1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission File Number 0-28090
-------
DECISIONONE HOLDINGS CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3435409
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Commission File Number 333-28411
---------
DECISIONONE CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2328680
--------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
50 East Swedesford Road, Frazer, Pennsylvania 19355
-----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code (610)296-6000
-------------
Indicate by check mark whether registrants (1) have filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrants were
required to file such reports), and (2) have been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of September 30, 1998, 12,584,219 shares of DecisionOne Holdings Corp. common
stock were outstanding and one share of DecisionOne Corporation common stock was
outstanding.
DecisionOne Corporation meets the requirements set forth in General Instruction
H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
2
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES AND
DECISIONONE CORPORATION AND SUBSIDIARIES
FORM 10-Q NOVEMBER 16, 1998
CONTENTS
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements of
DecisionOne Holdings Corp. and Subsidiaries:
Condensed Consolidated Balance Sheets -
September 30, 1998 and June 30, 1998
(unaudited) 2
Condensed Consolidated Statements of Operations
and Comprehensive Income (Loss) - Three Months
Ended September 30, 1998 and 1997 (unaudited) 3
Condensed Consolidated Statements of
Cash Flows - Three Months Ended
September 30, 1998 and 1997 (unaudited) 4
Notes to Condensed Consolidated Financial
Statements (unaudited) 5
Condensed Consolidated Financial Statements
of DecisionOne Corporation and Subsidiaries:
Condensed Consolidated Balance Sheets -
September 30, 1998 and June 30, 1998
(unaudited) 8
Condensed Consolidated Statements of Operations
and Comprehensive Income (Loss) - Three Months
Ended September 30, 1998 and 1997 (unaudited) 9
Condensed Consolidated Statements of
Cash Flows - Three Months Ended
September 30, 1998 and 1997 (unaudited) 10
Notes to Condensed Consolidated
Financial Statements (unaudited) 11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations - Three Months Ended
September 30, 1998 and 1997. 14
Item 3. Quantitative and Qualitative Disclosure
About Market Risk. 24
PART II OTHER INFORMATION 25
3
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
SEPTEMBER 30, JUNE 30,
ASSETS 1998 1998
-------------------- ---------------------
Current Assets:
Cash and cash equivalents $ 10,406 $ 6,415
Accounts receivable, net of allowances of $21,189 and $22,572 118,659 114,082
Consumable parts, net of allowances of $9,598 and $9,271 23,856 23,097
Prepaid expenses and other assets 15,612 28,106
------------------- --------------------
Total current assets 168,533 171,700
Repairable parts, net of accumulated amortization of $144,408 and $135,277 146,060 142,446
Property and equipment, net of accumulated depreciation
of $43,130 and $39,829 29,310 29,095
Intangibles, net of accumulated amortization of $67,462 and $60,827 148,003 154,029
Other assets 44,067 44,717
-------------------- ---------------------
Total Assets $ 535,973 $ 541,987
==================== =====================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Current portion of debt $ 12,927 $ 13,311
Accounts payable and accrued expenses 99,280 101,851
Deferred revenues 42,040 40,758
Income taxes and other liabilities 11,872 10,925
-------------------- ---------------------
Total current liabilities 166,119 166,845
Debt 737,646 731,012
Other Liabilities 5,119 5,736
Shareholders' Deficit:
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 12,584,219 shares 126 126
Additional paid-in capital 242,181 242,181
Accumulated deficit (612,187) (601,195)
Accumulated other comprehensive loss (3,031) (2,718)
-------------------- ---------------------
Total shareholders' deficit (372,911) (361,606)
-------------------- ---------------------
Total Liabilities and Shareholders' Deficit $ 535,973 $ 541,987
==================== =====================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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4
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------------------------------
1998 1997
------------------------ ------------------------
Revenues $ 196,044 $ 202,264
Cost of Revenues 148,479 157,445
----------------------- -------------------------
Gross Profit 47,565 44,819
Operating Expenses:
Selling, general and administrative expenses 33,241 26,922
Amortization of intangibles 6,792 6,521
Merger expenses - 69,046
----------------------- -------------------------
Total operating expenses 40,033 102,489
----------------------- -------------------------
Operating Income (Loss) 7,532 (57,670)
Interest Expense, Net of Interest Income 18,524 11,733
----------------------- -------------------------
Loss Before Income Taxes (Benefit) (10,992) (69,403)
Provision (Benefit) for Income Taxes - (11,776)
----------------------- -------------------------
Net Loss $ (10,992) $ (57,627)
----------------------- -------------------------
Other Comprehensive Loss, Net of Tax -
Foreign Currency Translation Adjustments (313) -
------------------------ --------------------------
Comprehensive Loss $ (11,305) $ (57,627)
======================== ==========================
Basic Earnings per Common Share $ (0.87) $ -
Weighted Average Number of Common Shares 12,584 -
Pro Forma Information - See Note 3:
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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5
DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------------------------
1998 1997
-------------------------- ----------------------------
Operating Activities:
Net loss $ (10,992) $ (57,627)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Amortization of repairable parts 18,894 18,425
Amortization of intangibles 6,792 6,521
Depreciation 3,596 3,987
Changes in assets and liabilities, net of effects of acquisitions 9,291 (19,220)
-------------------------- -------------------------
Net cash provided by (used in) operating activities 27,581 (47,914)
Investing Activities:
Capital expenditures (3,811) (3,138)
Repairable spare parts purchases, net (22,910) (20,526)
Acquisitions of companies and contracts (417) -
-------------------------- --------------------------
Net cash used in investing activities (27,138) (23,664)
Financing Activities:
Proceeds from issuance of common stock in connection
with recapitalization - 226,583
Redemption of common stock in connection with recapitalization - (609,654)
Redemption of common stock warrants in connection with
recapitalization - (12,149)
Issuance of common stock warrants - 1,880
Net proceeds from borrowings 4,013 465,938
Other, net (465) (1,086)
-------------------------- ---------------------------
Net cash provided by financing activities 3,548 71,512
