1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF SECURITIES EXCHANGE ACT OF 1934
For the transition period ended
DECISIONONE HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
Commission File Number 0-28090
Delaware 13-3435409
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
DECISIONONE CORPORATION
(Exact name of registrant as specified in its charter)
Commission File Number 333-28411
Delaware 23-2328680
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
50 East Swedesford Road, Frazer, Pennsylvania 19355
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code (610) 296-6000
Indicate by check mark whether registrants (1) have filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrants were
required to file such reports), and (2) have been subject of such filing
requirements for the past 90 days. Yes [ ] No [X]
As of October 22, 1997, 12,503,326 shares of DecisionOne Holdings Corp. common
stock were outstanding and one share of DecisionOne Corporation was
outstanding.
DecisionOne Corporation meets the conditions set forth in General Instruction
H(1) of form 10-Q and is therefore filing this form with the reduced disclosure
format.
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DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
AND
DECISIONONE CORPORATION AND SUBSIDIARIES
FORM 10-Q NOVEMBER 14, 1997
CONTENTS
--------
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
of DecisionOne Holdings Corp:
Condensed Consolidated Balance Sheets -
September 30, 1997 and June 30, 1997
(unaudited) 2
Condensed Consolidated Statements of
Operations - Three Months Ended
September 30, 1997 and 1996 (unaudited) 3
Condensed Consolidated Statements of
Cash Flows - Three Months Ended
September 30, 1997 and 1996 (unaudited) 4
Notes to Condensed Consolidated Financial
Statements (unaudited) 5
Condensed Consolidated Financial Statements
of DecisionOne Corporation:
Condensed Consolidated Balance Sheets -
September 30, 1997 and June 30, 1997
(unaudited) 9
Condensed Consolidated Statements of
Operations - Three Months Ended September 30,
1997 and 1996 (unaudited) 10
Condensed Consolidated Statements of
Cash Flows - Three Months Ended September 30,
1997 and 1996 (unaudited) 11
Notes to Condensed Consolidated
Financial Statements (unaudited) 12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 15
PART II. OTHER INFORMATION 26
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DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, JUNE 30,
ASSETS 1997 1997
------------ ---------
Current Assets:
Cash and cash equivalents $ 10,811 $ 10,877
Accounts receivable, net of allowances of $10,854 and $14,869 140,034 127,462
Consumable parts, net of allowances of $13,941 and $15,976 27,944 29,052
Other 17,547 9,778
--------- ---------
Total current assets 196,336 177,169
Repairable Parts, Net of Accumulated Amortization of $156,288 and $156,468 207,875 205,366
Intangibles, Net of Accumulated Amortization of $49,049 and $42,632 184,329 191,366
Property and Equipment, Net of Accumulated Depreciation
of $42,249 and $36,305 33,378 34,227
Other 40,563 14,977
--------- ---------
Total Assets $ 662,481 $ 623,105
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Current portion of long-term debt $ 9,987 $ 4,788
Accounts payable and accrued expenses 97,194 96,516
Deferred revenues 58,251 56,600
Other 8,774 11,513
--------- ---------
Total current liabilities 174,206 169,417
Revolving Credit Loan and Long-term Debt 717,843 232,721
Other Liabilities 5,077 6,079
Shareholders' Equity (Deficiency):
Preferred stock, no par value; authorized 5,000,000 shares; none outstanding
Common stock, $.01 par value, authorized 100,000,000 shares;
issued and outstanding 12,499,978 and 27,817,832 shares 125 278
Additional paid-in capital (133,422) 258,331
Accumulated deficit (100,059) (42,432)
Other (1,289) (1,289)
--------- ---------
Total Shareholders' Equity (Deficiency) (234,645) 214,888
--------- ---------
Total Liabilities and Shareholders' Equity (Deficiency) $ 662,481 $ 623,105
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1996
--------- ----------
Revenues $ 202,264 $ 176,426
Cost of Revenues 157,445 134,565
--------- ---------
Gross Profit 44,819 41,861
Operating Expenses:
Selling, general and administrative expenses 26,922 24,269
Merger expenses 69,046 --
Amortization of intangibles 6,521 4,919
--------- ---------
Total operating expenses 102,489 29,188
--------- ---------
Operating Income (Loss) (57,670) 12,673
Interest expense, Net of Interest Income 11,733 3,268
--------- ---------
Income (Loss) Before Income Taxes (69,403) 9,405
Provision (Benefit) for Income Taxes (11,776) 3,950
--------- ---------
Net Income (Loss) $ (57,627) $ 5,455
========= =========
Pro forma Information:
Pro forma Net Income $ 1,237
Pro forma Net Income Per Common Share $ 0.09
Pro forma Weighted Average Number of Common Shares
and Equivalent Shares Outstanding 14,200
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
--------- --------
Operating Activities:
Net income (loss) $ (57,627) $ 5,455
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Amortization of repairable parts 18,425 14,195
Amortization of intangibles 6,521 4,919
Depreciation 3,987 2,997
Changes in assets and liabilities, net of effects of business acquisitions (24,707) (20,843)
--------- --------
Net cash provided by (used in) operating activities (53,401) 6,723
Investing Activities:
Business acquistions -- (1,566)
Capital expenditures, net of retirements (3,138) (2,055)
Repairable spare parts purchases, net (20,526) (17,035)
--------- --------
Net cash used in investing activities (23,664) (20,656)
Financing Activities:
Proceeds from issuance of common stock 228,622 97
Cash paid to redeem common stock (609,391) --
Cash paid to cancel common stock warrants (12,158) --
Issuance of common stock warrants 1,880 --
Net proceeds from borrowings 468,071 15,035
Net principal payments under capital leases (25) (394)
--------- --------
Net cash provided by financing activities 76,999 14,738
Effect of exchange rates on cash -- 2
--------- --------
Net change in cash and cash equivalents (66) 807
Cash and cash equivalents beginning of period 10,877 8,221
--------- --------
Cash and cash equivalents end of period $ 10,811 $ 9,028
========= ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996)
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
DecisionOne Holdings Corp. and Subsidiaries (the "Company") have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
and, therefore, do not include all information and footnotes necessary for
presentation of financial position, results of operations and cash flows
required by generally accepted accounting principles. The June 30, 1997 balance
sheet was derived from the Company's audited consolidated financial statements.
