-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SI429mWhZR/3Sr0FmYQfLhAruXEvz4IWpr4+4hPT7ZC0BhSUz/McLhGbRX6SbJlf +oNm/VYrrRW7NXD7Wu6Wjw== 0000893220-97-001614.txt : 19971001 0000893220-97-001614.hdr.sgml : 19971001 ACCESSION NUMBER: 0000893220-97-001614 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970929 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DECISIONONE CORP /DE CENTRAL INDEX KEY: 0001040354 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-28411 FILM NUMBER: 97687961 BUSINESS ADDRESS: STREET 1: 50 EAST SWEDESFORD RD CITY: FRAZER STATE: PA ZIP: 19355 BUSINESS PHONE: 6104083820 MAIL ADDRESS: STREET 1: CAPITAL PRINTING STREET 2: 919 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10022 10-K405 1 FORM 10-K, DECISIONONE CORPORATION 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO DECISIONONE HOLDINGS CORP. (exact name of registrant as specified in its charter) DELAWARE 0-28090 13-3435409 (State or other jurisdiction of (Commission file #) (I.R.S. Employer incorporation or organization) Identification No.)
DECISIONONE CORPORATION (exact name of registrant as specified in its charter) DELAWARE 333-28411 23-2328680 (State or other jurisdiction of (Commission file #) (I.R.S. Employer incorporation or organization) Identification No.)
50 EAST SWEDESFORD ROAD FRAZER, PENNSYLVANIA 19355 (610) 296-6000 (ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF THE PRINCIPAL EXECUTIVE OFFICES OF REGISTRANTS) SECURITIES REGISTERED PURSUANT TO THE SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ----------------------------------------------------- ---------------------------------------- DECISIONONE HOLDINGS CORP.: 9 3/4 SENIOR SUBORDINATED NOTES DUE 2007 NONE DECISIONONE CORPORATION: 11 1/2 SENIOR DISCOUNT DEBENTURES DUE 2009 NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: DECISIONONE HOLDINGS CORP.: COMMON STOCK, $.01 PAR VALUE NONE
Indicate by check mark whether DecisionOne Holdings Corp. (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [CHECK] No_______ Indicate by check mark whether DecisionOne Corporation (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes__________ No [CHECK] The aggregate market value of the voting stock of DecisionOne Holdings Corp. held by non-affiliates, based upon the closing price of Common Stock on September 11, 1997, as reported by the Nasdaq National Market System, was approximately $44,170,728. In making such calculation, registrant is not making a determination of the affiliate or non-affiliate status of any holders of shares of Common Stock. All of the voting stock of DecisionOne Corporation is held by DecisionOne Holdings Corp. At September 11, 1997, 12,499,978 shares of DecisionOne Holdings Corp. common stock were outstanding and one share of DecisionOne Corporation common stock was outstanding. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [CHECKED BOX] DecisionOne Corporation meets the conditions set forth in General Instruction I(1) of Form 10-K and is therefore filing this form with the reduced disclosure format. DOCUMENTS INCORPORATED BY REFERENCE: Portions of DecisionOne Holdings Corp.'s Proxy Statement prepared in connection with its 1997 Annual Meeting of Stockholders (Part III) ================================================================================ 2 PART I ITEM 1. BUSINESS Item 1. is presented with respect to both registrants submitting this filing, DecisionOne Holdings Corp. and DecisionOne Corporation. GENERAL DecisionOne Holdings Corp., through its wholly owned operating subsidiary DecisionOne Corporation and its subsidiaries (collectively, the "Company") is the largest independent provider of multivendor computer maintenance and technology support services in the United States, based on Dataquest Incorporated ("Dataquest") estimates for calendar year 1996. The Company offers its customers a single source solution for virtually all of their computer maintenance and technology support requirements, including hardware maintenance services, software support, end-user/help desk services, network support and other technology support services. The Company believes it is the most comprehensive independent (i.e., not affiliated with an original equipment manufacturer, or OEM) provider of these services across a broad range of computing environments, including mainframes, midrange and distributed systems, work groups, PCs and related peripherals. The Company provides support for over 15,000 hardware products manufactured by more than 1,000 OEMs. The Company also supports most major operating systems and over 150 off-the-shelf software applications. The Company delivers its services through an extensive field service organization of approximately 4,000 field technicians in over 150 service locations throughout the United States and Canada and strategic alliances in selected international markets. The Company services over 51,000 customers at over 182,000 sites across the United States and Canada. The Company's customers include a diverse group of national and multinational corporations, including SABRE Group, Inc. (an affiliate of American Airlines, Inc.), Sun Microsystems, Inc. ("Sun"), Compaq Computer Corporation ("Compaq"), NationsBank, DuPont Company ("DuPont"), Chevron Corporation and Netscape Communications Corporation ("Netscape"). 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 principally on providing computer maintenance and support services and sold its computer hardware products business. From the beginning of fiscal 1993 through fiscal 1997, the Company has established a major presence in the computer maintenance and technology support services industry through the acquisition and integration of 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; Bell Atlantic Business Systems Services, Inc. ("BABSS") which was acquired in October 1995 for approximately $250.0 million, and certain assets of the U.S. computer service business of Memorex Telex ("Memorex Telex"), which were acquired in November 1996 for cash consideration of approximately $24.4 million after certain purchase price adjustments. BABSS was established in the mid-1950s under the name Sorbus Inc. and was acquired by Bell Atlantic Corporation in 1985. In January 1990, BABSS acquired the assets of the third-party service business of Control Data Corporation ("CDC"), expanding its presence in the maintenance of large systems. After the CDC acquisition, BABSS focused significant resources on the development of, and experienced significant growth in, its customer and revenue bases, and by mid-1995 had grown to be among the largest independent providers of multivendor computer maintenance and technology support services in the United States. The BABSS acquisition provided the Company with a major presence in the servicing of large mainframe systems and in other service areas, such as software and network support, in which the Company had not 1 3 previously competed in a significant fashion. Moreover, the acquisition further enhanced the Company's presence in its traditional midrange business. As a result of the acquisition, BABSS became a wholly-owned subsidiary of the Company and the name of the Company's principal operating subsidiary was changed to DecisionOne Corporation. MERGER AND RESTRUCTURING On August 7, 1997, the Company consummated a merger (the "Merger") with an affiliate of DLJ Merchant Banking Partners II, L.P. ("DLJ"). Pursuant to the Merger, DLJ, certain funds affiliated with DLJ (collectively, with DLJ, the "DLJ Funds"), and third-party investors who have entered into an agreement (the "Investors' Agreement") with DLJ in respect of the voting and disposition of shares acquired by them (collectively, the "DLJ Group"), acquired approximately 10.9 million shares, or 87.4% of the Company's outstanding common stock in exchange for approximately $225 million. Such equity proceeds, along with $145.5 million of net proceeds from the sale of 9 3/4% Senior Subordinated Notes due 2007 (the "9 3/4% Notes"), $81.6 million of net proceeds from the sale of units consisting of 11 1/2% Senior Discount Debentures due 2008 and 148,400 Warrants to purchase 281,960 shares of Company common stock exercisable at $23 per share (the "Units"), and borrowings of $470.0 million under a $575 million senior secured loan facility were used to repurchase approximately 26.5 million shares for approximately $609.7 million, cash out existing options and warrants, repay the Company's then-existing revolving credit facility, and pay fees and expenses incurred in connection with the Merger. See "Merger and Recapitalization" included in Item 7 herein. INDUSTRY BACKGROUND The United States market for computer hardware maintenance and technology support services is large and growing. According to Dataquest projections, the hardware maintenance and technology support services market was approximately $40.5 billion in 1996 and is projected to grow at a compound annual rate of 5.6% to $50.3 billion by the year 2000. Within the market surveyed by Dataquest, Dataquest estimates that the independent, multivendor segment was approximately $8.8 billion in 1996 and projects the segment to grow at a 14% compound annual rate to $14.8 billion by the year 2000. According to Dataquest, independent, multivendor service providers such as the Company are taking market share from the OEM service providers faster than OEMs are contracting new business. The Company believes that this is occurring for several reasons including: (i) customers are looking for single source providers who support multiple computer hardware and software platforms, (ii) independent service providers are viewed as being unbiased toward computer purchase decisions and (iii) OEMs are increasingly outsourcing customer maintenance service (including warranty and post warranty services) and technical customer support such as help desk services to independents in order to focus on their core design, technology and marketing competencies. According to Dataquest, within the independent, multivendor segment, hardware maintenance was the dominant service, accounting for approximately 71% of 1996 revenues, with technology support services, including software support, network support and end-user training, comprising the remaining 29% of 1996 revenues. The independent, multivendor segment is also fragmented and consolidating. Participants in the independent multivendor segment include: (i) several large independent service providers, (ii) the multivendor segments of OEM service organizations and (iii) hundreds of smaller independent companies servicing either product niches or limited geographical areas of the United States. The significant market position of OEMs is due largely to their traditional role of servicing their own installed base of equipment and their customers' former reliance on centralized, single vendor solutions (i.e. mainframe systems). COMPANY SERVICES The Company provides a comprehensive range of core technology support services to customers across a broad range of computing environments, including mainframes, midrange and distributed systems, work groups, PCs and related peripherals. The Company customizes its service offerings to the individual customer's needs in response to the nature of the customer's requirements, the term of the contract and the combination of services that are provided. Services are bundled to match the support requirements of 2 4 customers and include hardware support, end-user and software support, network support, management information services, program management, planning support and ancillary support services. Hardware Support Hardware support services consist of remedial and preventive maintenance for computers and computer peripheral devices. The Company supports over 15,000 different hardware products manufactured by more than 1,000 OEMs. The Company's customer support centers ("CSCs") handle over 330,000 calls per month regarding hardware support. The Company maintains and manages an inventory of over 3.5 million parts representing more than 300,000 part numbers. The Company also has access to a network of computer equipment vendors, brokers and highly skilled repair suppliers, as well as access to certain IBM Designated Parts Sales Locations. In addition to its on site diagnostic tools, the Company uses industry and proprietary software diagnostic capabilities to monitor system performance on a remote basis. Also, large customers are provided remote, on line access to certain of the Company's systems to log service requests and track service delivery. The Company prices its products and services on either a fixed fee or per incident basis. Pricing is based on various factors including equipment failure rates, cost of repairable parts and labor expenses. End-user and Software Support The Company's CSCs handle over 90,000 calls per month for help desk and software support. Levels of support range from basic and network support for corporate end-users to advanced operating system support for systems administrators. Customized support also is available for vertical market applications and OEM accounts. Operational services are available seven days per week, twenty-four hours a day. The Company currently provides support for PC/workstation operating systems such as Windows95(R), Windows(R), MS DOS(R), and Sun Microsystems' Solaris(R), as well as support on network operating systems such as Novell Netware(R) and Windows NT(R). Groupware products like Lotus Notes and Internet browsers such as Netscape also are fully supported. Additionally, over 100 PC software products ranging from spreadsheets and word processing to communications and graphics are supported, as are numerous on-line services. The Company is a Microsoft Authorized Support Center, providing help desk support for a broad range of Microsoft business software applications and operating systems. Technical support is delivered through the Company's network of CSCs and ranges from basic end-user software support to second level professional support, and work in conjunction with Microsoft desktop applications and operating systems, like Microsoft Windows(R)95 and Windows(R)NT. Network Support The Company provides support services for networked computing environments, including management, administration, and operations support for both local area networks and wide area networks ("WANs"). Network support services are designed to reduce the cost of ownership of networked computing, improve productivity of network users, and supplement customers' internal support staffs. The Company's remote network management services provide monitoring of fault and performance data in customers' networks and problem resolution from the Company's network management center. The Company also provides on site network services to assist customers with network administration, operations, and remedial support. Network specialists may be resident at the customer site or dispatched as necessary. Logistics Services The Company also repairs and refurbishes computer parts and assemblies at seven depot repair centers in the United States. In addition to supporting its own business, these services are provided primarily for OEMs, distributors and other third party maintenance companies. Subassemblies repaired include system logic boards, hard disk drive assemblies, peripherals, power supplies and related equipment. The Company's depot 3 5 repair facilities located in Malvern, Pennsylvania; Boston, Massachusetts; Milwaukee, Wisconsin; and San Francisco, California are certified to ISO-9002 standards. The Company also provides logistics services, including the planning and forecasting of parts requirements and parts sourcing, inventory and warranty management, for Compaq and other manufacturers. Under terms of the Compaq logistics service contract, the Company handles orders from customers, dealers and distributors in North America for parts that are no longer produced by Compaq. The parts are used to repair Compaq desktops, laptops and servers and include such components as flat panels (LCDs), motherboards, monitors, power supplies and related parts. In addition to repair and replacement work, the Company manages the program's logistics requirements and parts warranty reimbursement activities. Program Management The Company provides ongoing management services for companies that wish to outsource all or a portion of their services management requirements. Typical services include third party vendor management, on site personnel support and program evaluation, as well as a variety of support capabilities required to prepare a system for operation and improve its efficiency. These support capabilities include support for system installation, de-installation, moves, upgrades, reconfigurations, system configuration audits, inventory tracking services and data restoration assistance. Planning Support The Company assists customers in defining their enterprise service requirements, establishing service delivery benchmarks, recommending process improvements and auditing the results of implemented programs over time. The objective of these consulting services is to assist customers in reducing the total cost of ownership and improving operating efficiency in their service environments. Information Services The Company makes service improvement recommendations to customers based on information accumulated from its hardware, network and end-user support services. Management information services allow customers to make informed decisions relating to hardware and software procurements as well as the need for increased employee training. The Company believes these services differentiate it from OEMs and software developers that may favor their own products. The Company's AssetOne(TM) service tracks customers' desktop assets and provides information on hardware configuration, software utilization, warranty status, equipment location and user profiles. This information can then be used to improve the way customers' assets are deployed, serviced, and used in order to reduce costs and increase end-user productivity. SUPPORT PARTNER PROGRAMS The Company maintains strategic alliances with several prominent companies in order to provide customers with comprehensive technology support solutions. The Company does not receive revenues for services provided by its strategic partners. Key relationships include: General Electric Computer Leasing Corp., which provides computer acquisition, disposition and financing services; SunGard Recovery Services Inc., which provides disaster recovery services; and MicroAge, Inc., which supplies hardware products such as personal computers, peripherals, network products and related devices. SALES AND MARKETING The Company's core product capabilities are bundled to match the support requirements of customers. Individual service portfolios exist for data center, mid range and desktop environments. In addition, a product portfolio exists for OEMs who seek support for parts sourcing and repair, inventory management and related logistics services. 