-------------------------- ---------------------------
Net change in cash and cash equivalents 3,991 (66)
Cash and cash equivalents, beginning of period 6,415 10,877
-------------------------- ---------------------------
Cash and cash equivalents, end of period $ 10,406 $ 10,811
========================== ===========================
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, 1998 AND 1997
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
DecisionOne Holdings Corp. and Subsidiaries (the "Company") have been prepared
pursuant to the rules and regulations of the United States Securities and
Exchange Commission and, therefore, do not include all information and footnotes
necessary for presentation of financial position, results of operations and cash
flows required by generally accepted accounting principles. The June 30, 1998
balance sheet was derived from the Company's audited consolidated financial
statements. The information furnished reflects all adjustments (consisting of
normal recurring adjustments) which are, in the opinion of management, necessary
for a fair summary of the financial position, results of operations and cash
flows. The results of operations for the three month periods ended September 30,
1998 and 1997 are not necessarily indicative of operating results to be expected
for the full fiscal year. The financial statements should be read in conjunction
with the audited consolidated financial statements of the Company and notes
thereto filed with the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1998.
Certain reclassifications have been made in order to conform with the September
30, 1998 presentation.
NOTE 2: COMPREHENSIVE INCOME (LOSS)
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, which established standards for reporting and
disclosure of comprehensive income, effective July 1, 1998. Total comprehensive
income (loss) for the three months ended September 30, 1998 and 1997 was ($11.3)
million and ($57.6) million, respectively. Total comprehensive income (loss)
includes net income (loss) and foreign currency translation gains (losses) for
the periods presented.
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 between
the Company and Quaker dated May 4, 1997, as amended (the "Merger Agreement").
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7
In accordance with the terms of the Merger Agreement, which was formally
approved by the Company's shareholders on August 7, 1997, Quaker merged with and
into the Company, and the holders of approximately 94.7% of shares of Company
common stock outstanding immediately prior to the merger received $23 in cash in
exchange for each of these shares. Holders of approximately 5.3% of shares of
Company common stock outstanding immediately prior to the merger retained such
shares in the merged Company, as determined based upon shareholder elections and
stock proration factors specified in the Merger Agreement. Immediately following
the merger, continuing shareholders owned approximately 11.9% of shares of
outstanding Company common stock. The aggregate value of the merger transaction
was approximately $940 million, including refinancing of the Company's revolving
credit facility.
In connection with the merger, the Company raised $85 million through the public
issuance of senior discount debentures, in addition to publicly issued senior
subordinated notes for approximately $150 million. The Company also entered into
a new syndicated credit facility (the "New Credit Facility") providing for term
loans of $470 million and revolving loans of up to $105 million. The proceeds of
the senior discount notes, senior subordinated notes, the initial borrowings
under the New Credit Facility and the purchase of approximately $225 million of
Company common stock by Quaker were used to finance the payments of cash to
cash-electing shareholders, to pay the holders of stock options and stock
warrants canceled or converted, as applicable, in connection with the merger, to
repay the Company's existing revolving credit facility and to pay expenses
incurred in connection with the merger.
As a result of the merger, the Company incurred various expenses, totaling
approximately $69.0 million on a pre-tax basis, in connection with consummating
the transaction. These costs consisted primarily of compensation costs,
underwriting discounts and commissions, professional and advisory fees and other
expenses. In addition to these expenses, the Company also incurred approximately
$22.3 million of capitalized debt issuance costs associated with the merger
financing. These costs are being charged to interest expense over the terms of
the related debt instruments.
The following summarized unaudited pro forma information for the 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 results of operations which actually
would have resulted had the merger occurred as of July 1, 1997 or which may
result in the future. Historical earnings per share data is not presented
because it would not be meaningful.
6
8
(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 Shares of Common Stock 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 $69.0 million
and (3) the elimination of the net tax benefit related to these adjustments of
approximately $5.1 million, including the effect of valuation allowances against
certain deferred tax assets.
Pro forma weighted average common and common equivalent shares outstanding
includes 12,499,979 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 ultimate realization of net deferred tax assets is dependent upon the
generation of future taxable income during the periods in which the temporary
differences become deductible. Net deferred tax assets as of September 30, 1998
were approximately $25.4 million.
During the three month period ended September 30, 1998, the Company recorded
additional net deferred tax assets of approximately $4.4 million, principally
due to the accumulation of additional temporary differences. The Company
recorded a corresponding increase to the valuation allowance, due principally to
the length of the period during which the anticipated tax benefits are expected
to be realized.
NOTE 5: DEBT COVENANTS
The New Credit Facility contains various terms and covenants which, among other
things, place certain restrictions on the Company's ability to pay dividends
and incur additional indebtedness, and which require the Company to meet certain
minimum financial performance measurements, including Adjusted EBITDA targets
which increase over time. The Company is in compliance with its covenants under
the amended New Credit Facility as of September 30, 1998. However, based on the
revenue trends observed during the three months ended September 30, 1998 and
thereafter, and the impact thereof on Adjusted EBITDA, the Company currently
believes it is likely that it will need to seek amendments to certain of the
covenants in order to remain in compliance as of December 31, 1998.