The information furnished reflects all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair summary of the financial position, results of operations and cash flows.
The results of operations for the three-month periods ended September 30, 1997
and 1996 are not necessarily indicative of operating results to be expected for
the full fiscal year. The financial statements should be read in conjunction
with the audited historical consolidated financial statements of the Company
and notes thereto filed with the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1997, as amended.
Certain reclassifications have been made to the June 30, 1997 balances in order
to conform with the September 30, 1997 presentation.
NOTE 2: RECENT ACCOUNTING PRONOUNCEMENT
In February, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128, which supersedes Accounting Principles Board Opinion No. 15, Earnings Per
Share, requires a dual presentation of basic and diluted earnings per share as
well as disclosures including a reconciliation of the computation of basic
earnings per share to diluted earnings per share. Basic earnings per share
excludes the dilutive impact of common stock equivalents and is computed by
dividing net income by the weighted average number of shares of common stock
outstanding for the period. Diluted net income (loss) per share, which will
approximate the Company's currently-reported pro forma net income per
common share, includes the effect of potential dilution from the exercise of
outstanding common stock equivalents into common stock, using the treasury stock
method at the average market price of the Company's common stock for the period.
SFAS 128 is effective for interim and annual financial reporting periods ending
after December 15, 1997, and early adoption is not permitted. When adopted by
the Company, as required, for the fiscal quarter ending December 31, 1997, all
prior quarters' pro forma net income (loss) per share information will be
required to be restated on a comparable basis.
Assuming that SFAS 128 had been implemented, supplemental pro forma basic
net income per share would have been $0.10 for the three month period ended
September 30, 1997. Under SFAS 128, supplemental pro forma diluted earnings per
share would not have differed from pro forma earnings per common share for the
period presented in the accompanying unaudited condensed consolidated
statements of operations.
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NOTE 3: MERGER, RECAPITALIZATION AND PRO FORMA INFORMATION
On August 7, 1997, the Company consummated a merger with Quaker Holding Co.
(Quaker), an affiliate of DLJ Merchant Banking Partners II, L.P.. The merger,
which was recorded as a recapitalization for accounting purposes as of the
consummation date, occurred pursuant to an agreement and Plan of Merger (the
"Merger Agreement") between the Company and Quaker dated May 4, 1997.
In accordance with the terms of the Merger Agreement, which was formally
approved by the Company's shareholders on August 7, 1997, Quaker merged with and
into the Company, and the holders of approximately 94.7% of shares of Company
common stock outstanding immediately prior to the merger received $23 in cash in
exchange for each of there shares. Holders of approximately 5.3% of shares of
Company common stock outstanding immediately prior to the merger retained such
shares in the merged Company, as determined based upon shareholder elections and
stock proration factors specified in the Merger Agreement. Immediately following
the merger, continuing shareholders owned approximately 11.9% of shares of
outstanding Company common stock. The aggregate value of the merger transaction
was approximately $940 million, including refinancing of the Company's revolving
credit facility.
In connection with the merger, the Company raised $85 million through the public
issuance of discount debentures, in addition to publicly issued subordinated
notes for approximately $150 million. The Company also entered into a new
syndicated credit facility providing for term loans of $470 million and
revolving loans of up to $105 million. The proceeds of the discount notes,
subordinated notes, the initial borrowings under the new credit facility and the
purchase of approximately $225 million of Company common stock by Quaker have
been used to finance the payments of cash to cash-electing shareholders, to pay
the holders of stock options and stock warrants canceled or converted, as
applicable, in connection with the merger, to repay the Company's existing
revolving credit facility and to pay expenses incurred in connection with the
merger.
As a result of the merger, the Company incurred various expenses, totaling $69
million on a pre-tax basis, in connection with consummating the merger. These
costs consisted primarily of compensation costs, professional and advisory fees
and other expenses. In addition to these expenses, the Company also incurred
approximately $22.3 million of capitalized debt issuance costs associated with
the merger financing. The capitalized debt issuance costs are amortized to
expense over the terms of the related debt instruments.
The following summarized unaudited pro forma information as of June 30, 1997 and
for the three month period ended September 30, 1997, assumes that the
merger had occurred on July 1, 1997. The pro forma results have been prepared
for comparative purposes only and do not purport to be indicative of the
financial condition or of the results of operations which actually would have
resulted had the merger occurred as of July 1, 1997 or which may result in the
future.
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(IN THOUSANDS)
PRO FORMA BALANCE SHEET INFORMATION: JUNE 30, 1997
-------------
Total Assets ............................................. $ 652,085
Long Term Indebtedness (including current portion) ....... 724,500
Other Liabilities ........................................ 170,708
Shareholders (deficiency) ................................ (243,123)
IN THOUSANDS EXCEPT PER
SHARE AMOUNTS
THREE MONTHS ENDED
SEPTEMBER 30,
PRO FORMA INCOME STATEMENT INFORMATION: 1997
---------
Revenues ........................................................... $ 202,264
Operating Income ................................................... 11,376
Loss from Continuing Operations before Income Tax Benefit .......... (5,467)
Net Income ......................................................... 1,237
Net income per Common Share ........................................ $ 0.09
Weighted Average Common and Common Equivalent Shares outstanding ... 14,200
The pro forma net income for the three-month period ended September 30, 1997
reflects (1) a net increase in interest expense of approximately $5.1 million
attributable to additional financing incurred in connection with the merger, net
of the repayment of the Company's existing revolving credit facility, (2) the
elimination of the non-recurring merger expenses of approximately $69 million
and (3) the net tax expense related to these adjustments of approximately $5.1
million, calculated at an effective rate of approximately 123%, including the
effects of valuation allowances against certain deferred tax assets (see Note
4).
Pro forma weighted average common and common equivalent shares outstanding
includes 12,499,978 common stock shares outstanding immediately subsequent to
the merger on August 7, 1997 and dilutive common stock warrants and stock
options (convertible into 281,960 and 1,418,530 shares of common stock,
respectively) issued in connection with or immediately subsequent to the merger.
