Debentures remains outstanding immediately
after the occurrence of each such redemption; and provided, further, that any
such redemption shall occur within 90 days of the date of the closing of each
such Equity Offering.
MANDATORY REDEMPTION
Except as set forth below under "--Repurchase at the Option of Holders,"
the Issuer is not required to make any mandatory redemption or sinking fund
payments with respect to the Debentures.
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<PAGE>
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Debentures will
have the right to require the Issuer to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's Debentures pursuant
to the offer described below (the "Change of Control Offer") at an offer
price in cash equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest thereon to the date of purchase (or, in the case
of repurchases of Debentures prior to August 1, 2002, at a purchase price
equal to 101% of the Accreted Value thereof as of the date of repurchase)
(the "Change of Control Payment"). Within 65 days following any Change of
Control, the Issuer will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and
offering to repurchase Debentures pursuant to the procedures required by the
Debenture Indenture and described in such notice. The Issuer will comply with
the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the
Debentures as a result of a Change of Control. To the extent that the
provisions of any securities laws or regulations conflict with the provisions
of the Debenture Indenture relating to such Change of Control Offer, the
Issuer will comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations described in the
Debenture Indenture by virtue thereof.
On the Change of Control Payment Date, the Issuer will, to the extent
lawful, (1) accept for payment all Debentures or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all
Debentures or portions thereof so tendered and (3) deliver or cause to be
delivered to the Trustee the Debentures so accepted together with an
Officers' Certificate stating the aggregate principal amount at maturity of
Debentures or portions thereof being purchased by the Issuer. The Paying
Agent will promptly mail to each Holder of Debentures so tendered the Change
of Control Payment for such Debentures, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each
Holder a new Debenture equal in principal amount at maturity to any
unpurchased portion of the Debentures surrendered, if any; provided that each
such new Debenture will be in a principal amount at maturity of $1,000 or an
integral multiple thereof. The Issuer will publicly announce the results of
the Change of Control Offer on or as soon as practicable after the Change of
Control Payment Date.
The Debenture Indenture will provide that, the Issuer will fix the Change
of Control Payment Date no earlier than 30 but no more than 60 days after the
Change of Control Offer is mailed as set forth above. Prior to complying with
the provisions of the preceding sentence, but in any event within 60 days
following a Change of Control, the Issuer will either repay all outstanding
Indebtedness of its Subsidiaries or obtain the requisite consents, if any,
under all agreements governing all such outstanding Indebtedness of its
Subsidiaries to permit the repurchase of the Debentures required by this
covenant. The New Credit Facility and the Senior Subordinated Notes restrict
DecisionOne from paying any dividends or making any other distributions to
the Issuer. If the Issuer does not obtain the consent of the lenders under
agreements governing outstanding Indebtedness of its Subsidiaries, including
under the New Credit Facility and the Senior Subordinated Notes, to permit
the repurchase of the Debentures or does not refinance such Indebtedness, the
Issuer will likely not have the financial resources to purchase Debentures
and the Issuer's Subsidiaries will be restricted by the terms of such
Indebtedness from paying dividends to the Issuer or otherwise lending or
distributing funds to the Issuer for the purpose of such purchase. In any
event, there can be no assurance that the Issuer's Subsidiaries will have the
resources available to pay any such dividend or make any such distribution.
The Issuer's failure to make a Change of Control Offer when required or to
purchase tendered Debentures when tendered would constitute an Event of
Default under the Debenture Indenture. See "Risk Factors--Substantial
Leverage; Shareholders' Deficit; Liquidity" and "--Limitations on Access to
Cash Flow of Subsidiaries; Holding Company Structure."
Except as described above with respect to a Change of Control, the
Debenture Indenture does not contain provisions that permit the Holders of
the Debentures to require that the Issuer repurchase or redeem the Debentures
in the event of a takeover, recapitalization or similar restructuring.
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The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or
substantially all" of the assets of the Issuer and its Subsidiaries, taken as
a whole. Although there is a developing body of case law interpreting the
phrase "substantially all," there is no precisely established definition of
the phrase under applicable law. Accordingly, the ability of a Holder of
Debentures to require the Issuer to repurchase such Debentures as a result of
a sale, lease, transfer, conveyance or other disposition of less than all of
the assets of the Issuer and its Subsidiaries taken as a whole to another
Person or group may be uncertain.
Asset Sales
The Debenture Indenture will provide that the Issuer will not, and will
not permit any of its Restricted Subsidiaries to, engage in an Asset Sale
unless (i) the Issuer (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the
fair market value (evidenced by a resolution of the Board of Directors set
forth in an Officers' Certificate delivered to the Trustee) of the assets or
Equity Interests issued or sold or otherwise disposed of and (ii) at least
75% of the consideration therefor received by the Issuer or such Restricted
Subsidiary is in the form of (I) cash or Cash Equivalents or (II) property or
assets that are used or useful in a Permitted Business, or Capital Stock of
any Person primarily engaged in a Permitted Business if, as a result of the
acquisition by the Issuer or any Restricted Subsidiary thereof, such Person
becomes a Restricted Subsidiary; provided that the amount of (x) any
liabilities (as shown on the Issuer's or such Restricted Subsidiary's most
recent balance sheet or in the notes thereto), of the Issuer or any
Restricted Subsidiary (other than contingent liabilities and liabilities of
the Issuer that are by their terms subordinated to the Debentures) that are
assumed by the transferee of any such assets pursuant to a customary novation
agreement that releases the Issuer or such Restricted Subsidiary from further
liability and (y) any notes or other obligations received by the Issuer or
any such Restricted Subsidiary from such transferee that are converted by the
Issuer or such Restricted Subsidiary into cash or Cash Equivalents (to the
extent of the cash or Cash Equivalents received) within 180 days following
the closing of such Asset Sale, will be deemed to be cash for purposes of
this provision; provided further, that the 75% limitation referred to above
shall not apply to any sale, transfer or other disposition of assets in which
the cash portion of the consideration received therefor, determined in
accordance with the foregoing proviso, is equal to or greater than what the
after-tax net proceeds would have been had such transaction complied with the
aforementioned 75% limitation.
Within 395 days after the Issuer's or any Restricted Subsidiary's receipt
of any Net Proceeds from an Asset Sale, Holdings or such Restricted
Subsidiary will apply such Net Proceeds (a) to permanently reduce
Indebtedness of a Restricted Subsidiary of the Issuer (and to correspondingly
reduce commitments with respect thereto) or (b) to repay Pari Passu
Indebtedness (provided that if the Issuer shall so repay Pari Passu
Indebtedness, it will equally and ratably reduce Indebtedness under the
Debentures if the Debentures are then redeemable or, if the Debentures may
not be then redeemed, the Issuer shall make an offer (in accordance with the
procedures set forth below for an Asset Sale Offer) to all Holders to
purchase at 100% of the principal amount thereof at maturity (or, in the case
of repurchases of Debentures prior to August 1, 2002, at a purchase price
equal to 100% of the Accreted Value thereof as of the date of repurchase) the
amount of Debentures that would otherwise be redeemed or (c) to an investment
in property, capital expenditures or assets that are used or useful in a
Permitted Business, or Capital Stock of any Person primarily engaged in a
Permitted Business if, as a result of the acquisition by Holdings or any
Restricted Subsidiary thereof, such Person becomes a Restricted Subsidiary.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding sentence of this paragraph will be deemed to
constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $15.0 million, the Issuer will be required to make an offer to all
Holders of Debentures (an "Asset Sale Offer") to purchase the maximum
principal amount of Debentures that may be purchased out of the Excess
Proceeds at an offer price in cash in an amount equal to 100% of the
principal amount at maturity thereof plus accrued and unpaid interest thereon
to the date of purchase (or, in the case of repurchases of Debentures prior
to August 1, 2002, at a purchase price equal to 100% of the Accreted Value
thereof as of the date of repurchase), in accordance with the procedures set
forth in the Debenture Indenture. To the extent that the aggregate principal
amount at maturity or Accreted Value (as
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applicable) of Debentures tendered pursuant to an Asset Sale Offer is less
than the Excess Proceeds, the Issuer may use any remaining Excess Proceeds
for general corporate purposes. If the aggregate principal amount at maturity
or Accreted Value (as applicable) of Debentures surrendered by holders
thereof exceeds the amount of Excess Proceeds, the Trustee shall select the
Debentures to be purchased on a pro rata basis. Upon completion of such Asset
Sale Offer, the amount of Excess Proceeds shall be reset at zero.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Debentures pursuant to an Asset Sale Offer. To the extent
that the provisions of any securities laws or regulations conflict with the
provisions of the Debenture Indenture relating to such Asset Sale Offer, the
Issuer will comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations described in the
Debenture Indenture by virtue thereof.
The New Credit Facility and the Senior Subordinated Notes restrict
DecisionOne Corp. from paying any dividends or making any other distributions
to the Issuer. If the Issuer does not obtain the consent of the lenders under
agreements governing outstanding Indebtedness of its Subsidiaries, including
under the New Credit Facility and the Senior Subordinated Notes, to permit
the repurchase of the Debentures or does not refinance such Indebtedness, the
Issuer will likely not have the financial resources to purchase Debentures
and the Issuer's Subsidiaries will be restricted by the terms of such
Indebtedness from paying dividends to the Issuer or otherwise lending or
distributing funds to the Issuer for the purpose of such purchase. In any
event, there can be no assurance that the Issuer's Subsidiaries will have the
resources available to pay any such dividend or make any such distribution.
The Issuer's failure to make an Asset Sale Offer when required or to purchase
tendered Debentures when tendered would constitute an Event of Default under
the Debenture Indenture. See "Risk Factors--Substantial Leverage;
Stockholders Deficit; Liquidity" and "--Limitations on Access to Cash Flow of
Subsidiaries; Holding Company Structure."
SELECTION AND NOTICE
If less than all of the Debentures are to be redeemed at any time,
selection of Debentures for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities
exchange, if any, on which the Debentures are listed or, if the Debentures
are not so listed, on a pro rata basis, by lot or by such other method as the
Trustee deems fair and appropriate, provided that no Debentures with a
principal amount at maturity of $1,000 or less shall be redeemed in part.
Notice of redemption shall be mailed by first class mail at least 30 but not
more than 60 days before the redemption date to each Holder of Debentures to
be redeemed at its registered address. If any Debenture is to be redeemed in
part only, the notice of redemption that relates to such Debenture shall
state the portion of the principal amount at maturity thereof to be redeemed.
A new Debenture in principal amount equal to the unredeemed portion thereof
will be issued in the name of the Holder thereof upon cancellation of the
original Debenture. On and after the redemption date, interest will cease to
accrue and original issue discount will cease to accrete on Debentures or
portions thereof called for redemption.
CERTAIN COVENANTS
Restricted Payments
The Debenture Indenture will provide that the Issuer will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly: (i)
declare or pay any dividend or make any other payment or distribution on
account of any Equity Interests of the Issuer or any of its Restricted
Subsidiaries (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Issuer or dividends or
distributions payable to the Issuer or any Wholly Owned Restricted
Subsidiary); (ii) purchase, redeem or otherwise acquire or retire for value
any Equity Interests of the Issuer, any of its Restricted Subsidiaries or any
other Affiliate of the Issuer (other than any such Equity Interests owned by
the Issuer or any Restricted Subsidiary of the Issuer); (iii) make any
principal payment
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on, or purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness of the Issuer that is pari passu with or subordinated in right
of payment to the Debentures, except in accordance with the scheduled
mandatory redemption or repayment provisions set forth in the original
documentation governing such Indebtedness or in accordance with the covenant
described under the caption entitled "--Repurchase at the Option of
Holders--Asset Sales" (but not otherwise pursuant to any mandatory offer to
repurchase upon the occurrence of any event); or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i)
through (iv) above being collectively referred to as "Restricted Payments"),
unless:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof, and
(b) immediately after giving effect to such transaction on a pro forma
basis, the Issuer would have been permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test
set forth in the first paragraph of the covenant described below under
caption entitled "--Incurrence of Indebtedness and Issuance of Preferred
Stock," and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Issuer and its Restricted Subsidiaries
after the date of the Debenture Indenture (excluding Restricted Payments
permitted by clauses (i) (to the extent that the declaration of any
dividend referred to therein reduces amounts available for Restricted
Payments pursuant to this clause (c)), (ii), (iii), (v), (vi), (viii),
(ix), (x), (xiii), (xiv), (xvi) and (xvii) of the next succeeding
paragraph), is less than the sum of (1) 50% of the Adjusted Consolidated
Net Income of the Issuer for the period (taken as one accounting period)
from the beginning of the first calendar month commencing after the date
of the Debenture Indenture to the end of the Issuer's most recently ended
fiscal quarter for which internal financial statements are available at
the time of such Restricted Payment (or, if such Adjusted Consolidated Net
Income for such period is a deficit, minus 100% of such deficit), plus (2)
100% of the Qualified Proceeds received by the Issuer since the date of
the Debenture Indenture from contributions to the Issuer's capital or the
issue or sale since the date of the Debenture Indenture of Equity
Interests of the Issuer or of convertible debt securities of the Issuer
that have been converted into such Equity Interests (other than Equity
Interests (or convertible debt securities) sold to a Subsidiary of the
Issuer and other than Designated Preferred Stock, Disqualified Stock or
convertible debt securities that have been converted into Disqualified
Stock), plus (3) the amount equal to the net reduction in Investments in
Persons after the date of the Debenture Indenture who are not Restricted
Subsidiaries (other than Permitted Investments) resulting from (x)
Qualified Proceeds received as a dividend, repayment of a loan or advance
or other transfer of assets (valued at the fair market value thereof) to
the Issuer or any Restricted Subsidiary from such Persons, (y) Qualified
Proceeds received upon the sale or liquidation of such Investment and (z)
the redesignation of Unrestricted Subsidiaries (other than any
Unrestricted Subsidiary designated as such pursuant to clause (vii) or
(xv) of the following paragraph) whose assets are used or useful in, or
which is engaged in, one or more Permitted Business as Restricted
Subsidiaries (valued (proportionate to the Issuer's equity interest in
such Subsidiary) at the fair market value of the net assets of such
Subsidiary at the time of such redesignation) not to exceed, in the case
of clauses (x), (y) and (z), the amount of Investments previously made by
the Issuer or any Restricted Subsidiary in such Person, which amount was a
Restricted Payment; provided that no proceeds received by the Issuer from
the issue or sale of any Equity Interests of the Issuer will be counted in
determining the amount available for Restricted Payments under this clause
(c) to the extent such proceeds were used to redeem, repurchase, retire or
acquire any Equity Interests or Subordinated Indebtedness of the Issuer
pursuant to clauses (ii) and (iv) of the next succeeding paragraph.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment would
have complied with the provisions of the Debenture Indenture;
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(ii) the redemption, repurchase, retirement or other acquisition of any
Equity Interests of the Issuer or pari passu or Subordinated Indebtedness
of the Issuer in exchange for, or out of the net proceeds of, the
substantially concurrent sale (other than to a Subsidiary of the Issuer)
of Equity Interests of the Issuer (other than Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized
for any such redemption, repurchase, retirement or other acquisition shall
be excluded from clause (c)(2) of the preceding paragraph;
(iii) the defeasance, redemption, repurchase or other acquisition of
pari passu or subordinated Indebtedness with the net proceeds from an
incurrence of Permitted Refinancing Indebtedness;
(iv) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of the Issuer or DecisionOne Corp. held by
any member of the Issuer's or any of the Issuer's Restricted Subsidiaries'
management pursuant to any management equity subscription agreement or
stock option agreement; provided that (A) the aggregate price paid for all
such repurchased, redeemed, acquired or retired Equity Interests shall not
exceed (I) $5.0 million in any calendar year (with unused amounts in any
calendar year being carried over to succeeding calendar years subject to a
maximum (without giving effect to the following clause (II)) of $10.0
million in any calendar year) plus (II) the aggregate cash proceeds
received by the Issuer during such calendar year from any reissuance of
Equity Interests by the Issuer or DecisionOne Corp. to members of
management of the Issuer and its Restricted Subsidiaries and (B) no
Default or Event of Default shall have occurred and be continuing
immediately after such transaction; provided further that the aggregate
cash proceeds referred to in clause (II) above shall be excluded from
clause (c)(2) of the preceding paragraph;
(v) the payment of dividends by a Restricted Subsidiary on any class of
common stock of such Restricted Subsidiary if (A) such dividend is paid
pro rata to all holders of such class of common stock and (B) at least 51%
of such class of common stock is held by the Issuer or one or more of its
Restricted Subsidiaries;
(vi) the repurchase of any class of common stock of a Restricted
Subsidiary if (A) such repurchase is made pro rata with respect to such
class of common stock and (B) at least 51% of such class of common stock
is held by the Issuer or one or more of its Restricted Subsidiaries;
(vii) any other Restricted Investment made in a Permitted Business
which, together with all other Restricted Investments made pursuant to
this clause (vii) since the date of the Debenture Indenture, does not
exceed $40.0 million (in each case, after giving effect to all subsequent
reductions in the amount of any Restricted Investment made pursuant to
this clause (vii), either as a result of (A) the repayment or disposition
thereof for cash or (B) as a result of the redesignation of an
Unrestricted Subsidiary as a Restricted Subsidiary (valued proportionate
to the Issuer's equity interest in such Subsidiary at the time of such
redesignation) at the fair market value of the net assets of such
Subsidiary at the time of such redesignation), in the case of clause (A)
and (B), not to exceed the amount of such Restricted Investment previously
made pursuant to this clause (vii); provided that no Default or Event of
Default shall have occurred and be continuing immediately after making
such Restricted Investment;
(viii) the declaration and payment of dividends to holders of any class
or series of Disqualified Stock of the Issuer issued after the date of the
Debenture Indenture in accordance with the covenant described below under
the caption "Incurrence of Indebtedness and Issuance of Preferred Stock;"
provided that no Default or Event of Default shall have occurred and be
continuing immediately after such declaration or payment;
(ix) repurchases of Equity Interests deemed to occur upon exercise of
stock options if such Equity Interests represent a portion of the exercise
price of such options;
(x) (A) payments made by the Issuer in respect of statutory appraisal
rights (and any settlement thereof) and (B) payments made by the Issuer to
fund the cash consideration payable in the Merger (including pursuant to
statutory appraisal rights and any settlement thereof) to
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security holders of Holdings (including without limitation, the Cash
Merger Consideration, the Option Cash Proceeds and the Warrant Cash
Proceeds) and fees and expenses of the Issuer and DecisionOne Corp. in
connection with the Merger;
(xi) a Restricted Payment to pay for the repurchase, retirement or other
acquisition or retirement for value of Equity Interests of the Issuer
outstanding on the date of the Debenture Indenture and which are not held
by the Principals or any member of management of the Issuer or any
Subsidiary of the Issuer on the date of the Debenture Indenture (including
any Equity Interests issued in respect of such Equity Interests as a
result of a stock split, recapitalization, merger, combination,
consolidation or otherwise, but excluding any Equity Interests issued
pursuant to any management equity plan or stock option plan or similar
agreement), provided that the aggregate Restricted Payments made under
this clause (xi) shall not exceed $40.0 million, provided further that
prior to the first anniversary of the consummation of the Merger, the
aggregate amount of Restricted Payments made under this clause (xi) shall
not exceed $20.0 million, provided further that notwithstanding the
foregoing proviso, the Issuer shall be permitted to make Restricted
Payments under this clause (xi) only if after giving effect thereto, the
Issuer would be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in
the first paragraph of the covenant described under the caption entitled
"--Incurrence of Indebtedness and Issuance of Preferred Stock;" provided
that no Default or Event of Default shall have occurred and be continuing
immediately after making such Restricted Payment;
(xii) the payment of dividends on the Issuer's common stock, following
the first public offering of the Issuer's common stock after the date of
the Debenture Indenture, of up to 6.0% per annum of the net proceeds
received by the Issuer as common equity from such public offering, other
than with respect to public offerings with respect to the Issuer's common
stock registered on Form S-8; provided that no Default or Event of Default
shall have occurred and be continuing immediately after any such payment
of dividends;
(xiii) the declaration and payment of dividends to holders of any class
or series of Designated Preferred Stock issued after the date of the
Debenture Indenture; provided, however, immediately after the date of
issuance of such Designated Preferred Stock, after giving effect to such
issuance on a pro forma basis, the Issuer would have been permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the
covenant described below under caption entitled "--Incurrence of
Indebtedness and Issuance of Preferred Stock;"
(xiv) the payment of cash in lieu of fractional shares of Holdings
Common Stock under the Warrant Agreement;
(xv) any other Restricted Payment which, together with all other
Restricted Payments made pursuant to this clause (xvi) since the date of
the Debenture Indenture, does not exceed $40.0 million (in each case,
after giving effect to all subsequent reductions in the amount of any
Restricted Investment made pursuant to this clause (xv) either as a result
of (A) the repayment or disposition thereof for cash or (B) the
redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary
(valued proportionate to the Issuer's equity interest in such Subsidiary
at the time of such redesignation) at the fair market value of the net
assets of such Subsidiary at the time of such redesignation), in the case
of clause (A) and (B), not to exceed the amount of such Restricted
Investment previously made pursuant to this clause (xv); provided that no
Default or Event of Default shall have occurred and be continuing
immediately after making such Restricted Payment;
(xvi) the pledge by the Company of the Capital Stock of an Unrestricted
Subsidiary of the Company to secure Non-Recourse Debt of such Unrestricted
Subsidiary; and
(xvii) distributions or payments of Receivables Fees.
The Board of Directors may designate any Restricted Subsidiary (other
than DecisionOne Corp.) to be an Unrestricted Subsidiary if such
designation would not cause a Default. For purposes of making such
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designation, all outstanding Investments by the Issuer and its Restricted
Subsidiaries (except to the extent repaid in cash) in the Subsidiary so
designated will be deemed to be Restricted Payments at the time of such
designation and will reduce the amount available for Restricted Payments
under the first paragraph of this covenant. All such outstanding Investments
will be deemed to constitute Restricted Investments in an amount equal to the
greater of (i) the net book value of such Investments at the time of such
designation and (ii) the fair market value of such Investments at the time of
such designation. Such designation will only be permitted if such Restricted
Investment would be permitted at such time and if such Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary.
The amount of (i) all Restricted Payments (other than Restricted Payments
made in cash) shall be the fair market value on the date of the Restricted
Payment of the asset(s) or securities proposed to be transferred or issued by
the Issuer or such Restricted Subsidiary, as the case may be, pursuant to the
Restricted Payment and (ii) Qualified Proceeds (other than cash) shall be the
fair market value on the date of receipt thereof by the Issuer of such
Qualified Proceeds. The fair market value of any non-cash Restricted Payment
and Qualified Proceeds shall be determined by the Board of Directors whose
resolution with respect thereto shall be delivered to the Trustee, such
determination to be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if such
fair market value exceeds $20.0 million. Not later than the date of making
any Restricted Payment, the Issuer shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting
forth the basis upon which the calculations required by the covenant
"Restricted Payments" were computed, which calculations shall be based upon
the Issuer's latest available financial statements.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Debenture Indenture will provide that (i) the Issuer will not, and
will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, issue, assume, guarantee or otherwise become,
directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt), (ii) that
the Issuer will not issue any Disqualified Stock and (iii) that the Issuer
will not permit any of its Restricted Subsidiaries to, issue any Preferred
Stock; provided, however, that the Issuer and the Issuer's Restricted
Subsidiaries may incur Indebtedness (including Acquired Debt), Holdings may
issue shares of Disqualified Stock and any Restricted Subsidiary of the
Issuer may issue Preferred Stock, if the Issuer's Fixed Charge Coverage Ratio
for Holdings' most recently ended four fiscal quarters for which internal
financial statements are available immediately preceding the date on which
such additional Indebtedness is incurred, or such Disqualified Stock or
Preferred Stock is issued, would have been at least 1.50 to 1.00, determined
on a pro forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock or Preferred Stock had been issued, as the case may be, at
the beginning of such four-quarter period.
The Debenture Indenture will also provide that the Issuer will not incur
any Indebtedness that is contractually subordinated in right of payment to
any other Indebtedness of the Issuer unless such Indebtedness is also
contractually subordinated in right of payment to the Debentures on
substantially identical terms; provided, however, that no Indebtedness of the
Issuer shall be deemed to be contractually subordinated in right of payment
to any other Indebtedness of the Issuer solely by virtue of being unsecured.