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DECISIONONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
SEPTEMBER 30, JUNE 30,
ASSETS 1998 1998
----------------- ---------------------
Current Assets:
Cash and cash equivalents $ 9,888 $ 5,205
Accounts receivable, net of allowances of $21,189 and $22,572 118,659 114,082
Consumable parts, net of allowances of $9,598 and $9,271 23,856 23,097
Prepaid expenses and other assets 15,303 27,797
---------------- -------------------
Total current assets 167,706 170,181
Repairable parts, net of accumulated amortization of $144,408 and $135,277 146,060 142,446
Property and equipment, net of accumulated depreciation
of $43,130 and $39,829 29,310 29,095
Intangibles, net of accumulated amortization of $67,462 and $60,827 148,003 154,029
Parent company loan receivable 70,347 69,867
Other assets 40,225 40,821
----------------- -------------------
Total Assets $ 601,651 $ 606,439
================= ===================
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current Liabilities:
Current portion of debt $ 12,927 $ 13,311
Accounts payable and accrued expenses 98,780 101,351
Deferred revenues 42,040 40,758
Income taxes and other liabilities 11,872 10,925
---------------- -------------------
Total current liabilities 165,619 166,345
Debt 642,691 638,766
Other Liabilities 5,119 5,796
Shareholder's Deficit:
Common stock, no par value; one share authorized, issued
and outstanding - -
Additional paid-in capital 12,323 12,323
Accumulated deficit (221,070) (214,073)
Accumulated other comprehensive loss (3,031) (2,718)
---------------- -------------------
Total shareholder's deficit (211,778) (204,468)
----------------- -------------------
Total Liabilities and Shareholder's Deficit $ 601,651 $ 606,439
================= ===================
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 AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------------------
1998 1997
----------------------- ------------------------
Revenues $ 196,044 $ 202,264
Cost of Revenues 148,479 157,445
---------------------- -----------------------
Gross Profit 47,565 44,819
Operating Expenses:
Selling, general and administrative expenses 33,241 26,922
Amortization of intangibles 6,792 6,521
Merger expenses - 69,046
---------------------- -----------------------
Total operating expenses 40,033 102,489
---------------------- -----------------------
Operating Income (Loss) 7,532 (57,670)
Interest Expense, Net of Interest Income 14,529 9,909
---------------------- -----------------------
Loss Before Income Taxes (Benefit) (6,997) (67,579)
Provision (Benefit) for Income Taxes - (10,462)
---------------------- -----------------------
Net Loss (6,997) (57,117)
---------------------- -----------------------
Other Comprehensive Loss, Net of Tax -
Foreign Currency Translation Adjustments (313) -
---------------------- -----------------------
Comprehensive Loss $ (7,310) $ (57,117)
====================== =======================
Pro Forma Information - See Note 3:
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,
------------------------------------------------
1998 1997
----------------------- ---------------------
Operating Activities:
Net loss $ (6,997) $ (57,117)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Amortization of repairable parts 18,894 18,425
Amortization of intangibles 6,792 6,521
Depreciation 3,596 3,987
Changes in assets and liabilities, net of effects of acquisitions 5,288 (20,869)
--------------------- ---------------------
Net cash provided by (used in) operating activities 27,573 (49,053)
Investing Activities:
Capital expenditures (3,811) (3,138)
Repairable spare parts purchases, net (22,910) (20,526)
Acquisitions of companies and contracts (417) -
--------------------- ---------------------
Net cash used in investing activities (27,138) (23,664)
Financing Activities:
Capital contributions - 302
Payment of dividends to Parent - (244,000)
Loan from (made to) Parent 700 (74,210)
Net proceeds from borrowings 4,013 386,215
Other, net (465) 184
-------------------- --------------------
Net cash provided by financing activities 4,248 68,491
-------------------- --------------------
Net change in cash and cash equivalents 4,683 (4,226)
Cash and cash equivalents, beginning of period 5,205 10,877
-------------------- --------------------
Cash and cash equivalents, end of period $ 9,888 $ 6,651
==================== ====================
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, 1998 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., herein called "Holdings") and Subsidiaries (the "Company") have been
prepared pursuant to the rules and regulations of the United States Securities
and Exchange Commission and, therefore, do not include all information and
footnotes necessary for presentation of financial position, results of
operations and cash flows required by generally accepted accounting principles.
The June 30, 1998 balance sheet was derived from the Company's audited
consolidated financial statements. The information furnished reflects all
adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair summary of the financial position,
results of operations and cash flows. The results of operations for the three
month periods ended September 30, 1998 and 1997 are not necessarily indicative
of the operating results to be expected for the full fiscal year. The financial
statements should be read in conjunction with the audited consolidated financial
statements of the Company and notes thereto filed with the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1998.
Certain reclassifications have been made in order to conform with the September
30, 1998 presentation.
NOTE 2: COMPREHENSIVE INCOME (LOSS)
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, which established standards for reporting and
disclosure of comprehensive income, effective July 1, 1998. Total comprehensive
income (loss) for the three months ended September 30, 1998 and 1997 was ($7.3)
million and ($57.1) million, respectively. Total comprehensive income (loss)
includes net income (loss) and foreign currency translation gains (losses) for
the periods presented.