NOTE 4: INCOME TAXES
The Company expects that the Merger will result in significant additional tax
loss carryforwards arising in fiscal 1998, due principally to $69.0 million of
non-recurring
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expenses incurred in consummating the Merger (see Note 3). Net anticipated tax
benefits and corresponding net deferred tax assets of approximately $11.3
million attributable to the Merger have been fully reflected in the three-month
period ended September 30, 1997. For financial reporting purposes, the
anticipated net deferred tax assets have been limited due primarily to
the length of the period during which the anticipated tax benefits are expected
to be realized.
The Company expects that its tax provision in future periods will reflect
effective tax rates significantly greater than enacted statutory tax rates and
the effective tax rate of 41.4% for fiscal 1997. Quarterly effective tax rates
in excess of 100% are currently anticipated during fiscal 1998, principally as a
result of unrecognized tax benefits on newly-arising net deferred tax assets,
due primarily to the length of the period during which associated tax benefits
are expected to be realized. Future effective tax rates may be subject to
significant volatility as a result of differences between management's
projections of future taxable income, newly-arising net deferred tax assets and
reversals of net deferred tax assets and corresponding actual results.
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DECISIONONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, JUNE 30,
ASSETS 1997 1997
------------ ---------
Current Assets:
Cash and cash equivalents $ 6,651 $ 10,877
Accounts receivable, net of allowances of $10,854 and $14,869 139,534 127,462
Consumable parts, net of allowances of $13,941 and $15,976 27,944 29,052
Other 17,973 9,778
--------- ---------
Total current assets 192,102 177,169
Repairable Parts, Net of Accumulated Amortization of $156,288 and $156,468 207,875 205,366
Intangibles, Net of Accumulated Amortization of $49,049 and $42,632 184,329 191,366
Property and Equipment, Net of Accumulated Depreciation
of $42,249 and $36,305 33,378 34,227
Loan receivable from parent company 59,100 --
Other 46,908 14,977
--------- ---------
Total Assets $ 723,692 $ 623,105
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIENCY)
Current Liabilities:
Current portion of long-term debt $ 9,987 $ 4,788
Accounts payable and accrued expenses 93,673 96,516
Deferred revenues 58,251 56,600
Other 12,723 11,513
--------- ---------
Total current liabilities 174,634 169,417
Revolving Credit Loan and Long-term Debt 632,543 232,721
Other Liabilities 5,077 6,079
Shareholder's Equity (Deficiency):
Common stock, no par value; one share authorized, issued
and outstanding in 1997 and 1996 -- --
Additional paid-in capital 12,276 258,609
Accumulated deficit (99,549) (42,432)
Other (1,289) (1,289)
--------- ---------
Total Shareholder's Equity (Deficiency) (88,562) 214,888
--------- ---------
Total Liabilities and Shareholder's Equity (Deficiency) $ 723,692 $ 623,105
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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DECISIONONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
--------- ---------
Revenues $ 202,264 $ 176,426
Cost of Revenues 157,445 134,565
--------- ---------
Gross Profit 44,819 41,861
Operating Expenses:
Selling, general and administrative expenses 26,922 24,269
Merger expenses 69,046 --
Amortization of intangibles 6,521 4,919
--------- ---------
Total operating expenses 102,489 29,188
--------- ---------
Operating Income (Loss) (57,670) 12,673
Interest expense, Net of Interest Income 9,909 3,268
--------- ---------
Income (Loss) Before Income Taxes (67,579) 9,405
Provision (Benefit) for Income Taxes (10,462) 3,950
--------- ---------
Net Income (Loss) $ (57,117) $ 5,455
========= =========
Pro forma Information:
Pro forma Net Loss $ (824)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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DECISIONONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
--------- --------
Operating Activities:
Net income (loss) $ (57,117) $ 5,455
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Amortization of repairable parts 18,425 14,195
Amortization of intangibles 6,521 4,919
Depreciation 3,987 2,997
Changes in assets and liabilities, net of effects of business acquisitions (35,726) (20,843)
--------- --------
Net cash provided by (used in) operating activities (63,910) 6,723
Investing Activities:
Business acquistions -- (1,566)
Capital expenditures, net of retirements (3,138) (2,055)
Repairable spare parts purchases, net (20,526) (17,035)
--------- --------
Net cash used in investing activities (23,664) (20,656)
Financing Activities:
Capital contributions 302 97
Payment of dividend to parent company (244,000) --
Loan made to parent company (59,100) --
Net proceeds from borrowings 385,962 15,035
Net proceeds (payments) under capital lease obligations 184 (394)
--------- --------
Net cash provided by financing activities 83,348 14,738
Effect of exchange rates on cash -- 2
--------- --------
Net change in cash and cash equivalents (4,226) 807
Cash and cash equivalents beginning of period 10,877 8,221
--------- --------
Cash and cash equivalents end of period $ 6,651 $ 9,028
========= ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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DECISIONONE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE THREE-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of DecisionOne Corporation (a wholly-owned subsidiary of DecisionOne Holdings
Corp.; "Holdings") and Subsidiaries (the "Company") have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission and,
therefore, do not include all information and footnotes necessary for
presentation of financial position, results of operations and cash flows
required by generally accepted accounting principles. The June 30, 1997 balance
sheet was derived from the Company's audited financial statements. The
information furnished reflects all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
summary of the financial position, results of operations and cash flows. The
results of operations for the three month periods ended September 30, 1997 and
1996 are not necessarily indicative of the operating results to be expected for
the full fiscal year. The financial statements should be reviewed in conjunction
with the audited financial statements of the Company and roles thereto filed
with the Company's Annual Report on form 10-K for the fiscal year ended June 30,
1997, as amended.
Certain reclassifications have been made to the June 30, 1997 balances in order
to conform with the September 30, 1997 presentation.
NOTE 2. MERGER, RECAPITALIZATION AND PRO FORMA INFORMATION
On August 7, 1997, the Company and Holdings consummated a merger with Quaker
Holding Co. (Quaker), an affiliate of DLJ Merchant Banking Partners II L.P. The
merger, which was recorded as a recapitalization for accounting purposes as of
the consummation date, occurred pursuant to an agreement and Plan of Merger (the
"Merger Agreement") between the Company, Holdings and Quaker dated May 4, 1997,
as amended.