The foregoing provisions will not apply to (collectively, "Permitted Debt"):
(i) the incurrence by the Issuer, DecisionOne and its Restricted
Subsidiaries of Indebtedness under the New Credit Facility; provided that
the aggregate principal amount of all Indebtedness (with letters of credit
and bankers' acceptances being deemed to have a principal amount equal to
the maximum face amount thereunder) outstanding under the New Credit
Facility after giving effect to such incurrence does not exceed an amount
equal to $625.0 million;
(ii) the incurrence by (A) the Issuer and the Issuer's Restricted
Subsidiaries of Indebtedness represented by the Debentures and (B)
DecisionOne and its Restricted Subsidiaries of Indebtedness represented by
the Senior Subordinated Notes and any guarantee thereof;
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(iii) the incurrence by the Issuer or any of its Restricted Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case, incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property used in the business of the Issuer
or such Restricted Subsidiary, in aggregate principal amount not to exceed
$25.0 million at any time outstanding;
(iv) Existing Indebtedness;
(v) the incurrence by the Issuer or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund,
Indebtedness that was permitted by the Debenture Indenture;
(vi) Indebtedness of the Issuer to a Restricted Subsidiary; provided
that any subsequent issuance or transfer of any Capital Stock or other
event which results in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any subsequent transfer of any such Indebtedness
(except to the Issuer or another Restricted Subsidiary) shall be deemed,
in each case, to be an incurrence of such Indebtedness;
(vii) Indebtedness of a Restricted Subsidiary to the Issuer or another
Restricted Subsidiary; provided that any subsequent issuance or transfer
of any Capital Stock of any Restricted Subsidiary to whom such
Indebtedness is owed or any other event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any
subsequent transfer of any such Indebtedness (except to the Issuer or
another Restricted Subsidiary) shall be deemed, in each case, to be an
incurrence of such Indebtedness;
(viii) the incurrence by the Issuer or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging (a) interest rate risk with respect to any floating rate
Indebtedness of such Person that is permitted by the terms of the
Debenture Indenture to be outstanding or (b) exchange rate risk with
respect to agreements or Indebtedness of such Person payable denominated
in a currency other than U.S. dollars; provided that such agreements do
not increase the Indebtedness of the obligor outstanding at any time other
than as a result of fluctuations in foreign currency exchange rates or
interest rates or by reason of fees, indemnities and compensation payable
thereunder;
(ix) the incurrence by the Issuer or any of its Restricted Subsidiaries
of Acquired Debt in an aggregate principal amount at any time outstanding
not to exceed $25.0 million;
(x) the incurrence by the Issuer or any Restricted Subsidiary of
Indebtedness (in addition to Indebtedness permitted by any other clause of
this paragraph) in an aggregate principal amount at any time outstanding
not to exceed $60.0 million;
(xi) Indebtedness arising from agreements of the Issuer or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, incurred or assumed in connection with
the disposition of any business, assets or a Restricted Subsidiary, other
than guarantees of Indebtedness incurred by any Person acquiring all or
any portion of such business, assets or a Restricted Subsidiary for the
purpose of financing such acquisition; provided, however, that (i) such
Indebtedness is not reflected on the balance sheet of the Issuer or any
Restricted Subsidiary (contingent obligations referred to in a footnote to
financial statements and not otherwise reflected on the balance sheet will
not be deemed to be reflected on such balance sheet for purposes of this
clause (i)) and (ii) the maximum assumable liability in respect of all
such Indebtedness shall at no time exceed the gross proceeds including
noncash proceeds (the fair market value of such noncash proceeds being
measured at the time received and without giving effect to any subsequent
changes in value) actually received by the Issuer and its Restricted
Subsidiaries in connection with such disposition;
(xii) obligations in respect of performance and surety bonds and
completion guarantees provided by the Issuer or any Restricted Subsidiary
in the ordinary course of business; and
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(xiii) (A) any guarantee by a Restricted Subsidiary of the Issuer of
Indebtedness of the Issuer that is pari passu in right of payment to the
Debentures that was permitted to be incurred under the Debenture Indenture
and (B) any guarantee by a Restricted Subsidiary of the Issuer of
Indebtedness of any other Restricted Subsidiary of the Issuer that was
permitted to be incurred under the Debenture Indenture.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xiii) above or
is entitled to be incurred pursuant to the first paragraph of this covenant,
the Issuer shall, in its sole discretion, classify such item of Indebtedness
in any manner that complies with this covenant and such item of Indebtedness
will be treated as having been incurred pursuant to only one of such clauses
or pursuant to the first paragraph hereof. Accrual of interest and the
accretion of original issue discount will not be deemed to be an incurrence
of Indebtedness for purposes of this covenant.
Liens
The Debenture Indenture will provide that the Issuer will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, create,
incur, assume or suffer to exist any Lien on any asset now owned or hereafter
acquired, or any income or profits therefrom, or assign or convey any rights
to receive income therefrom, unless all payments due under the Debenture
Indenture and the Debentures are secured on an equal and ratable basis with
the obligations so secured until such time as such obligation is no longer
secured by a Lien, except for (i) Liens existing on the date of the Debenture
Indenture, (ii) Liens on assets of any Restricted Subsidiary of the Issuer
securing Indebtedness of Restricted Subsidiaries of the Issuer and (iii)
Permitted Liens.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Debenture Indenture will provide that Holdings will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create
or otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to: (i)(a) pay
dividends or make any other distributions to the Issuer or any of its
Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any
other interest or participation in, or measured by, its profits or (b) pay
any Indebtedness owed to the Issuer or any of its Restricted Subsidiaries;
(ii) make loans or advances to the Issuer or any of its Restricted
Subsidiaries; or (iii) transfer any of its properties or assets to the Issuer
or any of its Restricted Subsidiaries, except for such encumbrances or
restrictions existing under or by reason of (a) the terms of any Indebtedness
permitted by the Debenture Indenture to be incurred by any Restricted
Subsidiary of the Issuer, (b) Existing Indebtedness, as in effect on the date
of the Debenture Indenture; (c) any agreement or other instrument of a Person
acquired by the Issuer or any of its Restricted Subsidiaries, as in effect at
the time of such acquisition (but not created in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person, or
the property or assets of the Person, so acquired; (d) customary
non-assignment provisions in leases entered into in the ordinary course of
business and consistent with past practices; (e) applicable law; (f) purchase
money obligations for property acquired in the ordinary course of business
that impose restrictions of the nature described in clause (iii) above on the
property so acquired; or (g) contracts for the sale of assets, including,
without limitation, customary restrictions with respect to a Subsidiary
pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of
such Subsidiary.
The New Credit Facility and the Senior Subordinated Notes restrict
DecisionOne Corp. from paying any dividends or making any other distributions
to the Issuer. The existence of such restrictions could have an adverse
effect on the Issuer's ability to pay interest and principal on the
Debentures. See "Risk Factors--Substantial Leverage; Stockholders' Deficit;
Liquidity" and "--Limitations on Access to Cash Flow of Subsidiaries; Holding
Company Structure."
Merger, Consolidation, or Sale of Assets
The Debenture Indenture will provide that the Issuer may not consolidate
or merge with or into (whether or not the Issuer is the surviving entity), or
sell, assign, transfer, lease, convey or otherwise
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dispose of all or substantially all of its properties or assets in one or
more related transactions to, another Person unless (i) the Issuer is the
surviving corporation or the Person formed by or surviving any such
consolidation or merger (if other than the Issuer) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the Person formed
by or surviving any such consolidation or merger (if other than the Issuer)
or the Person to which such sale, assignment, transfer, lease, conveyance or
other disposition will have been made assumes all the obligations of the
Issuer under the Debentures and the Debenture Indenture pursuant to a
supplemental indenture in form reasonably satisfactory to the Trustee; (iii)
immediately after such transaction, no Default or Event of Default exists;
and (iv) the Issuer or the Person formed by or surviving any such
consolidation or merger, or to which such sale, assignment, transfer, lease,
conveyance or other disposition will have been made will, at the time of such
transaction after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, be permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described above under the caption entitled "--Incurrence of Indebtedness and
Issuance of Preferred Stock." The foregoing clause (iv) will not prohibit (a)
a merger between the Issuer and a Subsidiary of an Affiliate of the Issuer
created solely for the purpose of holding the Capital Stock of the Issuer,
(b) a merger between the the Issuer and a Wholly Owned Restricted Subsidiary
or (c) a merger between the Issuer and an Affiliate incorporated solely for
the purpose of reincorporating the Issuer in another State of the United
States so long as, in each case, the amount of Indebtedness of the Issuer and
its Restricted Subsidiaries is not increased thereby.
Transactions with Affiliates
The Debenture Indenture will provide that the Issuer will not, and will
not permit any of its Restricted Subsidiaries to, make any payment to, or
sell, lease, transfer or otherwise dispose of any of its properties or assets
to, or purchase any property or assets from, or enter into or make or amend
any transaction, contract, agreement, understanding, loan, advance or
guarantee with or for the benefit of, any Affiliate (each of the foregoing,
an "Affiliate Transaction"), unless (i) such Affiliate Transaction is on
terms that are no less favorable to the Issuer or such Restricted Subsidiary
than those that would have been obtained in a comparable transaction by the
Issuer or such Restricted Subsidiary with an unrelated Person and (ii) if
such Affiliate Transaction involves aggregate payments in excess of $5.0
million, the Issuer delivers to the Trustee either (x) a resolution of the
Board of Directors of the Issuer set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
such Affiliate Transaction is approved by a majority of the members of the
Board of Directors of the Issuer or (y) an opinion as to the fairness to the
Holders of the Debentures of such Affiliate Transaction from a financial
point of view issued by an accounting, appraisal or investment banking firm
of national standing; provided, however, that (a) any employment agreement
entered into by the Issuer or any of its Restricted Subsidiaries in the
ordinary course of business and consistent with the past practice of the
Issuer or such Restricted Subsidiary, (b) transactions between or among the
Issuer and/or its Restricted Subsidiaries, (c) transactions between the
Issuer or its Restricted Subsidiaries on the one hand, and the Underwriter or
its Affiliates on the other hand, involving the provisions of financial,
consulting or underwriting services by the Underwriter or its Affiliates,
provided that the fees payable to the Underwriter or its Affiliates do not
exceed the usual and customary fees of the Underwriter and its Affiliates for
similar services, (d) transactions in accordance with the Specified
Agreements, as amended; provided that no such amendment contains any
provisions that are materially adverse to the Holders of the Debentures, (e)
payment of employee benefits, including bonuses, retirement plans and stock
options, in the ordinary course of business, consistent with past practice,
(f) the payment of reasonable and customary fees to, and indemnity provided
on behalf of, officers, directors, employees or consultants of the Issuer or
any Restricted Subsidiary; (g) Restricted Payments permitted by the
provisions of the Debenture Indenture described above under clauses (i),
(iv), (v), (vi), (ix), (x), (xiv) and (xvi) of the second paragraph of the
covenant described above under the caption entitled "--Restricted Payments,"
(h) payments and transactions in connection with the Merger and the
application of the net proceeds from the Offering, including the payment of
any fees and expenses with respect thereto, (i) transactions pursuant to the
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Intercompany Note and any forgiveness of Indebtedness thereunder, (j)
transactions permitted by the provisions of the Debenture Indenture under the
covenant described below under the caption entitled "--Sales of Accounts
Receivable" and (k) transactions pursuant to the Management Loans, in each
case, shall not be deemed Affiliate Transactions.
Sales of Accounts Receivable
The Issuer may, and any of its Restricted Subsidiaries may, sell at any
time and from time to time, accounts receivable to any Accounts Receivable
Subsidiary; provided that (i) the aggregate consideration received in each
such sale is at least equal to the aggregate fair market value of the
receivables sold, as determined by the Board of Directors in good faith, (ii)
no less than 80% of the consideration received in each such sale consists of
either cash or a promissory note (a "Promissory Note") which is subordinated
to no Indebtedness or obligation other than the financial institution or
other entities providing the financing to the Accounts Receivable Subsidiary
with respect to such accounts receivable (the "Financier") and the remainder
of such consideration consists of an Equity Interest in such Accounts
Receivable Subsidiary; provided further that the Initial Sale will include
all accounts receivable of the Issuer and/or its Restricted Subsidiaries that
are party to such arrangements that constitute eligible receivables under
such arrangements, (iii) the cash proceeds received from the Initial Sale
less reasonable and customary transaction costs will be deemed to be Net
Proceeds and will be applied in accordance with the second paragraph of the
covenant described above under the caption entitled "--Repurchase at the
Option of Holders--Asset Sales," and (iv) the Issuer and its Restricted
Subsidiaries will sell all accounts receivable that constitute eligible
receivables under such arrangements to the Accounts Receivable Subsidiary no
less frequently than on a weekly basis.
The Issuer (i) will not permit any Accounts Receivable Subsidiary to sell
any accounts receivable purchased from the Issuer or any of its Restricted
Subsidiaries to any other person except on an arm's-length basis and solely
for consideration in the form of cash or Cash Equivalents, (ii) will not
permit the Accounts Receivable Subsidiary to engage in any business or
transaction other than the purchase, financing and sale of accounts
receivable of the Issuer and its Restricted Subsidiaries and activities
incidental thereto, (iii) will not permit any Accounts Receivable Subsidiary
to incur Indebtedness in an amount in excess of 97% of the book value of such
Accounts Receivable Subsidiary's total assets, as determined in accordance
with GAAP, (iv) will, at least as frequently as monthly, cause the Accounts
Receivable Subsidiary to remit to the Issuer as payment for additional
receivables or on the Promissory Notes or as a dividend, all available cash
or Cash Equivalents not held in a collection account pledged to a Financier,
to the extent not applied to pay or maintain reserves for reasonable
operating expenses of the Accounts Receivable Subsidiary or to satisfy
reasonable minimum capital requirements based on then current market practice
of rating agencies in similar transactions involving receivables of a similar
type and quality, as determined by the Board of Directors in good faith and
(v) will not, and will not permit any of its Subsidiaries to, sell accounts
receivable to any Accounts Receivable Subsidiary upon (1) the occurrence of
an Event of Default with respect to the Issuer and its Restricted
Subsidiaries and (2) the occurrence of certain events of bankruptcy or
insolvency with respect to such Accounts Receivable Subsidiary.
Reports
The Debenture Indenture will provide that, whether or not required by the
rules and regulations of the Securities an Exchange Commission (the
"Commission"), so long as any Debentures are outstanding, the Issuer will
furnish to the Holders of Debentures (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Issuer were required to file such
Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that describes the financial condition
and results of operations of the Issuer and its Restricted Subsidiaries and,
with respect to the annual information only, a report thereon by the Issuer's
certified independent accountants and (ii) all current reports that would be
required to be filed with the Commission on Form 8-K if the Issuer were
required to file such reports. In addition whether or not required by the
rules and regulations of the Commission, the Issuer will file a copy of all
such information and reports with the Commission for public availability
(unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request.
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EVENTS OF DEFAULT AND REMEDIES
The Debenture Indenture will provide that each of the following
constitutes an Event of Default:
(i) default for 30 days in the payment when due of interest on the
Debentures;
(ii) default in payment when due of principal or premium, if any, on the
Debentures at maturity, upon redemption or otherwise;
(iii) failure by the Issuer for 30 days after receipt of notice from the
Trustee or Holders of at least 30% in principal amount of the Debentures
then outstanding to comply with the provisions of the covenants described
under the captions entitled "--Repurchase at the Option of Holders--Change
of Control," "--Repurchase at the Option of Holders--Asset Sales,"
"--Certain Covenants--Restricted Payments," "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," or
"--Certain Covenants--Merger, Consolidation or Sale of Assets;"
(iv) failure by the Issuer for 60 days after notice from the Trustee or
the Holders of at least 30% in principal amount of the Debentures then
outstanding to comply with its other agreements in the Debenture Indenture
or the Debentures;
(v) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Issuer or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Issuer or any
of its Restricted Subsidiaries) whether such Indebtedness or guarantee now
exists, or is created after the date of the Debenture Indenture, which
default (i) is caused by a failure to pay Indebtedness at its stated final
maturity (after giving effect to any applicable grace period provided in
such Indebtedness) (a "Payment Default") or (ii) results in the
acceleration of such Indebtedness prior to its stated final maturity and,
in each case, the principal amount of any such Indebtedness, together with
the principal amount of any other such Indebtedness under which there has
been a Payment Default or the maturity of which has been so accelerated,
aggregates $20.0 million or more;
(vi) failure by the Issuer or any of its Restricted Subsidiaries to pay
final judgments aggregating in excess of $20.0 million (net of any amounts
with respect to which a reputable and creditworthy insurance company has
acknowledged liability in writing), which judgments are not paid,
discharged or stayed within 60 days after their entry; and
(vii) certain events of bankruptcy or insolvency with respect to the
Issuer or any Restricted Subsidiary that is a Significant Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 30% in principal amount of the then outstanding
Debentures may declare all the Debentures to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising
from certain events of bankruptcy or insolvency with respect to the Issuer or
any Significant Subsidiary, all outstanding Debentures will become due and
payable without further action or notice. Upon any acceleration of maturity
of the Debentures, all principal of and accrued interest on (if on or after
August 1, 2002) or Accreted Value of (if prior to August 1, 2002) the
Debentures shall be due and payable immediately. Holders of the Debentures
may not enforce the Debenture Indenture or the Debentures except as provided
in the Debenture Indenture. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding Debentures may direct
the Trustee in its exercise of any trust or power.
The Holders of a majority in aggregate principal amount of the Debentures
then outstanding, by notice to the Trustee, may on behalf of the Holders of
all of the Debentures waive any existing Default or Event of Default and its
consequences under the Debenture Indenture, except a continuing Default or
Event of Default in the payment of interest or premium on, or principal of,
the Debentures. The Trustee may withhold from Holders of the Debentures
notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in such Holders' interest.
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The Issuer is required to deliver to the Trustee annually a statement
regarding compliance with the Debenture Indenture, and the Issuer is required
upon becoming aware of any Default or Event of Default to deliver to the
Trustee a statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Issuer
shall have any liability for any obligations of the Issuer under the
Debentures or the Debenture Indenture or for any claim based on, in respect
of, or by reason of, such obligations or their creation. Each Holder of
Debentures by accepting a Debenture waives and releases all such liability.
The waiver and release are part of the consideration for issuance of the
Debentures. Such waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the Commission that such a
waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuer may, at its option and at any time, elect to have the
obligation of the Issuer discharged with respect to the outstanding
Debentures ("legal defeasance"). Such legal defeasance means that the Issuer
will be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Debentures, except for (a) the rights of
Holders of outstanding Debentures to receive payments in respect of the
principal amount at maturity of or Accreted Value (as applicable), premium,
if any, and interest on the Debentures when such payments are due, or on the
redemption date, as the case may be, (b) the Issuer's obligations with
respect to the Debentures concerning issuing temporary Debentures,
registration of Debentures, mutilated, destroyed, lost or stolen Debentures
and the maintenance of an office or agency for payment and money for security
payments held in trust, (c) the rights, powers, trusts, duties and immunities
of the Trustee, and the Issuer's obligations in connection therewith and (d)
the legal defeasance provisions of the Debenture Indenture. In addition, the
Issuer may, at its option and at any time, elect to have the obligations of
the Issuer released with respect to certain covenants that are described in
the Debenture Indenture ("covenant defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Debentures. In the event covenant defeasance
occurs, certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "--Events of Default
and Remedies" will no longer constitute an Event of Default with respect to
the Debentures.
In order to exercise either legal defeasance or covenant defeasance, (i)
the Issuer must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the Debentures, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants selected by the Trustee, to pay the principal amount at
maturity of or Accreted Value (as applicable), premium, if any, and interest
on the outstanding Debentures on the stated maturity or on the applicable
optional redemption date, as the case may be, and the Issuer must specify
whether the Debentures are being defeased to maturity or to a particular
redemption date; (ii) in the case of legal defeasance, the Issuer shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) the Issuer has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Debenture Indenture, there has been a
change in the applicable federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel shall confirm that, subject
to customary assumptions and exclusions, the Holders of the outstanding
Debentures will not recognize income, gain or loss for federal income tax
purposes as a result of such legal defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such legal defeasance had not occurred; (iii) in
the case of covenant defeasance, the Issuer shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that, subject to customary assumptions and exclusions,
the Holders of the outstanding Debentures will not recognize income, gain or
loss for federal income tax purposes as a result of such covenant defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such covenant
defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit
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(other than a Default or Event of Default resulting from the borrowing of
funds to be applied to such deposit) or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit; (v) such legal defeasance
or covenant defeasance will not result in a breach or violation of, or
constitute a default under any material agreement or instrument (other than
the Debenture Indenture) to which the Issuer or any of its Subsidiaries is a
party or by which the Issuer or any of its Subsidiaries is bound; (vi) the
Issuer must have delivered to the Trustee an opinion of counsel to the effect
that, subject to customary assumptions and exclusions (which assumptions and
exclusions shall not relate to the operation of Section 547 of the United
States Bankruptcy Code or any analogous New York State law provision), after
the 91st day following the deposit, the trust funds will not be subject to
the effect of any applicable bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally and that the Trustee has a
perfected security interest in such trust funds for the ratable benefit of
the Holders; (vii) the Issuer must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Issuer with the
intent of preferring the Holders of Debentures over the other creditors of
the Issuer with the intent of defeating, hindering, delaying or defrauding
creditors of the Issuer or others; and (viii) the Issuer must deliver to the
Trustee an Officers' Certificate and an opinion of counsel (which opinion of
counsel may be subject to customary assumptions and exclusions), each stating
that all conditions precedent provided for relating to the legal defeasance
or the covenant defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Debentures in accordance with the
Debenture Indenture. The Registrar and the Trustee may require a Holder,
among other things, to furnish appropriate endorsements and transfer
documents and the Issuer may require a Holder to pay any taxes and fees
required by law or permitted by the Debenture Indenture. The Issuer is not
required to transfer or exchange any Debenture selected for redemption. Also,
the Issuer is not required to transfer or exchange any Debenture for a period
of 15 days before a selection of Debentures to be redeemed.
The registered Holder of a Debenture will be treated as the owner of it
for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Debenture
Indenture or the Debentures may be amended or supplemented with the consent
of the Holders of at least a majority in principal amount at maturity of the
Debentures then outstanding (including, without limitation, consents obtained
in connection with a purchase of, or tender offer or exchange offer for,
Debentures), and any existing default or compliance with any provision of the
Debenture Indenture or the Debentures may be waived with the consent of the
Holders of a majority in principal amount of the then outstanding Debentures
(including, without limitation, consents obtained in connection with a
purchase of, or tender offer or exchange offer for, Debentures).
Without the consent of each Holder affected, however, an amendment or
waiver may not (with respect to any Debenture held by a non-consenting
Holder): (i) reduce the principal amount of Debentures whose Holders must
consent to an amendment, supplement or waiver; (ii) reduce the principal
amount at maturity of, change the fixed maturity of, or alter the redemption
provisions of (other than provisions relating to the covenants described
above under the caption entitled "--Repurchase at the Option of Holders"),
the Debentures or amend or modify the calculation of the Accreted Value so as
to reduce the amount of the Accreted Value of the Debentures; (iii) reduce
the rate of or change the time for payment of interest on any Debentures;
(iv) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the Debentures (except a rescission of
acceleration of the Debentures by the Holders of at least a majority in
aggregate principal amount of the Debentures and a waiver of the payment
default that resulted from such acceleration); (v) make any Debenture payable
in money other than that stated in the Debentures; (vi) waive a redemption or
repurchase payment with respect to any Debenture (other a payment required by
one of the covenants described above under the caption entitled "--Repurchase
at the Option of Holders"), (vii) make any change in the foregoing amendment
and waiver provisions; (viii) modify any provision of the Debenture Indenture
with respect
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to the priority of the Debentures in right of payment or (ix) make any change
to the right of Holders to waive an existing Default or Event of Default or
the right of Holders to receive payments of principal, premium, if any, and
interest on Debentures. Notwithstanding the foregoing, any amendment or
waiver to the covenant described above under the caption "--Repurchase at the
Option of Holders--Change of Control" will require the consent of the Holders
of at least two-thirds in aggregate principal amount of the Debentures then
outstanding if such amendment would adversely affect the rights of Holders of
Debentures.
Notwithstanding the foregoing, without the consent of any Holder of
Debentures, the Issuer and the Trustee may amend or supplement the Debenture
Indenture or the Debentures to cure any ambiguity, defect or inconsistency,
to provide for uncertificated Debentures in addition to or in place of
certificated Debentures, to provide for the assumption of the Issuer's
obligations to Holders of the Debentures in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the Holders of the Debentures or that does not adversely affect
the legal rights under the Debenture Indenture of any such Holder or to
comply with requirements of the Commission in order to effect or maintain the
qualification of the Debenture Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Debenture Indenture contains certain limitations on the rights of the
Trustee, should the Trustee become a creditor of the Issuer, to obtain
payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise. The Trustee
will be permitted to engage in other transactions with the Issuer; however,
if the Trustee acquires any conflicting interest, it must eliminate such
conflict within 90 days, apply to the Commission for permission to continue
as Trustee or resign.
The Holders of a majority in principal amount at maturity of the then
outstanding Debentures will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Trustee subject to certain exceptions. The Debenture Indenture provides that
in case an Event of Default shall occur (which shall not be cured), the
Trustee will be required, in the exercise of its power, to use the degree of
care of a prudent man in the conduct of his own affairs. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Debenture Indenture at the request of any Holder
of Debentures, unless such Holder shall have offered to the Trustee security
and indemnity satisfactory to it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Debenture
Indenture, without charge by writing to DecisionOne Holdings Corp., 50 East
Swedesford Road, Frazer, Pennsylvania 19355, Attention: General Counsel.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Debenture Indenture.
Reference is made to the Debenture Indenture for a full disclosure of all
such terms, as well as any other capitalized terms used herein for which no
definition is provided.
"Accounts Receivable Subsidiary" means any newly created, Wholly Owned
Subsidiary of the Issuer (i) which is formed solely for the purpose of, and
which engages in no activities other than activities in connection with,
financing accounts receivable of the Issuer and/or its Restricted
Subsidiaries, (ii) which is designated by the Board of Directors of the
Issuer as an Accounts Receivables Subsidiary pursuant to a Board of
Directors' resolution set forth in an Officers' Certificate and delivered to
the Trustee, (iii) that has total assets at the time of such designation with
a book value not exceeding $500,000 plus the reasonable fees and expenses
required to establish such Accounts Receivable Subsidiary and any accounts
receivable financing, (iv) no portion of Indebtedness or any other obligation
(contingent or otherwise) of which (a) is at any time recourse to or
obligates the Issuer or any Restricted Subsidiary of the Issuer in any way,
other than pursuant to (I) representations and covenants entered into in the
ordinary course of
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business in connection with the sale of accounts receivable to such Accounts
Receivable Subsidiary or (II) any guarantee of any such accounts receivable
financing by the Issuer or any Restricted Subsidiary that is permitted to be
incurred pursuant to the covenant described under the caption entitled
"--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock," or (b) subjects any property or asset of the Issuer or any Restricted
Subsidiary of the Issuer, directly or indirectly, contingently or otherwise,
to the satisfaction thereof, other than pursuant to (I) representations and
covenants entered into in the ordinary course of business in connection with
sales of accounts receivable or (II) any guarantee of any such accounts
receivable financing by the Issuer or any Restricted Subsidiary that is
permitted to be incurred pursuant to the covenant described under the caption
entitled "--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock," (v) with which neither the Issuer nor any Restricted
Subsidiary of the Issuer has any contract, agreement, arrangement or
understanding other than contracts, agreements, arrangements and
understandings entered into in the ordinary course of business in connection
with sales of accounts receivable in accordance with the covenant described
under the caption "--Certain Covenants--Sales of Accounts Receivable" and
fees payable in the ordinary course of business in connection with servicing
accounts receivable and (vi) with respect to which neither the Issuer nor any
Restricted Subsidiary of the Issuer has any obligation (a) to subscribe for
additional shares of Capital Stock or other Equity Interests therein or make
any additional capital contribution or similar payment or transfer thereto
other than in connection with the sale of accounts receivable to such
Accounts Receivable Subsidiary in accordance with the covenant described
under "--Certain Covenants--Sales of Accounts Receivable" or (b) to maintain
or preserve the solvency or any balance sheet term, financial condition,
level of income or results of operations thereof.