NOTE 3: MERGER, RECAPITALIZATION AND PRO FORMA INFORMATION
On August 7, 1997, the Company and Holdings consummated a merger with Quaker
Holding Co. ("Quaker"), an affiliate of DLJ Merchant Banking Partners II, 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
between the Company, Holdings and Quaker dated May 4, 1997, as amended (the
"Merger Agreement").
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13
In accordance with the terms of the Merger Agreement, which was formally
approved by Holdings' shareholders on August 7, 1997, Quaker merged with and
into Holdings, and the holders of approximately 94.7% of shares of Holdings'
common stock outstanding immediately prior to the merger received $23 in cash in
exchange for each of these shares. Holders of approximately 5.3% of shares of
Holdings' common stock outstanding immediately prior to the merger retained such
shares in the merged Company, as determined based upon shareholder elections and
stock proration factors specified in the Merger Agreement. Immediately following
the merger, continuing shareholders owned approximately 11.9% of shares of
outstanding Holdings' common stock. The aggregate value of the merger
transaction was approximately $940 million, including refinancing of the
Company's revolving credit facility.
In connection with the merger, Holdings raised $85 million through the
public issuance of senior discount debentures, in addition to publicly issued
senior subordinated notes for approximately $150 million by the Company. The
Company also entered into a new syndicated credit facility (the "New Credit
Facility") providing for term loans of $470 million and revolving loans of up
to $105 million. The proceeds of the senior discount notes, senior subordinated
notes, the initial borrowings under the New Credit Facility along with a loan
of approximately $59.1 million from the Company to Holdings and the purchase of
approximately $225 million of Company common stock by Quaker were used to
finance the payments of cash to cash-electing shareholders, to pay the holders
of stock options and stock warrants canceled or converted, as applicable, in
connection with the merger, to repay the Company's existing revolving credit
facility and to pay expenses incurred in connection with the merger.
As a result of the merger, the Company and Holdings incurred various expenses,
totaling $69.0 million on a pre-tax basis, in connection with consummating the
transaction. These costs consisted primarily of compensation costs, underwriting
discounts and commissions, professional and advisory fees and other expenses. In
addition to these expenses, the Company and Holdings also incurred approximately
$22.3 million of capitalized debt issuance costs (of which approximately $18.9
million were incurred by the Company) associated with the merger financing.
These costs are being charged to interest expense over the terms of the related
debt instruments.
The following summarized unaudited pro forma information for the 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 results of operations which actually
would have resulted had the merger occurred as of July 1, 1997 or which may
result in the future. Historical earnings per share data is not presented
because it would not be meaningful.
12
14
(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) the
elimination of the non-recurring merger expenses of approximately $69.0 million
and (3) the elimination of the net tax benefit related to these adjustments of
approximately $9.2 million, including the effect of valuation allowances against
certain deferred tax assets.
NOTE 4: INCOME TAXES
The ultimate realization of net deferred tax assets is dependent upon the
generation of future taxable income during the periods in which the temporary
differences become deductible. Net deferred tax assets as of September 30, 1998
were approximately $24.4 million.
During the three month period ended September 30, 1998, the Company recorded
additional net deferred tax assets of approximately $2.8 million, principally
due to the accumulation of additional temporary differences. The Company
recorded a corresponding increase to the valuation allowance, due principally to
the length of the period during which the anticipated tax benefits are expected
to be realized.
NOTE 5: DEBT COVENANTS
The New Credit Facility contains various terms and covenants which, among other
things, place certain restrictions on the Company's ability to pay dividends
and incur additional indebtedness, and which require the Company to meet certain
minimum financial performance measurements, including Adjusted EBITDA targets
which increase over time. The Company is in compliance with its covenants under
the amended New Credit Facility as of September 30, 1998. However, based on the
revenue trends observed during the three months ended September 30, 1998 and
thereafter, and the impact thereof on Adjusted EBITDA, the Company currently
believes it is likely that it will need to seek amendments to certain of the
covenants in order to remain in compliance as of December 31, 1998.
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15
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 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 fiscal year ended June 30, 1998.
Item 2, and 3 are presented with respect to both registrants noted above. (As
used within Item 2, and 3, the term "Company" refers to DecisionOne Holdings
Corp. and its wholly-owned subsidiaries, including DecisionOne Corporation, and
the term "Holdings" refers to DecisionOne Holdings Corp.)
The information herein contains forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 that involve a
number of risks and uncertainties. A number of factors could cause actual
results, performance, achievements of the Company, or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward looking statements. These factors include,
but are not limited to, the 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, 1998. In addition, such
forward looking statements are necessarily dependent upon assumptions, estimates
and dates that may be incorrect or imprecise and involve known and unknown
risks, uncertainties and other factors. Accordingly, any forward looking
statements included herein do not purport to be predictions of future events or
circumstances and may not be realized. Forward looking statements can be
identified by, among other things, the use of forward-looking terminology such
as "believes", "expects", "may", "will", "should", "seeks", "pro forma",
"anticipates", "intends" or the negative of any thereof, or other variations
thereon or comparable terminology, or by discussions of strategy or intentions.
Given these uncertainties, readers are cautioned not to place undue reliance on
such forward looking statements. The Company disclaims any obligations to update
any such factors or to publicly announce the results of any revisions to any of
the forward looking statements contained herein to reflect future events or
developments.