In accordance with the terms of the Merger Agreement, which was formally
approved by Holdings' shareholders on August 7, 1997, Quaker merged with and
into Holdings, and the holders of approximately 94.7% of shares of Holdings
common stock outstanding immediately prior to the merger received $23 in cash in
exchange for each of these shares. Holders of approximately 5.3% of shares of
Holdings common stock outstanding immediately prior to the merger retained such
shares in the merged company, as determined based upon shareholder elections and
stock proration factors specified in the Merger Agreement. Immediately following
the merger, continuing shareholders owned approximately 11.9% of shares of
outstanding Holdings common stock. The aggregate value of the merger transaction
was approximately $940 million, including refinancing of DecisionOne
Corporation's revolving credit facility.
In connection with the merger, Holdings raised $85 million through the public
issuance of discount debentures, in addition to subordinated notes for
approximately $150 million issued publicly by the Company. The Company also
entered into a new syndicated credit facility
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providing for term loans of $470 million and revolving loans of up to $105
million. The proceeds of the discount notes, subordinated notes, the initial
borrowings under the new credit facility along with a loan of approximately
$59.1 million from the Company to Holdings and the purchase of approximately
$225 million of Holdings common stock by Quaker have been used to finance the
payments of cash to cash-electing shareholders, to pay the holders of stock
options and stock warrants canceled or converted, as applicable, in connection
with the merger to repay the DecisionOne Corporation's existing revolving
credit facility and to pay expenses incurred in connection with the merger.
As a result of the merger, the Company and Holdings incurred various expenses,
aggregating $69 million on a pre-tax basis, in connection with consummating the
merger. These costs consisted primarily of compensation costs, professional and
advisory fees and other expenses. In addition to these expenses, the Company
and Holdings also incurred approximately $22.3 million of capitalized debt
issuance costs (of which approximately $18.9 million were incurred by the
Company) associated with the merger financing. The capitalized debt issuance
costs are amortized to expense over the terms of the related debt instruments.
The following summarized unaudited pro forma information as of June 30, 1997 and
for the three-month period ended September 30, 1997, assumes that the
merger had occurred on July 1, 1997. The pro forma results have been prepared
for comparative purposes only and do not purport to be indicative of the
financial condition or of the results of operations which actually would have
resulted had the merger occurred as of July 1, 1997 or which may result in the
future.
(IN THOUSANDS)
PRO FORMA BALANCE SHEET INFORMATION: JUNE 30, 1997
-------------
Total Assets .............................................. $ 707,785
Long Term Indebtedness (including current portion) ........ 641,376
Other Liabilities ......................................... 170,708
Shareholders (deficiency) .................................... (104,299)
(IN THOUSANDS)
THREE MONTHS ENDED
SEPTEMBER 30,
PRO FORMA INCOME STATEMENT INFORMATION: 1997
---------
Revenues .................................................. $ 202,264
Operating Income .......................................... 11,376
Loss from Continuing Operations before Income
Tax benefit .......................................... (2,124)
Net Loss .................................................. $ (824)
The pro forma net loss for the three-month period ended September 30, 1997
reflects (1) a net increase in interest expense of approximately $3.6 million
attributable to additional financing incurred in connection with the merger, net
of the repayment of the Company's existing revolving credit facility, (2)
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the elimination of the non-recurring merger expenses of approximately $69
million and (3) the net tax expense related to these adjustments of
approximately $9.2 million, at an effective rate of approximately 61%,
including the effect of valuation allowances against certain deferred tax
assets (see Note 3).
NOTE 3: INCOME TAXES:
The Company expects that the Merger will result in significant additional tax
loss carryforwards arising in fiscal 1998, due principally to $69.0 million of
non-recurring expenses incurred in consummating the Merger (see Note 3). Net
anticipated tax benefits and corresponding net deferred tax assets of
approximately $11.3 million attributable to the Merger have been fully
reflected in the three-month period ended September 30, 1997. For financial
reporting purposes, the anticipated net deferred tax assets have been limited
due primarily to the length of the period during which the anticipated tax
benefits are expected to be realized.
The Company expects that its tax provision in future periods will
reflect effective tax rates significantly greater than enacted statutory tax
rates and the effective tax rate of 41.4% for fiscal 1997. Quarterly effective
tax rates in excess of 50% are currently anticipated during fiscal 1998,
principally as a result of unrecognized tax benefits on newly-arising net
deferred tax assets, due primarily to the length of the period during which
associated tax benefits are expected to be realized. Future effective tax
rates may be subject to significant volatility as a result of differences
between management's projections of future taxable income, newly-arising net
deferred tax assets and reversals of net deferred tax assets and corresponding
actual results.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997
The following discussion should be read in conjunction with the audited
Consolidated Financial Statements of DecisionOne Holdings Corp. and
Subsidiaries, the audited Consolidated Financial Statements of DecisionOne
Corporation and Subsidiaries, and the respective Notes thereto, filed with these
registrants' Annual Report on Form 10-K for the year ended June 30, 1997, as
amended. Item 2 Is presented with respect to both registrants noted above. (As
used within this Item 2, the term "Company" refers to DecisionOne Holdings Corp.
and its wholly-owned subsidiaries, including DecisionOne Corporation, and the
term "Holdings" refers to DecisionOne Holdings Corp.)
The information herein contains forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 that involve a
number of risks and uncertainties. A number of factors could cause actual
results, performance, achievements of the Company, or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward looking statements. These factors include,
but are not limited to, the competitive environment in the computer maintenance
and technology support services industry in general and in the Company's
specific market areas; changes in prevailing interest rates and the availability
of and terms of financing to fund the anticipated growth of the Company's
business; inflation; changes in costs of goods and services; economic conditions
in general and in the Company's specific market areas; demographic changes;
changes in or failure to comply with federal, state and/or local government
regulations; liability and other claims asserted against the Company; changes in
operating strategy or development plans; the ability to attract and retain
qualified personnel; the significant indebtedness of the Company; labor
disturbances; changes in the Company's acquisition and capital expenditure
plans; and other factors referenced in "Risk Factors" in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1997, as amended. In
addition, such forward looking statements are necessarily dependent upon
assumptions, estimates and dates that may be incorrect or imprecise and involve
known and unknown risks uncertainties and other factors. Accordingly, any
forward looking statements included herein do not purport to be predictions of
future events or circumstances and may not be realized. Forward looking
statements can be identified by, among other things, the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," "seeks,"
"pro forma" or "anticipates," "intends" or the negative of any thereof, or other
variations thereon or comparable terminology, or by discussions of strategy or
intentions. Given these uncertainties, prospective investors are cautioned not
to place undue reliance on such forward looking
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statements. The Company disclaims any obligations to update any such factors or
to publicly announce the results of any revisions to any of the forward looking
statements contained herein to reflect future events or developments.