"Accreted Value" means, as of any date of determination prior to August 1,
2002, with respect to any Debenture, the sum of (a) the initial offering
price (which shall be calculated by discounting the aggregate principal
amount at maturity of such Debenture at a rate of 11 1/2% per annum,
compounded semi-annually on each February 1 and August 1 from August 1, 2002
to the date of issuance) of such Debenture and (b) the portion of the excess
of the principal amount of such Debenture over such initial offering price
which shall have been accreted thereon through such date, such amount to be
so accreted on a daily basis at a rate of 11 1/2% per annum of the initial
offering price of such Debenture, compounded semi-annually on each February 1
and August 1 from the date of issuance of the Debentures through the date of
determination, computed on the basis of a 360-day year of twelve 30-day
months.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person
merges with or into or becomes a Subsidiary of such specified Person
including, without limitation, Indebtedness incurred in connection with, or
in contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person or assumed in
connection with the acquisition of any asset used or useful in a Permitted
Business acquired by such specified Person.
"Adjusted Consolidated Net Income" means, with respect to any Person for
any period, the Consolidated Net Income of such Person for such period plus,
to the extent deducted in calculating Consolidated Net Income, the sum of (i)
100% of the aggregate amortization of intangibles (less any tax benefit
recorded by such Person as a result of such amortization) plus, with respect
to the Issuer, up to $25 million of charges arising from any write-off of
intangibles reflected on the Issuer's balance sheet as of March 31, 1997, for
such period of such Person and its Restricted Subsidiaries, (ii) 100% of
non-cash compensation expense for such period incurred by such Person and its
Restricted Subsidiaries related to stock options or other Equity Interests
granted to the employees or directors of such Person and its Restricted
Subsidiaries and (iii) expenses and charges of the Issuer and DecisionOne
Corp. related to the Merger which are paid, taken or otherwise accounted for
within 90 days of the consummation of the Merger.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and
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"under common control with") as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a sale and leaseback)
other than (A) in the ordinary course of business or (B) sales of accounts
receivables to the Accounts Receivables Subsidiary in accordance with the
covenant described under the caption entitled "--Certain Covenants--Sales of
Accounts Receivable" (provided that the sale, lease, conveyance or other
disposition of all or substantially all of the assets of Holdings and its
Subsidiaries taken as a whole will be governed by the provisions of the
Debenture Indenture described above under the caption entitled "--Repurchase
at the Option of Holders--Change of Control" and/or the provisions described
above under the caption entitled "--Certain Covenants--Merger, Consolidation
or Sale of Assets" and not by the provisions of the Asset Sale covenant); and
(ii) the issue by any Restricted Subsidiaries of the Issuer of any Equity
Interests of such Restricted Subsidiary and the sale by the Issuer or any of
its Restricted Subsidiaries of Equity Interests of any of the Issuer's
Subsidiaries, in the case of clauses (i) and (ii), whether in a single
transaction or series of related transactions (a) that have a fair market
value in excess of $1.0 million or (b) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing: (1) a transfer of assets by the
Issuer to a Restricted Subsidiary or by a Restricted Subsidiary to the Issuer
or to another Restricted Subsidiary, (2) an issuance of Equity Interests by a
Restricted Subsidiary to the Issuer or to another Restricted Subsidiary, (3)
a Restricted Payment that is permitted by the covenant described above under
the caption entitled "--Certain Covenants--Restricted Payments," (4) the sale
and leaseback of any assets within 90 days of the acquisition of such assets,
(5) foreclosures on assets and (6) a disposition of Cash Equivalents in the
ordinary course of business will not be deemed to be Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining
term of the lease included in such sale and leaseback transaction (including
any period for which such lease has been extended or may, at the option of
the lessor, be extended).
"Business" shall have the meaning assigned to such term in Article 11,
Rule 11-01(d) of Regulation S-X, promulgated pursuant to the Securities Act,
as such regulation is in effect on the date of the Indenture.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means, (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated)
of corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right
to receive a share of the profits and losses of, or distributions of assets
of, the issuing Person.
"Cash Equivalents" means (i) Government Securities, (ii) any certificate
of deposit maturing not more than 365 days after the date of acquisition
issued by, or time deposit of, an Eligible Institution or any lender under
the New Credit Facility, (iii) commercial paper maturing not more than 365
days after the date of acquisition of an issuer (other than an Affiliate of
the Issuer) with a rating, at the time as of which any investment therein is
made, of "A-3" (or higher) according to S&P or "P-2" (or higher) according to
Moody's or carrying an equivalent rating by a nationally recognized rating
agency if both of the two named rating agencies cease publishing ratings of
investments, (iv) any bankers acceptances or money market deposit accounts
issued by an Eligible Institution and (v) any fund investing exclusively in
investments of the types described in clauses (i) through (iv) above.
"Change of Control" means the occurrence of any of the following: (i) any
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation) in one or a series of
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related transactions, of all or substantially all of the assets of the Issuer
and its Subsidiaries taken as a whole to any "person" (as defined in Section
13(d) of the Exchange Act) or "group" (as defined in Sections 13(d)(3) and
14(d)(2) of the Exchange Act) other than the Principals and their Related
Parties; (ii) the adoption of a plan for the liquidation or dissolution of
the Issuer; (iii) the Issuer consolidates with, or merges with or into,
another "person" (as defined above) or "group" (as defined above) in a
transaction or series of related transactions in which the Voting Stock of
the Issuer is converted into or exchanged for cash, securities or other
property, other than any transaction where (A) the outstanding Voting Stock
of the Issuer is converted into or exchanged for Voting Stock (other than
Disqualified Stock) of the surviving or transferee corporation and (B) either
(1) the "beneficial owners" (as defined in Rule 13d-3 under the Exchange Act)
of the Voting Stock of the Issuer immediately prior to such transaction own,
directly or indirectly through one or more Subsidiaries, not less than a
majority of the total Voting Stock of the surviving or transferee corporation
immediately after such transaction or (2) if, immediately prior to such
transaction the Issuer is a direct or indirect Subsidiary of any other Person
(such other Person, the "Parent Holding Company"), then the "beneficial
owners" (as defined above) of the Voting Stock of such Parent Holding Company
immediately prior to such transaction own, directly or indirectly through one
or more Subsidiaries, not less than a majority of the Voting Stock of the
surviving or transferee corporation immediately after such transaction; (iv)
the consummation of any transaction or series of related transactions
(including, without limitation, by way of merger or consolidation) the result
of which is that any "person" (as defined above) or "group" (as defined
above) other than the Principals and their Related Parties becomes the
"beneficial owner" (as defined above) of more than 50% of the voting power of
the Voting Stock of the Issuer or any Parent Holding Company of the Issuer or
(v) the first day on which a majority of the members of the Board of
Directors of the Issuer or any Parent Holding Company of the Issuer are not
Continuing Directors.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person and its Restricted Subsidiaries
for such period, plus, to the extent deducted in computing Consolidated Net
Income, (i) provision for taxes based on income or profits of such Person and
its Restricted Subsidiaries for such period, (ii) Fixed Charges of such
Person for such period, (iii) depreciation and amortization (including
amortization of goodwill and other intangibles) and all other non-cash
charges (excluding any such non-cash charge to the extent that it represents
(x) an accrual of or reserve for cash charges in any future period, (y)
amortization of a prepaid cash expense that was paid in a prior period or (z)
amortization attributable to rotable inventory which has been capitalized in
accordance with GAAP) of such Person and its Restricted Subsidiaries for such
period, (iv) any net loss realized in connection with any Asset Sale and any
extraordinary or non-recurring loss, in each case, on a consolidated basis
determined in accordance with GAAP and (v) expenses and charges of the Issuer
or DecisionOne Corp. related to the Merger which are paid, taken or otherwise
accounted for within 90 days of the consummation of the Merger.
Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, the Fixed Charges of, and the depreciation and amortization and
other non-cash charges of, a Restricted Subsidiary of a Person shall be added
to Consolidated Net Income to compute Consolidated Cash Flow only to the
extent (and in the same proportion) that the Net Income of such Restricted
Subsidiary was included in calculating the Consolidated Net Income of such
Person.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of: (a) the interest expense of such Person and its
Restricted Subsidiaries for such period, on a consolidated basis, determined
in accordance with GAAP (including amortization of original issue discount,
non-cash interest payments, the interest component of all payments associated
with Capital Lease Obligations, imputed interest with respect to Attributable
Debt, commissions, discounts and other fees and charges incurred in respect
of letter of credit or bankers' acceptance financings, and net payments, if
any, pursuant to Hedging Obligations; provided, however, that in no event
shall any amortization of deferred financing costs be included in
Consolidated Interest Expense) and (b) consolidated capitalized interest of
such Person and its Restricted Subsidiaries for such period, whether paid or
accrued.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in
accordance with GAAP; provided, however, that (i) the Net Income or loss of
any Person
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that is not a Restricted Subsidiary or that is accounted for by the equity
method of accounting shall be included only to the extent of the amount of
dividends or distributions paid to the referent Person or a Restricted
Subsidiary thereof in cash, (ii) the Net Income of any Person acquired in a
pooling of interests transaction for any period prior to, the date of such
acquisition shall be excluded, and (iii) the cumulative effect of a change in
accounting principles, shall be excluded.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Issuer or any Parent Holding Company of the
Issuer who (i) was a member of such Board of Directors immediately after
consummation of the Merger, including the Offering and the application of the
net proceeds thereof, or (ii) was nominated for election or elected to such
Board of Directors with the approval of a majority of the Continuing
Directors who were members of such Board at the time of such nomination or
election or any successor Continuing Directors appointed by such Continuing
Directors (or their successors).
"DecisionOne Corp." means DecisionOne Corporation, a Delaware corporation
or its successors.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Designated Preferred Stock" means preferred stock of the Issuer (other
than Disqualified Stock) that is issued for cash (other than to a Restricted
Subsidiary) and is so designated as Designated Preferred Stock, pursuant to
an Officers' Certificate executed by the principal executive officer and the
principal financial officer of the Issuer, on the issuance date thereof, the
cash proceeds of which are excluded from the calculation set forth in clause
(c) of the covenant described under the caption entitled "--Certain
Covenants--Restricted Payments."
"Disqualified Stock" means, with respect to any Person, any Capital Stock
that, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, is exchangeable for Indebtedness (except to the
extent exchangeable at the option of such Person subject to the terms of any
debt instrument to which such Person is a party), or is redeemable at the
option of the Holder thereof, in whole or in part, on or prior to August 1,
2008; provided, however, that if such Capital Stock is issued to any plan for
the benefit of employees of the Issuer or its Subsidiaries or by any such
plan to such employees, such Capital Stock shall not constitute Disqualified
Stock solely because it may be required to be repurchased by the Issuer in
order to satisfy applicable statutory or regulatory obligations.
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus not less than $100.0 million or its equivalent
in foreign currency, whose short-term debt is rated "A-3" or higher according
to Standard & Poor's Ratings Group ("S&P") or "P-2" or higher according to
Moody's Investor Services, Inc. ("Moody's") or carrying an equivalent rating
by a nationally recognized rating agency if both of the two named rating
agencies cease publishing ratings of investments.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any (i) issuance of common stock or preferred
stock by the Issuer (other than Disqualified Stock) that is registered
pursuant to the Securities Act, other than issuances registered on Form S-8
and issuances registered on Form S-4, and (ii) any private issuance of common
stock or preferred stock by the Issuer (other than Disqualified Stock),
excluding, in the case of clauses (i) and (ii) above, issuances of common
stock pursuant to employee benefit plans of the Issuer or its Restricted
Subsidiaries or otherwise as compensation to employees of the Issuer or its
Restricted Subsidiaries.
"Existing Indebtedness" means Indebtedness of the Issuer and its
Restricted Subsidiaries (other than Indebtedness under the New Credit
Facility or the Senior Subordinated Notes) in existence on the date of the
Debenture Indenture until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the Consolidated Interest Expense of such Person
for such period and (ii) any interest expense on
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Indebtedness of another Person that is guaranteed by the referent Person or
one of its Restricted Subsidiaries or secured by a Lien on assets of such
Person or one of its Restricted Subsidiaries (whether or not such guarantee
or Lien is called upon) and (iii) the product of (a) all cash dividend
payments of the Issuer or any Restricted Subsidiary of the Issuer on any
series of preferred stock of the Issuer or such Restricted Subsidiary times
(b) a fraction, the numerator of which is one and the denominator of which is
one minus the then current combined federal, state and local statutory tax
rate of such Person, expressed as a decimal, in each case, on a consolidated
basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person
and its Restricted Subsidiaries for such period. In the event that the Issuer
or any of its Restricted Subsidiaries incurs, assumes, guarantees, redeems or
repays any Indebtedness (other than revolving credit borrowings) or issues or
redeems preferred stock subsequent to the commencement of the period for
which the Fixed Charge Coverage Ratio is being calculated but on or prior to
the date on which the event for which the calculation of the Fixed Charge
Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge
Coverage Ratio shall be calculated giving pro forma effect to such
incurrence, assumption, guarantee, redemption or repayment of Indebtedness,
or such issuance or redemption of preferred stock, as if the same had
occurred at the beginning of the applicable four-quarter reference period.
For purposes of making the computation referred to above, (i) the
Consolidated Cash Flow of the Company shall include (a) the Consolidated Cash
Flow of the Company and its Restricted Subsidiaries for the latest
four-quarter period for which consolidated internal financial statements of
the Company are available as derived from such financial statements plus or
minus (b) with respect to any Business or Qualified Contracts that have been
acquired by the Company or any of its Restricted Subsidiaries, including
through mergers or consolidations, after the first day of the applicable
four-quarter period and prior to the Calculation Date, the result of (1) the
Consolidated Cash Flow of such Business or Qualified Contracts for the most
recent three-month period prior to such acquisition for which internal
financial statements in respect of such acquired Business or Qualified
Contracts are available times four multiplied by (2) a fraction the numerator
of which is 365 minus the number of days during the relevant four-quarter
period for which the results of operations of such Business or Qualified
Contracts were included in clause (a) of this sentence and the denominator of
which is 365, (ii) the acquisition of any Business or Qualified Contracts
that has been made by the Issuer or any of its Restricted Subsidiaries,
including through mergers or consolidations and including any related
financing transactions after the first day of the applicable four-quarter
period and on or prior to the Calculation Date shall give pro forma effect to
financing transactions (including the incurrence of Acquired Debt) in
connection with the acquisition of such Business or Qualified Contracts, as
if such acquisition had occurred at the beginning of the applicable reference
period, and (iii) the Consolidated Cash Flow and expenses attributable to
discontinued operations as determined in accordance with GAAP, and
operations, Businesses and Qualified Contracts disposed of prior to the
Calculation Date shall be excluded. For purposes of the foregoing clause (i),
the Consolidated Cash Flow attributable to any Business or Qualified
Contracts acquired by the Issuer or any Restricted Subsidiary of the Issuer
shall be calculated utilizing the actual revenues attributable to such
Business or Qualified Contracts for the applicable period and the expenses
that would have been attributable to such Business or Qualified Contracts had
the Issuer acquired such Business or Qualified Contracts at the beginning of
the applicable period, as determined in good faith by the Issuer, taking into
account the Issuer's historical expenses in connection with the provision of
similar services for similar equipment under similar contracts. If since the
beginning of the applicable four-quarter period any Person (that subsequently
becomes a Restricted Subsidiary or was merged with or into the Issuer or any
Restricted Subsidiary since the beginning of such period) shall have made or
engaged in any Investment, disposition of operations, Businesses or Qualified
Contracts, or merger or consolidation, or shall have discontinued any
operations or acquired any Business or Qualified Contracts that would have
required adjustment pursuant to this definition had such Person been a
Restricted Subsidiary at the time of such Investment, disposition, merger,
consolidation, discontinued operation or acquisition, then "Consolidated Cash
Flow" shall be calculated giving pro forma effect thereto for such period as
if such Investment, acquisition, disposition, merger, consolidation or
discontinued operation had occurred at the beginning of the applicable
four-quarter period.
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"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment
of the accounting profession of the United States, which are in effect on the
date of the Debenture Indenture; provided, however, that all reports and
other financial information provided by the Issuer to the Holders, the
Trustee and/or the Commission shall be prepared accordance with GAAP, as in
effect on the date of such report or other financial information.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which
guarantee or obligations the full faith and credit of the United States of
America is pledged.
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations
of such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or foreign exchange rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or representing Capital Lease
Obligations or the balance deferred and unpaid of the purchase price of any
property, except any such balance that constitutes an accrued expense or
trade payable, or representing any Hedging Obligations, if and to the extent
any of the foregoing indebtedness (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such
indebtedness is assumed by such Person), the maximum fixed repurchase price
of Disqualified Stock issued by such Person and the liquidation preference of
preferred stock issued by such Person, in each case, if held by any Person
other than the Issuer or a Wholly Owned Restricted Subsidiary of the Issuer,
and, to the extent not otherwise included, the guarantee by such Person of
any indebtedness of any other Person; provided that Indebtedness shall not
include the pledge by the Company of the Capital Stock of an Unrestricted
Subsidiary of the Company to secure Non-Recourse Debt of such Unrestricted
Subsidiary.
"Initial Sale" means (i) the first transaction after the commencement of
any accounts receivable financing arrangement in which accounts receivable
are sold by the Issuer and/or its Restricted Subsidiaries to an Accounts
Receivable Subsidiary and (ii) the first transaction following any amendment
to any such arrangement pursuant to which the class of eligible receivables
to be purchased pursuant to such arrangement is expanded in which such
expanded class of accounts receivable are sold by the Issuer and/or its
Restricted Subsidiaries to an Accounts Receivable Subsidiary.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees), advances or capital contributions
(excluding commission, travel and similar advances to officers and employees
made in the ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities, and all
other items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP; provided that an acquisition of assets,
Equity Interests or other securities by the Issuer for consideration
consisting of common equity securities of the Issuer shall not be deemed to
be an Investment. If the Issuer or any Subsidiary of the Issuer sells or
otherwise disposes of any Equity Interests of any direct or indirect
Subsidiary of the Issuer such that, after giving effect to any such sale or
disposition, such Person is no longer a Subsidiary of the Issuer, the Issuer
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity Interests of such
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described above under the caption entitled
"--Certain Covenants--Restricted Payments."
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"Investors' Agreement" means the investors' agreement, dated as of August
7, 1997, among DecisionOne Corp., the DLJMB Funds, the Institutional
Investors and the Management Shareholders, as amended from time to time.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable
law (including any conditional sale or other title retention agreement, any
lease in the nature thereof, any option or other agreement to sell or give a
security interest).
"Management Loans" means one or more loans by the Issuer or DecisionOne
Corp. to officers and/or directors of the Issuer and any of its Restricted
Subsidiaries to finance the purchase by such officers and directors of common
stock of the Issuer; provided, however, that the aggregate principal amount
of all such Management Loans outstanding at any time shall not exceed $10.0
million.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP, excluding, however, (i) any
gain (but not loss), together with any related provision for taxes on such
gain (but not loss), realized in connection with (a) any Asset Sale
(including, without limitation, dispositions pursuant to sale and leaseback
transactions) or (b) the extinguishment of any Indebtedness of such Person or
any of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring
gain (but not loss), together with any related provision for taxes on such
extraordinary or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Issuer or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale), net of the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied
to the repayment of Indebtedness (other than Indebtedness of the Issuer or
any Restricted Subsidiary referred to in clause (a) or (b) of the second
paragraph of the covenant described above under the caption "--Repurchase at
the Option of Holders--Asset Sales") secured by a Lien on the asset or assets
that are the subject of such Asset Sale and any reserve for adjustment in
respect of the sale price of such asset or assets established in accordance
with GAAP.
"New Credit Facility" means that certain credit agreement, by and among
DecisionOne, Donaldson, Lufkin & Jenrette Securities Corporation, as
arranger, DLJ Capital Funding, Inc., as syndication agent, and the lenders
party thereto, including any related notes, guarantees, collateral documents,
instruments and agreement executed in connection therewith, and in each case
as amended, modified, renewed, refunded, replaced refinanced from time to
time, including any agreement extending the maturity of or refinancing or
refunding all or any portion of the Indebtedness thereunder or increasing the
amount that may be borrowed under such agreement or any successor agreement,
whether or not among the same parties.
"Non-Recourse Debt" means Indebtedness (i) no default with respect to,
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Issuer or any of its Restricted Subsidiaries to declare a default on such
other Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity; and (ii) as to which the lenders have been
notified in writing that they will not have any recourse to the stock (other
than the stock of an Unrestricted Subsidiary pledged by the Company to secure
debt of such Unrestricted Subsidiary) or assets of the Issuer or any of its
Restricted Subsidiaries; provided, however, that in no event shall
Indebtedness of any Unrestricted Subsidiary fail to be Non-Recourse Debt
solely as a result of any default provisions contained in a guarantee thereof
by the Issuer or any of its Restricted Subsidiaries if the Issuer or such
Restricted Subsidiary was otherwise permitted to incur such guarantee
pursuant to the Debenture Indenture.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
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"Pari Passu Indebtedness" means Indebtedness of the Issuer that ranks pari
passu in right of payment to the Debentures.
"Permitted Business" means the equipment maintenance or support services
business or any business reasonably ancillary or related thereto.
"Permitted Investments" means (i) Investments in the Issuer or in a
Restricted Subsidiary of the Issuer, (ii) Investments in cash or Cash
Equivalents, (iii) Investments by the Issuer or any Restricted Subsidiary of
the Issuer in a Person if, as a result of such Investment, (a) such person
becomes a Restricted Subsidiary of the Issuer or (b) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Issuer or a
Restricted Subsidiary of the Issuer, (iv) Investments in accounts and notes
receivable acquired in the ordinary course of business, (v) any non-cash
consideration received in connection with an Asset Sale that complies with
the covenant described above under the caption entitled "--Repurchase at the
Option of Holders--Asset Sales," (vi) loans and advances to officers,
directors and employees for business-related travel expenses, moving expenses
and other similar expenses, in each case, incurred in the ordinary course of
business, (vii) any guarantees permitted to be made pursuant to the covenant
described under the caption "--Certain Covenants--Incurrence of Indebtedness
and Issuance of Preferred Stock," (viii) Investments in any Accounts
Receivable Subsidiary made in connection with the formation of an Accounts
Receivable Subsidiary or received in consideration of sales of accounts
receivable, in each case, in accordance with the covenant described under the
caption entitled "--Certain Covenants--Sales of Accounts Receivable" and (ix)
the Management Loans.
"Permitted Liens" means (i) Liens on assets of DecisionOne Corp. and its
Subsidiaries; (ii) Liens in favor of the Issuer; (iii) Liens created by
Restricted Subsidiaries of the Issuer to secure Indebtedness of such
Restricted Subsidiaries to the Issuer or to other Wholly Owned Restricted
Subsidiaries of the Issuer; (iv) the pledge of the capital stock of
DecisionOne Corp. to secure the New Credit Facility; (v) Liens to secure the
performance of statutory obligations, surety or appeal bonds, performance
bonds or other obligations of a like nature incurred in the ordinary course
of business; (vi) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested in good faith
by appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be required
in conformity with GAAP shall have been made therefor; (vii) carriers',
warehousemen's, mechanics', landlords', materialmen's, repairmen's or other
similar Liens arising in the ordinary course of business that are not
delinquent or remain payable without penalty; (viii) easements,
rights-of-way, restrictions and other similar encumbrances incurred in the
ordinary course of business that, in the aggregate, are not substantial in
amount, and that do not in any case materially detract from the value of the
property subject thereto or interfere with the ordinary conduct of the
businesses of the Issuer; (ix) Liens arising by operation of law in
connection with judgments to the extent, for an amount and for a period not
resulting in an Event of Default with respect thereto; (x) any customary
retention of title by the lessor under a Capital Lease Obligation incurred in
compliance with the covenant described under the caption entitled "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock;" (xi)
Liens in favor of the United States of America or any State thereof, or any
department, agency or instrumentality or political subdivision thereof, to
secure partial, progress, advance or other payments; (xii) Liens (other than
any Lien imposed by ERISA) consisting of pledges or deposits required in the
ordinary course of business in connection with workers' compensation,
unemployment insurance and other social security legislation; (xiii) Liens
arising solely by virtue of any statutory or common law provision relating to
banker's liens, rights of setoff or similar rights and remedies, in each case
as to deposit accounts or other funds maintained with a creditor depository
institution; provided that (A) such deposit account is not a dedicated cash
collateral account and is not subject to restrictions against access by the
Issuer in excess of those set forth by regulations promulgated by the Federal
Reserve Board, and (B) such deposit account is not intended by the Issuer to
provide collateral to the depository institution; (xiv) Liens on property of
a Person existing at the time such Person is merged into or consolidated with
the Issuer; provided that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not extend to any assets
other than those of the Person merged into or consolidated with the Issuer;
and (xv) Liens on property existing at the time of acquisition thereof by the
Issuer, provided that such Liens were in existence prior to the contemplation
of such acquisition.
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"Permitted Refinancing Indebtedness" means any Indebtedness of the Issuer
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Issuer or any of its Restricted
Subsidiaries; provided that: (i) the principal amount (or accreted value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount of (or accreted value, if applicable), plus accrued interest
on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of reasonable expenses and premiums incurred in
connection therewith); (ii) such Permitted Refinancing Indebtedness has a
final maturity date at least as late as the final maturity date of, and has a
Weighted Average Life to Maturity equal to or greater than the Weighted
Average Life to Maturity of, the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; (iii) if the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded is subordinated
in right of payment to the Debentures, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Debentures on terms at least
as favorable to the Holders of Debentures as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) if the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded is Pari Passu
Indebtedness, such Permitted Refinancing Indebtedness has a final maturity
date on or later than the final maturity date of, and is subordinated or pari
passu in right of payment to, the Debentures on terms at least as favorable
to the Holders of Debentures as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
"Principals" means DLJ Merchant Banking, Inc.; DLJ Offshore Partners II,
C.V., DLJ Diversified Partners, L.P., DLJMB Funding II, Inc., UK Investment
Plan 1997 Partners and DLJ ESC LLC and each of their respective Affiliates.
"Qualified Contract" means any contract for the provision of computer
maintenance and/or technology support services with respect to which the
Issuer and its Restricted Subsidiaries have not received notice that the
counterparty to such contract intends to terminate such contract prior to the
expiration of its term or not to renew such contract at the end of its term.