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BUSINESS OVERVIEW
Founded in 1969, the Company began operations as a provider of key punch
machines under the tradename "Decision Data". During the 1980s, its operations
expanded to include the sale of midrange computer hardware and related
maintenance services. During fiscal 1993, the Company decided to focus on
providing computer maintenance and support services and sold its computer
hardware products business.
Since the beginning of fiscal 1993, the Company has established a major
presence in the computer maintenance and technology support services industry
through the acquisition and integration of assets and contracts of over 40
complementary businesses. Significant acquisitions included IDEA Servcom, Inc.
("Servcom"), certain assets and liabilities of which were acquired in August
1994 for cash consideration of approximately $29.5 million, and Bell Atlantic
Business Systems Services, Inc. ("BABSS"), which was acquired in October 1995
for cash consideration of approximately $250.0 million. In addition, certain
assets of the U.S. computer service business of Memorex Telex were acquired in
November 1996 for cash consideration of approximately $24.4 million, after
certain purchase price adjustments. These acquisitions were accounted for as
purchase transactions.
At the time of its acquisition by the Company, BABSS was among the largest
independent, multivendor service organizations servicing end-user organizations
and original equipment manufacturers. 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 90% of the Company's revenues during the three
month period ended September 30, 1998 were derived from 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 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.
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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 typically 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.("DLJMB").
The Merger, which has been recorded as a recapitalization as of the consummation
date for accounting purposes, occurred pursuant to an Agreement and Plan of
Merger among the Company and Quaker dated May 4, 1997, as amended (the "Merger
Agreement").
In accordance with the terms of the Merger Agreement, which was approved by
the Company's shareholders on August 7, 1997, Quaker merged with and into the
Company, and the holders of approximately 94.7% of shares of Holdings' common
stock outstanding immediately prior to the Merger received $23 in cash in
exchange for each of these shares. Holders of approximately 5.3% of shares of
Holdings' common stock outstanding immediately prior to the Merger retained such
shares in the merged Company, as determined based upon shareholder elections and
stock proration factors specified in the Merger Agreement. The aggregate value
of the Merger was
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approximately $940 million, including refinancing of DecisionOne Corporation's
revolving credit facility.
The Company incurred various expenses, aggregating approximately $69.0
million on a pre-tax basis, in connection with consummating the Merger. These
costs consisted primarily of compensation costs, underwriting discounts and
commissions, professional and advisory fees and other expenses. This one-time
charge is reflected in the accompanying unaudited Condensed Consolidated
Statements of Operations and Comprehensive Income (Loss) of the Company and of
DecisionOne Corporation and Subsidiaries for the 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"). These costs are being
charged to interest expense over the terms of the related debt instruments (see
"Liquidity and Capital Resources").
RESULTS OF OPERATIONS
The following discussion of results of operations is presented with respect
to the Company and with respect to DecisionOne Corporation and Subsidiaries for
the three month periods ended September 30, 1998 and 1997.
The following tables set forth, for the three month periods ended
September 30, 1998 and 1997, respectively, certain operating data of the Company
and of DecisionOne Corporation and Subsidiaries:
DECISIONONE HOLDINGS CORP. DECISIONONE CORPORATION
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues $196,044 $202,264 $196,044 $202,264
Gross Profit 47,565 44,819 47,565 44,819
Operating Income (Loss) 7,532 (57,670) 7,532 (57,670)
Net Loss $(10,992) $(57,627) $(6,997) $(57,117)
========= ========= ======== =========
OTHER DATA:
EBITDA (1) $39,513 $40,309 $39,513 $40,309
Less: Amortization of
repairable parts (18,894) (18,425) (18,894) (18,425)
-------- -------- -------- --------
Adjusted EBITDA (1) 20,619 21,884 20,619 21,884
Net cash provided by (used in)
operating activities 27,581 (47,914) 27,573 (49,053)
Net cash used in investing
activities (27,138) (23,664) (27,138) (23,664)
Net cash provided by financing
activities 3,548 71,512 4,248 68,491
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(1) "EBITDA" represents income (loss) from continuing operations before interest
expense, interest income, income taxes (benefit), depreciation, amortization of
intangibles, amortization of repairable parts, amortization of discounts and
capitalized expenditures related to indebtedness, merger expenses (approximately
$69.0 million for the three month period ended September 30, 1997), and
incremental charges related to the Company's ongoing service delivery
re-engineering program (approximately $2.7 million for the three month period
ended September 30, 1998.) "Adjusted EBITDA" represents EBITDA reduced by the
amortization of repairable parts. Adjusted EBITDA is presented because it is
relevant to certain covenants contained in debt agreements entered 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.
Overview
Operating income (loss) was $7.5 million and ($57.7) million for the three
months ended September 30, 1998 and 1997, respectively. Operating income (loss)
for the three months ended September 30, 1998 and 1997 included $2.7 million for
incremental charges related to the Company's ongoing service delivery
re-engineering program and $69.0 million of merger expenses, respectively.
Excluding these charges, operating income was $10.2 million and $11.3
million for the three months ended September 30, 1998 and 1997, respectively.
The Company reported gross profit of $47.6 million and $44.8 million for the
three months ended September 30, 1998 and 1997, respectively. EBITDA was $39.5
million and $40.3 million for the three months ended September 30, 1998 and
1997, respectively. Adjusted EBITDA was $20.6 million and $21.9 million for the
three months ended September 30, 1998 and 1997, respectively.