COMPANY HISTORY
Founded in 1969, the Company began operations as a provider of key
punch machines under the tradename "Decision Data." During the 1980s, its
operations expanded to include the sale of midrange computer hardware and
related maintenance services. During fiscal 1993, the Company decided to focus
on providing computer maintenance and support services and sold its computer
hardware products business.
Since the beginning of fiscal 1993, the Company established a major
presence in the computer maintenance and technology support services industry
through the acquisition and integration of assets and contracts of over 36
complementary businesses. The most significant of these were IDEA Servcom, Inc.
("Servcom"), certain assets and liabilities of which were acquired in August
1994 for cash consideration of $29.5 million, and Bell Atlantic Business Systems
Services ("BABSS") which was acquired in October 1995 for cash consideration of
approximately $250.0 million. In addition, certain assets of the U.S. computer
service business of Memorex Telex Corporation and certain of its affiliates
(collectively, "Memorex Telex") were acquired in November 1996 for cash
consideration of approximately $24.4 million, after certain purchase price
adjustments. These acquisitions were accounted for as purchase transactions.
At the time of its acquisition by the Company, BABSS was among the
largest independent, multivendor service organizations servicing end-user
organizations and OEMs. Prior to the acquisition of BABSS, the Company had
higher gross margins than BABSS principally because approximately 30% of the
Company's revenues in fiscal 1995 were attributable to higher margin contracts
involving systems that can be serviced by a limited number of service providers
("proprietary systems"), whereas BABSS had limited revenues from proprietary
systems.
The Company's primary source of revenues is contracted services for
multivendor computer maintenance and technology support services, including
hardware support, end-user and software support, network support and other
support services. Approximately 85% of the Company's revenues are derived from
maintenance contracts covering a broad spectrum of computer hardware. These
contracts typically have a stipulated monthly fee over a fixed initial term
(typically one year) and continue thereafter unless canceled by either party.
Such contracts generally provide that customers may eliminate certain equipment
and services from the contract upon notice to the Company. In addition, the
Company enters into per-incident arrangements with its customers. Per incident
contracts can cover a range of bundled services for computer maintenance or
support services or for a specific service, such as network support or equipment
relocation services. Another form of per incident service
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revenues includes time and material billings for services as needed, principally
maintenance and repair, provided by the Company.
Furthermore, the Company derives additional revenues from the repair of
hardware and components at the Company's logistics services and depot repair
facilities. Pricing of the Company's services is based on various factors
including equipment failure rates, cost of repairable parts and labor expenses.
The Company customizes its contracts to the individual customer based generally
on the nature of the customer's requirements, the term of the contract and the
services that are provided.
The Company experiences reductions in revenue when customers replace
equipment being serviced with new equipment covered under a manufacturer's
warranty, discontinue the use of equipment being serviced due to obsolescence,
choose to use a competitor's services or move technical support services
in-house. The Company must more than offset this revenue "reduction" to grow its
revenues and seeks revenue growth from two principal sources: internally
generated sales from its direct and indirect sales force and the acquisition of
contracts and assets of other service providers. While the Company historically
has been able to offset the erosion of contract - based revenue and maintain
revenue growth through acquisitions and new contracts, notwithstanding the
reduction in contract based revenue, there can be no assurance it will continue
to do so in the future, and any failure to consummate acquisitions, enter into
new contracts or add additional services and equipment to existing contracts
could have a material adverse effect on the Company's profitability.
Cost of revenues is comprised principally of personnel - related costs
(including fringe benefits), consumable parts cost recognition, amortization and
repair costs for repairable parts, and facilities costs and related expenses.
The acquisition of contracts and assets has generally provided the
Company with an opportunity to realize economies of scale because the Company
generally does not increase its costs related to facilities, personnel and
consumable and repairable parts in the same proportion as increases in acquired
revenues.
MERGER AND RECAPITALIZATION
On August 7, 1997, the Company consummated a merger with Quaker Holding Co.
("Quaker"), an affiliate of DLJ Merchant Banking Partners II, L.P. (the
"Merger"). The Merger, which has been recorded as a recapitalization as of the
consummation date for accounting purposes, occurred pursuant to an Agreement
and Plan of Merger between the Company and Quaker dated May 4, 1997, as amended
(the "Merger Agreement"). The respective accompanying unaudited Consolidated
Financial Statements of DecisionOne Holdings Corp. and DecisionOne Corporation
and their respective subsidiaries as of and for the three months ended
September 30, 1997, included herein, reflect transactions related to the
consummation of the Merger.
In accordance with the terms of the Merger Agreement, which was
approved by the Company's shareholders on August 7, 1997, Quaker merged with and
into the Company, and
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the holders of approximately 94.7% of shares of Holdings common stock
outstanding immediately prior to the Merger received $23 in cash in exchange for
these shares. Holders of approximately 5.3% of shares of Holdings common stock
outstanding immediately prior to the Merger retained such shares in the merged
Company, as determined based upon shareholder elections and stock proration
factors specified in the Merger Agreement. The aggregate value of the Merger
transaction was approximately $940 million, including refinancing of DecisionOne
Corporation's revolving credit facility.
The Company incurred various expenses, aggregating $69.0 million on a
pretax basis, in connection with consummating the Merger transaction.
These costs consisted primarily of compensation costs, professional and
advisory fees and other expenses. This one-time charge is reflected in the
accompanying unaudited consolidated statements of operations of the Company and
of DecisionOne Corporation for the three months ended September 30, 1997. In
addition to these expenses, the Company also incurred $22.3 million of
capitalized debt issuance costs associated with financing incurred in
connection with the Merger (the "Merger Financing"). The capitalized debt
issuance costs are amortized to expense over the terms of the related debt
instruments (see "Liquidity and Capital Resources").