"Qualified Proceeds" means any of the following or any combination of the
following: (i) cash, (ii) Cash Equivalents, (iii) assets that are used or
useful in a Permitted Business and (iv) the Capital Stock of any Person
engaged in a Permitted Business if, in connection with the receipt by the
Issuer or any Restricted Subsidiary of the Issuer of such Capital Stock, (a)
such Person becomes a Restricted Subsidiary of the Issuer or any Restricted
Subsidiary of the Issuer or (b) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Issuer or any Restricted Subsidiary of
the Issuer.
"Receivables Fees" means distributions or payments made directly or by
means of discounts with respect to any participation interests issued or sold
in connection with, and other fees paid to a Person that is not a Restricted
Subsidiary in connection with, any receivables financing permitted pursuant
to the covenant entitled "Sales of Accounts Receivable."
"Related Party" means, with respect to the Principals, (i) any controlling
stockholder or partner of any Principal on the date of the Debenture
Indenture, or (ii) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially holding
(directly or through one or more Subsidiaries) a 51% or more controlling
interest of which consist of the Principals and/or such other Persons
referred to in the immediately preceding clauses (i) or (ii).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
of the Debenture Indenture.
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"Specified Agreements" means the Investors' Agreement and the Tax Sharing
Agreement.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of Voting Stock is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or one or more Subsidiaries of such Person (or any combination
thereof); provided, however, that the Accounts Receivable Subsidiary and its
Subsidiaries shall not be deemed Subsidiaries of the Issuer or any of its
other Subsidiaries.
"Unrestricted Subsidiary" means any Subsidiary (other than DecisionOne
Corp.) that is designated by the Board of Directors as an Unrestricted
Subsidiary pursuant to a Board Resolution, but only to the extent that such
Subsidiary: (i) has no Indebtedness other than Non-Recourse Debt; (ii) is not
party to any agreement, contract, arrangement or understanding with the
Issuer or any Restricted Subsidiary of the Issuer unless the terms of any
such agreement, contract, arrangement understanding are no less favorable to
the Issuer or such Restricted Subsidiary than those that might be obtained at
the time from Persons who are not Affiliates of the Issuer; (iii) is a Person
with respect to which neither the Issuer nor any of its Restricted
Subsidiaries has any direct or indirect obligation (a) to subscribe for
additional Equity Interests or (b) to maintain or preserve such Person's
financial condition or to cause such Person to achieve any specified levels,
of operating results; and (iv) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Issuer or any
of its Restricted Subsidiaries. Any such designation by the Board of
Directors shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the Board Resolution giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing conditions and was permitted by the covenant described above under
the caption entitled "--Certain Covenants--Restricted Payments." If, at any
time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as a Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Debenture Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a
Restricted Subsidiary of the Issuer as of such date (and, if such
Indebtedness is not permitted to be incurred as of such date under the
covenant described under the caption entitled "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," the
Issuer shall be in default of such covenant). The Board of Directors of the
Issuer may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that such designation shall be deemed to be
an incurrence of Indebtedness by a Restricted Subsidiary of the Issuer of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
shall only be permitted if (i) such Indebtedness is permitted under the
covenant described under the caption entitled "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock" and
(ii) no Default or Event of Default would be in existence following such
designation.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors,
managers or trustees of any Person (irrespective of whether or not, at the
time, stock of any other class or classes shall have, or might have, voting
power by reason of the happening of any contingency).
"Warrant Agreement" means the Warrant Agreement, dated as of the date of
the Debenture Indenture, between the Issuer and State Street Bank and Trust
Company, as warrant agent.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the
then outstanding principal amount of such Indebtedness into (ii) the total of
the product obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or by such
Person and one or more Wholly Owned Subsidiaries of such Person.
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DESCRIPTION OF WARRANTS
The Warrants will be issued pursuant to a Warrant Agreement (the "Warrant
Agreement") between Quaker and State Street Bank and Trust Company, as
Warrant Agent (the "Warrant Agent"), a copy of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part and
is available as set forth above under the caption entitled "--Description of
Debentures--Additional Information." Upon consummation of the Merger,
Holdings will succeed to the obligations of Quaker with respect to the
Warrants and the Warrants will, by their terms, become exercisable for an
equal number of shares of Holdings Common Stock. The following summary of
certain provisions of the Warrant Agreement does not purport to be complete
and is qualified in its entirety by reference to the Warrant Agreement,
including the definitions therein of certain terms used below.
GENERAL
Following the Merger, each Warrant, when exercised, will entitle the
Holder thereof to receive 1.9 fully paid and non-assessable shares of
Holdings Common Stock (the "Warrant Shares"), at an exercise price of $23.00
per share, subject to adjustment (the "Exercise Price"). The Exercise Price
and the number of Warrant Shares are both subject to adjustment in certain
cases referred to below. Following the Merger, the Holders of the Warrants
would be entitled, in the aggregate, to purchase shares of Holdings Common
Stock representing approximately 2% of Holdings Common Stock on a fully
diluted basis immediately following consummation of the Merger. The Warrants
will be exercisable at any time on or after the Separation Date. Unless
exercised, the Warrants will automatically expire on August 1, 2007 (the
"Expiration Date").
The Warrants may be exercised by surrendering to the Issuer the warrant
certificates evidencing the Warrants to be exercised with the accompanying
form of election to purchase properly completed and executed, together with
payment of the Exercise Price. Payment of the Exercise Price may be made at
the Holder's election (i) by tendering Debentures having an aggregate
principal amount at maturity, plus accrued and unpaid interest, if any,
thereon, to the date of exercise (or if such exercise takes place prior
August 1, 2002, an Accreted Value on the date of exercise) equal to the
Exercise Price and (ii) in cash in United States dollars by wire transfer or
by certified or official bank check to the order of the Issuer. Upon
surrender of the warrant certificate and payment of the Exercise Price, the
Issuer will deliver or cause to be delivered, to or upon the written order of
such Holder, stock certificates representing the number of whole Warrant
Shares to which the Holder is entitled. If less than all of the Warrants
evidenced by a warrant certificate are to be exercised, a new warrant
certificate will be issued for the remaining number of Warrants. Holders of
Warrants will be able to exercise their Warrants only if a registration
statement relating to the Warrant Shares underlying the Warrants is then in
effect, or the exercise of such Warrants is exempt from the registration
requirements of the Securities Act, and such securities are qualified for
sale or exempt from qualification under the applicable securities laws of the
states in which the various Holders of Warrants or other persons to whom it
is proposed that Warrant Shares be issued on exercise of the Warrants reside.
Upon consummation of the Merger, Holdings will be required under the terms of
the Warrant Agreement to file and use its best efforts to make effective, by
the earlier of (i) the later of the Separation Date and 120 days from the
closing of the Offering and (ii) 45 days after the occurrence of a Change of
Control, and (subject to certain "black out" periods not to exceed 45 days in
any calendar year) maintain effective until the expiration or exercise of all
Warrants a shelf registration statement on an appropriate form under the
Securities Act covering the issuance of Warrant Shares upon the exercise of
the Warrants. In addition, Holdings will be required under the terms of the
Warrant Agreement to file and use its best efforts to make effective, by the
earlier of (i) the later of the Separation Date and 120 days from the closing
of the Offering or 45 days after the occurrence of a Change of Control, and
(subject to certain "black out" periods not to exceed 45 days in any calendar
year) maintain effective until the expiration or exercise of all Warrants a
shelf registration statement on an appropriate form under the Securities Act
covering the resale of Warrant Shares upon the exercise of the Warrants by
broker-dealers. There can be no assurance that Holdings will be able to file,
cause to be declared effective or keep a registration statement continuously
effective until all of the Warrants have been exercised or have expired.
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No fractional Warrant Shares will be issued upon exercise of the Warrants.
The Issuer will pay to the Holder of the Warrant at the time of exercise an
amount in cash equal to the current market value of any such fractional
Warrant Shares less a corresponding fraction of the Exercise Price.
The Holders of the Warrants will have no right to vote on matters
submitted to the stockholders of the Issuer and will have no right to receive
dividends. The Holders of the Warrants will not be entitled to share in the
assets of the Issuer in the event of liquidation, dissolution or the winding
up of the Issuer. In the event a bankruptcy or reorganization is commenced by
or against the Issuer, a bankruptcy court may hold that unexercised Warrants
are executory contracts which may be subject to rejection by the Issuer with
approval of the bankruptcy court, and the Holders of the Warrants may, even
if sufficient funds are available, receive nothing or a lesser amount as a
result of any such bankruptcy case than they would be entitled to if they had
exercised their Warrants prior to the commencement of any such case.
In the event of a taxable distribution to holders of Holdings Common Stock
following the Merger that results in an adjustment to the number of Warrant
Shares or other consideration for which a Warrant may be exercised, the
Holders of the Warrants may, in certain circumstances, be deemed to have
received a distribution subject to United States federal income tax as a
dividend. See "Certain Federal Income Tax Considerations--Warrants."
ADJUSTMENTS
Following the Merger, the number of Warrant Shares purchasable upon
exercise of Warrants and the Exercise Price will be subject to adjustment in
certain events including: (i) the payment by Holdings of dividends and other
distributions on the Holdings Common Stock in Holdings Common Stock, (ii)
subdivisions, combinations and reclassifications of the Holdings Common
Stock, (iii) the issuance to all holders of Holdings Common Stock of rights,
options or warrants entitling them to subscribe for Holdings Common Stock or
securities convertible into, or exchangeable or exercisable for, Holdings
Common Stock at an offering price (or with an initial conversion, exchange or
exercise price) which is less than the Fair Market Value per share (as
defined) of Holdings Common Stock, (iv) the distribution to all holders of
Holdings Common Stock of any of Holdings' assets (including cash), debt
securities, preferred stock or any rights or warrants to purchase any such
securities (excluding those rights and warrants referred to in clause (iii)
above), (v) the issuance of shares of Holdings Common Stock for consideration
per share less than the then Fair Market Value per share of Holdings Common
Stock (excluding securities issued in transactions referred to in clauses (i)
through (iv) above), (vi) the issuance of securities convertible into or
exchangeable for Holdings Common Stock for a conversion or exchange price
plus consideration received upon issuance less than the then Fair Market
Value per share of Holdings Common Stock (excluding securities issued in
transactions referred to in clauses (i) through (iv) above), and (vii)
certain other events that could have the effect of depriving Holders of the
Warrants of the benefit of all or a portion of the purchase rights evidenced
by the Warrants.
"Disinterested Director" means, in connection with any issuance of
securities that gives rise to a determination of the Fair Market Value
thereof, each member of the Board of Directors of Holdings who is not an
officer, employee, director or other Affiliate of the party to whom Holdings
is proposing to issue the securities giving rise to such determination.
"Fair Market Value" per security at any date of determination shall be (1)
in connection with a sale to a party that is not an Affiliate of Holdings in
an arm's-length transaction (a "Non-Affiliate Sale"), the price per security
at which such security is sold and (2) in connection with any sale to an
Affiliate of Holdings, (a) the last price per security at which such security
was sold in a Non-Affiliate Sale within the three-month period preceding such
date of determination or (b) if clause (a) is not applicable, the fair market
value of such security determined in good faith by (i) a majority of the
Board of Directors of Holdings, including a majority of the Disinterested
Directors, and approved in a board resolution delivered to the Warrant Agent
or (ii) a nationally recognized investment banking, appraisal or valuation
firm, which is not an Affiliate of Holdings, in each case, taking into
account, among all other factors deemed relevant by the Board of Directors or
such investment banking, appraisal or valuation firm, the trading price and
volume of such security on any national securities exchange or automated
quotation system on which such security is traded.
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No adjustment in the Exercise Price will be required unless such
adjustment would require an increase or decrease of at least one percent
(1.0%) in the Exercise Price; provided however, that any adjustment that is
not made will be carried forward and taken into account in any subsequent
adjustment.
Following the Merger, in the case of certain consolidations or mergers of
Holdings, or the sale of all or substantially all of the assets of Holdings
to another corporation, (i) each Warrant will thereafter be exercisable for
the right to receive the kind and amount of shares of stock or other
securities or property to which such Holder would have been entitled as a
result of such consolidation, merger or sale had the Warrants been exercised
immediately prior thereto and (ii) the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale
shall have been made will assume the obligations of Holdings under the
Warrant Agreement.
RESERVATION OF SHARES
Holdings has authorized and reserved for issuance and will at all times
reserve and keep available such number of shares of Holdings Common Stock as
will be issuable upon the exercise of all outstanding Warrants. Such shares
of Holdings Common Stock, when paid for and issued, will be duly and validly
issued, fully paid and non-assessable, free of preemptive rights and free
from all taxes, liens, charges and security interests with respect to the
issuance thereof.
AMENDMENT
From time to time, the Issuer and the Warrant Agent, without the consent
of the Holders of the Warrants, may amend or supplement the Warrant Agreement
for certain purposes, including curing defects or inconsistencies or making
any change that does not adversely affect the legal rights of any Holder. Any
amendment or supplement to the Warrant Agreement that adversely affects the
legal rights of the Holders of the Warrants will require the written consent
of the Holders of a majority of the then outstanding Warrants (excluding
Warrants held by Holdings or any of its Affiliates). The consent of each
Holder of the Warrants affected will be required for any amendment pursuant
to which the Exercise Price would be increased or the number of Warrant
Shares purchasable upon exercise of Warrants would be decreased (other than
pursuant to adjustments provided in the Warrant Agreement).
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Holdings will be authorized upon consummation of the Merger by its Amended
and Restated Certificate of Incorporation to issue an aggregate of 30,000,000
shares of Holdings Common Stock, par value $.01 per share. Holdings is
authorized to issue up to 15,000,000 shares of Preferred Stock, par value
$.01 per share, in one or more series. Currently, there are no shares of
Preferred Stock issued or outstanding. The following is a summary of certain
of the rights and privileges pertaining to Holdings Common Stock and
Preferred Stock. For a full description of the Holdings' capital stock,
reference is made to the Holdings' Amended and Restated Certificate of
Incorporation currently in effect, a copy of which is on file with the
Commission.
COMMON STOCK
Voting Rights
The holders of Holdings Common Stock are entitled to one vote per share on
all matters submitted for action by the shareholders. There is no provision
for cumulative voting with respect to the election of directors. Accordingly,
the holders of more than 50% of the shares of Holdings Common Stock can, if
they choose to do so, elect the Board of Directors of Holdings and determine
most matters on which stockholders are entitled to vote.
Dividend Rights
Holders of Holdings Common Stock are entitled to share equally, share for
share, if dividends are declared on Holdings Common Stock, whether payable in
cash, property or securities of Holdings.
Liquidation Rights
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of Holdings, after payment has been made from the funds available
therefore to the holders of Preferred Stock, if any, for the full amount to
which they are entitled, the holders of the shares of Holdings Common Stock
are entitled to share equally, share for share, in the assets available for
distribution. Holders of Holdings Common Stock have no conversion, redemption
or preemptive rights.
PREFERRED STOCK
The Preferred Stock is issuable from time to time in one or more series
and with such designations and preferences for each series as shall be stated
in the resolutions providing for the designation and issue of each such
series adopted by the board of directors of Holdings. The board of directors
is authorized by Holdings' Certificate of Incorporation to determine the
voting, dividend, redemption and liquidation preferences and limitations
pertaining to such series. The board of directors, without shareholder
approval, may issue Preferred Stock with voting and other rights that could
adversely affect the voting power of the holders of the Common Stock and
could have certain antitakeover effects. Holdings has no present plans to
issue any shares of Preferred Stock. The ability of the board of directors to
issue Preferred Stock without stockholder approval could have the effect of
delaying, deferring or preventing a change in control of Holdings or the
removal of existing management.
SECTION 203 OF DELAWARE GENERAL CORPORATION LAW
Holdings is a Delaware corporation and subject to Section 203 of the DGCL.
Because the Board of Directors of Holdings approved the Merger Agreement and
Voting Agreement prior to the execution thereof, the restrictions set forth
in Section 203 of the DGCL will not apply to the DLJMB Funds with respect to
the Merger or the other transactions contemplated by the Merger Agreement and
the Voting Agreeement. However, in general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
a corporation's outstanding voting stock) from engaging in a "business
106
<PAGE>
combination" (as defined) with a Delaware corporation for three years
following the date such person became an interested stockholder, subject to
certain exceptions such as transactions done with the approval of the Board
of Directors and of the holders of at least two-thirds of the outstanding
shares of voting stock not owned by the interested stockholder. The existence
of this provision would be expected to have an anti-takeover effect,
including possibly discouraging takeover attempts that might result in a
premium over the market price for the shares of Holdings Common Stock.
DLJMB Warrants
Each DLJMB Warrant will entitle the holder thereof to purchase one share
of Holdings Common Stock at an exercise price of not less than $0.01 per
share subject to customary antidilution provisions and other customary terms.
The DLJMB Warrants will be exercisable at any time prior to 5:00 p.m., New
York City time, on August 15, 2007. The exercise of the DLJMB Warrants also
will be subject to applicable federal and state securities laws.
The DLJMB Funds will be entitled to request six demand registrations with
respect to the DLJMB Warrants (together with all or any portion of any
Preferred Stock owned by them) and the Holdings Common Stock owned by them,
which demand registration rights will be immediately exercisable subject to
customary deferral and cutback provisions. In addition, the holders of the
DLJMB Warrants will also be entitled to unlimited piggyback registration
rights with respect to such Warrants subject to customary cutback provisions.
Transfer Agent and Registrar
The transfer agent and registrar for the Holdings Common Stock following
the Merger will be Chase Mellon Shareholder Services, L.L.C.
107
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary, which is based on the opinion of Davis Polk &
Wardwell, counsel to the Issuer, describes the material United States federal
income tax consequences of the ownership and disposition of Units to initial
purchasers of the Units who are U.S. Holders (as defined below) and who
purchase the Units at the issue price set forth on the cover page hereof.
This summary is based on the Internal Revenue Code of 1986, as amended to the
date hereof (the "Code"), administrative pronouncements, judicial decisions
and existing and proposed Treasury Regulations, changes to any of which
subsequent to the date of this Prospectus may affect the tax consequences
described herein. This summary discusses only Units held as capital assets
within the meaning of Section 1221 of the Code. It does not discuss all of
the tax consequences that may be relevant to a holder in light of his
particular circumstances or to holders subject to special rules, such as
certain financial institutions, insurance companies, dealers in securities
and holders who hold the Debentures, Warrants or Units as part of a straddle
or a hedging or conversion transaction. Persons considering the purchase of
Units should consult their tax advisors with regard to the application of the
United States federal income tax laws to their particular situations as well
as any tax consequences arising under the laws of any state, local or foreign
taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a Unit
that for United States federal income tax purposes is (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other
entity created or organized in or under the laws of the United States or of
any political subdivision thereof, (iii) an estate the income of which is
subject to United States federal income taxation regardless of its source or
(iv) a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust. The term also includes certain former citizens or residents of the
United States.
ALLOCATION OF THE ISSUE PRICE BETWEEN THE DEBENTURE AND THE WARRANT
Each Unit is comprised of a Debenture and a Warrant. Consequently, the
"issue price" of a Unit for federal income tax purposes (generally, the first
price at which a substantial amount of Units is sold to persons other than
bond houses, brokers, or similar persons or organizations acting in the
capacity of underwriters, placement agents, or wholesalers) must be allocated
between the Debenture and the Warrant based on their respective fair market
values at the time of issuance, and a U.S. Holder's basis in each of the
Debenture and the Warrant will be equal to the amount allocated to such
Debenture and such Warrant. Based on the Issuer's estimate of the fair market
value of a Warrant, the Company intends to treat $560.13 of the issue price
of a Unit as allocable to the Debenture (which amount the Company will
therefore treat as the "issue price" of the Debenture for federal income tax
purposes) and $12.67 as allocable to the Warrant. The Issuer intends to file
information returns with the Internal Revenue Service (the "IRS") based on
such allocation.
The Company's allocation of the issue price is binding on a holder for
federal income tax purposes unless the holder discloses the use of a
different allocation in its federal income tax return for the year in which
the Unit was acquired. However, the Company's allocation is not binding on
the IRS, and there can be no assurance that the IRS will not challenge such
allocation.
THE DEBENTURES
For purposes of the following discussion, it is assumed that the
Debentures will constitute debt for federal income tax purposes. In general,
the excess of a Debenture's "stated redemption price at maturity" over its
issue price will generally constitute original issue discount ("OID") for
federal income tax purposes. The stated redemption price at maturity of a
Debenture is the sum of all scheduled amounts payable on the Debentures
(including the interest payable on the Debentures). U.S. Holders of the
Debentures will be required to include such OID in income for federal income
tax purposes as it accrues, in accordance with a constant yield method based
on a compounding of interest, before the receipt of cash payments
attributable to such income. Under this method, U.S. Holders of the
Debentures generally will be required to include in income increasingly
greater amounts of OID in successive accrual periods.
The Issuer does not intend to treat the possibility of an optional
redemption or repurchase of the Debentures as giving rise to any additional
accrual of OID or recognition of ordinary income upon redemption, sale or
exchange of a Debenture. Holders may wish to consider that United States
Treasury Regulations regarding the treatment of certain contingencies were
recently issued and may wish to consult their tax advisers in this regard.
108
<PAGE>
Upon the sale, exchange or retirement of a Debenture, a U.S. Holder will
recognize taxable gain or loss equal to the difference between the amount
realized on the sale, exchange or retirement and such holder's adjusted tax
basis in the Debenture. A U.S. Holder's adjusted tax basis in a Debenture
will generally equal the issue price of such Debenture increased by the
amount of any OID previously included in income by such Holder with respect
to such Debenture. Gain or loss realized on the sale, exchange or retirement
of a Debenture will be capital gain or loss and will be long-term capital
gain or loss if at the time of sale, exchange or retirement the Debenture has
been held for more than one year.
The Debentures will be "applicable high yield discount obligations"
("AHYDOs"), as defined in the Code, because the yield to maturity of such
Debentures will exceed the "applicable Federal rate" in effect at the time of
their issuance (the "AFR") plus five percentage points. Under the rules
applicable to AHYDOs, a portion of the OID that accrues on the Debentures
will not be deductible by the Company at any time. The non-deductible portion
of the OID will be an amount that bears the same ratio to such OID as (i) the
excess of the yield to maturity of the Debentures over the AFR plus six
percentage points bears to (ii) the yield to maturity of the Debentures. To
the extent that the non-deductible portion of OID would have been treated as
a dividend if it had been distributed with respect to the Company's stock, it
will be treated as a dividend to holders of the Debentures for purposes of
the rules relating to the dividends received deduction for corporate holders.
Any remaining OID on the Debentures will not be deductible by the Company
until such OID is paid.
THE WARRANTS
A U.S. Holder will generally not recognize any gain or loss upon exercise
of any Warrants (except with respect to any cash received in lieu of a
fractional share of Common Stock). A U.S. Holder will have an initial tax
basis in the shares of Holdings Common Stock received on exercise of the
Warrants equal to the sum of its tax basis in the Warrants and the aggregate
exercise price thereof. A U.S. Holder's holding period in such shares of
Holdings Common Stock will commence on the day after the Warrants are
exercised.
If a Warrant expires without being exercised, a U.S. Holder will recognize
a capital loss in an amount equal to its tax basis in the Warrant. Upon the
sale or exchange of a Warrant, a U.S. Holder will generally recognize a
capital gain or loss equal to the difference, if any, between the amount
realized on such sale or exchange and the U.S. Holder's tax basis in such
Warrant. Such capital gain or loss will be long-term capital gain or loss if,
at the time of such sale or exchange, the Warrant has been held for more than
one year.
Under Section 305 of the Code, a U.S. Holder of a Warrant may be deemed to
have received a constructive distribution from the Issuer, which may result
in the inclusion of ordinary dividend income, in the event of certain
adjustments to the number of shares of Holdings Common Stock to be issued on
exercise of a Warrant.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Certain noncorporate U.S. Holders may be subject to backup withholding at
a rate of 31% on payments received with respect to, and the proceeds of a
disposition of, a Debenture or Warrant. Backup withholding will apply only if
the U.S. Holder (i) fails to furnish its Taxpayer Identification Number
("TIN") which, in the case of an individual, would be his or her Social
Security number, (ii) furnishes an incorrect TIN, (iii) is notified by the
IRS that it has failed to properly report payments of interest and dividends
or (iv) under certain circumstances, fails to certify, under penalty of
perjury, that it has furnished a correct TIN and has not been notified by the
IRS that it is subject to backup withholding. U.S. Holders should consult
their tax advisors regarding their qualification for exemption from backup
withholding and the procedure for obtaining such an exemption if applicable.
The amount of any backup withholding from a payment to a U.S. Holder will be
allowed as a credit against such U.S. Holder's United States federal income
tax liability and may entitle such U.S. Holder to a refund, provided that the
required information is furnished to the IRS.
109
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") between Quaker and Donaldson, Lufkin & Jenrette
Securities Corporation (the "Underwriter" or "DLJSC"), the Underwriter has
agreed to purchase from Quaker, and Quaker has agreed to sell to the
Underwriter, all of the Units offered hereby.
The Underwriting Agreement provides that the obligations of the
Underwriter thereunder are subject to certain conditions precedent. The
Underwriting Agreement also provides that Quaker will indemnify the
Underwriter against certain liabilities and expenses, including liabilities
under the Securities Act. The nature of the Underwriter's obligation is such
that it is required to purchase all of the Units if any Units are purchased
by the Underwriter.
The Underwriter has advised Quaker that it proposes initially to offer the
Units, in part, directly to the public at the public offering price set forth
on the cover of this Prospectus and in part to selected dealers at such price
less a concession not in excess of $2.29 per Unit. The Underwriter may allow,
and such dealers may reallow, a discount not in excess of $1.43 per Unit to
certain other dealers. After the initial public offering of the Units, the
offering price and the other selling terms may be changed by the Underwriter.
The Securities are new securities for which no public market exists. The
Securities will not be listed on a securities exchange. There can be no
assurance that an active public market will develop or be sustained upon
completion of the Offering or at what prices Holders of the Securities would
be able to sell such securities, if at all. In addition, prevailing interest
rate levels, market fluctuations and general economic and political
conditions may adversely affect the liquidity and the market price of the
Securities, regardless of the Company's financial and operating performance.