4 6 The Company sells its services through both direct and indirect sales channels. The Company's direct sales force consists of approximately 275 sales professionals who are organized into a general commercial sales group as well as into several dedicated groups including: a Federal Group, which sells to the Federal Government; a National Accounts Group, which focuses on large and multinational corporate customers; and a Telesales Group, which focuses on small accounts. The Company also sells its services through its indirect sales force comprised of approximately 25 sales professionals. Product support relationships exist with OEMs such as Sequent Computer Corporation, EMC(2) Corporation ("EMC"), Sun and Compaq, and software developers such as Netscape, Novell, Inc., Microsoft Corporation and SunSoft, Inc. INTERNATIONAL BUSINESS PARTNERS In order to provide international service to its multinational customers, the Company supplements its broad North American infrastructure with strategic alliances in selected international markets. The Company maintains relationships with International Computers Limited ("ICL") and FBA Computer Technology Services ("FBA"). The Company licenses many of its proprietary multivendor support tools to FBA and to ICL Sorbus Ltd. ("ICL Sorbus"), which is ICL's multivendor services group in Western Europe. As a result, the Company is able to offer its multinational customers service in Western Europe, Asia and Australia. ICL is a leading information technology company that has approximately 23,000 employees operating in about 80 countries around the world. In Western Europe, the ICL Sorbus companies provide multivendor services in 17 countries with approximately 250 service locations and about 5,000 employees. Several of the Company's major customers, including SABRE Group, Inc. and DuPont, benefit from the agreement between the Company and ICL Sorbus, whereby ICL Sorbus agrees to provide services at the European locations of the Company's multinational customers. Through ICL Sorbus, the Company utilizes the service branches of both ICL and ICL's parent company, Fujitsu Ltd., to provide worldwide multivendor support throughout Asia, the Pacific Rim, the Middle East and Africa. FBA, an affiliate of Fujitsu Ltd., provides multivendor services in Australia and New Zealand from 21 locations with 150 employees. In addition to providing technical support to FBA, the Company has supplied various management and sales support personnel to FBA. FBA also provides services to certain of the Company's multinational customers, including Sun. SERVICE INFRASTRUCTURE Centralized Dispatch When a customer places a call for remedial maintenance, the Company uses its Dispatch Data Gathering system ("DDG") to manage the process. When a customer is identified, the DDG system displays the customer's service level requirements and covered equipment. Specific information on the symptoms of the problem and the products that are malfunctioning are entered into the system to begin tracking the service event. The Company's Customer Support Representative ("CSR") selects, based upon the requirements of the service event, the appropriate Customer Service Engineer ("CSE") from a list of pre-assigned primary and back-up personnel and passes this information to the selected CSE. The Company maintains three CSCs in Malvern, Pennsylvania; Bloomington, Minnesota; and Tulsa, Oklahoma. Customers can reach the CSCs by calling one toll free telephone number. The CSCs currently are staffed with over 575 CSRs and 29 staff/operations managers. There is a duty manager on call in each center at all times. CSCs are available on a 24 hour, 7 day per week basis. Redundancy for disaster recovery purposes is designed into the CSC system through the three locations' use of automatic telecommunications switching. Parts Logistics In order to meet customer computer repair requirements, the Company maintains a tiered approach to management of its consumable and repairable spare parts inventory. Parts or assemblies with low failure rates are stocked in either the Company's central distribution center located in Malvern, Pennsylvania or in its 5 7 critical parts center in Dallas, Texas. The Company also maintains six regional distribution centers in Atlanta, Georgia; Newark, New Jersey; Los Angeles, California; San Francisco, California; Chicago, Illinois; and Wilmington, Ohio for critical parts needed more frequently throughout the United States. In order to service customers whose response time requirements are two to four hours, higher usage parts are maintained at the Company's branch offices or local attended stocking locations. Customer site parts storage is arranged when customer response time requirements are two hours or less. The Company's field inventory system ("FIS") is a real time system which tracks the consumable and repairable parts assigned to its field workforce and located at seven distribution centers, field offices or at customer sites. Parts information processed through FIS is integrated with the Company's other key systems, including DDG and International Support Information System ("ISIS"). Service Technology The Company has developed several proprietary technologies for use in service planning, support and delivery. These service tools include proprietary databases, remote diagnostic and system monitoring software, and instructional documentation. These technical support tools not only provide remote and on site predictive and remedial service support, but also enable the Company to collect extensive, objective systems performance measurement information (on the customer's environment as well as benchmarking against the Company's database) which its customers can use to identify potential efficiencies, evaluate competing products and technologies, and determine whether its requirements are being met. The Company's proprietary service technologies include ISIS, SERVICE EDGE and MAXwatch(R). The Company licenses certain of these technologies and provides other technical support to certain foreign multivendor service providers, including ICL Sorbus in Europe, FBA in Australia and New Zealand, and PT Metrodata Electronics in Indonesia. International Support Information Systems. ISIS is a database accessible to the Company's customer service engineers that is comprised of diagnostic and symptom fix data for thousands of products, service updates, and service planning information, such as machine performance and parts usage information, and remote support capabilities for large IBM systems, including automatic "call home" to the Company. The Company believes that ISIS is the most comprehensive service related database of any independent computer service organization. SERVICE EDGE. SERVICE EDGE is a PC based system installed at the customer's site which monitors error messages and collects and reports service data to help customers predict potential system failures and provide customers with system performance information. MAXwatch(R). MAXwatch(R) is an on-site program for products of Digital Equipment Corporation ("Digital") which monitors system integrity, proactively detects and corrects certain system errors, and automatically "calls home" for remote technical support when pre defined error thresholds are exceeded. A similar product, MAX400, is available for IBM AS/400 systems. DecisionOne, AssetOne(TM), ISIS, Service Edge and MAXwatch(R) are service marks or trademarks owned by the Company. All other brand names, service marks or trademarks appearing herein are the property of their respective owners. Training The Company maintains the technical expertise of its engineers through training programs designed to teach the various techniques for determining the status of a customer's total computer operations. The Company's training offers support professionals a broad exposure to various computer system technologies. The Company's training facilities include 26 classrooms, 23,000 square feet of hands-on lab space, 26 full-time instructors and video specialists and a curriculum of over 80 courses. The Company has five training centers and labs located in Frazer, Pennsylvania; Malvern, Pennsylvania; Bloomington, Minnesota; Milwau- 6 8 kee, Wisconsin; and Phoenix, Arizona. Six months following course work, the Company surveys the engineers to gauge the effectiveness and applicability of its training curriculum. CUSTOMERS The Company services over 51,000 customers at over 182,000 sites across the United States and Canada. The Company sells services primarily to five types of customers: large businesses that have complex computing support needs and typically maintain a data center, distributed computing and work group environments; medium sized businesses that rely primarily on distributed systems for their computing needs; small businesses that principally use LANs and WANs for computing; individuals who use stand alone computing systems; and OEMs and software developers that contract with the Company for warranty services, logistic support services or help desk support. A significant portion of the Company's revenues are attributable to large businesses with complex computing support needs. COMPETITION Competition among computer support service providers, both OEM and independent service organizations, is intense. The Company believes that approximately 80% of that portion of the hardware maintenance services market that is related to mainframes and stand alone midrange systems is currently serviced by OEM service organizations. In addition, the Company believes that OEM service organizations provide a smaller, but still significant, portion of the computer maintenance services related to distributed systems, work groups and PCs. The remainder of the market is serviced by a small number of larger, independent companies, such as the Company, offering a broader range of service capabilities, as well as numerous small companies focusing on narrower areas of expertise. The Company considers its principal competitors to include: IBM and its affiliate Technology Service Solutions, Digital, and Wang Laboratories, Inc., the multivendor service divisions of certain other OEMs, other national independent service organizations that are not affiliated with OEMs such as Vanstar Corporation, Entex Corporation and Stream International, Inc., and various regional service providers. The Company believes that the primary competitive factors in the computer services industry are the quality of a company's services, the ability to service a wide range of products supplied by a variety of vendors, the geographic coverage of a company's services and the cost to the customer of those services. The Company believes that customers are increasingly looking for service providers capable of providing a single source solution for their increasingly complex multivendor systems. See "Risk Factors -- Competition; Competitive Advantages of OEMs." EMPLOYEES As of June 30, 1997, the Company had approximately 6,500 full-time and 60 part-time employees. None of the Company's employees is currently covered by collective bargaining agreements. Management considers employee relations to be good. 7 9 RISK FACTORS Cautionary Statement Concerning Forward-Looking Statements The information herein contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve a number of risks and uncertainties. A number of factors could cause actual results, performance, achievements of the Company, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. These factors include, but are not limited to, the competitive environment in the computer maintenance and technology support services industry in general and in the Company's specific market areas; changes in prevailing interest rates and the availability of and terms of financing to fund the anticipated growth of the Company's business; inflation; changes in costs of goods and services; economic conditions in general and in the Company's specific market areas; demographic changes; changes in or failure to comply with federal, state and/or local government regulations; liability and other claims asserted against the Company; changes in operating strategy or development plans; the ability to attract and retain qualified personnel; the significant indebtedness of the Company; labor disturbances; changes in the Company's acquisition and capital expenditure plans; and other factors referenced herein. In addition, such forward looking statements are necessarily dependent upon assumptions, estimates and dates that may be incorrect or imprecise and involve known and unknown risks uncertainties and other factors. Accordingly, any forward looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. Forward looking statements can be identified by, among other things, the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "pro forma," "anticipates," or "intends" or the negative of any thereof, or other variations thereon or comparable terminology, or by discussions of strategy or intentions. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward looking statements. The Company disclaims any obligations to update any such factors or to publicly announce the results of any revisions to any of the forward looking statements contained herein to reflect future events or developments. LOSS OF CONTRACT-BASED REVENUE; FIXED FEE CONTRACTS Over 85% of the Company's revenues during fiscal 1997 were contract based. As is customary in the computer services industry, the Company experiences reductions in its contract based revenue as customers may eliminate certain equipment or services from coverage under the contracts, typically upon 30 days' notice, or either cancel or elect not to renew their contracts upon 30, 60 or 90 days' notice. The Company believes the principal reasons for the loss of contract based revenue are the replacement of the equipment being serviced with new equipment covered under a manufacturer's warranty, the discontinuance of the use of equipment being serviced for a customer due to obsolescence or a customer's determination to utilize a competitor's services or to move technical support services in house. While the Company historically has been able to offset the reduction of contract based revenue and maintain revenue growth through acquisitions and new contracts, notwithstanding the reduction in contract based revenue, there can be no assurance it will continue to do so in the future, and any failure to consummate acquisitions, enter into new contracts or add additional services and equipment to existing contracts could have a material adverse effect on the Company's profitability. Under many of the Company's contracts, the customer pays a fixed fee for customized bundled services which are priced by the Company based on its best estimates of various factors, including estimated future equipment failure rates, cost of spare parts and labor expenses. While the Company believes it has historically been able to estimate these factors accurately enough to be able to price these fixed fee contracts on terms favorable to the Company, there can be no assurance the Company will be able to continue to do so in the future. SUBSTANTIAL LEVERAGE; STOCKHOLDERS' DEFICIT; LIQUIDITY In connection with the Merger, the Company entered into financings (the "Merger Financing") including a new revolving credit facility (the "New Credit Facility"), the terms of which include significant operating and financial restrictions, such as limits on the Company's ability to incur indebtedness, create liens, 8 10 sell assets, engage in mergers or consolidations, make investments and pay dividends. In addition, the New Credit Facility requires the Company to maintain certain debt to equity and other financial ratios. As of June 30, 1997, after giving pro forma effect to the Merger, including the Merger Financing and the application of the proceeds thereof, the Company would have had (i) total consolidated indebtedness of approximately $724.5 million and (ii) a stockholder's deficit of $243.1 million. In addition, subject to the restrictions in the New Credit Facility and other agreements relating to the Merger Financing, the Company may incur additional indebtedness from time to time. The level of the Company's indebtedness could have important consequences to the Company, including: (i) limiting cash flow available for general corporate purposes, including acquisitions, because a substantial portion of the Company's cash flow from operations must be dedicated to debt service; (ii) limiting the Company's ability to obtain additional debt financing in the future for working capital, repairable parts purchases, capital expenditures or acquisitions; (iii) limiting the Company's flexibility in reacting to competitive and other changes in the industry and economic conditions generally; and (iv) exposing the Company to risks inherent in interest rate fluctuations because certain of the Company's borrowings are at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates. The Company's ability to make scheduled payments of principal of, to pay interest on or to refinance its indebtedness and to satisfy its other debt obligations will depend upon its future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond its control. The Company anticipates that its operating cash flow, together with borrowings under the New Credit Facility, will be sufficient to meet its anticipated future operating expenses and capital expenditures and to service its debt requirements as they become due. However, if the Company's future operating cash flows are less than currently anticipated it may be forced, in order to meet its debt service obligations, to reduce or delay acquisitions, purchases of repairable parts or capital expenditures, sell assets or reduce operating expenses, including, but not limited to, investment spending such as selling and marketing expenses, expenditures on management information on systems and expenditures on new products. If the Company were unable to meet its debt service obligations, it could attempt to restructure or refinance its indebtedness or to seek additional equity capital. There can be no assurance that the Company will be able to effect any of the foregoing on satisfactory terms, if at all. In addition, subject to the restrictions and limitations contained in the agreements relating to the Merger Financing, the Company may incur significant additional indebtedness to finance future acquisitions, which could adversely affect the Company's operating cash flows and its ability to service its indebtedness. See "Management's Discussion and Analysis of Financial Condition and Results of Operations: Liquidity and Capital Resources." MANAGEMENT AND FUNDING OF GROWTH Any future growth of the Company will require the Company to manage its expanding domestic operations and international affiliations and to adapt its operational and financial systems to respond to changes in its business environment, while maintaining a competitive cost structure. The acquisition strategy of the Company and the expansion of the Company's service offerings have placed and will continue to place significant demands on the Company and its management to improve the Company's operational, financial and management information systems, to develop further the management skills of the Company's managers and supervisors, and to continue to retain, train, motivate and effectively manage the Company's employees. For example, the Company's acquisition and integration of BABSS resulted in the loss of certain members of its finance and accounting organization which resulted in a difficulty in the timely performance of certain internal reconciliations and account analyses. In response to these difficulties, the Company has taken various personnel and procedural actions including, among other things, increasing the size of, and restructuring its accounting staff, instituting an internal audit function and enhancing its accounting systems, policies and procedures. The failure of the Company to manage its prior or any future growth effectively could have a material adverse effect on the Company. 