As a result of the foregoing, including increased debt service
requirements resulting from the Merger Financing, the Company has recorded a net
loss of approximately $57.6 million for the three months ended September 30,
1997. Because this loss results primarily from the one - time charge incurred in
connection with the merger, and this charge has been funded entirely through the
proceeds of the Merger Financing, the Company does not expect this loss to
materially impact its liquidity, ongoing operations or market position. For a
discussion of the consequences of the incurrence of indebtedness in connection
with the Merger Financing, see "Liquidity and Capital Resources."
RESULTS OF OPERATIONS
The following discussion of consolidated results of operations is
presented with respect to the Company and with respect to DecisionOne
Corporation for the fiscal quarters ended September 30, 1997 and September 30,
1996. These results of operations include the acquisition of Memorex Telex from
November 15, 1996.
The following table sets forth, for the three month periods ended
September 30, 1997 and 1996, respectively, certain consolidated operating data
of the Company and of DecisionOne Corporation:
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DECISIONONE DECISIONONE
HOLDINGS CORP. CORPORATION
------------------------ ------------------------
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues $ 202,264 $ 176,426 $ 202,264 $ 176,426
Gross Profit 44,819 41,861 44,819 41,861
Operating Income excluding
Merger expenses 11,376 12,673 11,376 12,673
Operating Income (Loss) (57,670) 12,673 (57,670) 12,673
Net Income (Loss) $ (57,627) $ 5,455 $ (57,117) $ 5,455
========= ========= ========= =========
OTHER DATA:
EBITDA (1) $ 40,309 $ 34,784 $ 40,309 $ 34,784
Less: Amortization of
repairable parts (18,425) (14,195) (18,425) (14,195)
--------- --------- --------- ---------
Adjusted EBITDA (1) 21,884 20,589 21,884 20,589
Net cash provided (used) by
operating activities (53,401) 6,723 (63,910) 6,723
Net cash used in investing
activities (23,664) (20,656) (23,664) (20,656)
Net cash provided by financing
activities 76,999 14,738 83,348 14,738
(1) "EBITDA" represents income (loss) from continuing operations before interest
expense, interest income, income taxes, depreciation, amortization of
intangibles, amortization of repairable parts, amortization of discounts and
capitalized expenditures related to indebtedness, and non-recurring charges for
Merger expenses. "Adjusted EBITDA" represents EBITDA reduced by the amortization
of repairable parts. Adjusted EBITDA is presented because it is relevant to
certain covenants contained in debt agreements entered into by the Company in
connection with the Merger, and because the Company believes that Adjusted
EBITDA is a more consistent indicator of the Company's ability to meet its debt
service, capital expenditure and working capital requirements than EBITDA.
Overview
The Company reported gross profit of $44.8 million and $41.9 million
for the three months ended September 30, 1997 and 1996, respectively. Excluding
pre-tax charges for Merger expenses during the three months ended September 30,
1997, operating income was $11.4 million and $12.7 million for the three
months ended September 30, 1997 and 1996, respectively. Adjusted EBITDA was
$21.9
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million and $20.6 million for the three months ended September 30, 1997 and
1996, respectively.
First Quarter of Fiscal 1998 Compared to First Quarter of Fiscal 1997
Revenues: Revenues increased by $25.9 million, or 14.7%, to $202.3
million for the three months ended September 30, 1997 from $176.4 million for
the three months ended September 30, 1996. This increase is attributable
primarily to the acquisition of the service contracts of several complementary
businesses, principally those of Memorex Telex on November 15, 1996.
Revenues for the quarter ended September 30, 1997 reflected a decline
of $10.9 million in comparison to the previous quarter, due primarily to a
decline in per-incident and other revenues. Per-incident and other revenues are
subject to periodic fluctuation, depending upon customer demand for the types
and levels of such services.
Gross Profit: Gross profit increased by $2.9 million, or 7.0%, from
$41.9 million for the three months ended September 30, 1996 to $44.8 million for
the three months ended September 30, 1997. This increase is also due primarily
to the acquisition of the service contracts of several complementary businesses,
principally those of Memorex Telex.
Gross profit as a percentage of revenues decreased from 23.7% for the
three months ended September 30, 1996 to 22.2% for the three months ended
September 30, 1997. This reduction is principally attributable to the
aforementioned decline in per-incident and other revenues during the quarter
ended September 30, 1997 versus the previous quarter without a proportionate
reduction in related cost of revenues. While the Company generally can reduce
its cost structure in response to declines in these revenues, these cost
structure reductions typically trail the revenue declines.
Selling, General and Administrative Expenses: Selling, general
and administrative expenses increased by $2.6 million, or 10.7%, to $26.9
million for the three months ended September 30, 1997 from $24.3 million for the
three months ended September 30, 1996. This increase is primarily attributable
to the acquisition of the service contracts of several complementary businesses,
principally Memorex Telex, as noted above. Also, during the quarter ended
September 30, 1997, the Company incurred approximately $1.0 million of
incremental expenditures for information systems and related re-engineering
initiatives. See "Liquidity and Capital Resources" for additional information
with respect to these expenditures.
Merger Expenses: In connection with the Merger, which was consummated
on August 7, 1997, the Company incurred a one-time pre-tax charge of $69.0
million, comprised of expenses directly related to the Merger transaction. See
"Merger and Recapitalization" for additional information with respect to these
Merger expenses.
Amortization of Intangibles: Amortization of intangible assets
increased by $1.6 million, or 32.7%, from $4.9 million for the three months
ended September 30, 1996 to $6.5 million for the three months ended September
30, 1997. This increase was attributable principally to the amortization of
intangibles resulting from the Memorex Telex acquisition in November, 1996.
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Interest Expense: The Company's interest expense, net of interest
income, increased to $11.7 million for the three months ended September 30, 1997
from $3.3 million for the three months ended September 30, 1996, an increase of
254.5%. As more fully described in Note 3 to the Company's unaudited Condensed
Consolidated Financial Statements for the three months ended September 30, 1997,
this increase is due to the Company's significantly-increased average borrowings
as a result of the Merger, which was consummated on August 7, 1997. These
increased average borrowings of approximately $527.8 million for the three
months ended September 30, 1997, as compared to approximately $198.5 million for
the three months ended September 30, 1996, coupled with higher average debt
interest rates ( 9.0% and 6.4% for the respective periods), resulted in the
significant increase in net interest expense during the first quarter of fiscal
1998.