The market for "high yield" securities, such as the Debentures, and markets
for the Units and the Warrants are volatile and unpredictable, which may have
an adverse effect on the liquidity of, and prices for, such securities. The
Company has been advised by the Underwriter that it currently intends to make
a market in the Securities after consummation of the Offering as permitted by
applicable laws and regulations; however, the Underwriter is not obligated to
do so and may discontinue doing so without notice at any time. Accordingly,
no assurance can be given that a liquid trading market of the Securities will
develop or be sustained. In addition, because the Underwriter may be deemed
to be an affiliate of the Company, the Underwriter will be required to
deliver a current "market-maker" prospectus and otherwise to comply with the
registration requirements of the Securities Act in connection with any
secondary market sale of the Debentures, which may affect its ability to
continue market-making activities. The Underwriter's ability to engage in
market-making transactions will therefore be subject to the availability of a
current "market-maker" prospectus. For so long as any of the Securities are
outstanding and, in the reasonable judgment of the Underwriter and its
counsel, the Underwriter or any of its affiliates (as defined in the rules
and regulations under the Securities Act) is required to deliver a prospectus
in connection with the sale of the Debentures, the Company has agreed to make
a "market-maker" prospectus available to the Underwriter to permit it to
engage in market-making transactions.
The Underwriter has informed Quaker that it does not intend to confirm
sales of the Units to any accounts over which it exercises discretionary
authority.
In connection with the Offering, the Underwriter may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Units. Specifically, the Underwriter may overallot the Offering, creating a
syndicate short position. The Underwriter may bid for and purchase the Units
in the open market to cover syndicate short positions. In addition, the
Underwriter may bid for and purchase the Units in the open market to
stabilize the price of the Units. These activities may stabilize or maintain
the market price for the Units above independent market levels. The
Underwriter is not required to engage in these activities, and may end these
activities at any time.
The Underwriter is also acting as underwriter in connection with a
concurrent offering by DecisionOne Corp. of Senior Subordinated Notes and
will receive customary discounts and commissions in connection therewith. In
addition, the Underwriter is acting as Arranger and DLJ Capital Funding, an
110
<PAGE>
affiliate of the Underwriter, is the syndication agent and a lender under the
New Credit Facility. DLJ Capital Funding and the Underwriter will receive
fees pursuant to the New Credit Facility customary to performing such
services. In addition, the Underwriter will receive a merger advisory fee of
$5.0 million in cash from Quaker upon consummation of the Merger. It is also
expected that DLJSC will receive an annual fee from Holdings for financial
advisory services.
DLJMB and certain related entities, all of which are affiliates of the
Underwriter, will own a significant amount of Holdings Common Stock following
the Merger and Merger Financing. See "Certain Relationships and Related
Transactions--Transactions with DLJ and its Affiliates."
This Prospectus has been prepared for use by DLJSC in connection with
offers and sales of the Securities in market-making transactions at
negotiated prices related to prevailing market prices at the time of the
sale. DLJSC may act as principal or agent in such transactions. Holdings has
been advised by DLJSC that it intends to make a market in the Securities;
however, DLJSC is not obligated to do so. Any market-making may be
discontinued at any time, and there is no assurance that an active public
market for the Units will develop or, that if such market develops, that it
will continue.
Under Rule 2720 of the Conduct Rules ("Rule 2720") of the National
Association of Securities Dealers, Inc. ("NASD"), the Underwriter may be
deemed to be an "affiliate" of the Issuer and to have a "conflict of
interest" with the Issuer by virtue of the fact that affiliates of the
Underwriter may be deemed to beneficially own greater than 10% of the voting
stock of the Issuer. Under Rule 2720, when a member of the NASD, such as the
Underwriter, proposes to underwrite or otherwise assist in the distribution
of an affiliate's securities in a public offering, the yield on debt
securities to be distributed to the public must not be lower, or the price of
equity securities higher than that recommended by a "qualified independent
underwriter", who must participate in the preparation of the registration
statement and the prospectus and who must exercise the usual standards of due
diligence with respect thereto. In accordance with such requirements,
Ladenburg Thalmann & Co. Inc. (the "QIU") has agreed to act as the qualified
independent underwriter in connection with the Offering, has participated in
the preparation of this Prospectus and the Registration Statement of which
this Prospectus forms a part and has exercised the usual standards of due
diligence with respect thereto. The price of the Units when sold will be no
higher than that recommended by the QIU. The QIU will receive an aggregate
fee of $125,000 and will be reimbursed for certain other expenses, all of
which will be paid by the Issuer and DecisionOne Corp. in connection with the
offering of the Senior Subordinated Notes and Units. In addition, Quaker,
Holdings and DecisionOne Corp have jointly and severally agreed to indemnify
the QIU against certain liabilities, including liabilities under the
Securities Act or to contribute to payments which the QIU may be required to
make in respect thereof.
LEGAL MATTERS
The validity of the Units offered hereby will be passed upon for the
Issuer by Davis Polk & Wardwell, New York, New York. Certain legal matters in
connection with the Offering will be passed upon for the Underwriter by
Latham & Watkins, New York, New York.
EXPERTS
The Consolidated Financial Statements of the Company as of June 30, 1996
and for each of the three years in the period ended June 30, 1996 and the
Consolidated Financial Statements of DecisionOne Corp. (formerly BABSS) as of
December 31, 1994 and October 20, 1995 and for the years ended December 31,
1993 and 1994 and the period from January 1, 1995 to October 20, 1995, and
the related financial statement schedules appearing in this Prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as set forth in
their reports included herein and are included in reliance upon the reports
of such firm given upon their authority as experts in accounting and
auditing.
111
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
DECISIONONE HOLDINGS CORP.
Audited Financial Statements:
Independent Auditors' Report............................................................... F-2
Consolidated Balance Sheets as of June 30, 1995 and 1996................................... F-3
Consolidated Statements of Operations for the Years Ended June 30, 1994, 1995 and 1996 .... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended June 30, 1994, 1995
and 1996.................................................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1994, 1995 and 1996 .... F-6
Notes to Consolidated Financial Statements................................................. F-7
Unaudited Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 1996 and March 31, 1997 ............. F-27
Condensed Consolidated Statement of Operations--Three and Nine Months Ended March 31, 1996
and 1997.................................................................................. F-28
Condensed Consolidated Statement of Cash Flows--Nine Months Ended March 31, 1996 and 1997 . F-29
Notes to Condensed Consolidated Financial Statements ...................................... F-30
DECISIONONE CORPORATION (FORMERLY BELL ATLANTIC BUSINESS SYSTEMS SERVICES, INC.)
Audited Financial Statements:
Independent Auditors' Report............................................................... F-33
Consolidated Balance Sheets as of December 31, 1994 and October 20, 1995 .................. F-34
Consolidated Statements of Operations for the years ended December 31, 1993 and 1994 and
for the period January 1, 1995 to October 20, 1995........................................ F-35
Consolidated Statements of Stockholder's Equity for the years ended December 31, 1993 and
1994 and for the period January 1, 1995 to October 20, 1995............................... F-36
Consolidated Statements of Cash Flows for the years ended December 31, 1993 and 1994 and
for the period January 1, 1995 to October 20, 1995........................................ F-37
Notes to Consolidated Financial Statements................................................. F-38
</TABLE>
F-1
<PAGE>
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,
1995 and 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended June 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements 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 at June 30, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended June 30, 1996 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
August 30, 1996
F-2
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
YEARS ENDED JUNE 30, 1995 AND 1996
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................................... $ 2,659 $ 8,221
Accounts receivable, net.......................................... 27,758 92,650
Inventories....................................................... 4,024 30,130
Prepaid expenses, income tax receivable and other assets ......... 7,636 4,752
Deferred tax asset................................................ 8,503 8,018
---------- ----------
Total current assets............................................. 43,707 143,771
---------- ----------
Repairable Parts, net.............................................. 27,360 154,970
Property and Equipment, net........................................ 4,429 32,430
Deferred Tax Asset, net............................................ 25,011 16,405
Intangibles, net................................................... 34,568 164,659
Other Assets....................................................... 478 2,275
---------- ----------
Total Assets....................................................... $135,553 $514,510
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt................................. $ 19,414 $ 2,321
Accounts payable.................................................. 11,412 53,347
Accrued expenses.................................................. 21,773 36,217
Deferred revenues................................................. 40,222 38,485
Income taxes payable.............................................. 1,648
Net liabilities related to discontinued products division ........ 1,056 479
---------- ----------
Total current liabilities........................................ 95,525 130,849
---------- ----------
Revolving Credit Loan and Long-term Debt........................... 6,157 188,582
Other Liabilities.................................................. 12,383 14,286
Redeemable Preferred Stock......................................... 6,811
Shareholders' Equity:
Preferred stock, $1.00 par value; authorized 5,000,000 shares;
none outstanding
Common stock, $.01 par value; authorized 25,000,000 shares in
1995 and 100,000,000 shares in 1996; issued and outstanding
8,935,348 shares in 1995 and 27,340,288 shares in 1996 .......... 89 273
Additional paid-in capital........................................ 107,991 255,262
Accumulated deficit............................................... (92,378) (73,516)
Foreign currency translation adjustment........................... 680 622
Pension liability adjustment...................................... (1,705) (1,848)
---------- ----------
Total shareholders' equity....................................... 14,677 180,793
---------- ----------
Total Liabilities and Shareholders' Equity......................... $135,553 $514,510
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Service............................................ $ 97,548 $ 154,044 $ 526,703
Other.............................................. 10,868 8,976 13,488
------------ ------------ ------------
108,416 163,020 540,191
------------ ------------ ------------
Cost of Revenues:
Service............................................ 70,502 107,922 393,311
Other.............................................. 6,478 5,561 9,005
------------ ------------ ------------
76,980 113,483 402,316
------------ ------------ ------------
Gross Profit........................................ 31,436 49,537 137,875
Operating Expenses:
Selling, general and administrative expenses ...... 16,474 21,982 69,237
Amortization and write-off of intangibles ........ 5,380 6,776 15,673
Employee severance and unutilized lease costs
(credit).......................................... (6,401) 3,592
------------ ------------ ------------
Operating Income.................................... 15,983 20,779 49,373
Interest expense, net of interest income of $132 in
1994, $53 in 1995 and $239 in 1996................. 4,847 2,468 14,714
------------ ------------ ------------
Income from continuing operations before income
taxes (benefit), discontinued operations and
extraordinary item................................. 11,136 18,311 34,659
Provision for income taxes (benefit)................ 1,024 (23,104) 13,870
------------ ------------ ------------
Income before discontinued operations and
extraordinary item................................. 10,112 41,415 20,789
Discontinued operations--Income from operations of
discontinued products division...................... 1,113
------------ ------------ ------------
Income before extraordinary item.................... 10,112 42,528 20,789
Extraordinary item, net of tax benefit of $1,284 .. (1,927 )
------------ ------------ ------------
Net income........................................ $ 10,112 $ 42,528 $ 18,862
============ ============ ============
Primary Income (Loss) Per Common Share:
Continuing operations.............................. $ 0.45 $ 1.81 $ 0.83
Discontinued operations............................ $ 0.05
Extraordinary item................................. $ (0.08)
------------ ------------ ------------
Net income ....................................... $ 0.45 $ 1.86 $ 0.75
============ ============ ============
Weighted average number of common and common
equivalent shares outstanding...................... 22,594,764 22,842,727 25,195,867
============ ============ ============
Fully Diluted Income (Loss) Per Common Share:
Continuing operations.............................. $ 0.45 $ 1.79 $ 0.82
Discontinued operations............................ $ 0.05
Extraordinary item................................. (0.08)
------------ ------------ ------------
Net income........................................ $ 0.45 $ 1.84 $ 0.74
============ ============ ============
Weighted average number of common and common
equivalent shares outstanding...................... 22,594,764 23,149,301 25,429,961
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT NUMBER OF SHARES OF COMMON STOCK)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------
NUMBER ADDITIONAL ACCUMULATED
OF SHARES AMOUNT PAID-IN CAPITAL DEFICIT
<S> <C> <C> <C> <C>
------------ -------- --------------- -------------
Balance, June 30, 1993 .......... 8,889,547 $ 89 $ 87,324 $(145,018)
Net income ................... 10,112
Adjustment to pension
liability ....................
Foreign currency translation
adjustment ...................
Accrued dividends on Series A
and B Redeemable Preferred
Stock ........................ (186)
Increase in additional paid-in
capital and number of common
stock shares due to debt
restructuring ................ 30,801 21,220
------------ -------- --------------- -------------
Balance, June 30, 1994 .......... 8,920,348 89 108,358 (134,906)
Net income .................... 42,528
Adjustment to pension
liability ....................
Foreign currency translation
adjustment ..................
Accrued dividends on Series A
and B Redeemable Preferred
Stock ........................ (375)
Increase due to exercise of
options ..................... 15,000 8
------------ -------- --------------- -------------
Balance, June 30, 1995 .......... 8,935,348 89 107,991 (92,378)
Net income ................... 18,862
Adjustment to pension
liability ....................
Common Stock issued:
Exercise of preemptive
rights. ..................... 384,502 4 1,526
Public offering ............ 6,300,000 63 106,250
Exercise of options ........ 329,850 3 300
Exercise of warrants ....... 118,664 1 598
Conversion of Redeemable
Preferred Stock ...........11,271,924 113 37,529
Stock issuance costs ......... (1,573)
Issuance of warrants ......... 126
Issuance of warrants attached
to Subordinated Debentures .. 3,400
Foreign currency translation
adjustment ..................
Accrued dividends on
Redeemable Preferred Stock ... (885)
------------ -------- --------------- -------------
Balance, June 30, 1996 ..........27,340,288 $ 273 $255,262 $ (73,516)
============ ======== =============== =============
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
FOREIGN TOTAL
CURRENCY PENSION SHAREHOLDERS'
TRANSLATION LIABILITY (DEFICIENCY)
ADJUSTMENT ADJUSTMENT EQUITY
------------- ------------ ---------------
<S> <C> <C> <C> <C>
Balance, June 30, 1993 .......... $445 $ (986) $(58,146)
Net income ................... 10,112
Adjustment to pension
liability .................... (639) (639)
Foreign currency translation
adjustment ................... 12 12
Accrued dividends on Series A
and B Redeemable Preferred
Stock ........................ (186)
Increase in additional paid-in
capital and number of common
stock shares due to debt
restructuring ................ 21,220
------------- ------------ ---------------
Balance, June 30, 1994 .......... 457 (1,625) (27,627)
Net income .................... 42,528
Adjustment to pension
liability .................... (80) (80)
Foreign currency translation
adjustment .................. 223 223
Accrued dividends on Series A
and B Redeemable Preferred
Stock ........................ (375)
Increase due to exercise of
options ..................... 8
------------- ------------ ---------------
Balance, June 30, 1995 .......... 680 (1,705) 14,677
Net income ................... 18,862
Adjustment to pension
liability .................... (143) (143)
Common Stock issued:
Exercise of preemptive
rights. ..................... 1,530
Public offering ............ 106,313
Exercise of options ........ 303
Exercise of warrants ....... 599
Conversion of Redeemable
Preferred Stock ........... 37,642
Stock issuance costs ......... (1,573)
Issuance of warrants ......... 126
Issuance of warrants attached
to Subordinated Debentures .. 3,400
Foreign currency translation
adjustment .................. (58) (58)
Accrued dividends on
Redeemable Preferred Stock ... (885)
------------- ------------ ---------------
Balance, June 30, 1996 .......... $622 $(1,848) $180,793
============= ============ ===============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Operating Activities:
Net income..................................................... $ 10,112 $ 42,528 $ 18,862
Adjustments to reconcile net income to net cash provided by
operating activities:
Income from discontinued operations............................ (1,113)
Write-down of intangible assets................................ 2,932 70
Net credit on unused leases, net............................... (6,401)
Depreciation and amortization of property and equipment ....... 1,781 1,778 8,309
Amortization of intangibles.................................... 2,448 6,706 15,673
Amortization of repairable parts............................... 5,929 7,688 37,869
Deferred income taxes.......................................... (23,104) 7,579
Provision (recovery of loss) on accounts receivable ........... (162) 1,930 3,434
Provision for inventory obsolescence........................... 1,580 1,995 1,171
Extraordinary item............................................. 1,927
Changes in operating assets and liabilities, net of effects
from companies acquired, which provided (used) cash:
Accounts receivable............................................ (3,498) (8,836) (1,900)
Inventories.................................................... 1,107 931 (1,248)
Accounts payable............................................... (787) 4,552 29
Accrued expenses............................................... 264 (5,723) 227
Deferred revenues.............................................. 9,547 6,811 (33,928)
Net changes in other assets and liabilities.................... 3,870 2,202 (6,110)
---------- ---------- -----------
Net cash provided by operating activities..................... 28,722 38,415 51,894
---------- ---------- -----------
Investing Activities:
Capital expenditures-net of retirements........................ (304) (2,786) (7,278)
Repairable parts purchases..................................... (1,857) (12,154) (63,514)
Purchases of companies......................................... (1,187) (39,331) (275,562)
---------- ---------- -----------
Net cash used in investing activities......................... (3,348) (54,271) (346,354)
---------- ---------- -----------
Financing Activities:
Proceeds from issuance of preferred stock...................... 2,250 31,392
Proceeds from issuance of subordinated debentures.............. 30,000
Proceeds from issuance of common stock......................... 107,298
Proceeds from borrowings....................................... 11,000 32,000 703,720
Payment of subordinated debentures............................. (30,000)
Payments on borrowings......................................... (37,713) (14,463) (537,548)
Principal payments under capital leases........................ (3,423)
Dividends paid on preferred stock ............................. (1,446)
Other.......................................................... (483) 29
---------- ---------- -----------
Net cash provided by (used in) financing activities .......... (24,946) 17,537 300,022
---------- ---------- -----------
Net increase in cash and cash equivalents....................... 428 1,681 5,562
Cash and cash equivalents, beginning of year.................... 550 978 2,659
---------- ---------- -----------
Cash and cash equivalents, end of year.......................... $ 978 $ 2,659 $ 8,221
========== ========== ===========
Supplemental Disclosures of Cash Flow Information:
Net cash paid during the year for:
Interest...................................................... 485 2,065 14,838
Income taxes.................................................. 397 1,009 5,344
Noncash investing/financing activities:
Interest exchanged for subordinated debt...................... 2,073
Issuance of seller notes in connection with acquisitions .... 1,313 2,866 587
Accretion of accrued dividends................................ 186 375 885
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
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's services include hardware support, user and
software support, network support and other support services. These services
are offered by the Company across a broad range of computing environments,
including mainframes, midrange and distributed systems, workgroups, personal
computers ("PCs") and related peripherals. The Company maintains
approximately 3,900 technical personnel located in over 150 service locations
in North America.
Through June 30, 1995, the Company's services predominantly involved the
provision of maintenance services to the midrange computer market. On October
20, 1995, the Company acquired Bell Atlantic Business Systems Services, Inc.
("BABSS") (see Note 4). BABSS provided computer maintenance and technology
support services for computer systems ranging from the data center, which
includes both mainframe and midrange systems, to desk top. Subsequent to the
acquisition, DecisionOne Holdings Corp.'s principal operating subsidiary,
Decision Servcom, Inc., was merged into BABSS, which had changed its name to
DecisionOne Corporation. As a result, DecisionOne Corporation is the
principal operating subsidiary of the Company.
The Company's wholly owned, international subsidiaries are not significant
to the Company's financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION -- The consolidated financial statements include the
accounts of DecisionOne Holdings Corp. and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated in consolidation.
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.
INVENTORIES --Inventories are stated at the lower of cost or market, cost
principally being determined using the weighted average method. The Company
previously determined cost using the FIFO (first-in, first-out) method. The
change has no material effect on the consolidated financial statements.
REPAIRABLE PARTS -- Repairable parts are required in order to meet the
requirements of the contracts with the Company's maintenance customers. These
parts are principally purchased from equipment manufacturers and other third
parties. As these parts are purchased, they are capitalized at cost and
amortized principally using the straight-line method over three to five
years, their estimated useful life. Repairable parts are repaired by the
Company based upon anticipated need and generally have an economic life that
extends beyond the normal life cycle of the applicable product. Costs of
refurbishing parts are charged to operations as incurred. Repairable parts
are stated at cost, less accumulated amortization of $46,554 and $45,064 as
of June 30, 1995 and 1996, respectively. Repairable parts amortization
expense for the years ended June 30, 1994, 1995 and 1996 was $5,929, $7,688
and $37,869, respectively.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation is provided for using the straight-line method over the
estimated useful lives of the depreciable assets. Capitalized equipment
leases and leasehold improvements are amortized over the shorter of the
related lease terms or asset lives. Maintenance and repairs are charged to
expense as incurred; renewals and betterments are capitalized. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is charged to operations.
F-7
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
INTANGIBLES --Intangible assets are comprised of excess purchase price
over net assets acquired (goodwill), debt issuance costs and other intangible
assets, including the fair value of contractual profit participation rights,
acquired customer contracts, tradenames, other intangibles, and amounts
assigned to noncompete agreements.
Goodwill is being amortized on a straight-line basis over 20 years. Other
intangibles are being amortized, primarily on a straight-line basis, over 3
to 8 years for customer contracts; 20 years for contractual profit
participation rights; 1 to 6 years for tradenames and other intangibles; and
over four-year terms for specific noncompete agreements. Debt issuance costs
are amortized using the interest method over the term of the related debt.
CARRYING VALUE OF LONG-TERM ASSETS --The Company evaluates the carrying
value of long-term assets, property and equipment, repairable parts and
intangible assets, based upon current and anticipated undiscounted cash
flows, and recognizes an impairment when such estimated cash flows will be
less than the carrying value of the asset. Measurement of the amount of
impairment, if any, is 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. 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.
Estimated losses on contracts, if any, are charged against earnings in the
period in which such losses are identified.
FOREIGN CURRENCY TRANSLATION -- Gains and losses resulting from foreign
currency translation are accumulated as a separate component of shareholders'
equity. Gains and losses resulting from foreign currency transactions are
included in operations.
CREDIT RISK --Concentration of credit risk with respect to trade
receivables is limited due to the large number of customers comprising the
Company's customer base and their dispersion across many industries.
INCOME TAXES -- Effective July 1, 1993, the Company changed its policy of
accounting for income taxes to conform to Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109"), Accounting for Income Taxes. The Company
previously followed Financial Accounting Standards No. 96, Accounting for
Income Taxes. SFAS No. 109 requires, among other things, the accrual of
deferred tax liabilities for future taxable amounts, deferred tax assets for
future deductions and operating loss carryforwards and a valuation allowance
to reduce deferred tax assets to the amounts that are more likely than not to
be realized. The adoption of SFAS No. 109 on July 1, 1993 did not have a
material effect on the Company's consolidated financial position or results
of operations.
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.
F-8
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, AND ACCOUNTS PAYABLE --
The carrying amount of these items is a reasonable estimate of their fair
value.
SHORT-TERM DEBT AND LONG-TERM DEBT --Rates currently available to the
Company for debt with similar terms and remaining maturities are used to
estimate the fair value for debt issues. Accordingly, the carrying amount of
debt is a reasonable estimate of its fair value.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates
and assumptions.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS -- Effective July 1, 1994, the
Company adopted the provisions of No. 106, ("SFAS No. 106") Employers'
Accounting for Postretirement Benefits Other Than Pensions, and No. 112
("SFAS No. 112"), Employers' Accounting for Postemployment Benefits. The
adoption of SFAS No. 106 and SFAS No. 112 did not have a material effect on
the Company's consolidated financial position or results of operations.
STOCK-BASED COMPENSATION --In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123"). SFAS No. 123
defines a fair value method of accounting for stock options and other equity
instruments. Under the fair value method, compensation cost is measured at
the grant date based on the fair value of the award and is recognized over
the service period, which is usually the vesting period.
Under SFAS No. 123, the Company is permitted to continue to account for
employee stock-based transactions under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees ("APB No. 25"), but will be
required to disclose in a note to the consolidated financial statements pro
forma net income and income per share information as if the Company had
applied the new method of accounting. SFAS No. 123 also requires increased
disclosures for stock-based compensation arrangements regardless of the
method chosen to measure and recognize compensation for employee stock-based
arrangements.
The Company has determined that it will continue to account for such
transactions under APB No. 25 and will provide the disclosures required by
SFAS No. 123 during the year ending June 30, 1997.
DERIVATIVE FINANCIAL INSTRUMENTS -- Derivative financial instruments,
which constitute interest rate swaps (see Note 10), are used by the Company
in the management of its interest rate exposure and are accounted for on an
accrual basis. These derivative financial instruments are used to hedge risk
caused by fluctuating interest rates. Hedged financial instruments are
accounted for based on settlement accounting. Income and expense are recorded
in the same category as that arising from the related asset or liability. The
amounts to be paid or received under interest rate swap agreements are
recognized as interest income or expense in the periods in which they accrue.
Gains and losses resulting from effective hedges of existing assets,
liabilities or firm commitments are deferred and recognized when the
offsetting gains and losses are recognized on the related hedged items. Gains
realized on termination of interest rate swap contracts are deferred and
amortized over the remaining terms of the original swap agreements. The
Company does not hold or issue any derivative financial instruments for
trading purposes.
F-9
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
3. DISCONTINUED OPERATIONS
On February 9, 1993, the Company sold all of the inventory, fixed assets
and other intangible assets, as defined in the asset purchase agreement, of
its products division. The remaining assets and liabilities of the
discontinued operations consisted mainly of accounts receivable and accrued
expenses for warranty, lease commitments and other accrued costs. In 1993,
the Company established liabilities based on the best available information.
In 1995, the Company revised its estimates as a result of settlement of these
liabilities and the consolidated statement of operations for 1995 reflects an
increase in net income of $1,113 for the change in estimate.
In conjunction with the sale of the products division, the Company entered
into a maintenance service agreement with the purchaser. The agreement
provides that the Company has the option to be the exclusive provider of
warranty, extended warranty and maintenance services of products marketed by
the purchaser for a term of 5 years after the date of the sale.
4. BUSINESS ACQUISITIONS
During the years ended June 30, 1994, 1995 and 1996, the Company acquired
certain net assets of a series of service companies as follows:
<TABLE>
<CAPTION>
CONSIDERATION (IN THOUSANDS)
---------------------------------------------------------------------
TOTAL
NUMBER OF PURCHASE OTHER
YEARS ENDED ACQUISITIONS CASH NOTES PRICE INTANGIBLES GOODWILL
- ---------------------------------- -------------- --------- -------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Significant business acquisitions:
June 30, 1995 .................... 1 $ 27,413 $2,094 $ 29,507 $15,600 $ 7,394
June 30, 1996..................... 1 250,549 250,549 72,581 60,533
Nonsignificant business and
maintenance contract
acquisitions:
June 30, 1994..................... 5 975 1,490 2,465 3,193
June 30, 1995..................... 5 9,327 255 9,582 4,577 8,680
June 30, 1996..................... 5 14,853 578 15,431 6,522 6,318
</TABLE>
The Company purchased substantially all of the operating assets and
assumed certain liabilities of the acquired entities. These acquisitions have
been accounted for as purchase transactions, with the purchase price of each
acquisition allocated to the assets and liabilities acquired based on their
respective estimated fair values at the dates of acquisition. The results of
operations of the acquired entities have been included in the accompanying
consolidated financial statements from the dates of acquisition.