9 11 Additionally, the Company's ability to maintain and increase its revenue base and to respond to shifts in customer demand and changes in industry trends will be partially dependent on its ability to generate sufficient cash flow or obtain sufficient capital for the purpose of, among other things, financing acquisitions, satisfying customer contractual requirements and financing infrastructure growth, including a significant investment in repairable parts, which are classified as non current assets. There can be no assurance the Company will be able to generate sufficient cash flow or that financing will be available on acceptable terms (or permitted to be incurred under the terms of the Merger Financing and any future indebtedness) to fund the Company's future growth. ACQUISITION GROWTH STRATEGY The Company has historically pursued an aggressive acquisition strategy, acquiring certain contracts and assets in 36 transactions from the beginning of fiscal 1993 through June 30, 1997. Future acquisitions and/or internal revenue growth will be necessary to offset expected declines in contract based revenues. As a result, the Company expects to continue to evaluate acquisitions that can provide meaningful benefits by expanding the Company's existing and future hardware maintenance and technology support capabilities and leveraging its existing and future infrastructure. However, there are various risks associated with pursuing an acquisition strategy of this nature. The risks include problems inherent in integrating new businesses, including potential loss of customers and key personnel and potential disruption of operations. There can be no assurance that contracts acquired by the Company will generate significant revenues or that customers covered by such acquired contracts will not choose to terminate such contracts. The rate at which any such contracts are terminated may be higher than the rates at which the Company's contracts have historically been terminated. There also can be no assurance that suitable acquisition candidates will be available, that acquisitions can be completed on reasonable terms, that the Company will successfully integrate the operations of any acquired entities or that the Company will have access to adequate funds to effect any desired acquisitions. Future acquisitions may be limited by restrictions in the Company's indebtedness. COMPETITION; COMPETITIVE ADVANTAGES OF OEMS Competition among computer support service providers, both original equipment manufacturer and independent service organizations, is intense. The Company believes approximately 80% of that portion of industry hardware maintenance services related to mainframes and stand alone midrange systems is currently serviced by OEM service organizations. In addition, the Company believes that OEM service organizations provide a smaller, but still significant, portion of the computer maintenance services related to distributed systems, work groups and PCs. The remainder of the market is serviced by a small number of larger, independent companies, such as the Company, offering a broader range of service capabilities, as well as numerous small companies focusing on narrower areas of expertise or serving limited geographic areas. In many instances, OEM service organizations have greater resources than the Company, and, because of their access to the OEM's engineering data, may be able to respond more quickly to servicing equipment that incorporates new or emerging technologies. Moreover, some OEMs, especially in the mainframe environment, do not make available to end-users or independent service organizations the technical information, repairable parts, diagnostics, engineering changes and other support items required to service their products, and design and sell their products in a manner so as to make it virtually impossible for a third party to perform maintenance services without potentially infringing upon certain proprietary rights of the OEM. In addition OEMs are sometimes able to develop proprietary remote diagnostic or monitoring systems which the Company may not be able to offer. Therefore, OEM service organizations sometimes have a cost and timing advantage over the Company because the Company must first develop or acquire from another party the required support items before the Company can provide services for that equipment. An OEM's cost advantage, the unavailability of required support items or various proprietary rights of the OEM may preclude the Company from servicing certain products. Furthermore, OEMs usually provide warranty coverage for new equipment for specified periods, during which it is not economically feasible for the Company to compete for the provision of maintenance services. To the extent OEMs choose, for marketing reasons or otherwise, to expand their warranty periods or terms, the Company's business may be adversely affected. 10 12 In June 1994, International Business Machines Corporation ("IBM") filed in the United States District Court for the Southern District of New York (the "Court") a motion to terminate a 1956 consent decree (the "IBM Consent Decree") that, among other things, requires IBM to provide repairable parts, documentation and other support items for IBM electronic data processing systems to third parties on reasonable terms and places other restrictions on IBM's conduct. On January 18, 1996, the Court entered an order approving a modification of the IBM Consent Decree that, among other things, terminated the IBM Consent Decree except insofar as it applies to the System 360/370/390 (mainframes) and AS/400 (midrange) families of IBM products. In July 1996, IBM and the U.S. Department of Justice ("DOJ") reached an agreement in tentative settlement of the remainder of IBM's motion and jointly moved to terminate on a phased basis, the remaining provisions of the IBM Consent Decree (the "Joint Motion"). On May 1, 1997 the Court granted the Joint Motion. Portions of the order granting the Joint Motion have been appealed. Consequently, certain of the remaining provisions of the IBM Consent Decree (primarily relating to sales and marketing restrictions on IBM) terminate either immediately upon, or within six months of, entry of the Court order; all of the other remaining provisions (including those requiring IBM to provide parts and other support items to third parties) terminate on July 2, 2000 with respect to AS/400 systems and on July 2, 2001 with respect to System 360/370/390 mainframes. The impact, if any, upon the Company of the termination of such sales and marketing restrictions is impossible to predict because it depends upon what changes, if any, IBM will make in its sales and marketing policies and practices. As a result of the termination of the IBM Consent Decree, the Company's ability to service midrange and mainframe products may be adversely affected. Furthermore, as the Company's business is highly dependent upon its ability to service a wide variety of equipment in a multivendor environment, the inability to compete effectively for the service of IBM mainframes and midrange products could cause the loss of a substantial portion of the Company's customer base to IBM or an IBM affiliate, which would have a material adverse effect on the Company's business. CONSUMABLE AND REPAIRABLE PARTS MANAGEMENT In order to service its customers, the Company is required to maintain a high level of consumable and repairable parts for extended periods of time. Any decrease in the demand for the Company's maintenance services could result in a substantial portion of the Company's consumable and repairable parts becoming excess, obsolete or otherwise unusable. In addition, rapid changes in technology could render significant portions of the Company's consumable and repairable parts obsolete, thereby giving rise to write-offs and a reduction in profitability. The inability of the Company to manage its consumable and repairable parts or the need to write them off in the future could have a material adverse effect on the Company's business, financial results and results of operations. Consumable and repairable parts purchases are made from OEMs and other vendors. The Company typically has more than a single source of supply for each part and component, but from time to time it will have only a single supplier for a particular part. In some cases, the Company's OEM customer may be the only source of supply for a repair part or component. Should a supplier be unwilling or unable to supply any part or component in a timely manner, the Company's business could be adversely affected. In addition, the Company is dependent upon IBM for obtaining certain parts that are critical to the maintenance of certain IBM mainframe and midrange systems that IBM is currently required to make available to third parties pursuant to the IBM Consent Decree. There can no assurance that IBM will continue to make parts available for AS/400 Systems after July 2, 2000 and for System 360/370/390 mainframes after July 2, 2001. Even if such parts or components are available, a shortage of supply could result in an increase in procurement costs which, if not passed on to the customer, may adversely affect the Company's profitability. COPYRIGHT ISSUES In connection with the Company's performance of most hardware maintenance, the computer system which is being serviced must be turned on for the purpose of service or repair. When the computer is turned on, the resident operating system software and, in some cases diagnostic software, is transferred from a peripheral storage device or a hard disk drive into the computer's random access memory. Within the past several years, several OEMs have been involved in litigation with independent service organizations, including 11 13 the Company, in which they have claimed such transfer constitutes the making of an unauthorized "copy" of such software by the independent service organization which infringes on the software copyrights held by the OEMs. The Company is aware of three cases in this area which have been decided in favor of the OEM. Although the Company was not a party in any of these cases, three similar claims have been asserted against the Company, each of which has been resolved. Litigation of this nature can be time consuming and expensive, and there can be no assurance the Company will not be a party to similar litigation in the future, or that such litigation would be resolved on terms that do not have a material adverse effect on the Company. DEPENDENCE ON COMPUTER INDUSTRY TRENDS; RISK OF TECHNOLOGICAL CHANGE The Company's future success is dependent upon the continuation of a number of trends in the computer industry, including the migration by information technology end-users to multivendor and multisystem computing environments, the overall increase in the sophistication and interdependency of computing technology, and a focus by information technology managers on cost efficient management. The Company believes these trends have resulted in a movement by both end-users and OEMs towards outsourcing and an increased demand for support service providers that have the ability to provide a broad range of multivendor support services. There can be no assurance these trends will continue into the future. Additionally, rapid technological change and compressed product life cycles are prevalent in the computer industry, which may lead to the development of improved or lower cost technologies, higher quality hardware with significantly reduced failure rates and maintenance needs, or customer decisions to replace rather than continue to maintain aging hardware, and which could result in a reduced need for the Company's services in the future. Moreover, such rapid technological changes could adversely affect the Company's ability to predict equipment failure rates, and, therefore, to establish prices that provide adequate profitability. Similarly, new computer systems could be built based upon proprietary, as opposed to open, systems that could not be serviced by the Company. DEPENDENCE ON KEY PERSONNEL The Company's continued success depends, to a large extent, upon the efforts and abilities of key managerial employees, particularly the Company's executive officers. There are not currently any employment contracts which would ensure the continued employment of any executive officer. Competition for qualified management personnel in the industry is intense. The loss of the services of certain of these key employees or the failure to retain qualified employees when needed could have a material adverse effect on the Company's business. The Company does not currently maintain key man insurance. CONTROL BY DLJ Approximately 87.4% of the outstanding shares of the Company's common stock are currently held by the DLJ Group. As a result of its stock ownership and the Investors' Agreement (which includes members of management to the extent their shares are acquired through the Company's Direct Investment Program), the DLJ Funds control the Company and have the power to elect a majority of the Company's directors, appoint new management and approve any action requiring the approval of the holders of the Company's common stock, including adoption of certain amendments to the Company's certificate of incorporation and approving mergers or sales of all or substantially all of the Company's assets. The directors elected by the DLJ Funds have the authority to effect decisions affecting the capital structure of the Company, including the issuance of additional capital stock, the implementation of stock repurchase programs and the declaration of dividends. DILUTION The Company has granted approximately 1,179,000 options to purchase shares of Company Common Stock to members of the Company's management, and may grant additional options in the future. The aggregate number of shares of Company Common Stock reserved for issuance pursuant to the Company's Management Incentive Plan is 1,698,280, which includes approximately 251,000 shares to accommodate options rolled over from the Company's previous stock option plan. The exercise price of any options granted 12 14 pursuant to the Management Incentive Plan may be less than the fair market value of the shares of Company Common Stock. Any such grant or exercise of any stock option, will dilute the equity ownership percentage of Company stockholders and the DLJMB Funds (and the Institutional Investors) and may result in a decrease of the book value of the Company Common Stock per share. In addition, pursuant to the Company's Direct Investment Program, certain members of management purchased approximately 97,520 shares of Company Common Stock at the time of the Merger. The aggregate number of shares reserved for issuance pursuant to the Direct Investment Plan is 238,095. These purchases, and any future purchases under the plan, would also dilute the equity ownership percentage of the DLJMB Funds (and the Institutional Investors) and the Company stockholders. POTENTIAL DELISTING AND LOSS OF LIQUIDITY As a result of the Merger, the Company's common stock no longer meets certain maintenance requirements of The NASDAQ National Market System ("NASDAQ"). While NASDAQ has granted the Company a dispensation from such maintenance requirements, there can be no assurance that in the future NASDAQ will not unilaterally act to delist the Company's common stock. Following the Merger, there has been a limited market for the Company's common stock because of the significant ownership of the DLJ Group. In the event that a delisting occurs stockholders may experience difficulty selling shares or obtaining prices that reflect the value thereof. ITEM 2. PROPERTIES Item 2 is presented with respect to both registrants submitting this filing, DecisionOne Holdings Corp. and DecisionOne Corporation. FACILITIES The Company leases certain office and warehouse facilities under operating leases and subleases that expire at various dates through November 30, 2005. The Company's executive offices are located at the Frazer, Pennsylvania facilities listed below. The principal facilities currently leased or subleased by the Company are as follows:
SQUARE LEASE FOOTAGE EXPIRATION ------- -------------- Frazer, Pennsylvania (Office)............................ 109,800 November 2005 Frazer, Pennsylvania (Office)............................ 35,968 April 2003 Malvern, Pennsylvania (Depot/Call Center)................ 200,000 May 2000 Horsham, Pennsylvania (Warehouse)........................ 100,000 December 1999 Bloomington, Minnesota (Call Center)..................... 66,000 March 1998 Hayward, California (Depot).............................. 91,000 September 1999 Northborough, Massachusetts (Depot)...................... 52,778 July 1998 Wilmington, Ohio (Warehouse)............................. 83,000 January 2001 Grove City, Ohio (Depot)................................. 118,500 January 2002
In addition, the Company owns two facilities located in Tulsa, Oklahoma (multipurpose) and the suburbs of Milwaukee, Wisconsin (logistics services). The Company's management believes that its current facilities will be adequate to meet its projected growth for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS Item 3 is presented with respect to both registrants submitting this filing, DecisionOne Holdings Corp. and DecisionOne Corporation. The Company is a party, from time to time, to lawsuits arising in the ordinary course of business. The Company believes it is not currently a party to any material legal proceedings. However, within the past several years, several OEMs have been involved in litigation with independent service organizations, including 13 15 the Company, in which such OEMs have claimed infringement of software copyrights held by the OEMs. The Company currently is not involved in any such litigation. See "Risk Factors -- Copyright Issues." The Company, or certain businesses as to which it is alleged that the Company is a successor, have been identified as potentially responsible parties in respect of four waste disposal sites that have been identified by the United States Environmental Protection Agency as Superfund Sites: (i) PAS Irwin Dump Site, Oswego, New York (and six satellite sites, including the Fulton Terminals Site, Fulton, New York); (ii) North Penn Area 6 Site, Lansdale, Pennsylvania; (iii) Revere Chemical Site, Nockamixon, Pennsylvania; and (iv) Malvern TCE site, Malvern, Pennsylvania. In addition, the Company received a notice several years ago that it may be a potentially responsible party with respect to the Boarhead Farms Site, Bridgeton, Pennsylvania, at a site related to the Revere Chemical site, but has not received any additional communication with respect to that site. Under applicable law, all parties responsible for disposal of hazardous substances at those sites are jointly and severally liable for clean up costs. The Company has estimated that its share of the costs of the clean up of one of the sites will be approximately $500,000, which has been provided for in liabilities related to the discontinued products division in the accompanying consolidated balance sheets as of June 30, 1997, 1996 and 1995. Complete information as to the scope of required clean up at these sites is not yet available and, therefore, management's evaluation may be affected as further information becomes available. However, in light of information currently available to management, including information regarding assessments of the sites to date and the nature of involvement of the Company's predecessor at the sites, it is management's opinion that the Company's potential additional liability, if any, for the cost of clean up of these sites will not be material to the consolidated financial position, results of operations or liquidity of the Company. See Note 16 to the Company's Consolidated Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1997. 14 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE OF THE COMMON STOCK The Common Stock of DecisionOne Holdings Corp. is quoted on the NASDAQ National Market System under the symbol "DOCI". As of September 15, 1997, there were 472 stockholders of record. The following table shows, for the periods indicated, the high and low sale prices of a share of the Company Common Stock as reported by Bloomberg Financial Markets.