Consolidated interest expense, net of interest income, for DecisionOne
Corporation increased to $9.9 million for the three months ended September 30,
1997 from $3.3 million for the three months ended September 30, 1996, an
increase of 200.0%. This increase was similarly attributable to
significantly-increased average borrowings as a result of the Merger, as
described above. The increase in consolidated net interest expense for
DecisionOne Corporation during the three months ended September 30, 1997 was
lower than the aforementioned increase for the Company, primarily due to
interest incurred with respect to approximately $85.0 million of 11-1/2% Senior
Discount Debentures issued by Holdings in connection with the Merger (see
"Liquidity and Capital Resources").
Income Taxes: The Company expects that the Merger will result in
significant additional tax loss carryforwards arising in fiscal 1998,
due principally to $69.0 million of non-recurring expenses incurred in
consummating the Merger (see Note 3 to the Company's accompanying unaudited
condensed consolidated financial statements). Net anticipated tax benefits and
corresponding net deferred tax assets of approximately $11.3 million
attributable to the Merger have been fully reflected in the three-month period
ended September 30, 1997. For financial reporting purposes, the anticipated
net deferred tax assets have been limited due primarily to the length of the
period during which the anticipated tax benefits are expected to be realized.
The Company expects that its tax provision in future periods will
reflect effective tax rates significantly greater than enacted statutory tax
rates and the effective tax rate of 41.4% for fiscal 1997. Quarterly effective
tax rates in excess of 100% (in excess of 50% for DecisionOne Corporation and
Subsidiaries) are currently anticipated during fiscal 1998, principally as a
result of unrecognized tax benefits on newly-arising net deferred tax assets,
due primarily to the length of the period during which associated tax benefits
are expected to be realized. Future effective tax rates may be subject to
significant volatility as a result of differences between management's
projections of future taxable income, newly-arising net deferred tax assets and
reversals of net deferred tax assets and corresponding actual results.
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LIMITATION ON USE OF NET OPERATING LOSS CARRYFORWARDS AND OTHER TAX CREDITS
As of June 30, 1997, the Company had tax loss carryforwards of
approximately $12.9 million and $8.7 million for Federal and state income tax
purposes, respectively, which are scheduled to expire between 1998 and 2008. The
Company also had minimum tax credits of approximately $1.5 million as of June
30, 1997, with no applicable expiration period. These carryforwards and credits
may be utilized, as applicable, to reduce future taxable income. The Company's
initial public offering in April, 1996 resulted in an "ownership change"
pursuant to Section 382 of the Code, which in turn resulted in the usage, for
U.S. federal income tax purposes, of these carryforwards and credits during any
future period being limited to approximately $20 million per annum.
In addition, the Company's Merger in August, 1997 represents another
"ownership change" under Section 382 of the Code, and the Company, therefore,
estimates that, for U.S. federal income tax purposes, the limitation on its use
of the pre-existing carryforwards as well as certain carryforwards arising
during fiscal 1998 will be reduced to approximately $9.0 million per annum for
any post-Merger period. The Company anticipates that expenses incurred in
connection with the Merger during the three months ended September 30, 1997,
partially offset by anticipated taxable income from continuing operations during
fiscal 1998 (excluding Merger expenses) will result in additional tax loss
carryforwards arising in fiscal 1998. The Company expects that a significant
portion of the tax loss carryforward arising in fiscal 1998 will not be subject
to future limitation pursuant to Section 382.
For financial reporting purposes, the anticipated tax benefit
associated with these carryforwards is limited due primarily to the length of
the period during which the anticipated tax benefit is expected to be realized.
See Note 4 to the Company's unaudited Condensed Consolidated Financial
Statements for the three months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Financing and Leverage
Current (Post-Merger) : The Company's principal sources of liquidity
are cash flow from operations and borrowings under its new $105 million
revolving credit facility, which was entered into in connection with the Merger.
The Company's principal uses of cash are debt service requirements, capital
expenditures, purchases of repairable parts, acquisitions, and working capital.
The Company expects that ongoing requirements for debt service, capital
expenditures, repairable parts and working capital will be funded from operating
cash flow and borrowing under the new revolving credit facility. To finance
future acquisitions, the Company may require additional funding which may be
provided in the form of additional debt, equity financing or a combination
thereof.
The Company incurred substantial indebtedness in connection with the
Merger. As of September 30, 1997, the Company had outstanding approximately
$727.8 million of long-term indebtedness, as compared to approximately $237.5
million as of June 30, 1997. (See
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Note 2 to the Company's unaudited Condensed Consolidated Financial Statements
for the three months ended September 30, 1997). The Company's significant debt
service obligations could, under certain circumstances, have material
consequences to security holders of the Company. See "Risk Factors", included in
the Company's Annual Report on Form 10-K for the year ended June 30, 1997, as
amended.
In connection with the merger, Holdings raised $85 million of 11-1/2%
Senior Discount Debentures due 2008 (the "11-1/2% Notes"), and DecisionOne
Corporation issued $150 million of 9-3/4% Senior Subordinated Notes due 2007
(the "9-3/4% Notes"). DecisionOne Corporation also entered into a new syndicated
credit facility providing for term loans of $470 million and revolving loans of
up to $105 million. The proceeds of the 11-1/2% Notes (which were issued with
attached warrants), the 9-3/4% Notes, the initial borrowings under the new
credit facility and the purchase of approximately $225 million of Holdings
common stock by Quaker have been used to finance the payments of cash to
cash-electing shareholders, to pay the holders of stock options and stock
warrants canceled or converted, as applicable, in connection with the Merger, to
repay DecisionOne Corporation's existing revolving credit facility and to pay
expenses incurred in connection with the Merger. See Note 3 to the Company's
unaudited Condensed Consolidated Financial Statements for the three months ended
September 30, 1997 for additional information.
The Company has budgeted approximately $10 million in incremental
expenditures for information systems and related re-engineering initiatives to
be incurred in fiscal 1998. The initiatives to be funded include the following:
(i) enhancements to the Company's service entitlement process which will further
ensure that customers are billed for all work performed; (ii) improvements to
the Company's dispatch system and field engineer data collection and technical
support tools which are designed to increase productivity; (iii) enhancements to
the Company's help desk and central dispatch systems to provide an integrated
support solution to the customer base, and (iv) improvements to the Company's
field inventory tracking system which will facilitate increased transfer of
inventory among field locations and reduce purchases of repairable parts. There
can be no assurance that these amounts will be so expended by the Company, nor
when these amounts will be so expended. The Company incurred approximately
$1.3 million of these incremental expenditures during the three months
ended September 30, 1997.