On August 31, 1994, the Company purchased certain net assets and
liabilities of IDEA/Servcom, Inc. ("Servcom") for approximately $29,500. This
acquisition was funded by cash and the issuance of a $2,600
noninterest-bearing note to the seller. See seller notes payable section of
Note 10. The excess of asset purchase price over the fair value of assets
acquired at the date of purchase resulted in goodwill of approximately
$7,400.
On October 20, 1995, the Company acquired all of the outstanding common
stock of BABSS, a subsidiary of Bell Atlantic Corporation ("BAC") for
approximately $250,549. The acquisition was funded with the proceeds from the
issuance of $30,000 of Series C preferred stock, $30,000 of subordinated
debentures and the balance from additional bank borrowings (see Notes 10 and
15). The excess of asset purchase price over the fair value of assets
acquired at the date of purchase resulted in goodwill of approximately
$58,796 initially recorded. Subsequent to the acquisition, the Company
recorded a net adjustment increasing goodwill by $1,737 and adjusted other
balance sheet accounts principally by the
F-10
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
4. BUSINESS ACQUISITIONS (Continued)
same amount. This resulted from the adjustment and reclassification of
certain tax accruals offset by favorable negotiations on certain leased
facilities (see Note 9). As part of the acquisition, the Company purchased
from BAC contractual profit participation rights whereby the Company will
receive a fixed percentage of the annual operating profits (3.2% or 3.5%,
depending upon the level of profits) earned by a former foreign affiliate of
BAC which provides computer maintenance and technology support services in
Europe. The value of the discounted estimated future cash flows over a
twenty-year period from these contractual profit participation rights is
$25,000.
The following summarized unaudited pro forma information for significant
acquisitions that have a material effect on the Company's results of
operations for the years ended June 30, 1995 and 1996 assumes that the
Servcom and BABSS acquisitions occurred as of July 1, 1994. The
nonsignificant business and maintenance contract acquisitions are not
considered material individually or in the aggregate. The pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of the results of operations which actually would have resulted
had the significant acquisitions been in effect on the dates indicated or
which may result in the future.
<TABLE>
<CAPTION>
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
YEARS ENDED JUNE 30,
---------------------
1995 1996
---------- ----------
(UNAUDITED)
<S> <C> <C>
Revenues ............................................................. $679,284 $697,676
Income from continuing operations before extraordinary item ......... 20,153 31,080
Net income........................................................... 21,266 29,153
Primary Income Per Common Share:
Income from continuing operations before extraordinary item per
share .............................................................. $ 0.88 $ 1.23
Net income per common share.......................................... 0.93 1.16
Fully Diluted Income Per Common Share:
Income from continuing operations before extraordinary item per
share............................................................... $ 0.87 $ 1.22
Net income per common share.......................................... 0.92 1.15
</TABLE>
5. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
-------------------
1995 1996
--------- ---------
<S> <C> <C>
Trade receivables .................... $33,843 $ 99,762
Other ................................ 531 2,468
--------- ---------
34,374 102,230
Allowance for uncollectible accounts (6,616) (9,580)
--------- ---------
$27,758 $ 92,650
========= =========
</TABLE>
F-11
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
6. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Consumable parts .......... $ 15,243 $ 40,564
Finished goods............. 569 360
---------- ----------
15,812 40,924
Allowance for
obsolescence.............. (11,788) (10,794)
---------- ----------
$ 4,024 $ 30,130
========== ==========
</TABLE>
7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Land and buildings......................... $ 2,055
Equipment.................................. $ 5,682 13,858
Computer hardware and software............. 8,359 27,277
Furniture and fixtures..................... 4,306 8,051
Leasehold improvements..................... 1,450 4,125
---------- ----------
19,797 55,366
Accumulated depreciation and amortization (15,368) (22,936)
---------- ----------
$ 4,429 $ 32,430
========== ==========
</TABLE>
The principal lives (in years) used in determining depreciation and
amortization rates of various assets are: buildings (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 $1,781, $1,778 and
$8,309 for the fiscal years ended 1994, 1995 and 1996.
F-12
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
8. INTANGIBLES
Intangibles consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
--------------------
1995 1996
--------- ----------
<S> <C> <C>
Goodwill................................ $16,074 $ 82,355
Customer contracts...................... 20,248 64,758
Contractual profit participation
rights................................. 25,000
Noncompete agreement.................... 3,000 4,500
Other intangibles....................... 2,250 7,671
Tradename............................... 1,500
--------- ----------
43,072 184,284
Accumulated amortization................ (8,504) (19,625)
--------- ----------
$34,568 $164,659
========= ==========
</TABLE>
Based upon the results of an impairment evaluation for the years ended
June 30, 1994 and 1995, management determined that customer contracts should
be written down $2,932 and $70, respectively. There were no write-downs of
intangibles in 1996.
Amortization expenses relating to intangibles were approximately $2,448,
$6,706 and $15,673 for the fiscal years ended 1994, 1995 and 1996.
9. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
-------------------
1995 1996
--------- ---------
<S> <C> <C>
Compensation and benefits......... $11,046 $22,115
Interest.......................... 2,246 1,505
Unused leases..................... 857 3,485
Pension accrual................... 1,262 1,258
Accrued accounting and legal
fees............................. 920 1,073
Other accrued expenses............ 5,442 6,781
--------- ---------
$21,773 $36,217
========= =========
</TABLE>
Prior to 1994, the Company received $2,600 in tax bills (primarily
interest) from the Internal Revenue Service ("IRS") related to claims for tax
and interest for the years ended 1981 through 1987. The Company paid
approximately $500 of the claims upon receipt of the bills. As the Company
disputes the tax bills, no payments were made in 1994 nor 1995. In 1996, an
IRS mandated payment of $828 was made. As of June 30, 1995 and 1996, the
Company has an accrued liability of $2,500 and $1,883, respectively.
Subsequent to June 30, 1996, the Company provided the IRS with a letter of
credit in the amount of $1,768 to collateralize the outstanding balance.
In connection with the acquisition of BABSS, which has been accounted for
using the purchase method of accounting (see Note 4), the Company recorded
approximately $11,000 in liabilities resulting from planned actions with
respect to BABSS, which included the costs to exit certain leased facilities
and
F-13
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
9. ACCRUED EXPENSES (Continued)
to involuntarily terminate employees. The provision of approximately $3,500
for the costs to exit certain leased facilities principally relates to future
lease payments on a warehouse in California which has been made idle.
Approximately $4,000 was provided for severance and termination benefits of
approximately 210 employees in the field, operations support, sales and
administration. Approximately $3,000 was provided in connection with the exit
plan for write-downs of inventory and equipment at two California facilities
which will not be utilized in future operations. The provision for various
other charges of approximately $500 consisted of costs to complete the exit
plan. As of June 30, 1996, the Company has settled all of these liabilities,
except for the lease liabilities on idle facilities approximating $1,200 for
which payments will continue through 1999.
As a result of successful negotiations of unutilized leased facilities,
during 1996, the Company recorded a reduction of approximately $975 to both
the provisions for leased facilities and goodwill.
10. REVOLVING CREDIT LOAN AND LONG-TERM DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
--------------------
1995 1996
--------- ----------
<S> <C> <C>
Revolving credit loan........................................... $186,400
Bank debt....................................................... $21,000
Promissory note, noninterest-bearing, due August 31, 1998 ...... 2,256
Seller noninterest-bearing notes payable........................ 2,122 2,118
Capitalized lease obligations, payable in varying installments
amounting to $1,413 and $972 in 1997 and 1998, respectively,
at interest rates ranging from 7.25% to 13.01% at June 30,
1996, net of interest of approximately $6 and $187 in 1995 and
1996, respectively............................................. 193 2,385
--------- ----------
25,571 190,903
Less current portion............................................ 19,414 2,321
--------- ----------
$ 6,157 $188,582
========= ==========
</TABLE>
BANK DEBT
On October 20, 1995, in connection with the BABSS acquisition (see Note 4)
the Company entered into a Credit Agreement which provided for a term loan
(the "1995 Term Loan") of $230,000 and a revolving credit facility of up to a
maximum of $30,000. The 1995 Term Loan provided for 19 equal quarterly
principal payments of $10,000 to be due and payable on the last day of each
calendar quarter commencing December 31, 1995 with a final payment due on
September 30, 2000. Loans under the revolving credit facility were to mature
on September 30, 2000. Interest on the 1995 Term Loan and the revolving
credit facility were at varying rates based, at the Company's option, on the
Eurodollar rate or the Alternative Base Rate (NationsBank prime rate), plus
the Applicable Margins. Margins were based on the ratio of Total Funded Debt
to EBITDA; the Eurodollar Margin ranged from 1.75% to 2.5%, while the
Alternative Base Rate Margin ranged from 0.5% to 1.25%.
In April 1996, the Company completed an initial public offering (see Note
15). The Company used a portion of the proceeds to repay approximately
$70,000 of the 1995 Term Loan.
F-14
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
10. REVOLVING CREDIT LOAN AND LONG-TERM DEBT (Continued)
Also in April 1996, the Company converted the 1995 Term Loan and the
existing $30,000 Revolving Credit Facility into a $225,000 variable rate,
unsecured revolving credit facility ("the 1996 Revolving Credit Facility").
The 1996 Revolving Credit Facility is at floating interest rates, based
either on the LIBOR or prime rate, in either case plus an Applicable Margin,
at the Company's option. As of June 30, 1996, the applicable rate was LIBOR
plus .75% or 6.32%. The 1996 Revolving Credit Facility enables the Company to
borrow up to $225,000 in the form of revolving credit loans with a maturity
date of April 26, 2001 and with interest periods determined principally on a
quarterly basis. To offset the variable rate characteristics of the
borrowings, the Company has entered into interest rate swap agreements with
two banks resulting in fixed interest rates of 5.4% on $40,000 notional
principal amount through December 1997 and 5.5% on another $40,000 notional
principal amount through December 1998, thereby leaving approximately
$100,000 subject to floating rates under the 1996 Revolving Credit Facility.
Under the swap agreements, the Company receives interest payments at a
floating rate based on the pricing of the three-month LIBOR and pays interest
on the same notional amounts at an average fixed rate of 5.45%. The floating
rate is 5.44% for the three-month period ended June 30, 1996. For the
three-month period ending September 30, 1996, the floating rate is 5.57%. The
agreements convert a portion of the Company's debt obligation from a floating
rate to a fixed rate basis. The fair value of the interest rate swap
agreements generally reflects the estimated amount that the Company would
receive or pay to terminate the agreements. As of June 30, 1996, the Company
would receive approximately $1,100 to terminate the swap agreements.
The Company attempts to minimize its credit exposure by entering into
interest rate swap agreements only with major financial institutions.
Although the Company may be exposed to losses in the event of nonperformance
by counterparties, the Company does not expect such losses, if any, to be
significant.
Under the terms of the 1996 Revolving Credit Facility, the Company may use
up to $25,000 for letters of credit, subject to the limitation of $225,000 in
total credit. As of June 30, 1996, letters of credit in the face amount of
$3,498 were outstanding.
The loan agreement relating to the 1996 Revolving Credit Facility contains
various terms and covenants which provide for certain restrictions on the
Company's indebtedness, liens, investments, disposition of assets and mergers
and acquisitions and require the Company, among other things, to maintain
minimum levels of consolidated net worth and certain minimum financial
ratios.
The borrower under the 1996 Revolving Credit Facility is DecisionOne
Corporation. Repayment of the debt is guaranteed by the Company and its other
subsidiaries except for its Canadian subsidiary.
The Company had average borrowings of $24,379 and $172,065 during 1995 and
1996, respectively, at an average interest rate of 10.34% and 8.69%,
respectively. Maximum borrowings during 1995 and 1996 were $32,648 and
$268,748, respectively.
SELLER NOTES PAYABLE
In connection with various acquisitions, the Company issued
noninterest-bearing notes, the principal of which is payable monthly,
primarily based upon a percentage of monthly maintenance contract revenues
billed during the previous month (ranging from 12.5% to 30.0%). Aggregate
maturities of these notes are as follows: 1997-$908; 1998-$647; 1999-$475 and
2000-$88. As of June 30, 1996, the notes are presented at their estimated net
present value based on imputed interest rates ranging from 7.25% to 11.00%.
F-15
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
10. REVOLVING CREDIT LOAN AND LONG-TERM DEBT (Continued)
PROMISSORY NOTE
As part of the August 31, 1994 acquisition of certain assets and
liabilities of IDEA/Servcom, Inc., the Company issued a $2,600
noninterest-bearing note which was due in annual installments of $650 over
four years. The liability was reflected on the Company's books, net of a $506
discount calculated at the Company's then incremental borrowing rate of
9.50%. The loan was scheduled to mature on August 31, 1998. During the year
ended June 30, 1996, the Company prepaid the entire outstanding loan balance.
The resulting gain from prepayment was not material.
SUBORDINATED DEBENTURES
In connection with the BABSS acquisition (see Note 4) on October 20, 1995,
the Company issued and sold to its principal shareholders, an aggregate
$30,000 principal amount of 10.101% debentures (the "Affiliate Notes") due on
October 20, 2001. The Affiliate Notes were subordinated to the 1995 Term Loan
and the revolving credit facility. Interest on the Affiliate Notes was
payable semiannually on the last business day of June and December of each
year commencing on December 31, 1995.
In connection with the issuance of the debentures, the Company issued
468,750 Common Stock Purchase Warrants (the "Warrants"). Each Warrant
initially entitled the owner to buy one share of Common Stock for $0.10. The
number of shares that can be purchased per Warrant steps up over 24 months in
conjunction with the increasing conversion privilege applicable to the
Preferred Stock such that, at the end of 24 months, each Warrant entitled the
holder to buy approximately 1.21 shares of Common Stock at a price of $0.10
per share. The Warrants were exercisable from October 20, 1997 until October
20, 2001, provided that if the Company had a public offering of its Common
Stock meeting certain requirements before October 20, 1997, the Warrants
became exercisable at the time of the public offering and the number of
shares that could be purchased on exercise was fixed at that time and no
longer increased in steps. The Warrants also became exercisable upon
retirement of the debentures. Each Warrant had an assigned value of $7.25333
which resulted in an original issue discount of $3,400 which was being
amortized over the term of the Affiliate Notes. Upon consummation of its
initial public offering in April 1996, the Company was required to pay up to
the total amount outstanding under the Affiliate Notes and, accordingly, the
Company used $30,000 of the proceeds to retire the Affiliate Notes. As a
result, the Company recorded an extraordinary loss in the amount of $3,211,
net of taxes of $1,284, due to the acceleration of the amortization of
original issue discount.
1994 DEBT RESTRUCTURING
On January 27, 1994, the Company amended its then current Credit Agreement
to provide an $11,000 term loan and an $8,000 Revolving Credit Facility. The
term loan provided for 29 equal monthly payments of $350 beginning January
31, 1994 through May 31, 1996. Interest was at the "Base Rate" (the higher of
the bank's base rate or 1/2 percent above the Federal Funds Effective Rate)
plus 1-1/2 percent. The Revolving Credit Facility was due on demand and bore
interest at the Base Rate plus 1-1/2 percent. The loans were collateralized
by all of the Company's assets. The proceeds of the term loan were used to
extinguish certain subordinated notes. The term loan was prepaid in June
1994. There were no borrowings under the Revolving Credit Facility through
June 30, 1994.
Also, on January 27, 1994, the Company agreed with certain noteholders to
restructure its equity capitalization and subordinated debt. The noteholders
forgave debt approximating $46,698 of principal and interest in exchange for
cash and equity interest in the Company which resulted in a net gain of
approximately $20,031 to the Company, which was recorded as additional
paid-in capital. The outstanding indebtedness as of January 27, 1994 was
restructured as follows:
F-16
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
10. REVOLVING CREDIT LOAN AND LONG-TERM DEBT (Continued)
Senior Subordinated Noteholders exchanged $38,068 principal amount of
notes, $2,008 in accrued but unpaid interest, 2,570,160 shares of the
Company's common stock and warrants to purchase 210,369 shares of the
Company's common stock for $19,625 in cash and 40,000 shares of the
Company's Series B Convertible Preferred Stock, $1.00 par value, with a
redemption value of $100 per share (see Note 15).
The Junior Subordinated Noteholders exchanged $6,556 principal amount of
notes, $64 in accrued interest and warrants to purchase 55,707 shares of
the Company's common stock for 2,617,612 shares of the Company's common
stock, $.01 par value. The shares of common stock issued were deemed at
such time to have a fair value of $.50 per share.
As part of previous credit agreements and the 1994 Debt Restructuring, the
Company issued warrants to purchase shares of the Company's common stock
at a price of $10 per share. At June 30, 1995, due to antidilution
adjustment, warrants to purchase 235,735 shares at an exercise price of
$5.90 were outstanding. During 1996, warrants to purchase 101,257 shares
of common stock were exercised.
At June 30, 1996, warrants to purchase 134,478 shares of common stock were
outstanding. These warrants expire in the year 2000.
11. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED JUNE 30,
------------------------------
1994 1995 1996
--------- ----------- --------
<S> <C> <C> <C>
Current:
Federal................................. $ 2,485 $ 16,065 $ 2,892
State................................... 760 4,599 1,595
Foreign................................. (1,272) 548
Deferred:
Federal................................. (29,897) 8,945
State................................... (3,617) 641
Foreign................................. (499)
Benefit of operating loss carryforwards:
Federal................................. (1,861) (7,729)
State................................... (360) (1,253)
Foreign................................. (252)
--------- ----------- --------
Provision (benefit) for income taxes ... $ 1,024 $(23,104) $13,870
========= =========== ========
</TABLE>
F-17
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
11. INCOME TAXES (Continued)
The tax effects of temporary differences consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
-------------------
1995 1996
--------- ---------
<S> <C> <C>
Gross deferred tax assets:
Accounts receivable.................................... $ 1,443 $ 1,341
Inventory.............................................. 3,299 2,586
Accrued expenses....................................... 3,761 6,378
Unused leases.......................................... 1,353
Fixed assets........................................... 100 299
Goodwill and other intangibles......................... 598 5,670
Operating loss carryforwards........................... 25,482 14,252
Minimum tax carryforward............................... 632 1,170
--------- ---------
Gross deferred tax asset................................ 36,668 31,696
Net valuation allowance................................. (686)
Gross deferred tax liabilities--repairable spare parts . (2,468) (7,273)
--------- ---------
Net deferred tax asset.................................. $33,514 $24,423
========= =========
</TABLE>
The change in the valuation allowance from 1995 to 1996 is principally due
to the utilization of foreign net operating loss carryforwards.
Net operating loss and minimum tax credit carryforwards available at June
30, 1996 expire in the following years:
<TABLE>
<CAPTION>
(IN THOUSANDS) YEAR OF
AMOUNT EXPIRATION
-------------- ------------
<S> <C> <C>
Federal operating
losses.................. 38,136 2002-2009
State operating losses .. 15,223 1997-2009
Minimum tax credit....... 1,170 INDEFINITE
</TABLE>
As a result of the Company's initial public offering, an "ownership
change" occurred pursuant to Section 382 of the Internal Revenue Code.
Accordingly, net operating loss and tax credit carryforwards are limited
during any future period to approximately $20,000 per annum.
F-18
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
11. INCOME TAXES (Continued)
A reconciliation between the provision (benefit) for income taxes,
computed by applying the statutory federal income tax rate of 34% for 1994,
35% for 1995 and 35% for 1996 to income before income taxes, and the actual
provision (benefit) for income taxes follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- --------- -------
<S> <C> <C> <C>
Federal income tax provision at statutory tax rate ...... 34.0% 35.0% 35.0%
State income taxes, net of federal income tax provision . 4.5 3.5 4.6
Foreign income taxes..................................... (6.9)
Unused lease credit...................................... (18.1) (0.1)
Write-off of intangibles................................. 12.6
Benefit of operating loss carryforward................... (19.9) (49.1) (0.8)
Change in valuation allowance............................ (108.9) (1.4)
Other.................................................... (3.9) (0.3) 2.6
-------- --------- -------
Actual income tax provision (benefit) effective tax
rate.................................................... 9.2% 126.2% 40.0%
======== ========= =======
</TABLE>
12. OTHER LIABILITIES
Other liabilities consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
------------------
1995 1996
--------- --------
<S> <C> <C>
Accrued rent, unused facilities and deferred
revenues............................................. $ 2,334 $ 4,237
Other noncurrent liabilities.......................... 10,049 10,049
--------- --------
$12,383 $14,286
========= ========
</TABLE>
Other noncurrent liabilities include provisions for possible liabilities
relating to various tax matters.
13. STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN
Under the 1988 Stock Option and Restricted Stock Purchase Plan, the name
of which was subsequently changed to DecisionOne Stock Option and Restricted
Stock Purchase Plan (the "Plan"), the Company, at the discretion of the Board
of Directors, may issue restricted stock, incentive stock options and
non-qualified options for shares of the Company's common stock. Vesting of
the restricted stock and stock options is at the discretion of the Board of
Directors and generally occurs at a rate of 25% per year.
During 1994, the Board of Directors amended the Plan increasing the total
number of shares issuable to approximately 2,350,000. Additionally, in
November 1995 the Board of Directors amended the Plan increasing the total
number of shares issuable to approximately 3,350,000.
The price of the incentive stock options issued to employees under the
Plan is not less than 100% of the fair market value of the common shares at
the date of issuance. The option price for nonqualified options is determined
by the Board of Directors at the time of grant and may be less than the fair
market value of the common shares at the time of grant. However, no such
options were granted at prices less then 100% of the fair value of common
shares at the date of issuance. Options expire through May 2006. Restricted
shares which are not vested upon an employee's termination are subject to a
repurchase right of the Company at a price equal to the amount paid by the
employee.
Presented below is the activity in the Plan for the years ended June 30,
1994, 1995 and 1996:
F-19
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
13. STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN (Continued)
<TABLE>
<CAPTION>
OPTIONS PRICE RANGE
----------- -------------
<S> <C> <C>
Balance, July 1, 1993 . 436,606 .50-100.00
Options granted....... 1,507,089 .50
Options cancelled .... (100) .50
Balance, June 30,
1994.................. 1,943,595 .50-100.00
Options exercised .... (15,000) .50
Options granted....... 410,000 1.25-6.00
Options cancelled .... (75,275) .50-100.00
Balance, June 30,
1996.................. 2,263,320 .50-6.00
Options exercised .... (329,850) .50-6.00
Options granted....... 803,000 8.00-27.50
Options cancelled .... (125,000) 1.25-8.00
Balance, June 30,
1996.................. 2,611,470 .50-27.50
</TABLE>
As of June 30, 1995, 977,454 options were vested and 40,901 options
remained available for issuance. As of June 30, 1996, 1,274,877 options were
vested and 382,808 options remained available for issuance.
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
2005. The future minimum lease payments for operating leases having initial
or remaining noncancellable terms in excess of one year for the five years
succeeding June 30, 1996 and thereafter are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997......... 20,477
1998......... 16,080
1999......... 13,300
2000......... 10,811
2001......... 4,621
Thereafter .. 12,150
--------
77,439
========
</TABLE>
On December 29, 1993, the Company entered into a settlement agreement to
terminate an existing lease on an unused facility, resulting in a payment to
the lessor amounting to $1,000. The payment was structured in the form of
cash and a $250 five-year, noninterest-bearing note payable. The settlement
resulted in a credit of approximately $8,000 recorded in the consolidated
statement of operations net of the provision of $1,599 for additional unused
leases for the year ended June 30, 1994. The outstanding balance of the $250
five-year, noninterest-bearing note payable was repaid in full during the
year ended June 30, 1995.
Rental expense, exclusive of unused rental expense and credits under all
noncancellable operating leases, amounted to approximately $5,128, $5,878 and
$13,149 for the fiscal years ended 1994, 1995 and 1996, respectively.
F-20
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
15. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
In January 1994, as part of its debt restructuring (see Note 10), the
Company authorized the issuance of 22,500 shares of Series A redeemable
preferred stock, $1.00 par value, and 40,000 shares of Series B redeemable
preferred stock, $1.00 par value. The Series A redeemable preferred stock
("Series A Preferred Stock") was issued in exchange for $2,250 in cash and
the Series B redeemable preferred stock ("Series B Preferred Stock") was
issued in connection with the settlement of the senior subordinated notes
(see Note 10). On October 17, 1995, the Board of Directors and the
shareholders amended the Company's Certificate of Incorporation to authorize
the issuance of 300,000 shares of Series C Preferred Stock, $1.00 par value
(herein called the "Series C Preferred Stock" and together with the Series A
Preferred Stock and the Series B Preferred Stock, herein called the
"Preferred Stock"). On December 8, 1995, the Board of Directors and
shareholders further amended the Company's Certificate of Incorporation to
authorize 376,416 shares of preferred stock; consisting of 23,499 shares
designated Series A; 41,776 shares designated Series B; and 311,141 shares
designated Series C.
The holders of Series A Preferred Stock voted as a class (each holder of
Series A Preferred Stock entitled to one vote for each share of common stock
that would be issuable to such holder upon the conversion of the Series A
Preferred Stock); each share of the Series B and Series C Preferred Stock was
nonvoting. Cash dividends were cumulative and accrued at the rate of $6.00
per share per annum for Series A and Series B and $4.00 per share per annum
for Series C from the date of issuance. Dividends were paid when and as
declared by the Board of Directors. Series A was junior to Series C and
senior to Series B. No dividends (except dividends payable in common stock)
were permitted on Series A and Series B Preferred Stock or on common stock,
and no redemption of Series A and B Preferred Stock or common stock was
permitted unless all accrued dividends of Series C Preferred Stock had been
paid and Series C Preferred Stock had been fully redeemed. The Series A, B
and C redeemable preferred stock was assigned a value of $100 per share.