Three Month Period Ended September 30, 1998 Compared to Three Month Period
Ended September 30, 1997
Revenues: Revenues decreased by $6.3 million, or 3.1%, from $202.3 million for
the three months ended September 30, 1997 to $196.0 million for the three months
ended September 30, 1998. This decrease is principally due to lower monthly
maintenance contract-based revenues as a result of equipment cancellations
exceeding sales of new contracts. The contract-based revenue reductions were
partially offset by growth in the volume of per incident revenues.
The Company is continuing to take actions to update its sales approach
to the market including the recent employment of important executive and other
sales management. While the Company expects these actions and the future
acquisition of service contracts from other businesses to result in revenue
growth from current levels, the timing of such revenue growth, if any, is
uncertain.
Cost of Revenues: Cost of revenues decreased by $8.9 million, or 5.7%,
from $157.4 million for the three months ended September 30, 1997 to $148.5
million for the three months ended September 30, 1998. This decrease is
principally due to labor efficiencies gained as a
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result of re-engineering initiatives to improve the Company's service delivery
processes, including a reduction in temporary personnel.
Gross Percentage: As a percentage of revenues, gross profit increased from
22.2% for three months ended September 30, 1997 to 24.3% for the three months
ended September 30, 1998. This improvement was due to labor efficiencies gained
as a result of re-engineering initiatives to improve the Company's service
delivery processes. Future margin performance is difficult to predict, as it
will be driven by the results of the aforementioned actions taken by the Company
to generate revenue growth.
Selling, General and Administrative Expenses: Selling, general and
administrative ("SG&A") expenses increased by $6.3 million, or 23.4%, from $26.9
million for the three months ended September 30, 1997 to $33.2 million for the
three months ended September 30, 1998. Included in SG&A expenses for the quarter
ended September 30, 1998 were incremental consulting fees incurred in connection
with the Company's re-engineering efforts of approximately $2.7 million (see
"Liquidity and Capital Resources" for additional information with respect to
these expenditures). Increases in sales employment costs, non-income taxes and
the provision for uncollectible receivables also contributed to the comparative
increase.
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 $0.3 million, or 4.6%, from $6.5 million for the three months ended
September 30, 1997 to $6.8 million for the three months ended September 30,1998.
This increase was attributable principally to the amortization of intangibles
resulting from the acquisition of the service contracts of complementary
businesses subsequent to September 30, 1997.
Interest Expense: The Company's interest expense, net of interest income,
increased by $6.8 million, or 58.1%, from $11.7 million for the three months
ended September 30, 1997 to $18.5 million for the three months ended September
30, 1998. This increase is due principally to the Company's significantly
increased average borrowings as a result of the Merger, which was consummated on
August 7, 1997. Average borrowings were approximately $748.1 million for the
three month period ended September 30, 1998, as compared to approximately $481.0
million for the three month period ended September 30, 1997 (see Note 3 to the
Company's unaudited Condensed Consolidated Financial Statements for the three
months ended September 30, 1998).
With respect to DecisionOne Corporation, consolidated interest expense,
net of interest income, increased by $4.6 million, or 46.5%, from $9.9 million
for the three months ended September 30, 1997 to $14.5 million for the three
months ended September 30, 1998. This increase is principally attributable to
significantly increased average borrowings as a result of the Merger. Average
borrowings for DecisionOne Corporation, on a consolidated basis were $654.5
million for the three month period ended September 30, 1998, as compared to
$438.4 million for the three month period ended September 30, 1997.
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The increase in consolidated net interest expense for DecisionOne
Corporation during the three month period ended September 30, 1998 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 and interest income
on a $59.1 million parent company loan receivable held by DecisionOne
Corporation (see "Liquidity and Capital Resources").
Income Taxes: The $69.0 million of non-recurring expenses incurred in
consummating the Merger and certain other charges taken by the Company in fiscal
1998 resulted in significant additional tax loss carryforwards and carrybacks.
Net anticipated tax assets of approximately $25.4 million have been reflected in
the September 30, 1998 consolidated balance sheets. The anticipated net deferred
tax assets have been reduced significantly, by a valuation allowance for
financial reporting purposes, due primarily to management's projections of
future taxable income and the length of the period during which the anticipated
tax benefits are expected to be realized.
The Company expects that its tax provision (benefit) in future periods
will reflect effective tax rates which vary significantly from enacted statutory
tax rates principally as a result of additional unrecognized tax benefits on
newly-arising net deferred tax assets. Future effective tax rates may also be
subject to volatility as a result of valuation allowance changes which arise
from differences between management's projections of future taxable income,
newly-arising net deferred tax assets and reversals of net deferred tax assets
and corresponding actual results.
LIQUIDITY AND CAPITAL RESOURCES
Financing and Leverage
The Company's principal sources of liquidity are cash flow from
operations and borrowings under the $105 million revolver under the new credit
facility (the "New Credit Facility"), which was entered into in connection with
the Merger. The New Credit Facility is scheduled to expire on August 7, 2003.
The interest rate applicable to the New Credit Facility varies, at the Company's
option, based upon LIBOR (plus applicable margins not to exceed 3.0%, as
amended) or the Prime Rate (plus applicable margin not to exceed 1.75%). As of
September 30, 1998, the weighted average interest rate applicable to loans under
the New Credit Facility was 8.63%. 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 borrowings under the New 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, 1998 and June 30, 1998, the Company had outstanding
debt of approximately $750.6 million and $744.3 million, respectively. (See Note
3 to the Company's unaudited Condensed Consolidated Financial Statements.) The
Company's significant debt service obligations could, under certain
circumstances, have material consequences to security holders of
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the Company. See "Risk Factors" included in the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1998.