HIGH LOW ---- --- 1996 Second Quarter*....................................................... 29 3/4 19 1/2 Third Quarter......................................................... 26 1/2 12 1/2 Fourth Quarter........................................................ 29 3/4 19 1/2 1997 First Quarter......................................................... 26 1/2 12 1/2 Second Quarter........................................................ 16 3/4 13 1/4 Third Quarter**....................................................... 30 22 3/8
- --------------- * The Common Stock has been quoted and traded on the NASDAQ National Market System since April 4, 1996. ** Through September 11, 1997. Since its initial public offering in 1996, the Company has not paid any cash dividends on its Common Stock and it does not have any present intention to commence payment of any cash dividends. The Company intends to retain earnings to provide funds for the operation and expansion of the Company's business and to repay outstanding indebtedness. The Company's debt agreements and other agreements to which it is a party contain certain covenants restricting the payment of dividends on, or repurchases of, Company Common Stock. ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data sets forth, for the periods and the dates indicated, selected consolidated financial data of the Company, derived from the historical consolidated financial statements of the Company. The consolidated financial data of the Company for the years ended June 30, 1997, 1996 and 1995 and as of June 30, 1997 and 1996 are derived from the Company's audited consolidated financial statements included elsewhere herein. The information set forth below is qualified by reference to and should be read in conjunction with the Company's and DecisionOne Corporation and Subsidiaries' Consolidated Financial Statements and Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations". The following selected financial data (except for per share data, presented only for DecisionOne Holdings Corp.) is presented for both registrants submitting this filing, DecisionOne Holdings Corp. and DecisionOne Corporation. 15 17
YEARS ENDED JUNE 30, ------------------------------------------------------------ THE COMPANY 1997 1996 1995 1994 1993 - ------------------------------------ -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PRO FORMA LOSS PER COMMON SHARE) STATEMENT OF OPERATIONS DATA:(1) Revenues............................ $785,950 $540,191 $163,020 $108,416.. $114,060 Income (loss) before discounted operations and extraordinary item.............................. 31,084 20,789 41,415 10,112 (5,234) Net income (loss)(2)................ 31,084 18,862 42,528 10,112 (10,590) Pro forma net loss (unaudited)(3)... (183) Pro forma loss per common share (unaudited)(3).................... (0.01) BALANCE SHEET DATA:(1) Consumable parts.................... $ 34,518 $ 29,770 $ 3,455 $ 3,584 $ 5,528 Repairable parts.................... 199,900 154,970 27,360 9,473... 13,545 Total assets........................ 623,105 514,510 135,553 35,469 44,721 Long-term debt, less current portion........................... 232,721 188,582 6,157 2,366 44,769 Redeemable preferred stock.......... -- -- 6,811 6,436 -- Total shareholders' equity (deficiency)...................... 214,888 180,793 14,677 (27,627) (58,146)
- --------------- (1) The Selected Financial Data presented includes the results of operations and balance sheet data of the Company, including the following acquisitions: Servcom from September 1, 1994, BABSS from October 20, 1995 and certain assets of the U.S. computer service business of Memorex Telex from November 15, 1996. (2) The years ended June 30, 1993 and 1994 include income taxes based on an effective tax rate substantially less than the 40% effective tax rate for the year ended June 30, 1996 and the 41% effective tax rate for the year ended June 30, 1997. The year ended June 30, 1995 includes a $23.1 million net benefit arising from the recognition of future tax benefits of tax loss carryforwards and temporary timing differences. See Note 9 to the Company's Consolidated Financial Statements. (3) Pro forma net loss and loss per common share information for the fiscal year ended June 30, 1997 is presented to reflect the Merger and related transactions as if these had occurred on July 1, 1996. Historical per share data is not presented as this would not be meaningful. See Note 3 to the Company's Consolidated Financial Statements for additional information. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with the Company's Consolidated Financial Statements, DecisionOne Corporation and Subsidiaries' Consolidated Financial Statements and the respective Notes thereto, as included in Item 8 herein. Item 7 is presented with respect to both registrants submitting this filing, DecisionOne Holdings Corp. and DecisionOne Corporation. (As used in this Item 7, the term "Company" refers to DecisionOne Holdings Corp. and its wholly-owned subsidiaries, including DecisionOne Corporation and the term "Holdings" refers to DecisionOne Holdings Corp.) This discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors" in Item 1. COMPANY HISTORY Founded in 1969, the Company began operations as a provider of key punch machines under the tradename "Decision Data." During the 1980s, its operations expanded to include the sale of midrange computer hardware and related maintenance services. During fiscal 1993, the Company decided to focus on providing computer maintenance and support services and sold its computer hardware products business. 16 18 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 36 complementary businesses. Significant acquisitions included IDEA Servcom, Inc. ("Servcom"), certain assets and liabilities of which were acquired in August 1994 for cash consideration of approximately $29.5 million and BABSS, which was acquired in October 1995 for cash consideration of approximately $250.0 million. In addition, certain assets of the U.S. computer service business of Memorex Telex were acquired in November 1996 for cash consideration of approximately $24.4 million after certain purchase price adjustments. These acquisitions were accounted for as purchase transactions. 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 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. 17 19 MERGER AND RECAPITALIZATION On August 7, 1997, the Company consummated the Merger with Quaker Holding Co. ("Quaker"), an affiliate of DLJ Merchant Banking Partners II. 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"). The respective Consolidated Financial Statements of DecisionOne Holdings Corp. and DecisionOne Corporation and their respective subsidiaries as of and for the year ended June 30, 1997, included herein, do not 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 the holders of approximately 94.7% of shares of DecisionOne Holdings Corp. 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 DecisionOne Holdings Corp. common stock outstanding immediately prior to the Merger retained such shares in the merged Company, as determined based upon shareholder elections and stock proration factors specified in the Merger Agreement. The aggregate value of the Merger was approximately $940 million, including refinancing of DecisionOne Corporation's revolving credit facility (See Note 3 to the Company's Consolidated Financial Statements). As a result of the Merger, the Company incurred various expenses, aggregating approximately $71 million on a pretax basis (approximately $64 million after related tax benefit), subject to adjustment, in connection with consummating the transaction. These costs consisted primarily of compensation costs, underwriting discounts and commissions, professional and advisory fees and other expenses. The Company will report this one-time charge during the first quarter of fiscal 1998. In addition to these expenses, the Company also incurred approximately $22.3 million of capitalized debt issuance costs associated with the Merger Financing. These costs will be charged to expense over the terms of the related debt instruments (see "Liquidity and Capital Resources"). As a result of the foregoing, the Company expects to record a significant net loss in the first quarter of fiscal 1998. Because this loss will result directly from the one-time charge incurred in connection with the merger, and this charge will be funded entirely through the proceeds of the Merger Financing, the Company does not expect this loss to materially impact its liquidity, ongoing operations or market position. For a discussion of the consequences of the incurrence of indebtedness in connection with the Merger Financing, see "Liquidity and Capital Resources." RESULTS OF OPERATIONS The following discussion of results of operations is presented for the fiscal years ended June 30, 1997, 1996 and 1995. The results of operations of the Company include the operations of Memorex Telex from November 15, 1996, BABSS from October 20, 1995 and Servcom from September 1, 1994. 18 20 The following table sets forth, for the periods indicated, certain operating data expressed in dollar amounts and as a percentage of revenues:
FISCAL YEAR ENDED JUNE 30, ------------------------------------ 1997 1996 1995 --------- --------- -------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues................................................. $ 785,950 $ 540,191 $163,020 Cost of Revenues......................................... 581,860 402,316 113,483 -------- -------- -------- Gross Profit............................................. 204,090 137,875 49,537 Selling, general and administrative expenses............. 108,570 69,137 21,982 Employee severance and unutilized lease costs............ 4,300 3,692 -- Amortization of intangibles.............................. 23,470 15,673 6,776 -------- -------- -------- Total operating expenses................................. 136,340 88,502 28,758 Operating income....................................... 67,750 49,373 20,779 Interest expense, net of interest income................. 14,698 14,714 2,468 Provision (benefit) for income taxes..................... 21,968 13,870 (23,104) Gain from discontinued operations........................ -- -- 1,113 Extraordinary item -- loss on early extinguishment of debt................................................... -- (1,927) -- -------- -------- -------- Net income..................................... $ 31,084 $ 18,862 $ 42,528 ======== ======== ======== OTHER DATA: EBITDA(1)................................................ $ 172,939 $ 114,816 $ 37,021 Less: Amortization of repairable parts................. (63,870) (37,869) (7,688) -------- -------- -------- Adjusted EBITDA(1)....................................... 109,069 76,947 29,333 ======== ======== ======== Net cash provided by operating activities................ 88,974 51,894 38,415 Net cash (used in) investing activities.................. (129,244) (346,354) (54,271) Net cash provided by financing activities................ 42,926 300,022 17,537
- --------------- (1) Adjusted 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 employee severance charges and provisions for unutilized leases. ("EBITDA" represents Adjusted EBITDA, increased by the amortization of repairable parts). Adjusted EBITDA is presented because it is relevant to certain covenants contained in debt agreements entered by the Company in connection with the merger, and because the Company believes that Adjusted EBITDA is a more-consistent indicator of the Company's ability to meet its debt service, capital expenditure and working capital requirements than EBITDA. 19 21
FISCAL YEAR ENDED JUNE 30, ------------------------- 1997 1996 1995 ----- ----- ----- STATEMENT OF OPERATIONS DATA: Revenues............................................................ 100.0% 100.0% 100.0% Cost of Revenues.................................................... 74.0% 74.5% 69.6% ----- ----- ----- Gross Profit........................................................ 26.0% 25.5% 30.4% Selling, general & administrative expenses.......................... 13.8% 12.8% 13.5% Employee severance and unutilized lease costs....................... 0.5% 0.7% -- Amortization of intangibles......................................... 3.0% 2.9% 4.2% ----- ----- ----- Total operating expenses............................................ 17.3% 16.4% 17.7% Operating income.................................................. 8.7% 9.1% 12.7% Interest expense, net of interest income............................ 1.9% 2.7% 1.5% Provision (benefit) for income taxes................................ 2.8% 2.6% (14.2)% Gain from discontinued operations................................... -- -- (0.7)% Extraordinary item -- loss on early extinguishment of debt.......... -- (0.3)% -- ----- ----- ----- Net income................................................ 4.0% 3.5% 26.1% ===== ===== =====
Overview The Company reported income from continuing operations before income taxes of $53.1 million, $34.7 million, and $18.3 million in fiscal 1997, 1996 and 1995 respectively. Excluding pre-tax charges for employee severance and unutilized lease costs in fiscal 1997 and 1996, income from continuing operations before income taxes was $57.4 million and $38.4 million. Adjusted EBITDA was $109.1 million, $76.9 million, and $29.3 million in fiscal 1997, 1996 and 1995 respectively. Growth in Adjusted EBITDA and in income from continuing operations before taxes in fiscal 1997 are primarily a result of certain strategic initiatives, including the acquisition of complementary contracts and assets, enhancement of the efficiency of the Company's field technician service force and renegotiation of certain vendor contracts on more-favorable terms and related increases in operating leverage. Fiscal 1997 Compared to Fiscal 1996 Revenues: Revenues increased by $245.8 million, or 45.5%, to $786.0 million for the fiscal year ended June 30, 1997 from $540.2 million for the fiscal year ended June 30, 1996. This increase is attributable primarily to the full period effect of the BABSS acquisition, which occurred on October 20, 1995. To a lesser degree, this increase is attributable to the acquisition of the service contracts of several complementary businesses, principally Memorex Telex on November 15, 1996. Revenues for the quarter ended June 30, 1997 reflected strong growth in per-incident and other non-contract revenues, compared to the previous quarter. This revenue is subject to fluctuation depending upon customer demand for the types and levels of such services. The Company currently expects a decline in such revenues in the first quarter of fiscal 1998 compared to the fourth quarter of fiscal 1997. Gross Profit: Gross profit increased by $66.2 million, or 48.0%, from $137.9 million for the fiscal year ended June 30, 1996 to $204.1 million for the fiscal year ended June 30, 1997. This increase is due primarily to the acquisition of BABSS in October, 1995, and to a lesser degree, the acquisition of Memorex Telex in November, 1996. As a percentage of revenues, gross profit increased from 25.5% for the fiscal year ended June 30, 1996 to 26.0% for the fiscal year ended June 30, 1997. This improvement in gross profit margin is primarily attributable to (i) increased revenues, both from acquisitions during the fiscal year ended June 30, 1997 and internal sales growth without a proportionate increase in personnel and other operating expenses, (ii) head count reductions in the Company's field technician force effected in November 1996 and (iii) more efficient 20 22 utilization of the Company's field service personnel and resources to service the increased revenues referred to above. Selling, General and Administrative Expenses: Selling, general and administrative expenses, exclusive of employee severance and unutilized lease costs, increased by $39.4 million, or 56.9%, to $108.6 million for the fiscal year ended June 30, 1997 from $69.2 million for the fiscal year ended June 30, 1996. This increase is primarily attributable to the full period effect in fiscal 1997 of the BABSS acquisition, and to a lesser degree, to the acquisition of Memorex Telex in fiscal 1996. As a percentage of revenues, exclusive of employee severance