The Series A and B Preferred Stock were to be automatically converted if
the Company completed a public offering in which the total price paid for
shares of common stock was at least $12,500, the price per share of common
stock was at least $2.75, and the common stock was authorized for trading on
Nasdaq or listed on the New York or American Stock Exchange. The Series C
Preferred Stock was to automatically convert if the Company completed a
public offering of shares of its common stock in which (i) the aggregate
price paid for such shares by the public was at least $50,000, (ii) the price
per share paid by the public for such shares was at least $10 per share, and
(iii) the common stock after such public offering, was authorized for trading
on Nasdaq or was listed on the New York or American Stock Exchange.
Accordingly, as of June 30, 1996 all outstanding preferred stock has been
converted into common stock.
F-21
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
15. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (Continued)
The following table summarizes certain matters relating to Series A, B
and C preferred stock activity from July 1, 1993 to June 30, 1996:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
-------------------- -------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT TOTAL
---------- --------- ---------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1993
Issuance of Series A and B
Preferred Stock................ 22,500 $ 2,250 40,000 $ 4,000 $ 6,250
Accretion of accruing
dividends...................... 67 119 186
---------- --------- ---------- --------- ----------- ---------- ----------
Balance, June 30, 1994.......... 22,500 2,317 40,000 4,119 6,436
Accretion of accruing
dividends...................... 135 240 375
---------- --------- ---------- --------- ----------- ---------- ----------
Balance, June 30, 1995.......... 22,500 2,452 40,000 4,359 6,811
Issuance of Series A, B and C
Preferred Stock ............... 999 100 1,776 178 311,141 31,114 31,392
Accretion of accruing
dividends...................... 107 190 588 885
Payment of accrued dividends ... (309) (549) (588) (1,446)
Conversion to Common Stock ..... (23,499) (2,350) (41,776) (4,178) (311,141) (31,114) (37,642)
---------- --------- ---------- --------- ----------- ---------- ----------
Balance, June 30, 1996.......... 0 $ 0 0 $ 0 0 $ 0 $ 0
========== ========= ========== ========= =========== ========== ==========
</TABLE>
During the year ended June 30, 1996, certain shareholders exercised their
preemptive right to subscribe for and purchase additional shares of common
stock or other securities so issued at the same price as originally issued on
certain occasions from 1992 through 1995. On December 4, 1995, the following
securities were purchased: (a) 382,578 shares of common stock at a price of
$4 per share; (b) 999 shares of Series A Preferred Stock, at a price of $100
per share; (c) 1,776 shares of Series B Preferred Stock, at a price of $100
per share; (d) 1,924 shares of common stock at a price of $.50 per share; (e)
11,141 shares of Series C Preferred Stock, at a price of $100 per share; and
(f) 17,407 Common Stock Purchase Warrants at a price of $7.25333 per warrant
which entitles the holder to purchase 17,407 shares of common stock at an
exercise price of $.10 per share. The 17,407 Common Stock Purchase Warrants
were exercised in 1996.
On February 9, 1996, the Company amended its Certificate of Incorporation
to increase the number of authorized shares of Common Stock to 100,000,000
shares and to authorize 5,000,000 shares of Preferred Stock.
In April 1996, the Company completed a public offering of 6,300,000 shares
of common stock at $18.00 per share (the "Offering"). Prior to the Offering,
there was no public market for the Company's common stock. The common stock
is listed on the Nasdaq National Market under the symbol "DOCI".
The net proceeds of the offering, after deducting applicable issuance
costs and expenses were $104,740. The proceeds were used to repay
approximately $70,000 of the 1995 Term Loan, $30,000 in Affiliate Notes,
approximately $1,446 in accrued dividends to holders of the Redeemed
Preferred Stock and for other general corporate purposes.
In connection with the Company's initial public offering in April 1996,
all of the preferred shares were automatically converted to common stock at
the conversion price of $.4928 per Series A share, $1.6560 per Series B share
and $7.8161 per Series C share. Preferred shares were converted into
11,271,924 shares of common stock. Additionally, dividends in arrears of $309
for Series A, $549 for Series B and $588 for Series C were declared and paid
by the Company.
F-22
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
15. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (Continued)
In connection with his service as a director and Chairman of the Board
prior to 1994, the Company granted an individual warrants to purchase an
aggregate of 66,667 shares of common stock at an exercise price of $4.00 per
share. The warrants which expire on March 15, 2003 remain outstanding at June
30, 1996.
For further information regarding warrants attached to affiliate notes,
and other outstanding warrants, see Note 10.
16. RETIREMENT PLANS
The Company maintains a 401(k) plan for its employees which is funded
through the contributions of its participants. A similar plan exists for
former employees of an acquired company for which eligibility and additional
contributions were frozen in September 1988.
In addition, the Company assumed the liability of the defined benefit
pension plan applicable to employees of a company acquired in 1986. The
eligibility and benefits were frozen as of the date of the acquisition.
Pension expense for the defined benefit pension plan was computed as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED JUNE 30,
-----------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Interest cost ................. $ 461 $ 482 $ 495
Actual return on plan assets . (271) (312) (449)
Net amortization and deferral (72) (42) (72)
------- ------- -------
Periodic pension costs......... $ 118 $ 128 $ 118
======= ======= =======
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.5%, and the expected long-term rate of
return on assets was 8.5% for 1994, 1995 and 1996.
The following table sets forth the funded status of the frozen pension
plan as of May 1, 1996 and 1995:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1995 1996
--------- ---------
<S> <C> <C>
Accumulated benefits (100% vested) ........ $ 6,757 $ 7,116
Fair value of plan assets.................. 5,432 5,800
--------- ---------
Unfunded projected benefit obligation ... 1,325 1,316
Unrecognized net loss...................... 1,705 1,848
Unrecognized net transition obligation .... 536 504
Adjustment to recognized minimum
liability................................. (2,241) (2,352)
--------- ---------
Accrued pension costs.................... $ 1,325 $ 1,316
========= =========
</TABLE>
F-23
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
17. EMPLOYEE SEVERANCE AND UNUTILIZED LEASE COSTS
In the second quarter of fiscal year 1996, in connection with the BABSS
acquisition, the Company recorded a $7,000 charge for $6,900 of leases of
duplicate facilities (the former headquarters, several large repair depots,
and numerous field offices of the Company) and $100 of severance of former
employees of the Company. Such amounts were based on management estimates.
In the fourth quarter of fiscal year 1996, the Company reversed $3,400 of
the charge. The reversal was the result of the Company's ability to utilize
and sublease various facilities identified in the original restructuring
charge. Such information was unknown to the Company when the original charge
was recorded.
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 three 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 fourth 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 originally estimated that its share of the costs of the clean-up of
one of these sites would be approximately $500 which is provided for in
liabilities related to the discontinued products division in the accompanying
consolidated balance sheets as of June 30, 1995 and 1996. Complete
information as to the scope of required clean-up at these sites is not yet
available and, therefore, management's evaluation may be affected as further
information becomes available. However, in light of information currently
available to management, including information regarding assessments of the
sites to date and the nature of involvement of the Company's predecessor at
the sites, it is management's opinion that the Company's share, if any, of
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.
19. RELATED PARTY TRANSACTIONS
Prior to 1994, the Company entered into an agreement to purchase printer
products from Genicom Corporation (Genicom). The Company and Genicom are
under common ownership. The initial term of the agreement is for five years
with an option to extend based on mutual agreement of the parties. Purchases
from Genicom for the years ended June 30, 1994, 1995 and 1996 were
approximately $1,421, $1,972 and $1,512, respectively. Accounts payable to
Genicom amounted to approximately $42 and $14 as of June 30, 1995 and 1996,
respectively.
During the year ended June 30, 1996, the Company entered into a contract
with a related party for cleaning services. The approximate annual value of
the contract approximates $150.
During the year ended June 30, 1996, the Company paid approximately $125
for expense reimbursements to certain shareholders for services rendered in
connection with an acquisition in 1988. The amount was accrued for in prior
years.
F-24
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
19. RELATED PARTY TRANSACTIONS (Continued)
In connection with the Company's financing of the BABSS acquisition on
October 20, 1995, the Company issued subordinated debentures and redeemable
preferred stock to certain related parties (see Notes 10 and 15).
20. INCOME (LOSS) PER COMMON SHARE
Primary income (loss) per common share is computed using the weighted
average number of shares of common stock and dilutive common stock
equivalents outstanding during the period. Common stock equivalents are
computed on the applicable outstanding options and warrants using the average
price for the period under the treasury stock method. For the years ended
June 30, 1994, 1995 and 1996, the effect upon the primary income per share of
common stock equivalents was dilutive and is included in the computations.
Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletins, primary income (loss) per share when presented during periods
which include a Company's initial public offering, also include amounts
computed on options and warrants issued within twelve months of the filing
date as if they were outstanding for all periods presented, even when the
result is anti-dilutive, using the treasury stock method and the assumed
initial public offering price. For these options and warrants, the
determination of common stock and equivalents outstanding for the remainder
of the year, subsequent to initial public offering, assumes computation using
average prices for the period under the treasury stock method. Additionally,
the computation of primary income (loss) per common share includes the
conversion of all preferred stock, which automatically converts to shares of
common stock as of the closing of the initial public offering, as if they
were outstanding for all periods prior to the initial public offering, even
when the result is anti-dilutive.
The fully diluted income (loss) per common share computation assumes
common stock equivalents are computed on the applicable outstanding options
and warrants using the end of the period price under the treasury stock
method.
21. SUPPLEMENTARY DATA (UNAUDITED)
The unaudited supplementary primary and fully diluted income per common
share data gives effect to the Company's initial public offering and
recapitalization and the assumed use of predominately all of the proceeds
from the Company's sale of 6,300,000 shares of common stock therefrom to
principally reduce by approximately $70,000 the outstanding amount of its
1995 Term Loan due September 30, 2000, and to repay the $30,000 face amount
of the Affiliate Notes in each case as if such transactions had occurred on
October 20, 1995, the date of the aforementioned debt transactions.
Supplementary weighted average number of common and common equivalent shares
outstanding reflects additional shares of 3,647,368 assumed to be outstanding
to effect these transactions. The supplementary extraordinary item results
from the write-off of unamortized original issue discount related to the
warrants issued in conjunction with the Affiliate Notes, which occurred in
April 1996, and is assumed as of October 20, 1995.
F-25
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
21. SUPPLEMENTARY DATA (UNAUDITED) (Continued)
The unaudited supplementary per share data for the year ended June 30,
1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Supplementary primary income per share data:
Supplementary income from continuing operations before
extraordinary item ........................................... 0.81
Supplementary extraordinary item--early extinguishment of debt (0.07)
Supplementary weighted average number of common and common
equivalent shares outstanding ................................ 28,843,235
Supplementary fully diluted income per share data:
Supplementary income from continuing operations before
extraordinary item ........................................... 0.80
Supplementary extraordinary item--early extinguishment of debt (0.07)
Supplementary weighted average number of common and common
equivalent shares outstanding................................. 29,077,329
</TABLE>
22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly financial
information for the fiscal years ended 1995 and 1996:
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS) SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,(1)
--------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
1995
Revenues ...................................... $32,044 $41,730 $41,660 $47,586
Gross profit .................................. 8,334 13,221 13,245 14,737
Income before extraordinary item .............. 1,476 4,043 4,660 32,349
Net income .................................... 1,476 4,043 4,660 32,349
Primary income per common share:
Income before extraordinary item ............. 0.06 0.18 0.20 1.42
Net income.................................... 0.06 0.18 0.20 1.42
</TABLE>
- ------------
(1) Net income for the fourth quarter of 1995 includes a tax benefit of
$24,900 primarily related to the future utilization of tax loss
carryforwards.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS) SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,(2)
--------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
1996
Revenues ...................................... $46,791 $149,703 $172,673 $171,024
Gross profit .................................. 15,524 38,224 42,711 41,416
Income before extraordinary item .............. 4,386 638 5,842 9,923
Net income .................................... 4,386 638 5,842 7,996
Primary income per common share:
Income before extraordinary item ............. 0.19 0.03 0.25 0.34
Net income ................................... 0.19 0.03 0.25 0.27
</TABLE>
- ------------
(2) Net income for the fourth quarter of 1996 includes (a) a $3,400
reversal of the previously recorded charge for employee severance and
unutilized lease costs (Note 17); and (b) a $1,500 adjustment related
to recoveries of previously reserved receivables.
F-26
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1997
---------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ....................................... $ 8,221 $ 12,886
Accounts receivable, net of allowances of $9,580 and $11,727 .... 92,650 136,401
Inventories, net of allowances of $19,537 and $19,928 ........... 30,130 35,186
Other ........................................................... 12,770 7,637
---------- -----------
Total current assets ........................................... 143,771 192,110
Repairable Parts, Net of Accumulated Amortization of $105,462 and
$144,158 .......................................................... 154,970 195,656
Intangibles, Net of Accumulated Amortization of $19,625 and $36,164 164,659 197,675
Property, Plant and Equipment, Net of Accumulated Depreciation of
$22,936 and $36,530 ............................................... 32,430 33,283
Other .............................................................. 18,680 22,953
---------- -----------
Total Assets ....................................................... $514,510 $641,677
========== ===========
LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities:
Current portion of long-term debt ............................... $ 2,321 $ 4,756
Accounts payable and accrued expenses ........................... 89,564 101,156
Deferred revenues ............................................... 38,485 72,096
Other ........................................................... 479 3,691
---------- -----------
Total current liabilities ...................................... 130,849 182,059
Revolving Credit Loan and Long-term Debt ........................... 188,582 241,915
Other Liabilities .................................................. 14,286 16,608
Shareholders Equity:
Preferred stock, $1.00 par value; authorized 5,000,000 shares;
none outstanding
Common stock, $.01 par value, authorized 100,000,000 shares;
issued and outstanding 27,340,288 and 27,813,832 shares ........ 273 278
Additional paid-in capital ...................................... 255,262 255,691
Accumulated deficit ............................................. (73,516) (53,600)
Other ........................................................... (1,226) (1,274)
---------- -----------
Total Shareholders' Equity ..................................... 180,793 201,095
---------- -----------
Total Liabilities and Shareholders' Equity ......................... $514,510 $641,677
========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-27
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues ................................. $172,673 $205,070 $369,167 $572,749
Cost of Revenues ......................... 129,962 150,372 272,708 427,969
---------- ---------- ---------- ----------
Gross Profit ............................. 42,711 54,698 96,459 144,780
Operating Expenses:
Selling, general and administrative
expenses ............................. 22,303 28,228 56,519 82,878
Amortization of intangibles ........... 4,872 6,390 10,617 16,861
---------- ---------- ---------- ----------
Total Operating Expenses ............ 27,175 34,618 67,136 99,739
Operating Income ......................... 15,536 20,080 29,323 45,041
---------- ---------- ---------- ----------
Interest Expense, Net of Interest Income 5,801 3,689 11,220 10,704
---------- ---------- ---------- ----------
Income Before Income Taxes ............... 9,735 16,391 18,103 34,337
Provision for Income Taxes ............... 3,893 6,884 7,237 14,421
---------- ---------- ---------- ----------
Net Income ............................... $ 5,842 $ 9,507 $ 10,866 $ 19,916
========== ========== ========== ==========
Per Common Share:
- -----------------------------------------
Net Income................................ $ 0.25 $ 0.32 $ 0.46 $ 0.66
Weighted Average Number of
Common Shares and Equivalent Shares
Outstanding ............................. 23,469 30,062 23,424 30,066
</TABLE>
See notes to condensed consolidated financial statements.
F-28
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Operating Activities:
Net income.............................................................. $ 10,866 $ 19,916
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of property and equipment................. 5,611 9,836
Amortization of intangibles............................................. 10,617 16,861
Amortization of repairable parts........................................ 23,017 45,642
Changes in assets and liabilities, net of effects of business
acquisitions........................................................... (14,622) (34,601)
----------- -----------
Net cash provided by operating activities.............................. 35,489 57,654
Investing Activities:
Business acquisitions................................................... (273,725) (34,433)
Capital expenditures, net of retirements................................ (3,331) (6,093)
Repairable parts purchases.............................................. (31,715) (64,803)
----------- -----------
Net cash used in investing activities.................................. (308,771) (105,329)
Financing Activities:
Proceeds from issuance of common stock.................................. 1,631 434
Proceeds from issuance of redeemable preferred stock.................... 31,392 --
Proceeds from issuance of subordinated debentures and warrants ......... 30,126 --
Proceeds from borrowings................................................ 260,945 52,915
Payments on borrowings.................................................. (48,062) ---
Principal payments under capital leases................................. -- (961)
----------- -----------
Net cash provided by financing activities.............................. 276,032 52,388
Effect of exchange rates on cash......................................... (20) (48)
----------- -----------
Net change in cash and cash equivalents................................... 2,730 4,665
Cash and cash equivalents beginning of period............................. 2,659 8,221
----------- -----------
Cash and cash equivalents end of period................................... $ 5,389 $ 12,886
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-29
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
DecisionOne Holdings Corp. and Subsidiaries (the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission and, therefore, do not include all information and footnotes
necessary for presentation of financial position, results of operations and
cash flows required by generally accepted accounting principles. The June 30,
1996 balance sheet was derived from the Company's audited consolidated
financial statements. The information furnished reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair summary of the financial position, results
of operations and cash flows. The Notes have been prepared based on
information available as of May 15, 1997 except with respect to Note 5 which
has been updated. The financial statements should be read in conjunction with
the audited historical consolidated financial statements of the Company and
notes thereto filed with the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996, as amended.
NOTE 2: INCOME PER COMMON SHARE
Pursuant to Securities and Exchange Commission Staff Accounting Bulletins,
primary income per share for the three and nine month periods ended March 31,
1996, presented in connection with the Company's initial public offering of
common stock in its Registration Statement on Form S-1, as amended, dated
April 3, 1996 (the "Offering"), also includes amounts computed on options and
warrants issued within twelve months of the filing date as if they were
outstanding for all periods presented, even when the result is anti-dilutive,
using the treasury stock method and the Company's initial public offering
price. Additionally, the computation of primary income per common share for
the three and nine month periods ended March 31, 1996 includes the conversion
of all shares of preferred stock, which automatically converted into shares
of common stock as of the closing of the Offering, as if they were
outstanding for all periods presented, even when the result is anti-dilutive.
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS 128"). SFAS 128, which supersedes Accounting Principles Board Opinion
No. 15, Earnings Per Share, requires a dual presentation of basic and diluted
earnings per share as well as disclosures including a reconciliation of the
computation of basic earnings per share to diluted earnings per share. Basic
earnings per share excludes the dilutive impact of common stock equivalents
and is computed by dividing net income by the weighted average number of
shares of common stock outstanding for the period. Diluted earnings per
share, which will approximate the Company's currently-reported net income per
common share, includes the effect of potential dilution from the exercise of
outstanding common stock equivalents into common stock, using the treasury
stock method at the average market price of the Company's common stock for
the period.
SFAS 128 is effective for interim and annual financial reporting periods
ending after December 15, 1997, and early adoption is not permitted. When
adopted by the Company, as required, for the fiscal quarter ending December
31, 1997, all prior quarters' earnings per share information will be required
to be restated on a comparable basis.
Assuming that SFAS 128 had been implemented, pro forma basic earnings per
share would have been $0.34 and $0.27 for the three month periods and $0.72
and $0.51 for the nine month periods ended March 31, 1997 and 1996,
respectively. Under SFAS 128, diluted earnings per share would not have
differed from net income per common share for the periods presented in the
accompanying unaudited condensed consolidated statements of operations.
F-30
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
NOTE 3: BUSINESS ACQUISITION (DOLLARS IN THOUSANDS)
On November 15, 1996, the Company acquired substantially all of the assets
of the U.S. computer service business (the "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 in the District of Delaware on October 15, 1996; the Court
approved the sale to the Company on November 1, 1996. The base purchase price
was $52,500, comprised of the assumption of certain liabilities under
contracts of the Business (the "Deferred Revenues"), which were estimated at
closing to be $26,015, and base cash consideration of $26,485, excluding
transaction and closing costs. The purchase price is subject to further
adjustment based upon the actual amount of Deferred Revenues, the amount of
revenues of the Business for the two calendar months prior to closing, and
the actual amount of inventory. The estimated fair market values of certain
assets acquired, as well as liabilities assumed, are also subject to further
adjustment as additional information becomes available to the Company. During
the third quarter of fiscal 1997, the estimated Deferred Revenue liability
was increased by approximately $2,300.
The primary source of funds used for the acquisition was the Company's
revolving credit facility, which was increased from $225,000 to $300,000 on
November 13, 1996.
NOTE 4: EMPLOYEE SEVERANCE AND EXIT COSTS
In the second quarter of fiscal 1997, in connection with the Memorex Telex
acquisition, the Company recorded a $3,400 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 $3,400 charge, recorded in accordance
with Statement of Financial Accounting Standards No. 112 ("SFAS 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
unaudited condensed consolidated statement of operations for the nine month
period ended March 31, 1997. For further information regarding the Memorex
Telex acquisition, see Note 3.
In the second quarter of fiscal 1996, in connection with the acquisition
of Bell Atlantic Business Systems Services ("BABSS"), the Company recorded
pre-tax charges for exit costs of $6,900, and estimated future employee
severance costs of $100. During the fourth quarter of fiscal 1996, the
Company reversed $3,400 of these employee severance and exit cost
liabilities. The reversal was primarily the result of the Company's ability
to utilize and sublease various facilities identified in the original $7,000
combined liability. Such information was unknown to the Company when the
original liability was recorded.
NOTE 5: SUBSEQUENT EVENT
On May 4, 1997, the Company and Quaker Holding Co. ("Quaker") an affiliate
of DLJ Merchant Banking Partners II, L.P. and affiliated funds and other
entities, entered into a definitive Agreement and Plan of Merger (the "Merger
Agreement"). Under the terms of the Merger Agreement, Quaker will merge with
and into the Company, and, subject to the following sentence, the holders of
each share of the Company's common stock can elect to receive $23 in cash for
such share or to retain such share in the merged Company. In any event,
holders will be required to retain 5.3% of the Company's common stock
outstanding immediately prior to the merger. In addition, the Company and
Quaker entered into a voting agreement with certain partnerships affiliated
with Welsh, Carson, Anderson & Stowe and J.H. Whitney & Co., pursuant to
which these partnerships, subject to certain conditions, have agreed to vote
in favor
F-31
<PAGE>
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 5: SUBSEQUENT EVENT (Continued)
of the merger 8,345,349 of the 14,837,501 shares of Company common stock
owned by them, exclusive of warrants to purchase 468,750 shares of common
stock at $0.10 per share. The 8,345,349 shares represent approximately 30% of
the Company's common stock outstanding on April 21, 1997.
The proposed merger, which will be recorded as a recapitalization for
accounting purposes, is subject to a number of conditions, including
regulatory approvals and approval by Company stockholders. The transaction is
estimated to have an aggregate value of approximately $957,000, including
refinancing of the Company's existing revolving credit facility. The Company
expects the merger to close by September, 1997.
As a result of the proposed merger, the Company and Quaker will incur
various costs, currently estimated to range between $95,000 and $105,000, on
a pretax basis, in connection with consummating the transaction. These costs
consist primarily of professional fees, registration costs, compensation
costs and other expenses. Although the exact timing, nature and amount of
these merger transaction costs are subject to change, the Company expects
that a one-time pre-tax charge for these costs of approximately $76 million
($69 million after tax) will be recorded in the quarter during which the
merger is consummated.
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder
of DecisionOne Corporation (formerly Bell Atlantic Business Systems Services,
Inc.):
We have audited the accompanying consolidated balance sheets of
DecisionOne Corporation (formerly, Bell Atlantic Business Systems Services,
Inc.) and subsidiary (the "Company") as of December 31, 1994 and October 20,
1995, and the related consolidated statements of operations, stockholder's
equity and of cash flows for the years ended December 31, 1993 and 1994 and
the period from January 1, 1995 to October 20, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements 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
subsidiary as of December 31, 1994 and October 20, 1995, and the results of
their operations and their cash flows for the years ended December 31, 1993
and 1994 and the period from January 1, 1995 to October 20, 1995 in
conformity with generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, the
Company changed its method of accounting for income taxes and postemployment
benefits as of January 1, 1993.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
December 29, 1995
F-33
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC BUSINESS
SYSTEMS SERVICES, INC.) AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents.................................... $ 6,456 --
Accounts receivable, net.................................... 50,743 66,426
Inventories, net............................................ 28,620 24,371
Deferred tax asset--current................................. 6,910 --
Prepaid expenses and other assets........................... 2,754 2,990
-------------- -------------
Total current assets...................................... 95,483 93,787
Repairable parts, net........................................ 91,012 91,486
Property and equipment, net.................................. 24,925 28,352
Intangibles, net............................................. 52,345 50,747
Deferred tax asset, net...................................... 12,814 1,062
Other assets................................................. 1,005 499
-------------- -------------
Total assets................................................. $ 277,584 $ 265,933
============== =============
Liabilities and Stockholder's Equity
Current Liabilities:
Accounts payable............................................ $ 24,767 $ 26,260
Accrued expenses............................................ 20,160 18,384
Deferred revenues........................................... 14,582 29,231
Current capitalized lease obligations....................... 1,627 1,525
Income taxes payable........................................ 1,548 --
Due to Bell Atlantic affiliates............................. 39,579 --
-------------- -------------
Total current liabilities................................. 102,263 75,400
Noncurrent capitalized lease obligations..................... 3,128 1,880
Due to Bell Atlantic affiliates.............................. 773 862
Other liabilities............................................ 23,377 1,293
Commitments and contingent liabilities
Stockholder's equity:
Common stock, no par value; one share authorized, issued
and outstanding in 1994 and 1995........................... -- --
Additional paid-in capital.................................. 276,619 314,262
Accumulated deficit......................................... (127,730) (127,134)
Foreign currency translation adjustment..................... (846) (630)
-------------- -------------
Total stockholder's equity................................ 148,043 186,498
-------------- -------------
Total liabilities and stockholder's equity................... $ 277,584 $ 265,933
============== =============
</TABLE>
See notes to consolidated financial statements.