The Company anticipates that its operating cash flow, together with
borrowings under the new credit facility, will be sufficient to meet its
anticipated future operating expenses, capital expenditures and to service its
debt requirements as they become due. However, the Company's ability to make
scheduled payments of principal of, to pay interest on or to refinance its
indebtedness and to satisfy its other debt obligations will depend upon its
future operating performance, which will be affected by general economic,
financial, competitive, legislative, regulatory, business and other factors
beyond its control.
Historical: Until its initial public offering in April 1996, the
Company's principal sources of capital had been borrowings from banks (primarily
to finance acquisitions),
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private placements of equity and debt securities with principal stockholders and
cash flow generated by operations. In April 1996, the Company (i) completed an
initial public offering, which raised approximately $106 million and (ii)
refinanced its bank debt, each of which is more fully discussed below.
The Company has historically relied on banks as the primary source of
funds required for larger acquisitions, such as the August 1994 acquisition of
certain assets and liabilities of Servcom and the October 1995 acquisition of
BABSS. Since July 1993, the Company's smaller acquisitions have been funded
primarily through a combination of seller financing, cash and the assumption of
liabilities under acquired prepaid service contracts.
In April 1996, the Company completed an initial public offering (the
"Offering"), raising $106 million through the issuance of 6.3 million shares of
common stock. Subsequent to the Offering, the Company converted its
then-existing term loan as well as its $30 million revolving credit facility
into a $225 million variable rate, unsecured revolving credit facility (the
"Facility"). During November 1996, in connection with the acquisition of certain
assets of the U.S. computer service business of Memorex Telex, the Company's
lender approved a $75 million increase to the Facility, raising the total loan
commitment to $300 million.
The commitments under the Facility were scheduled to terminate on April
26, 2001. The interest rate applicable to the Facility varied, at the Company's
option, based upon LIBOR (plus an applicable margin not to exceed 1%) or the
prime rate. As of June 30, 1997, the interest rate applicable to loans under the
Facility was LIBOR plus .75%, or an effective rate of approximately 6.5%, and
available borrowings under the Facility were $65.7 million.
The borrower under the Facility was DecisionOne Corporation. The
obligations of DecisionOne Corporation thereunder were guaranteed by the Company
and certain subsidiaries, except for its Canadian subsidiary. In connection with
the Merger in August, 1997, all indebtedness outstanding under the Facility was
repaid.
Financial Condition:
Cash flow from operating activities, exclusive of non-recurring Merger
expenses, for the three months ended September 30, 1997 was approximately $15.6
million, as compared to $6.7 million for the three months ended September 30,
1996. These funds, together with borrowings under the Company's new credit
facility, provided the required capital to fund repairable part purchases and
capital expenditures of approximately $23.7 million during the three months
ended September 30, 1997.
The Company maintains a significant inventory of consumable and
repairable parts. Consumable parts are expensed as they are used in the
operations of the business. Repairable parts are recorded at cost at the time of
their acquisition and are generally amortized over three to five years. The
Company maintains a high level of parts due to the wide range of products
serviced, ranging from mainframe to personal computers. At September 30, 1997,
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the Company had no material commitments for purchases of spare parts or for
other capital expenditures.
The Company provides for obsolescence when accounting for consumable
parts and reviews obsolescence as it applies to its repairable parts. The
Company believes it has provided adequate reserves for obsolescence for
consumable parts. The Company believes that accumulated amortization on
repairable parts renders the need for an obsolescence reserve with respect to
repairable parts unnecessary.
The Company, or certain businesses as to which it is alleged that the
Company is a successor, have been identified as potentially responsible parties
in respect of four waste disposal sites that have been identified by the U.S.
Environmental Protection Agency as Superfund sites. In addition, the Company
received a notice several years ago that it may be a potentially responsible
party in respect of a fifth site, but has not received any other communication
in respect of that site. The Company has estimated that its share of the costs
of the cleanup of one of the sites will be approximately $500,000, which has
been provided for in liabilities related to the discontinued products division
in the Company's financial statements. Complete information as to the scope of
required cleanup at these sites is not yet available and, therefore,
management's evaluation may be affected as further information becomes
available. However, in light of information currently available to management,
including information regarding assessments of the sites to date and the nature
of involvement of the Company's predecessor at the sites, it is management's
opinion that the Company's potential additional liability, if any, for the cost
of cleanup of these sites will not be material to the consolidated financial
position, results of operations or liquidity of the Company.
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DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
DECISIONONE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
On August 7, 1997 a special meeting of shareholders
of DecisionOne Holdings Corp. was held to
consider and vote on a proposal to approve and adopt
an Agreement and Plan of Merger, dated as of May 4,
1997, as amended, among DecisionOne Holdings Corp.
and Subsidiaries and Quaker Holding Co., an
affiliate of DLJ Merchant Banking Partners II, L.P.
21,204,312 shares were voted in favor of approving
the Agreement, 561,304 shares voted against approval
and 1,700 shares abstained.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(A) EXHIBITS:
Number Description of Documents
10.1 Employment Agreement,
dated as of August 7, 1997
between DecisionOne
Holdings Corp.,
DecisionOne Corporation
and Kenneth Draeger
10.2 Employment Agreement,
dated as of August 7, 1997
among DecisionOne Holdings
Corp., DecisionOne
Corporation and Stephen J.
Felice
27 Financial data schedules
(B) REPORTS ON FORM 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrants have duly caused this report to be signed on their
behalf by the undersigned thereunto duly authorized.
DecisionOne Holdings Corp.
/s/ Thomas J. Fitzpatrick
-------------------------------------
Thomas J. Fitzpatrick
Duly Authorized and Chief Financial Officer
DATE: November 14, 1997
DecisionOne Corporation
/s/ Thomas J. Fitzpatrick
-------------------------------------
Thomas J. Fitzpatrick
Duly Authorized and Chief Financial Officer
DATE: November 14, 1997