and unutilized lease costs, selling, general and administrative expenses increased to 13.8% for the fiscal year ended June 30, 1997 from 12.8% for the fiscal year ended June 30, 1996. Employee severance and unutilized lease costs: During the fiscal year ended June 30, 1997, the Company recorded $4.3 million in employee severance and unutilized lease/contract costs, in connection with specific acquisitions. These costs are included in Selling, general and administrative expenses in the Company's Consolidated Statement of Operations. During fiscal 1996, the Company recorded $3.6 million in employee severance and unutilized lease costs. These costs were related principally to future rent obligations and related costs for facilities of the Company that the Company determined were no longer required as a result of the acquisition of BABSS. (See Note 15 to the Company's Consolidated Financial Statements for additional information). Amortization of Intangibles: Amortization of intangible assets increased by $7.8 million, or 49.7%, from $15.7 million for the fiscal year ended June 30, 1996 to $23.5 million for the fiscal year ended June 30, 1997. This increase was attributable principally to the amortization of intangibles resulting from the BABSS and Memorex Telex acquisitions. Interest Expense: Interest expense, net of interest income, equaled approximately $14.7 million for each of the fiscal years ended June 30, 1997 and 1996. This was the result of two offsetting factors, as the Company's reduced average borrowing rate on long-term indebtedness, (approximately 6.4% for the fiscal year ended June 30, 1997 as compared to 9.0% for the fiscal year ended June 30, 1996) substantially offset the increase in average borrowings during the fiscal year ended June 30, 1997. The reduced average borrowing rate resulted from the refinancing of the Company's revolving credit facility in April, 1996. The increased average borrowings during fiscal 1997 were attributable primarily to the funding requirements of several acquisitions, principally Memorex Telex. Income Taxes: The Company's income tax provision for the fiscal year ended June 30, 1997 reflects an estimated effective income tax rate of approximately 41%, while the effective income tax rate for the fiscal year ended June 30, 1996 was approximately 40%. This increase in the Company's anticipated effective income tax rate was due primarily to the prior-year impact of certain non-recurring foreign income tax benefits relating to net operating loss carryforwards. Fiscal 1996 Compared to Fiscal 1995 Revenues: Revenues increased by $377.2 million, or 231.4%, from $163.0 million for the fiscal year ended June 30, 1995 to $540.2 million for the fiscal year ended June 30, 1996. The increase is largely a result of acquisitions, principally the BABSS acquisition in October 1995 which accounted for approximately $350 million of the increase. Gross profit: Gross profit increased by $88.4 million, or 178.6%, from $49.5 million during the fiscal year ended June 30, 1995 to $137.9 million for the fiscal year ended June 30, 1996. As a percentage of revenues, gross profit decreased from 30.4% to 25.5%, reflecting the change in mix of services resulting from the acquisition of BABSS. As a result of that acquisition, a smaller portion of revenues was derived from proprietary systems which typically generate higher profit margins than services for nonproprietary systems. Selling, general and administrative expenses: Selling, general and administrative expenses, exclusive of employee severance and unutilized lease costs, increased by $47.2 million, from $22.0 million for the fiscal year ended June 30, 1995 to $69.2 million for the fiscal year ended June 30, 1996, principally as a result of the 21 23 additional expenses relating to the revenue growth discussed above. As a percentage of revenues, selling, general and administrative decreased from 13.5% to 12.8%, respectively, reflecting economies of scale. Employee severance and unutilized lease costs: During fiscal 1996, the Company recorded $3.6 million in employee severance and unutilized lease costs. These costs were related principally to future rent obligations and related costs for facilities of the Company that the Company determined were no longer required as a result of the acquisition of BABSS. These costs are included in Selling, general and administrative expenses in the Company's Consolidated Statement of Operations. (See Note 15 to the Company's Consolidated Financial Statements for additional information). Amortization and write-off of intangibles: Amortization of intangibles increased by $8.9 million, from $6.8 million for the fiscal year ended June 30, 1995 to $15.7 million for the fiscal year ended June 30, 1996, principally due to the amortization of intangibles arising from the BABSS acquisition. Interest expense: Interest expense increased by $12.2 million, from $2.5 million for the fiscal year ended June 30, 1995 to $14.7 million for the fiscal year ended June 30, 1996, principally as a result of the indebtedness incurred to finance the acquisition of BABSS. See Note 8 to the Company's Consolidated Financial Statements. Provision for income taxes: The income tax provision for the fiscal year ended June 30, 1996 was based on an effective tax rate of approximately 40%. For the fiscal year ended June 30, 1995, the Company reported an income tax benefit equivalent of approximately 126%, arising primarily from the recognition of future tax benefits of tax loss carry-forwards and temporary timing differences. See Note 9 to the Company's Consolidated Financial Statements. Extraordinary item -- early extinguishment of debt: Upon consummation of its initial public offering in April 1996, the Company was required to pay the total outstanding principal amount of its $30 million of 10.101% subordinated debentures due October 20, 2001. This prepayment resulted in the write-off of unamortized original issue discount of approximately $1.9 million, net of income tax effect of $1.3 million, related to warrants issued with the debentures. Discontinued operations: During fiscal 1995, the Company revised its estimates of certain accruals created as a result of the disposal of its computer products division during fiscal 1993. The reversal of certain accruals resulted in $1.1 million in additional net income in fiscal 1995. 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 with Quaker 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 tax loss carryforwards and other credits in any post-merger period will be reduced to approximately $9.0 million per annum. The Company anticipates that fees and expenses incurred in connection with the merger will result in additional tax loss carryforwards arising in fiscal 1998. For financial reporting purposes, the anticipated tax benefit associated with these carryforwards will be limited due primarily to the length of the period during which the anticipated tax benefit is expected to be realized. See Note 9 to the Company's Consolidated Financial Statements. 22 24 LIQUIDITY AND CAPITAL RESOURCES Post-Merger The Company's principal sources of liquidity will be 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 will be debt service requirements, capital expenditures, purchases of repairable parts and acquisitions, and working capital. The Company expects that ongoing requirements for debt service, capital expenditures, repairable parts and working capital will be funded from operating cash flow and borrowing under the new 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 on August 7, 1997. On a pro forma basis, after giving effect to the Merger, including the Merger financing and the application of the proceeds thereof, the Company would have had approximately $724.5 million of indebtedness outstanding as of June 30, 1997 as compared to actual $237.5 million of indebtedness outstanding as of June 30, 1997. In addition, on the same pro forma basis, the Company would have a stockholders' deficit of $243.1 million at June 30, 1997 as compared to actual stockholders' equity of $214.9 million as of June 30, 1997. The Company's significant debt service obligations following the Merger could, under certain circumstances, have material consequences to security holders of the Company. See "Risk Factors", included herein under Item 1. In connection with the Merger, Holdings issued $85 million of 11 1/2% Notes due 2008 (the "11 1/2% Notes"). DecisionOne Corporation issued $150 million of 9 3/4% 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), 9 3/4% Notes, the initial borrowings under the new credit facility and the purchase of approximately $225 million of Holdings common stock by the DLJ Group 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 and DecisionOne Corporation's Consolidated Financial Statements 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 consumable and repairable parts 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. These planned expenditures are expected to negatively impact income during fiscal year 1998. 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 and capital expenditures and to service its debt requirements as they become due. However, the Company's ability to make scheduled payments of principal of, to pay interest on or to refinance its indebtedness and to satisfy its other debt obligations will depend upon its future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond its control. See "Risk Factors", included herein under Item 1. 23 25 Historical Financing: Until its initial public offering in April 1996, the Company's principal sources of capital had been borrowings from banks (primarily to finance acquisitions), private placements of equity and debt securities with principal stockholders and cash flow generated by operations. In April 1996, the Company (i) completed an initial public offering, which raised approximately $106 million and (ii) refinanced its bank debt, each of which is more fully discussed below. The Company has relied on banks as the primary source of funds required for larger acquisitions, such as the August 1994 acquisition of certain assets and liabilities of Servcom and the October 1995 acquisition of BABSS. Since July 1993, the Company's smaller acquisitions have been funded primarily through a combination of seller financing, cash and the assumption of liabilities under acquired prepaid service contracts. In April 1996, the Company completed an initial public offering raising $106 million through the issuance of 6.3 million shares of common stock. The Company used the proceeds to repay approximately $70 million of its then existing term loan (the "1995 Term Loan") and the Affiliate Notes. Concurrent with the initial public offering, the Company's Preferred Stock (Series A, B and C) was converted into common stock in accordance with the terms thereof. In April 1996, the Company converted the 1995 Term Loan and an existing $30 million revolving credit facility into a $225 million variable rate, unsecured revolving credit facility (the "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. See Note 8 to the Company's Consolidated Financial Statements. The Facility provides for revolving borrowings up to $300 million. The commitments thereunder terminate on April 26, 2001. The interest rate applicable to the Facility varies, at the Company's option, based upon LIBOR (plus an applicable margin not to exceed 1%) or the prime rate. The Company had entered into interest rate swap agreements resulting in fixed Euro dollar interest rates of 5.4% on $40.0 million through December 1997 and 5.5% on another $40.0 million through December 1998. During fiscal 1997, the Company terminated these interest rate swap agreements, resulting in an insignificant gain. See Notes 1 and 8 to the Company's Consolidated Financial Statements. 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. Borrowings incurred during fiscal 1997 included substantially all of the funding required with respect to the Memorex Telex acquisition. See Note 4 to the Company's Consolidated Financial Statements. The borrower under the Facility is DecisionOne Corporation, a wholly-owned and the principal operating subsidiary of the Company. The obligations of DecisionOne Corporation thereunder are 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 for the fiscal year ended June 30, 1997 was approximately $89.0 million. These funds, together with borrowings under the Facility, provided the required capital to fund repairable part purchases and capital expenditures of approximately $97.0 million, as well as the acquisition of contracts and assets of complementary businesses for approximately $32.3 million. Reducing cash flow from operating activities for the fiscal year ended June 30, 1997 was a $1.8 million payment to the Internal Revenue Service in full satisfaction of certain interest liabilities related to prior tax periods. See Note 7 to the Company's Consolidated Financial Statements. The Company had adequately accrued for this liability prior to payment, and no further amounts are due with regard to these matters. In fiscal years 1996 and 1995, the Company generated net cash flow from operating activities of $51.9 million and $38.4 million, respectively. Cash required to fund the purchase of repairable parts and for capital expenditures totaled $70.8 million and $14.9 million, during fiscal years 1996 and 1995, respectively. 24 26 The Company maintains a significant inventory of consumable and repairable parts. Expendable parts are expensed as they are used in the operations of the business. Repairable parts are recorded at cost at the time of their acquisition and amortized over 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 June 30, 1997, 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 most significant of the Company's acquisitions during the fiscal year ended June 30, 1997 was the Memorex Telex acquisition on November 15, 1996. The adjusted purchase price was $52.7 million, comprised of the Company's assumption of $28.3 million of liabilities under acquired customer maintenance contracts, and $24.4 million in cash, excluding transactions and closing costs, after taking into account certain purchase price adjustments. The Company, 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. See Note 16 to the Company's Consolidated Financial Statements. EFFECT OF INFLATION; SEASONALITY Inflation has not been a material factor affecting the Company's business. In recent years, the cost of electronic components has remained relatively stable due to competitive pressures within the industry, which has enabled the Company to contain its service costs. The Company's general operating expenses, such as salaries, employee benefits, and facilities costs, are subject to normal inflationary pressures. The operations of the Company are generally not subject to seasonal fluctuations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Attached hereto and a part of this report are financial statements and supplementary data for DecisionOne Holdings Corp. and DecisionOne Corporation listed in Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 25 27 PART III ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF REGISTRANT The information required by this item is incorporated by reference to the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders to be filed by the Company with the Securities and Exchange Commission on or before October 28, 1997. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders to be filed by the Company with the Securities and Exchange Commission on or before October 28, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders to be filed by the Company with the Securities and Exchange Commission on or before October 28, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders to be filed by the Company with the Securities and Exchange Commission on or before October 28, 1997. 26 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) Financial Statements See Index to Financial Statements appearing on Page F-1. (2) Financial Statement Schedules Schedule I -- Condensed Financial Information of Registrant (DecisionOne Holdings Corp. only) Schedule II -- Valuation and Qualifying Accounts (3) Exhibits DECISIONONE HOLDINGS CORP.