In connection with the Merger, Holdings received proceeds of $85
million from the issuance of 11 1/2% Senior Discount Debentures due 2008 (the
"11 1/2% Notes"), and DecisionOne Corporation issued $150 million of 9 3/4%
Senior Subordinated Notes due 2007 (the "9 3/4% Notes"). DecisionOne Corporation
also entered into a new syndicated credit facility providing for term loans of
$470 million and revolving loans of up to $105 million. The proceeds of the 11
1/2% Notes (which were issued with attached warrants), the 9 3/4% Notes, the
initial borrowings under the New Credit Facility and the purchase of
approximately $225 million of Holdings common stock by DLJMB and other
institutional investors were used to finance the payments of cash to
cash-electing shareholders, to pay the holders of stock options and stock
warrants canceled or converted, as applicable, in connection with the Merger, to
repay DecisionOne Corporation's existing revolving credit facility and to pay
expenses incurred in connection with the Merger. (See Note 3 to the Company's
unaudited Condensed Consolidated Financial Statements for additional
information.)
The New Credit Facility contains various terms and covenants which,
among other things, place certain restrictions on the Company's ability to pay
dividends and incur additional indebtedness, and which require the Company to
meet certain minimum financial performance measurements, including Adjusted
EBITDA targets which increase over time. The Company is in compliance with its
covenants under the amended New Credit Facility as of September 30, 1998.
However, based on the revenue trends observed during the three months ended
September 30, 1998 and thereafter, and the impact thereof on Adjusted EBITDA,
the Company currently believes it is likely that it will need to seek
amendments to certain of the covenants in order to remain in compliance as of
December 31,1998.
The Company incurred approximately $2.4 million in incremental
expenditures for information systems and related re-engineering initiatives
during the three months ended September 30, 1998 and has budgeted to incur $10.0
million through June 30, 1999. The initiatives that are being 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, technical support tools and service delivery processes, all of which
are designed to increase productivity; (iii) enhancements to the Company's help
desk and central dispatch systems to provide an integrated support solution to
the customer base; and (iv) improvements to the Company's field inventory
tracking system which will facilitate increased transfer of consumable and
repairable parts among field locations and reduce purchases of repairable parts.
There can be no assurance that the 1999 budgeted amounts will be so expended by
the Company, nor when these amounts will be so expended.
The Company currently anticipates that its operating cash flow, together
with borrowings under the New Credit Facility, will be sufficient to meet its
anticipated future operating expenses and capital expenditures and to service
its debt requirements as they become due. However, the Company's ability to make
scheduled payments of principal, 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" included in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1998.
The Company has received notification from Nasdaq that it does
not currently meet the requirement for continued listing on the Nasdaq National
Market with respect to the market value of the public float of Company common
stock, and therefore may be de-listed from the Nasdaq National
Market. However, the Company believes that in such event the stock qualifies
for listing on the Nasdaq SmallCap Market.
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Financial Condition:
Cash flow from operating activities for the three months ended September
30, 1998 was approximately $27.6 million. These funds provided the required
capital to fund repairable part purchases and capital expenditures of
approximately $26.7 million during the three months ended September 30, 1998, as
well as the acquisition of contracts and assets of complementary businesses for
approximately $0.4 million during this period.
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 accrued for in the accompanying condensed consolidated balance sheets as of
September 30, 1998 and June 30, 1998. Complete information as to the scope of
required cleanup at these sites is not yet available and, therefore,
management's evaluation may be affected as further information becomes
available. However, in light of information currently available to management,
including information regarding assessments of the sites to date and the nature
of involvement of the Company's predecessor at the sites, it is management's
opinion that the Company's potential additional liability, if any, for the cost
of cleanup of these sites will not be material to the consolidated financial
position, results of operations or liquidity of the Company.
YEAR 2000 COMPLIANCE
As in the case with most other businesses, the Company is in the process
of evaluating and addressing Year 2000 compliance of both its information
technology systems and its non-information technology systems (collectively
referred to as "Systems"). Such Year 2000 compliance efforts are designed to
identify, address and resolve issues that may be created by computer programs
being written using two digits rather than four to define the applicable year.
Any of the Company's computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. If this
situation occurs, the potential exists for System failure or miscalculations by
computer programs, which could cause disruption of operations.
The Company has completed an assessment of both its information technology
systems and its non-information technology systems. The Company has four mission
critical information technology systems, two of which have been remediated and
are Year 2000 compliant and have been placed into service.
Remediation has begun on the other two mission critical information technology
systems and is expected to be complete by July 1999. The Company has
identified approximately 70 non-mission critical information technology
systems, which the Company plans to remediate using in-house personnel or will
obtain certifications and or upgrades from its vendors. Subsequently, all of
the systems will be compliance tested by in-house personnel. The Company
believes it is approximately 45% complete with the above remediation processes
and will be 100% complete by August 1999. The Company has commenced
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remediation of its non-information technology systems and expects to be
complete by June 1999.
The Company has initiated communications with all of its significant
business partners via a Vendor Readiness Survey to determine their plans to
comply with Year 2000. All responses are evaluated as received to determine if
additional action is required to ensure compliance of the business partner.