F-34
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
PERIOD
JANUARY 1 TO
OCTOBER 20,
1993 1994 1995
---------- ---------- --------------
<S> <C> <C> <C>
Revenues:
Service................................................... $375,977 $457,675 $388,203
Other..................................................... 27,405 28,418 24,283
---------- ---------- --------------
403,382 486,093 412,486
---------- ---------- --------------
Cost of revenues:
Service................................................... 304,334 369,596 316,964
Other..................................................... 21,856 21,281 20,348
---------- ---------- --------------
326,190 390,877 337,312
---------- ---------- --------------
Gross profit............................................... 77,192 95,216 75,174
Operating expenses:
Selling, general and administrative expenses.............. 71,096 74,627 69,980
Amortization of intangibles............................... 4,383 3,884 1,652
---------- ---------- --------------
Operating income........................................... 1,713 16,705 3,542
Interest expense........................................... (3,341) (2,203) (1,855)
Interest income............................................ 206 54 218
---------- ---------- --------------
Income (loss) before income taxes and cumulative effect of
accounting change......................................... (1,422) 14,556 1,905
Provision for income taxes................................. 132 6,595 1,309
---------- ---------- --------------
Income (loss) before cumulative effect of accounting
change.................................................... (1,554) 7,961 596
Cumulative effect of accounting change..................... 1,881
---------- ---------- --------------
Net income.............................................. $ 327 $ 7,961 $ 596
========== ========== ==============
</TABLE>
See notes to consolidated financial statements.
F-35
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND PERIOD
JANUARY 1 TO OCTOBER 20, 1995
(in thousands, except number of shares)
<TABLE>
<CAPTION>
CUMULATIVE
COMMON STOCK FOREIGN
------------------ ADDITIONAL CURRENCY TOTAL
NUMBER OF PAID-IN ACCUMULATED TRANSLATION STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMEN EQUITY
----------- ------ ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 ... 1 $0 $295,419 $(136,018) $(312) $159,089
Net income ............... 327 327
Foreign currency
translation adjustment .. (215) (215)
Distributions to BAC ..... (1,900) (1,900)
---------- -------- ------------ ------------- ------------- ---------------
Balance, December 31, 1993 . 1 0 293,519 (135,691) (527) 157,301
Net income ............... 7,961 7,961
Foreign currency
translation adjustment .. (319) (319)
Distributions to BAC ..... (16,900) (16,900)
---------- -------- ------------ ------------- ------------- ---------------
Balance, December 31, 1994 . 1 0 276,619 (127,730) (846) 148,043
Net income ............... 596 596
Foreign currency
translation adjustment .. 216 216
Distributions to BAC ..... (800) (800)
Contributed capital ...... 38,443 38,443
---------- -------- ------------ ------------- ------------- ---------------
Balance, October 20, 1995 .. 1 $0 $314,262 $(127,134) $(630) $186,498
========== ======== ============ ============= ============= ===============
</TABLE>
See notes to consolidated financial statements.
F-36
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
PERIOD
YEARS ENDED DECEMBER 31, JANUARY 1,
------------------------ TO OCTOBER
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income ............................................... $ 327 $ 7,961 $ 596
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of property and
equipment............................................ 7,572 8,499 7,171
Amortization of intangibles........................... 4,383 3,884 1,652
Amortization of repairable parts...................... 43,443 43,450 28,767
Loss on fixed asset retirements ...................... 259 215 165
Provision for accounts receivable .................... 1,213 810 810
Provision for inventory obsolescence ................. 5,351 4,802 6,365
Changes in operating assets and liabilities, net of
effects from contributed capital, which provided
(used) cash:
Accounts receivable ............................. (9,448) (7,660) (18,305)
Inventories ..................................... (4,321) (3,800) (2,116)
Accounts payable ................................ 5,673 7,755 1,493
Accrued expenses ................................ 3,734 3,391 2,953
Deferred revenues ............................... 5,154 (757) 14,649
Net changes in income taxes, deferred taxes,
other assets and liabilities ................... (2,865) (189) 4,415
-------- ---------- --------------
Net cash provided by operating activities ..... 60,475 68,361 48,615
-------- ---------- --------------
Investing activities:
Capital expenditures ..................................... (8,336) (9,585) (10,763)
Repairable parts purchases ............................... (29,833) (45,907) (29,241)
Proceeds from sale of fixed assets ....................... 124 -- --
-------- ---------- --------------
Net cash used in investing activities ............. (38,045) (55,492) (40,004)
-------- ---------- --------------
Financing activities:
Distributions to shareholder ............................. (1,900) (16,900) (3,475)
Net borrowings (repayments) on affiliated debt ........... (19,029) 7,544 (10,242)
Additions to capital lease obligations ................... 1,825 2,283
Payments on capital lease obligations .................... (1,309) (1,357) (1,350)
-------- ---------- --------------
Net cash used in financing activities ............. (20,413) (8,430) (15,067)
-------- ---------- --------------
Net increase (decrease) in cash and cash equivalents ....... 2,017 4,439 (6,456)
Cash and cash equivalents, beginning of year ................ -- 2,017 6,456
-------- ---------- --------------
Cash and cash equivalents, end of year ...................... $ 2,017 $ 6,456 --
======== ========== ==============
Supplemental disclosures of cash flow information:
Net cash paid during the year for:
Interest ............................................... $ 3,409 $ 2,307 $ 1,986
Income taxes ........................................... 1,598 8,366 5,237
Noncash investing and financing activities:
Assets and liabilities contributed to capital by stockholder:
Accounts receivable .................................... $ 1,812
Accounts payable ....................................... (4,729)
Notes payable .......................................... (29,248)
Income tax payable ..................................... 1,675
Deferred taxes ......................................... 17,079
Employee related liabilities ........................... (27,707)
--------------
$(41,118)
==============
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(In thousands)
1. NATURE OF BUSINESS
The consolidated financial statements include the accounts of DecisionOne
Corporation (formerly, Bell Atlantic Business Systems Services, Inc.
("BABSS")) and its wholly-owned subsidiary, Sorbus Canada Ltd. (the
"Company"). Prior to the acquisition discussed below, BABSS had been wholly
owned by Bell Atlantic Business Systems, Inc., a subsidiary of Bell Atlantic
Enterprises International, Inc., and, ultimately by Bell Atlantic Corporation
("BAC"). The Company is a provider of multivendor computer maintenance
service and technology support services.
On September 19, 1995, BAC entered into a stock purchase agreement (the
"Agreement") to sell all of the outstanding common stock of BABSS to Decision
Servcom, Inc. ("Operating Co."), an independent provider of computer
maintenance services in the mid-range computer market, for a cash purchase
price of approximately $250,000. In connection with the acquisition, the
Company's name was changed from BABSS to DecisionOne Corporation, and
Operating Co. was merged into it.
The Company's wholly-owned international subsidiary is not significant to
the Company's financial statements.
2. BASIS OF PRESENTATION
The Company was acquired effective October 20, 1995, through a transaction
accounted for using the purchase method of accounting. The accounts of the
Company do not reflect the allocation of the purchase price.
BAC's retention of certain of the Company's liabilities, and net of
certain assets (including cash and cash equivalents), has been accounted for
as a contribution of capital in the Company's accompanying consolidated
statements of stockholder's equity for the period ended October 20, 1995. See
Note 4.
Obligations arising out of employee benefit and pension plans accrued
prior to October 20, 1995, as well as certain claims and causes of action
related to the Company's actions or omissions that occurred prior to October
20, 1995 have been retained by BAC. Therefore, no accruals for the
aforementioned have been made in the Company's accompanying consolidated
balance sheet as of October 20, 1995.
3. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION -- The consolidated financial statements include the
accounts of BABSS and its wholly owned subsidiary. All intercompany balances
and transactions have been eliminated in consolidation.
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.
INVENTORIES -- Inventories are stated at the lower of cost or market, cost
being determined using the weighted average method. Inventories consist of
consumable replacement parts which are charged to operations when used.
Inventories are stated net of a provision for obsolescence of $21,718,
$22,742 and $23,852 at December 31, 1993 and 1994 and October 20, 1995,
respectively.
REPAIRABLE PARTS -- Repairable parts are required in order to meet the
requirements of the contracts with the Company's maintenance customers. These
parts are primarily purchased from equipment manufacturers or other third
parties. As these parts are purchased, they are capitalized at cost and
amortized using the straight-line method over five years, the estimated
useful life of these repairable parts.
F-38
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(In thousands)
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
When a repairable part is used in providing maintenance services to a
customer's equipment, the defective part taken from the equipment is
exchanged for the repairable part taken from the Company's inventory.
Repairable parts are repaired by the Company based upon anticipated need and
generally have an economic life that extends beyond the normal life cycle of
the applicable product. Costs of refurbishing parts are charged to operations
as incurred. Repairable parts are stated at cost, less accumulated
amortization of $68,803 and $74,411 as of December 31, 1994 and October 20,
1995, respectively. Repairable parts amortization expense for the years ended
December 31, 1993 and 1994 and the period ended October 20, 1995 was $43,443,
$43,450 and $28,767, respectively.
No such impairment writedowns were required in the years ended December
31, 1993, or 1994, or in the period ended October 20, 1995.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation is provided for using the straight-line method over the
estimated useful lives of the depreciable assets. Capitalized equipment
leases and leasehold improvements are amortized over the shorter of the
related lease terms or asset lives. Maintenance and repairs are charged to
expense as incurred; renewals and betterments are capitalized. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is charged to operations.
INTANGIBLE ASSETS -- Intangible assets are comprised of excess purchase
price over net assets acquired ("goodwill") and the fair value of acquired
customer contracts.
Goodwill is being amortized on a straight-line basis over a life of 25 to
40 years. Other intangibles are being amortized on a straight-line basis,
with lives between 2 to 18 years.
CARRYING VALUE OF LONG-TERM ASSETS -- The Company evaluates the carrying
value of long-term assets, property and equipment, repairable parts and
intangible assets, based upon current and anticipated undiscounted cash
flows, and recognizes an impairment when such estimated cash flows will be
less than the carrying value of the asset. Measurement of the amount of
impairment, if any, is based upon the difference between carrying value and
fair value.
SERVICE REVENUE -- The Company enters into maintenance contracts whereby
it services various manufacturers' equipment. Revenues from these contracts
are recorded as deferred revenues and are recognized ratably over the term of
the contract. Revenues derived from the maintenance of equipment not under
contract are recognized as the service is performed.
FOREIGN CURRENCY TRANSLATION -- Gains and losses resulting from foreign
currency translation are accumulated in a separate component of shareholder's
equity titled, "Cumulative Foreign Currency Translation Adjustment". Gains
and losses resulting from foreign currency transactions are not significant
and are included in operations.
CREDIT RISK -- Concentration of credit risk with respect to trade
receivables is limited due to the large number of customers comprising the
Company's customer base and their dispersion across many industries.
INCOME TAXES -- The Company is included in the consolidated federal tax
return of BAC. Calculation of the Company's income taxes on a separate return
basis would not result in any change to the amounts reflected in the
consolidated financial statements. Effective January 1, 1993, the Company
changed its policy of accounting for income taxes to conform to Statement of
Financial Accounting Standards
F-39
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(In thousands)
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
("SFAS") No. 109, Accounting for Income Taxes. The Company previously
followed Accounting Principles Board Opinion No. 11, "Accounting for Income
Taxes." SFAS No. 109 requires, among other things, the accrual of deferred
tax liabilities for future taxable amounts, deferred tax assets for future
deductions and operating loss carryforwards, and a valuation allowance to
reduce deferred tax assets to the amounts that are more likely than not to be
realized. The cumulative effect of adopting SFAS No. 109 as of January 1,
1993 resulted in a non-cash increase to net income of $1,881 for the initial
adjustment of deferred tax balances to reflect the tax rates in effect at
adoption.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The following disclosure of the
estimated fair value of financial instruments was 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.
NOTES PAYABLE -- Rates currently available to the Company for debt with
similar terms and remaining maturities are used to estimate the fair value
for debt issues, accordingly, the carrying amount of debt is a reasonable
estimate of its fair value.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
PENSION PLAN -- Substantially all of the Company's employees participated
in a noncontributory defined benefit pension plan sponsored by BAC for the
years ended December 31, 1993 and 1994 and for the period ended October 20,
1995. Amounts contributed by the Company to the pension plan were determined
by BAC based principally on the aggregate cost actuarial method, and are
subject to applicable federal income tax regulations. The obligation of the
pension plan which has been terminated as of October 20, 1995, will be
assumed by BAC.
POSTEMPLOYMENT BENEFITS -- Effective January 1, 1993, the Company adopted
the provisions of SFAS No. 112, Employers' Accounting for Postemployment
Benefits. SFAS No. 112 establishes accrual accounting standards for
employer-provided benefits which cover former or inactive employees after
employment, but before retirement. The adoption of SFAS No. 112 on January 1,
1993 did not have a material effect on the Company's consolidated financial
position or results of operations.
The Company's employees, if eligible, are provided post employment
benefits under plans administered by BAC for the years ended December 31,
1993 and 1994 and for the period ended October 20, 1995. Amounts contributed
by the Company to the benefit plans were determined by BAC based on an
actuarial methodology. BAC has assumed all such liabilities accrued as of
October 20, 1995.
4. CONTRIBUTED CAPITAL
Effective October 20, 1995, in accordance with the Agreement between BAC
and Operating Co., the Company accounted for BAC's retention of liabilities,
net of certain assets, as a contribution of capital.
F-40
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
4. CONTRIBUTED CAPITAL (Continued)
Amounts contributed to capital were as follows: (In thousands)
<TABLE>
<CAPTION>
<S> <C>
Cash .................................. $ (2,675)
Accounts receivable.................... (1,812)
Accounts payable and accrued expenses 4,729
Income taxes payable................... (1,675)
Notes payable to affiliates............ 29,248
Deferred taxes......................... (17,079)
Employee related liabilities........... 27,707
----------
Net amount contributed to capital ..... $ 38,443
==========
</TABLE>
5. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Trade receivables......................... $51,513 $68,136
Due from affiliates....................... 1,655 1,362
Other..................................... 847 697
-------------- -------------
54,015 70,195
Less allowance for uncollectible
accounts................................. (3,272) (3,769)
-------------- -------------
$50,743 $66,426
============== =============
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Land and buildings........................ $ 2,419 $ 2,509
Equipment, furniture and fixtures ........ 48,008 54,722
Leasehold improvements.................... 3,964 4,721
Other..................................... 11,461 10,854
-------------- -------------
65,852 72,806
Accumulated depreciation and
amortization............................. (40,927) (44,454)
-------------- -------------
$ 24,925 $ 28,352
============== =============
</TABLE>
The principal lives (in years) used in determining depreciation rates of
various assets are: buildings (40); computers and equipment (5); furniture
and fixtures (10); office machines (10); and leasehold improvements (term of
related leases).
Depreciation expense was $7,572 and $8,499, for the years ended December
31, 1993 and 1994, respectively, and $7,171 for the period ended October 20,
1995.
F-41
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(In thousands)
7. INTANGIBLES
Intangibles consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Customer contracts....... $ 8,500 $ 8,500
Goodwill................. 59,141 59,214
-------------- -------------
67,641 67,714
Accumulated
amortization............ (15,296) (16,967)
-------------- -------------
$ 52,345 $ 50,747
============== =============
</TABLE>
The Company periodically evaluates the fair value of goodwill and other
intangible assets and recognizes an impairment when it is probable that
estimated future undiscounted cash flows will be less than the carrying value
of the asset. No writedowns of goodwill or other intangible assets were made
in 1993, 1994 or 1995.
Amortization expense relating to intangibles was approximately $4,383 and
$3,884 for the years ended December 31, 1993 and 1994, respectively, and
$1,652 for the period ended October 20, 1995.
8. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Compensation and
benefits................. $ 6,642 $ 7,272
Bonuses................... 5,109 2,790
Other accrued expenses ... 8,409 8,322
-------------- -------------
$20,160 $18,384
============== =============
</TABLE>
9. INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
PERIOD
JANUARY 1
YEARS ENDED TO
DECEMBER 31, OCTOBER 20,
----------------------- 1995
1993 1994
- --------------------------------------------- ---------
<S> <C> <C> <C>
Continuing operations:
Current:
Federal..................................... $ 2,820 $ 7,243 $ 390
State....................................... 126 727 (110)
Foreign..................................... 552 1,026 653
--------- --------- -------------
3,498 8,996 933
--------- --------- -------------
Deferred:
Federal..................................... (3,119) (2,078) 707
State....................................... (7) 1,455 225
Foreign..................................... (240) (323) (331)
--------- --------- -------------
(3,366) (946) 601
--------- --------- -------------
Benefit of net operating loss carryforwards:
State....................................... -- (1,455) (225)
--------- --------- -------------
Provision for income taxes (benefit) ......... $ 132 $ 6,595 $1,309
========= ========= =============
</TABLE>
F-42
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(In thousands)
9. INCOME TAXES (Continued)
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax asset were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Deferred tax assets (liabilities):
Current:
Accounts receivable ............... $ 1,934 --
Inventory ......................... 5,186 --
Accrued expenses ................... (489) --
Other .............................. 279 --
Deferred state taxes ............... 1,395 --
--------------
Gross deferred tax asset--current . 8,305 --
Less valuation allowance............... (1,395) --
--------------
Net deferred tax assets--current .. 6,910 --
--------------
Non-current:
Property and equipment ........... 2,646 1,062
Repairable parts ................... 2,211 --
Employee benefits ................. 8,100 --
Deferred state taxes .............. 1,777 --
Other ............................. (143) --
State net operating loss
carryforwards ...................... 5,163 --
-------------- -------------
Gross deferred tax
asset--noncurrent .................. 19,754 1,062
Less valuation allowance............... (6,940) --
-------------- -------------
Net deferred tax
asset--noncurrent .................. 12,814 1,062
-------------- -------------
Net deferred tax asset................. $19,724 $1,062
============== =============
</TABLE>
The net deferred tax asset as of December 31, 1994 in essence represents
an intercompany receivable from BAC, resulting from the future benefit of the
inclusion of the Company's temporary differences in the consolidated U.S.
federal tax return of BAC.
The October 20, 1995 deferred tax asset related to foreign operations.
A reconciliation between the provision (benefit) for income taxes,
computed by applying the statutory income tax rate to income before income
taxes, and the actual provision for income taxes follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- ------- -------
<S> <C> <C> <C>
Federal income tax provision (benefit) at statutory tax
rate....................................................... (35.0)% 35.0% 35.0%
State income taxes, net of federal income tax benefit ..... 5.4 3.2 (3.7)
Foreign income tax rate differential ....................... 5.1 1.2 6.6
Nondeductible expenses ..................................... 6.8 1.8 9.7
Amortization of goodwill.................................... 33.8 4.1 21.7
Other ...................................................... (6.9) -- (0.6)
--------- ------- -------
Actual income tax provision effective tax rate ............. 9.2% 45.3% 68.7%
========= ======= =======
</TABLE>
F-43
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(In thousands)
10. LEASE COMMITMENTS
The Company leases certain computer equipment under noncancellable capital
leases. 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 at various dates during
the next six years.
Future minimum payments under noncancellable capital leases and operating
leases as of October 20, 1995 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
October 21, 1995 to December 31, 1995 .. $ 364 $ 3,639
1996.................................... 1,669 15,308
1997.................................... 1,261 13,456
1998.................................... 400 10,885
1999.................................... 58 8,343
2000.................................... 55 4,588
Thereafter.............................. -- 11
--------- -----------
Total minimum lease payments............ 3,807 $56,230
Less amount representing interest ...... 402
---------
Present value of minimum lease
payments............................... 3,405
Less current obligations................ 1,525
---------
Noncurrent obligations.................. $1,880
=========
</TABLE>
Rental expense for operating leases was $12,609 and $14,145 for the years
ended December 31, 1993 and 1994 and $12,749 for the period ended October 20,
1995.
11. BENEFIT PLANS
Substantially all of the Company's employees were covered under a
noncontributory pension benefit plan sponsored by BAC, which plan was
terminated on October 20, 1995 (see Note 3). The pension benefit formula used
in the determination of pension cost is based on the greater of a flat dollar
amount per year of service or a stated percentage of adjusted career average
income. BAC's objective in funding the plan is to accumulate funds at a
relatively stable rate over participants' working lives so that benefits are
fully funded at retirement. Plan assets consist principally of investments in
corporate equity securities, U.S. Government and corporate debt securities
and real estate.
SFAS No. 87 requires a comparison of the actuarial present value of
projected benefit obligations with the fair value of plan assets, the
disclosure of the components of net periodic pension costs and a
reconciliation of the funded status of the plan with amounts recorded on the
balance sheet. Such disclosures are not presented for the Company because the
structure of the plan does not allow for determination of this information on
an individual company basis.
F-44
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(In thousands)
11. BENEFIT PLANS (Continued)
The Company recognized pension expense of $3,243 and $4,202 for the years
ended December 31, 1993 and 1994 and $4,846 for the period ended October 20,
1995.
The assumptions used in the actuarial computations by BAC for
determination of the above pension expense were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Discount rate ................................... 7.25% 8.25% 7.25%
Expected long-term rate of return on plan
assets.......................................... 8.25 8.25 8.25
Future compensation growth rate ................. 5.25 5.25 4.75
</TABLE>
Substantially all of the Company's employees participate in a savings plan
provided by BAC which provides opportunities for eligible employees to save
for retirement on a tax deferred basis. The Company recognized contribution
expense of $1,482 and $1,531 for the years ended December 31, 1993 and 1994
and $1,602 for the period ended October 20, 1995.
Under the Agreement, Operating Co. assumed no liabilities of the Company
relating to employee benefit programs.
12. OTHER LIABILITIES
Other liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Other postemployment benefit liabilities $19,120 $ --
Accrued pension cost ..................... 3,220 --
Other noncurrent liabilities ............. 1,037 1,293
-------------- -------------
$23,377 $1,293
============== =============
</TABLE>
Effective October 20, 1995, employee related liabilities (including other
postemployment benefit liabilities and accrued pension costs) were
contributed to capital by BAC. (see Note 4).
13. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a defendant in a number of lawsuits in the ordinary course
of business, including actions alleging wrongful termination of employment
and breach of contract. In several of the alleged wrongful termination cases,
the plaintiffs are seeking punitive damages. The Company believes it has
meritorious defenses to all of the claims and is vigorously defending the
lawsuits. Although the ultimate outcome of these lawsuits cannot be predicted
with certainty, the Company's management, after consultation with legal
counsel, does not expect that such lawsuits will have a material adverse
effect on the Company's financial condition, results of operation or
liquidity.
F-45
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(In thousands)
14. RELATED PARTY TRANSACTIONS
The Company engages in various activities with Bell Atlantic affiliated
companies. Amounts due from the affiliated companies consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Bell Atlantic Network Services, Inc. $ 797 $ 806
Bell Atlantic Network Integration ... 252 281
New Jersey Bell ...................... 65 70
Bell of Pennsylvania ................. 35 62
C&P Telephone Company--Maryland ..... 96 35
Other ................................ 410 108
-------------- -------------
Total due from affiliates .......... $1,655 $1,362
============== =============
</TABLE>
Amounts due to the affiliated companies consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 20,
1994 1995
-------------- -------------
<S> <C> <C>
Bell Atlantic Enterprises International ...... $ 3,856 $ 309
Bell Atlantic Professional Services........... 110 297
Bell Atlantic Customer Services
International................................ 239
Other......................................... 340 159
-------------- -------------
Total accounts payable affiliates........... 4,545 765
-------------- -------------
Notes payable--FSI............................ 39,579
Notes payable--BAP............................ 773 862
-------------- -------------
Total notes payable affiliates.............. 40,352 862
-------------- -------------
Total due to affiliates..................... $44,897 $1,627
============== =============
</TABLE>
The Company engages in various activities with affiliated companies. The
amount due to Bell Atlantic Financial Services, Inc. ("FSI") at December 31,
1994 is represented by a promissory note for the aggregate unpaid principal
balance plus interest on demand. The interest rates charged are based on the
weighted average cost of FSI's outstanding borrowings during the month. The
weighted average interest rate for 1994 and 1995 was approximately 5.8%.
The amount due to Bell Atlantic Properties ("BAP") is also represented by
a promissory note for the aggregate unpaid principal balance plus interest.
Interest is payable monthly on the unpaid principal at the rate of 9.88% per
annum.
Effective October 20, 1995, notes payable excluding interest of $29,248
due to FSI, and $4,650 of accounts payable due to affiliates were contributed
to capital by BAC. See Note 4.
F-46
<PAGE>
DECISIONONE CORPORATION (FORMERLY, BELL ATLANTIC
BUSINESS SYSTEMS SERVICES, INC.) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND PERIOD JANUARY 1 TO OCTOBER 20, 1995
(In thousands)
14. RELATED PARTY TRANSACTIONS (Continued)
Transactions with affiliated companies had the following impact on the
results of operations:
<TABLE>
<CAPTION>
PERIOD
JANUARY 1 TO
YEARS ENDED OCTOBER 20,
DECEMBER 31, 1993 1995
------------------- --------------
1993 1994 1995
--------- --------- --------------
<S> <C> <C> <C>
Revenues....................................... $17,347 $13,971 $10,270
--------- --------- --------------
Total operating and other expenses:
Rent expense ................................ $ 5,329 $ 3,176 $ 2,626
Other service and general and administrative
expenses.................................... 11,957 14,191 8,153
Interest expense............................. 3,035 1,823 1,512
--------- --------- --------------
$20,321 $19,190 $12,291
========= ========= ==============
</TABLE>
F-47
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<PAGE>
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<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SHARES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO,
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Available Information.................... 2
Prospectus Summary....................... 3
Risk Factors............................. 18
The Merger and Merger Financing.......... 28
Use of Proceeds.......................... 30
Capitalization........................... 31
Unaudited Condensed Consolidated
Pro Forma Financial Data................ 32
Selected Consolidated Financial Data .... 41
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 44
Business................................. 55
Management .............................. 65
Executive Compensation................... 67
Security Ownership of Certain Beneficial
Owners and Management................... 70
Certain Relationships and Related
Transactions............................ 73
Description of New Credit Facility ...... 74
Description of Units..................... 76
Description of Debentures................ 76
Description of Warrants.................. 103
Description of Capital Stock............. 106
Certain Federal Income Tax Consequences . 108
Underwriting............................. 110
Legal Matters............................ 111
Experts.................................. 111
Index to Consolidated Financial
Statements.............................. F-1
</TABLE>
Until October 28, 1997, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may
be required to deliver a prospectus. This is in addition to the obligation of
dealers to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
$148,400,000
[DECISIONONE LOGO]
DECISIONONE
DECISIONONE HOLDINGS CORP.
(AS SUCCESSOR OBLIGOR BY MERGER TO QUAKER HOLDING CO.)
148,400 UNITS
CONSISTING OF
11 1/2% SENIOR DISCOUNT
DEBENTURES DUE 2008
AND
148,400 WARRANTS TO PURCHASE
281,960 SHARES OF
COMMON STOCK
PROSPECTUS
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
JULY 30, 1997