EXHIBIT NO. DESCRIPTION - -------- ----------------------------------------------------------------------------------- 2.1 Agreement and Plan of Merger, dated May 4, 1997 between the Company and Quaker Holding Co.(5) (appears as Annex A) 2.2 Amendment No. 1 to the Agreement and Plan of Merger, dated as of July 15, 1997(5) (appears as Annex A-1) 3.1 Amended and Restated Certificate of Incorporation (Exhibit 3.1)(1) 3.2 Amended and Restated Bylaws (Exhibit 3.2)(1) 4.1* Specimen of DecisionOne Corporation's 9 3/4% Senior Subordinated Notes due 2007 (included in Exhibit 4.2)(6) 4.2* 9 3/4% Senior Subordinated Note Indenture dated as of August 7, 1997 between DecisionOne Corporation and State Street Bank and Trust Company as Trustee(6) 4.3* Specimen of the Company's 11 1/2% Senior Discount Debenture due 2008 (included in Exhibit 4.4) 4.4* 11 1/2% Senior Discount Debenture Indenture dated as of August 7, 1997 by and between Quaker Holding Co. and State Street Bank and Trust as Trustee 4.5* Form of Warrant (included in Exhibit 4.6) 4.6* Warrant Agreement dated as of August 7, 1997 between Quaker Holding Co. and State Street Bank and Trust as Warrant Agent 4.7* Debenture Agreement dated as of August 7, 1997 between the Company and State Street Bank and Trust as Trustee (included in Exhibit 4.4) 4.8* Warrant Assumption dated as of August 7, 1997 between the Company and State Street Bank and Trust as Warrant Agent (included in Exhibit 4.6) 10.1+* Management Incentive Plan 10.2+* Direct Investment Program 10.3* (intentionally omitted) 10.4* U.S. $575,000,000 Credit Agreement dated as of August 7, 1997 by and among DecisionOne Corporation, various financial institutions, DLJ Capital Funding Inc. (as Syndication Agent), Nations Bank of Texas, N.A. (as Administrative Agent) and BankBoston, N.A. (as Documentation Agent)(6) 10.5 Employment Agreement with Kenneth Draeger (Exhibit 10.7)(1) 10.6+ Employment Letter with Stephen J. Felice (Exhibit 10.8)(1) 10.7+ Employment Letter with James J. Greenwell (Exhibit 10.10)(1)
27 29
EXHIBIT NO. DESCRIPTION - -------- ----------------------------------------------------------------------------------- 10.8 Amended and Restated Registration Rights Agreement (Exhibit 10.11)(1) 10.9 First Amendment to Amended and Restated Registration Rights Agreement (Exhibit 10.12)(1) 10.10 Lease for Frazer, Pennsylvania executive offices (East)(Exhibit 10.14)(1) 10.11 Lease for Frazer, Pennsylvania executive offices (West)(Exhibit 10.15)(1) 10.12 Lease for Malvern, Pennsylvania depot and call center (Exhibit 10.16)(1) 10.13+ Employment Letter with Joseph S. Giordano (Exhibit 10.17)(2) 10.14 Lease for Bloomington, Minnesota call center (Exhibit 10.18)(2) 10.15 Lease for Haywood, California depot (Exhibit 10.19)(2) 10.16 Lease for Northborough, Massachusetts depot (Exhibit 10.20)(2) 10.17+ Employment Letter with Thomas J. Fitzpatrick (Exhibit 10.22)(3) 10.18 Employment Letter with Thomas M. Molchan(4) 10.19 Employment Letter with Dwight T. Wilson(4) 10.20* Intercompany Note made by the Company in favor of DecisionOne Corporation dated as of August 7, 1997 12 Computation of Ratios of Earnings to Fixed Charges(5) 21 Subsidiaries of the Registrant (Exhibit 21)(1) 23.1* Consent of Deloitte & Touche LLP 27* Financial Data Schedule
- --------------- (1) Filed as an Exhibit to Registration Statement No. 333-1256 on Form S-1 filed with the Securities and Exchange Commission on February 9, 1996. + Compensation plans and arrangements for executives and others. * Filed herewith (2) Filed as an Exhibit to Pre-Effective Amendment No. 1 to Registration Statement No. 333-1256 on Form S-1 filed with the Securities and Exchange Commission on March 14, 1996. (3) Filed as an Exhibit to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 30, 1996. (4) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 1997. (5) Previously filed as an Exhibit to Registration Statement No. 333-28265 on Form S-4 filed with the Securities and Exchange Commission on June 2, 1997. (6) Filed as an Exhibit to the Annual Report on Form 10-K for DecisionOne Corporation filed with the Securities and Exchange Commission on September 29, 1997. DECISIONONE CORPORATION
EXHIBIT NO. DESCRIPTION - ------- ------------------------------------------------------------------------------------ 3.1 Amended and Restated Certificate of Incorporation of the Company, as amended.(1) 3.2 Amended and Restated Bylaws of the Company.(1) 4.1* Specimen of the Company's 9 3/4 Senior Subordinated Notes due 2007 (included in Exhibit 4.2). 4.2* 9 3/4% Senior Subordinated Note Indenture dated as of August 7, 1997 between the Company and State Street Bank and Trust as Trustee. 10.1+ Employment Agreement with Kenneth Draeger.(2) 10.2+ Employment Letter with Stephen J. Felice.(2)
28 30
EXHIBIT NO. DESCRIPTION - ------- ------------------------------------------------------------------------------------ 10.3 Lease for Frazer, Pennsylvania executive offices (East).(2) 10.4 Lease for Frazer, Pennsylvania executive offices (West).(2) 10.5 Lease for Malvern, Pennsylvania depot and call center.(2) 10.6 Lease for Bloomington, Minnesota call center.(3) 10.7 Lease for Hayward, California depot.(3) 10.8 Lease for Northborough, Massachusetts depot.(3) 10.9 Form of Tax Sharing Agreement.(1) 10.10* U.S. $575,000,000 Credit Agreement dated as of August 7, 1997 by and among the Company, various finance institutions, DLJ Capital Funding Inc. (as Syndication Agent), NationsBank of Texas, N.A. (as Administrative Agent) and BankBoston, N.A. (as Documentation Agent). 10.11* Intercompany Note made by the DecisionOne Holdings Corp. in favor of the Company dated as of August 7, 1997.(6) 12.1 Statement Regarding Computation of Ratios.(1) 23* Consent of Deloitte & Touche LLP 27* Financial Data Schedule.
- --------------- (1) Filed as an Exhibit to Registration Statement No. 333-28411 on Form S-1 filed with the Securities and Exchange Commission on June 3, 1997. + Compensation plans and arrangements for executives and others. * Filed herewith (2) Filed as an Exhibit to Registration Statement No. 333-1256 on Form S-1 filed with the Securities and Exchange Commission on February 9, 1996. (3) Filed as an Exhibit to Pre-Effective Amendment No. 1 to Registration Statement No. 333-1256 on Form S-1 filed with the Securities and Exchange Commission on March 14, 1996. (4) Filed as an Exhibit to the Annual Report on Form 10-K filed by DecisionOne Holdings Corp. with the Securities and Exchange Commission on September 30, 1996. (5) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed by DecisionOne Holdings Corp. with the Securities and Exchange Commission on May 15, 1997. (6) Filed as an Exhibit to the Annual Report on Form 10-K filed by DecisionOne Holdings Corp. with the Securities and Exchange Commission on September 29, 1997. (b) Current Reports on Form 8-K filed during the quarter ended June 30, 1997: A Current Report on Form 8-K, dated May 5, 1997, was filed regarding i.) the Company's Agreement and Plan of Merger with Quaker Holding Co. ("Quaker") dated May 4, 1997 (the "Merger Agreement"), and ii.) the Voting Agreement by and among the Company, Quaker and certain partnerships affiliated with Welsh, Carson, Anderson and Stowe and J.H. Whitney & Co., with respect to the Merger Agreement. 29 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in Frazer, Pennsylvania on September 29, 1997. DECISIONONE CORPORATION By: /s/ KENNETH DRAEGER ------------------------------------ Kenneth Draeger Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the indicated persons. Each person whose signature appears below in so signing also makes, constitutes and appoints Kenneth Draeger and Thomas J. Fitzpatrick, and each of them acting for him and in his name, place and stead in any and all capacities, to execute and cause to be filed with the Securities and Exchange Commission any and all amendments to this report, and in each case to file the same, with all exhibits thereto and other documents in connection therewith, and hereby ratifies and confirms all that said attorney-in-fact or his substitute or substitutes may do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE - -------------------------------------- --------------------------------------- ------------------ /s/ KENNETH DRAEGER Chairman of the Board and Chief September 29, 1997 - -------------------------------------- Executive Officer (Principal Kenneth Draeger Executive Officer) /s/ THOMAS J. FITZPATRICK Vice President and Chief Financial September 29, 1997 - -------------------------------------- Officer (Principal Financial and Thomas J. Fitzpatrick Accounting Officer) /s/ PETER T. GRAUER Director September 29, 1997 - -------------------------------------- Peter T. Grauer /s/ KIRK B. WORTMAN Director September 29, 1997 - -------------------------------------- Kirk B. Wortman
31 32 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENT OF DECISIONONE HOLDINGS CORP.: Independent Auditors' Report...................................................... F-2 Consolidated Balance Sheets as of June 30, 1997 and 1996.......................... F-3 Consolidated Statements of Operations for the Years Ended June 30, 1997, 1996 and 1995........................................................................... F-4 Consolidated Statements of Shareholders' Equity for the Years Ended June 30, 1997, 1996 and 1995.................................................................. F-5 Consolidated Statements of Cash Flows for the Years Ended June 30, 1997, 1997 and 1995........................................................................... F-6 Notes to Consolidated Financial Statements........................................ F-7 CONSOLIDATED FINANCIAL STATEMENTS OF DECISIONONE CORPORATION: Independent Auditors' Report...................................................... F-26 Consolidated Balance Sheets as of June 30, 1997 and 1996.......................... F-27 Consolidated Statements of Operations for the Years Ended June 30, 1997, 1996 and 1995........................................................................... F-28 Consolidated Statements of Shareholders' Equity for the Years Ended June 30, 1997, 1996 and 1995.................................................................. F-29 Consolidated Statements of Cash Flows for the Years Ended June 30, 1997, 1997 and 1995........................................................................... F-30 Notes to Consolidated Financial Statements........................................ F-31 FINANCIAL STATEMENT SCHEDULES: Schedule I -- Condensed Financial Information of Registrant (DecisionOne Holdings Corp. only).................................................................... S-1 Schedule II -- Valuation and Qualifying Accounts.................................. S-5
F-1 33 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of DecisionOne Holdings Corp.: We have audited the accompanying consolidated balance sheets of DecisionOne Holdings Corp. and subsidiaries (the "Company") as of June 30, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1997. Our audits also included the financial statement schedules listed in the Index at Item 14. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of DecisionOne Holdings Corp. and subsidiaries as of June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. Deloitte & Touche LLP Philadelphia, Pennsylvania August 15, 1997 F-2 34 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1997 AND 1996 (IN THOUSANDS, EXCEPT NUMBER OF SHARES OF COMMON STOCK)
1997 1996 -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents............................................ $ 10,877 $ 8,221 Accounts receivable, net of allowances of $14,869 and $9,580......... 127,462 92,650 Consumable parts, net of allowances of $17,889 and $19,537........... 34,518 29,770 Prepaid expenses and other assets.................................... 4,542 5,112 Deferred tax asset................................................... 5,236 8,018 -------- -------- Total current assets......................................... 182,635 143,771 REPAIRABLE PARTS, Net of accumulated amortization of $154,555 and $105,462............................................................. 199,900 154,970 PROPERTY AND EQUIPMENT................................................. 34,227 32,430 INTANGIBLES............................................................ 191,366 164,659 OTHER ASSETS........................................................... 14,977 18,680 -------- -------- TOTAL ASSETS........................................................... $623,105 $514,510 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt.................................... $ 4,788 $ 2,321 Accounts payable and accrued expenses................................ 95,516 89,564 Deferred revenues.................................................... 56,600 38,485 Income taxes and other liabilities................................... 4,664 479 -------- -------- Total current liabilities.................................... 161,568 130,849 REVOLVING CREDIT LOAN AND LONG-TERM DEBT............................... 232,721 188,582 OTHER LIABILITIES...................................................... 13,928 14,286 SHAREHOLDERS' EQUITY: 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 27,817,832 shares in 1997 and 27,340,288 shares in 1996.............................................................. 278 273 Additional paid-in capital........................................... 258,331 255,262 Accumulated deficit.................................................. (42,432) (73,516) Other................................................................ (1,289) (1,226) -------- -------- Total shareholders' equity................................... 214,888 180,793 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $623,105 $514,510 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 35 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1997 1996 1995 -------- -------- -------- REVENUES................................................... $785,950 $540,191 $163,020 COST OF REVENUES........................................... 581,860 402,316 113,483 -------- -------- -------- GROSS PROFIT............................................... 204,090 137,875 49,537 OPERATING EXPENSES: Selling, general and administrative expenses............. 112,870 72,829 21,982 Amortization of intangibles.............................. 23,470 15,673 6,776 -------- -------- -------- OPERATING INCOME........................................... 67,750 49,373 20,779 INTEREST EXPENSE, Net of interest income of $197 in 1997, $239 in 1996 and $53 in 1995............................. 14,698 14,714 2,468 -------- -------- -------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (BENEFIT), DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM..................................................... 53,052 34,659 18,311 PROVISION (BENEFIT) FOR INCOME TAXES....................... 21,968 13,870 (23,104) -------- -------- -------- INCOME BEFORE DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM..................................................... 31,084 20,789 41,415 DISCONTINUED OPERATIONS -- Income from operations of discontinued products division........................... 1,113 -------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEM........................... 31,084 20,789 42,528 EXTRAORDINARY ITEM, NET OF TAX BENEFIT OF $1,284........... 1,927 -------- -------- -------- NET INCOME................................................. $ 31,084 $ 18,862 $ 42,528 ======== ======== ======== PRO FORMA INFORMATION (UNAUDITED): Net income before interest expense adjustment............ $ 31,084 Interest expense adjustment, net of tax.................. (31,267) -------- Pro forma net loss....................................... $ (183) ======== Pro forma loss per share................................. $ (.01) ======== Pro forma weighted average number of common and common equivalent shares outstanding......................... 14,200 ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 36 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT NUMBER OF SHARES OF COMMON STOCK)