The Company continues to use both internal and external resources to
comply with Year 2000. The Company has recently engaged a consultant to assess
the Company's processes in place to achieve Year 2000 compliance. The Company
has in place a Year 2000 Steering Committee, which meets regularly and
periodically reports the progress of Year 2000 compliance to the Company's
executive management and the Board of Directors. Currently, the Company does not
have any contingency plans. However, it recognizes the need to develop
contingency plans and expects to have these plans secured by September 1999.
As of September 30, 1998 the Company has incurred costs of approximately
$2.6 million and expects to incur approximately $4.5 million thereafter to
remediate all of the Company's Systems. This represents approximately 9.0% of
the Company's information technology budget. No significant information
technology projects have been deferred due to the Company's Year 2000 efforts.
The future remediation costs to be incurred are based on management's best
estimates, which were derived using assumptions of future events including the
continued availability of resources and the reliability of third party
modification plans. There can be no assurance that this estimate will be
achieved and actual results may be materially different. Specific factors that
might cause such material differences include, but not limited to, the
availability and cost of personnel with appropriate skills and the ability to
locate and correct all non-compliant Systems.
The Company is aware of the potential for claims against it and other
companies for damages for products and services that were not Year 2000
compliant. Since the Company is neither a hardware manufacturer nor a software
developer, the Company believes that it does not have material exposure to
liability for such claims.
While the Company does not believe that the Year 2000 matters discussed
above will have a material impact on its business, financial condition or
results of operations, it is uncertain whether or to what extent the Company may
be affected by such matters.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company uses its revolving credit facility, term loans, senior
discount debentures, and senior subordinated notes to finance a significant
portion of its operations. These on-balance sheet financial instruments, to the
extent they provide for variable rates of interest, expose the Company to
interest rate risk resulting from changes in LIBOR or the prime rate. The
Company uses off-balance sheet interest rate swap and collar agreements to
partially hedge interest rate exposure associated with on-balance sheet
financial instruments. All of the Company's derivative financial instrument
transactions are entered into for non-trading purposes. The terms and
characteristics are matched with the underlying on-balance instruments, subject
to the terms of the New Credit Facility.
To the extent that the Company's financial instruments expose the
Company to interest rate risk and market risk, they are presented in the table
below. The table presents principal cash flows and related interest rates by
year of maturity for the Company's revolving credit facility, term loans,
senior discount debentures, and senior subordinated notes in effect at
September 30, 1998 and, in the case of the senior discount notes, exclude the
potential exercise of the redemption feature. For interest rate swaps and
collars, the table presents notional amounts and the related reference interest
rates by year of maturity. Fair values included herein have been determined
based on (1) quoted market prices for the term loans, the revolver, senior
discount debentures, and senior subordinated notes, and (2) estimates obtained
from dealers to settle interest rate swap and collar agreements.
Fiscal Year of Maturity Fair Value
----------------------- Total Due at Sept. 30,
Interest Rate Sensitivity 1999 2000 2001 2002 2003 Thereafter At Maturity 1998
- - ------------------------- ---- ---- ---- ---- ---- ---------- ----------- ----
(DOLLARS IN THOUSANDS)
Debt:
Fixed Rate -- -- -- -- -- $298,400 $298,400 $149,440
Average Interest Rate -- -- -- -- -- 10.6% -- --
Variable Rate $7,912 $19,325 $36,875 $49,062 $73,438 $316,188 $502,800 $470,327
Average Interest Rate 8.5% 8.5% 8.4% 8.4% 8.4% 8.8% -- --
Interest Rate Instruments:
Variable to Fixed Swaps -- $75,000 -- -- -- -- $75,000 $(957)
Average Pay Rate -- 5.9% -- -- -- -- -- --
Average Receive Rate -- 5.7% -- -- -- -- -- --
Collars: -- $25,000 $75,000 -- -- -- $100,000 $(1,867)
Average Cap Rate -- 5.8 % 6.7% -- -- -- -- --
Average Floor Rate -- 5.7% 5.7% -- -- -- -- --
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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 and Use of Proceeds.
Not applicable
Item 3. Defaults Upon Senior Securities.
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable
Item 5. Other Information.
DecisionOne Holdings Corp. and DecisionOne Corporation filed
today a Form 8-K reporting a change in their fiscal year end
from June 30 to December 31. The Change was made because the
companies' business is not seasonal in nature, and will enable them
to share the same accounting period utilized by most of their
customers, vendors and business associates.
A Transition Report on Form 10-K will be filed by DecisionOne
Holdings Corp. and DecisionOne Corporation on or before March 31,1999
covering the transition period of July 1, 1998 through December 31,
1998. A Form 8-K will be filed by DecisionOne Holdings Corp.
informing its stockholders of the date of the next annual meeting of
stockholders and the dates by which certain proposals of stockholders
must be received by the Company promptly after such dates are
determined by the Company's board of directors.
Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBITS
Number Description of Document
------ -----------------------
27.1 Financial data schedule--
DecisionOne Holdings Corp.
27.2 Financial data schedule--
DecisionOne Corporation
(b) REPORTS ON FORM 8-K
Not applicable
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by
the undersigned thereunto duly authorized.
DecisionOne Holdings Corp.
DATE: November 16, 1998 /s/ Thomas J. Fitzpatrick
----------------- ---------------------------
Thomas J. Fitzpatrick
Executive Vice President and
Chief Financial Officer
DecisionOne Corporation
DATE: November 16, 1998 /s/ Thomas J. Fitzpatrick
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Thomas J. Fitzpatrick
Executive Vice President and
Chief Financial Officer
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