COMMON STOCK FOREIGN TOTAL ------------------- ADDITIONAL CURRENCY PENSION SHAREHOLDERS' NUMBER OF PAID-IN ACCUMULATED TRANSLATION LIABILITY (DEFICIENCY) SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT ADJUSTMENT EQUITY ---------- ------ ---------- ----------- ----------- ---------- ------------- BALANCE, JUNE 30, 1994................ 8,920,348 $ 89 $108,358 $(134,906) $ 457 $ (1,625) $ (27,627) Net income.......................... 42,528 42,528 Adjustment to pension liability..... (80) (80) Foreign currency translation adjustment........................ 223 223 Accrued dividends on Series A and B Redeemable Preferred Stock........ (375) (375) Exercise of stock options........... 15,000 8 8 ----------- ---- -------- --------- ---- ------- -------- BALANCE, JUNE 30, 1995................ 8,935,348 89 107,991 (92,378) 680 (1,705) 14,677 Net income.......................... 18,862 18,862 Adjustment to pension liability..... (143) (143) Common Stock issued: Exercise of preemptive rights..... 384,502 4 1,526 1,530 Public offering................... 6,300,000 63 106,250 106,313 Exercise of stock options......... 329,850 3 300 303 Exercise of warrants.............. 118,664 1 598 599 Conversion of Redeemable Preferred Stock........................... 11,271,924 113 37,529 37,642 Stock issuance costs................ (1,573) (1,573) Issuance of warrants................ 126 126 Issuance of warrants attached to Subordinated Debentures........... 3,400 3,400 Foreign currency translation adjustment........................ (58) (58) Accrued dividends on Redeemable Preferred Stock................... (885) (885) ----------- ---- -------- --------- ---- ------- -------- BALANCE, JUNE 30, 1996................ 27,340,288 273 255,262 (73,516) 622 (1,848) 180,793 Net income.......................... 31,084 31,084 Adjustment to pension liability..... (25) (25) Tax benefit -- disqualifying stock disposition....................... 2,635 2,635 Foreign currency translation adjustment........................ (38) (38) Exercise of stock options........... 477,544 5 434 439 ----------- ---- -------- --------- ---- ------- -------- BALANCE, JUNE 30, 1997................ 27,817,832 $278 $258,331 $ (42,432) $ 584 $ (1,873) $ 214,888 =========== ==== ======== ========= ==== ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 37 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (IN THOUSANDS)
1997 1996 1995 --------- --------- -------- OPERATING ACTIVITIES: Net income............................................... $ 31,084 $ 18,862 $ 42,528 Adjustments to reconcile net income to net cash provided by operating activities: Income from discontinued operations................... (1,113) Depreciation.......................................... 13,549 8,309 1,779 Amortization of repairable parts...................... 63,870 37,869 7,688 Amortization of intangibles........................... 23,470 15,673 6,775 Provision for losses on accounts receivable........... 7,849 3,434 1,930 Provision for consumable parts obsolescence........... 2,554 1,171 1,995 Extraordinary item.................................... 1,927 Changes in operating assets and liabilities, net of effects from companies acquired, which provided (used) cash: Accounts receivable................................. (38,365) (1,900) (8,836) Consumable parts.................................... (6,038) (1,248) 931 Accounts payable and accrued expenses............... 3,885 256 (1,171) Deferred revenues................................... (25,427) (33,928) 6,811 Net changes in other assets and liabilities......... 12,543 1,469 (20,902) --------- --------- -------- Net cash provided by operating activities........ 88,974 51,894 38,415 --------- --------- -------- INVESTING ACTIVITIES: Capital expenditures..................................... (10,540) (7,278) (2,786) Repairable spare parts purchases, net.................... (86,446) (63,514) (12,154) Acquisitions of companies and contracts.................. (32,258) (275,562) (39,331) --------- --------- -------- Net cash used in investing activities............ (129,244) (346,354) (54,271) --------- --------- -------- FINANCING ACTIVITIES: Proceeds from issuance of preferred stock................ 31,392 Proceeds from issuance of subordinated debentures........ 30,000 Proceeds from issuance of common stock................... 439 106,313 Payment of subordinated debentures....................... (30,000) Net proceeds from borrowings............................. 43,625 165,711 17,537 Principal payments under capital leases.................. (1,075) (3,423) Other.................................................... (63) 29 --------- --------- -------- Net cash provided by financing activities........ 42,926 300,022 17,537 --------- --------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS.................. 2,656 5,562 1,681 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............... 8,221 2,659 978 --------- --------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR..................... $ 10,877 $ 8,221 $ 2,659 ========= ========= ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Net cash paid during the year for: Interest.............................................. $ 15,640 $ 14,838 $ 2,065 Income taxes.......................................... 8,381 5,344 1,009 Noncash investing/financing activities: Issuance of seller notes in connection with acquisitions........................................ 2,224 587 2,866 Issuance of seller notes in exchange for repairable parts............................................... 1,855 Repairable parts received in lieu of cash for accounts receivable.......................................... 1,124 Accretion of accrued dividends........................ 885 375
The accompanying notes are an integral part of these consolidated financial statements. F-6 38 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1997, 1996 AND 1995 1. NATURE OF BUSINESS DecisionOne Holdings Corp. and its wholly-owned subsidiaries (the "Company") are providers of multivendor computer maintenance and technology support services. The Company offers its customers a single-source, independent (i.e., not affiliated with an original equipment manufacturer, or "OEM") solution for computer maintenance and technology support requirements, including hardware maintenance services, software support, end-user/help desk services, network support and other technology support services. These services are provided by the Company across a broad range of computing environments, including mainframes, midrange and distributed systems, workgroups, personal computers ("PCs") and related peripherals. In addition, the Company provides outsourcing services for OEMs, software publishers, system integrators and other independent service organizations. The Company delivers its services through an extensive field service organization of approximately 4,000 field technicians in over 150 service locations throughout North America and through strategic alliances in selected international markets. Through June 30, 1995, the Company's services predominantly involved the provision of maintenance services to the midrange computer market. On October 20, 1995, the Company acquired Bell Atlantic Business Systems Services, Inc. ("BABSS") (see Note 4). BABSS provided computer maintenance and technology support services for computer systems ranging from the data center, which includes both mainframe and midrange systems, to desk top. Subsequent to the acquisition, the Company's principal operating subsidiary, Decision Servcom, Inc., was merged into BABSS, which had changed its name to DecisionOne Corporation. As a result, DecisionOne Corporation is the principal operating subsidiary of the Company. The Company's wholly owned, direct international subsidiaries are not significant to the Company's consolidated financial statements. 2. SIGNIFICANT ACCOUNTING POLICIES Consolidation -- The consolidated financial statements include the accounts of DecisionOne Holdings Corp. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Pro Forma Information (Unaudited) -- The pro forma information included in the accompanying statement of operations and in Note 3 has been prepared to reflect the Company's recapitalization and merger with Quaker Holding Co. ("Quaker") and related transactions as if these had occurred on July 1, 1996. Historical earnings per share data for the fiscal years ended June 30, 1997, 1996 and 1995 is not presented as this would not be meaningful. Cash and Cash Equivalents -- Cash and cash equivalents are highly liquid investments with remaining maturities of three months or less at the time of purchase. Cash equivalents, consisting primarily of repurchase agreements with banks, are stated at cost, which approximates fair market value. Consumable Parts and Repairable Parts -- In order to provide maintenance and repair services to its customers, the Company is required to maintain significant levels of computer parts. These parts are classified as consumable parts or as repairable parts. Consumable parts, which are utilized during the repair process, are stated at cost, principally determined using the weighted average method, less an accumulated allowance for obsolescence and shrinkage. Consumable parts are reflected in cost of revenues during the period utilized. Repairable (rotable) parts, which can be refurbished and reused, are stated at original cost less accumulated amortization. Amortization of repairable parts is reflected in cost of revenues. Costs of refurbishing repairable parts are also included in cost of revenues as these costs are incurred. Amortization of repairable parts is based principally on the composite group method, using straight-line composite rates. F-7 39 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Repairable parts generally have an economic life which corresponds to the normal life cycle of the related products, currently estimated to be three to five years. As consumable and repairable parts are retired, the weighted average gross amounts at which such parts have been carried are removed from the respective assets accounts, and charged to the accumulated allowance or accumulated amortization accounts, as applicable. Periodic revisions to amortization and allowance estimates are required, based upon the evaluation of several factors, including changes in product life cycles, usage levels and technology changes. Changes in these estimates are reflected on a prospective basis unless such changes result from an extraordinary retirement or from other events or circumstances which indicate that impairment may exist. Impairment is recognized when the net carrying value of the parts exceeds the estimated current and anticipated undiscounted net cash flows. Measurement of the amount of impairment, if any, is calculated based upon the difference between carrying value and fair value. Property and Equipment -- Property and equipment are stated at cost. Depreciation is provided for using the straight-line method over the estimated useful lives of the depreciable assets. Capitalized equipment leases and leasehold improvements are amortized over the shorter of the related lease terms or asset lives. Maintenance and repairs are charged to expense as incurred. Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is charged to operations. Business and Contract Acquisitions -- Business and contract acquisitions have been accounted for as purchase transactions, with the purchase price of each acquisition allocated to the assets acquired and liabilities assumed based upon their respective estimated fair values at the dates of acquisition. Consistent with the Company's parts retirement accounting methods, the gross value of parts acquired is generally stated at weighted average cost. Fair value adjustments, if any, are reflected as adjustments to the respective accumulated amortization or allowance accounts. The excess of the purchase price over identified net assets acquired is amortized, on a straight-line basis, over the expected period of future benefit (see Note 6). Typical contract acquisitions are comprised primarily of customer maintenance and support contracts of complementary entities, along with the accompanying consumable and repairable parts required to support these contracts and other identifiable intangibles, such as noncompete agreements. Liabilities assumed in business and contract acquisitions consist primarily of prepaid amounts related to multi-period customer maintenance and support contracts. These liabilities are recorded as deferred revenues at acquisition dates and are recognized as revenues when earned in accordance with the terms of the respective contracts. Intangible Assets -- Intangible assets are comprised of excess purchase price over the fair value of net assets acquired, acquired customer lists and other intangible assets, including the fair value of contractual profit participation rights and amounts assigned to noncompete agreements. Intangible assets, which arise principally from acquisitions, are generally amortized on a straight-line basis over their respective estimated useful lives (see Note 6). The Company evaluates the carrying value of intangible assets whenever events or changes in circumstances indicate that these carrying values may not be recoverable within the amortization period. Impairment is recognized when the net carrying value of the intangible asset exceeds the estimated current and anticipated discounted future net cash flows. Measurement of the amount of impairment, if any, is calculated based upon the difference between carrying value and fair value. Revenue -- The Company enters into maintenance contracts whereby it services various manufacturers' equipment. Revenues from these contracts are recognized ratably over the terms of such contracts. Prepaid revenues from multi-period contracts are recorded as deferred revenues and are recognized ratably over the term of the contracts. F-8 40 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Revenues derived from the maintenance of equipment not under contract are recognized as the service is performed. Revenues derived from other technology support services are recognized as the service is performed or ratably over the term of the contract. Foreign Currency Translation -- Gains and losses resulting from foreign currency translation are accumulated as a separate component of shareholders' equity. Gains and losses resulting from foreign currency transactions are included in operations. Credit Risk -- Concentration of credit risk with respect to trade receivables is limited due to the large number of customers comprising the Company's customer base and their dispersion across many industries. Fair Value of Financial Instruments -- The following disclosures of the estimated fair value of financial instruments were made in accordance with the requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Cash and Cash Equivalents, Accounts Receivable, and Accounts Payable -- The carrying amount of these items are a reasonable estimate of their fair value. Short-Term Debt and Long-Term Debt -- As more fully described in Note 8, under its revolving borrowing facility the Company incurs interest at variable rates based upon market conditions (i.e., based upon the prime rate or LIBOR). Rates applicable to other debt instruments, which consist primarily of short-term notes payable in connection with certain acquisitions, are comparable to those of similar instruments currently available to the Company. Accordingly, the carrying amount of debt is a reasonable estimate of its fair value. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates and assumptions. Discontinued Operations -- During fiscal 1993, in connection with the sale of its products division, the Company established estimated liabilities relating to the settlement of the remaining assets and liabilities of this division. In 1995, the Company revised its estimates as a result of settlement of these liabilities, and the consolidated statement of operations for 1995 reflects an increase in net income of $1,113,000 for the change in estimate. Stock-Based Compensation -- Effective July 1, 1996, the Company adopted the provisions of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 encourages, but does not require, companies to record compensation cost for stock-based compensation plans at fair value. The Company has elected to continue to account for stock-based compensation in accordance with Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, as permitted by SFAS 123. Compensation expense for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock (see Note 11). Derivative Financial Instruments -- Derivative financial instruments, which constitute interest rate swap agreements (see Note 8), are periodically used by the Company in the management of its variable interest rate exposure. Amounts to be paid or received under interest rate swap agreements are recognized as interest expense or interest income during the period in which these accrue. Gains realized, if any, on the early termination of interest rate swap contracts are deferred, to be recognized upon the termination of the related asset or liability or expiration of the original term of the swap contract, whichever is earlier. The Company does not hold any derivative financial instruments for trading purposes. F-9 41 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Recent Accounting Pronouncement -- In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings Per Share. SFAS No. 128, which supersedes APB No. 15, Earnings Per Share, requires a dual presentation of basic and diluted earnings per share as well as disclosures including a reconciliation of the computation of basic earnings per share to diluted earnings per share. Basic earnings per share excludes the dilutive impact of common stock equivalents and is computed by dividing net income by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share, which will approximate the Company's currently reported pro forma earnings (loss) per 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 No. 128 is effective for interim and annual financial reporting periods ending after December 15, 1997, and early adoption is not permitted. When adopted by the Company, as required, for the fiscal quarter ending December 31, 1997, all prior quarters' earnings (loss) per share information will be required to be restated on a comparable basis. Assuming that SFAS No. 128 had been implemented, supplemental pro forma basic loss per share and supplemental pro forma diluted loss per share would not have differed from the pro forma loss per share presented in the accompanying consolidated statements of operations for the fiscal year ended June 30, 1997. Reclassifications -- Certain reclassifications have been made to the 1996 balances in order to conform with the 1997 presentation. 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. The merger, which will be 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. The accompanying historical consolidated financial statements do not include any adjustments with respect to the consummation of the merger. 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 (see Note 8). 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, aggregating approximately $71 million on a pretax basis (approximately $64 million after related tax benefit), subject to adjustment, in connection with consummating the transaction. These costs consisted primarily of compensation costs, underwriting F-10 42 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) discounts and commissions, professional and advisory fees and other expenses. The Company will report this one-time charge during the first quarter of fiscal 1998. In addition to these expenses, the Company also incurred approximately $22.3 million of capitalized debt issuance costs associated with the merger financing. These costs will be charged to expense over the terms of the related debt instruments. The following summarized unaudited pro forma information as of and for the year ended June 30, 1997 assumes that the merger had occurred on July 1, 1996. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the financial condition or of the results of operations which actually would have resulted had the merger occurred as of July 1, 1996 or which may result in the future.
(UNAUDITED) (IN THOUSANDS) PRO FORMA BALANCE SHEET INFORMATION: Total assets................................................................... $652,085 Long term indebtedness (including current portion)............................. 724,500 Other liabilities.............................................................. 170,708 Shareholders' (deficit)........................................................ (243,123) PRO FORMA INCOME STATEMENT INFORMATION: Revenues....................................................................... $785,950 Operating income............................................................... 67,750 Loss from continuing operations before income tax benefit...................... (312) Net loss....................................................................... (183) Loss per common share.......................................................... $ (0.01) Weighted average common and common equivalent shares outstanding............... 14,200
The pro forma net loss reflects a net increase in interest expense of approximately $53.4 million ($31.3 million after related pro forma tax effect), attributable to additional financing incurred in connection with the merger, net of repayment of the Company's existing revolving credit facility. Pro forma weighted average common and common equivalent shares outstanding include 12,499,978 shares outstanding immediately subsequent to the merger on August 7, 1997 and dilutive common stock warrants and stock options (convertible into 281,960 and 1,418,530 shares of common stock, respectively) issued in connection with or immediately subsequent to the merger. 4. BUSINESS AND CONTRACT ACQUISITIONS During the years ended June 30, 1997, 1996 and 1995, the Company acquired certain net assets of other service companies as follows (in thousands):
EXCESS CONSIDERATION PURCHASE ----------------------------------------------------------- PRICE OVER TOTAL FAIR VALUE NUMBER OF PURCHASE OTHER OF NET ASSETS YEARS ENDED ACQUISITIONS CASH NOTES PRICE INTANGIBLES ACQUIRED - -------------------------------- ------------ -------- -------- -------- ----------- ------------- Significant business acquisitions: June 30, 1995................. 1 $ 27,413 $ 2,094 $ 29,507 $15,600 $ 7,394 June 30, 1996................. 1 250,549 250,549 72,581 60,533 Nonsignificant business or maintenance contract acquisitions: June 30, 1995................. 5 9,327 255 9,582 4,577 8,680 June 30, 1996................. 5 14,853 578 15,431 6,522 6,318 June 30, 1997................. 9 31,749 2,224 33,973 231 47,200
F-11 43 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On August 31, 1994, the Company purchased certain net assets and liabilities of IDEA/Servcom, Inc. for approximately $29,500,000. This acquisition was funded by cash and the issuance of a $2,600,000 noninterest- bearing note to the seller. See seller notes payable section of Note 8. The excess of asset purchase price over the fair value of net assets acquired at the date of purchase was approximately $7,400,000. On October 20, 1995, the Company acquired all of the outstanding common stock of BABSS, a subsidiary of Bell Atlantic Corporation ("BAC") for approximately $250,549,000. The acquisition was funded with the proceeds from the issuance of $30,000,000 of Series C preferred stock, $30,000,000 of subordinated debentures and the balance from additional bank borrowings (see Notes 8 and 13). The excess of asset purchase price over the fair value of net assets acquired at the date of purchase was initially recorded as approximately $58,796,000. Subsequent to the acquisition, the Company recorded a net adjustment increasing the initial amount by $1,737,000 and adjusted other balance sheet accounts principally by the same amount. This resulted from the adjustment and reclassification of certain tax accruals offset by favorable negotiations on certain leased facilities (see Note 7). As part of the acquisition, the Company purchased from BAC contractual profit participation rights whereby the Company will receive a fixed percentage of the annual operating profits (3.2% or 3.5%, depending upon the level of profits) earned by a former foreign affiliate of BAC which provides computer maintenance and technology support services in Europe. The estimated value of the discounted estimated future cash flows over a twenty-year period from the acquisition date from these contractual profit participation rights is $25,000,000. Included in nonsignificant maintenance contract acquisitions is the acquisition of substantially all of the contracts and related assets, including spare parts of the U.S. computer service business of Memorex Telex Corporation and certain of its affiliates (collectively, "Memorex Telex"). Memorex Telex had filed a petition in bankruptcy in the United States Bankruptcy Court (the "Court") in the District of Delaware on October 15, 1996; the Court approved the sale to the Company on November 1, 1996. The adjusted purchase price was $52.7 million, comprised of the assumption of certain liabilities under contracts of the service business, which were valued at $28.3 million, and base cash consideration of approximately $24.4 million, after certain purchase price adjustments, excluding transaction and closing costs. The estimated fair market values of certain assets acquired, as well as liabilities assumed, are subject to further adjustment as additional information becomes available to the Company. During the third quarter of fiscal 1997, the Company recorded an adjustment increasing the deferred revenues assumed in the Memorex Telex acquisition by approximately $2,300,000, to revise the estimated fair value of certain contract liabilities of the business assumed by the Company. The following summarized unaudited pro forma information for significant acquisitions that have a material effect on the Company's results of operations for the years ended June 30, 1996 and 1995 assumes that the acquisitions occurred as of July 1, 1994. The nonsignificant business and maintenance contract acquisitions are not considered material individually or in the aggregate. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the significant acquisitions been in effect on the dates indicated or which may result in the future.
YEARS ENDED JUNE 30, --------------------- 1996 1995 -------- -------- (IN THOUSANDS) (UNAUDITED) Revenues....................................................... $697,676 $679,284 Income from continuing operations before extraordinary item.... 31,080 20,153 Net income..................................................... 29,153 21,266
F-12 44 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
JUNE 30, --------------------- 1997 1996 -------- -------- (IN THOUSANDS) Land and buildings............................................. $ 6,318 $ 2,055 Equipment...................................................... 16,248 13,858 Computer hardware and software................................. 35,030 27,277 Furniture and fixtures......................................... 8,308 8,051 Leasehold improvements......................................... 4,628 4,125 -------- -------- 70,532 55,366 Accumulated depreciation and amortization...................... (36,305) (22,936) -------- -------- $ 34,227 $ 32,430 ======== ========
The principal lives (in years) used in determining depreciation and amortization rates of various assets are: buildings (20-40); equipment (3-10); computer hardware and software (3-5); furniture and fixtures (5-10) and leasehold improvements (term of related leases). Depreciation and amortization expense was approximately $13,549,000, $8,309,000 and $1,779,000 for the fiscal years ended 1997, 1996 and 1995, respectively. 6. INTANGIBLES Intangibles consisted of the following:
JUNE 30, --------------------- 1997 1996 -------- -------- (IN THOUSANDS) Excess purchase price over fair value of net assets acquired... $130,548 $ 82,355 Customer lists................................................. 64,688 64,758 Contractual profit participation rights........................ 25,000 25,000 Noncompete agreements.......................................... 4,631 4,500 Other intangibles.............................................. 9,131 7,671 -------- -------- 233,998 184,284 Accumulated amortization....................................... (42,632) (19,625) -------- -------- $191,366 $164,659 ======== ========
The periods (in years) used in determining the amortization rates of intangible assets are: excess purchase price over fair value of net assets acquired (4-20); customer lists (3-8); contractual profit participation rights (20); noncompete agreements (3-5) and other (1-6). Amortization expense relating to intangibles was approximately $23,470,000, $15,673,000 and $6,775,000, for the fiscal years ended 1997, 1996 and 1995, respectively. F-13 45 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. ACCRUED EXPENSES Accounts payable and accrued expenses consisted of the following:
JUNE 30, ------------------- 1997 1996 ------- ------- (IN THOUSANDS) Accounts payable................................................. $55,723 $53,347 Compensation and benefits........................................ 22,706 22,115 Interest......................................................... 563 1,505 Unused leases.................................................... 878 3,485 Pension accrual.................................................. 1,371 1,258 Accrued accounting and legal fees................................ 1,435 1,073 Non-income taxes and other....................................... 12,840 6,781 ------ ------ $95,516 $89,564 ====== ======
Prior to 1994, the Company received $2,600,000 in tax bills (primarily interest) from the Internal Revenue Service ("IRS") related to claims for tax and interest for the years 1981 through 1987. The Company paid approximately $500,000 of the claims upon receipt of the bills. Although the Company disputed the tax bills, an IRS mandated payment of $828,000 was made in 1996. As of June 30, 1996, the Company had an accrued liability of $1,883,000 related to this assessment. During fiscal 1997, the Company paid $1,729,000 in full settlement of these tax and interest bills. In connection with the acquisition of BABSS, which has been accounted for using the purchase method of accounting (see Note 4), the Company recorded approximately $11,000,000 in liabilities resulting from planned actions with respect to BABSS, which included the costs to exit certain leased facilities and to involuntarily terminate employees. The provision of approximately $3,500,000 for the costs to exit certain leased facilities principally relates to future lease payments on a warehouse in California which has been made idle. Approximately $4,000,000 was provided for severance and termination benefits of approximately 210 employees in the field, operations support, sales and administration. Approximately $3,000,000 was provided in connection with the exit plan for write-downs of spare parts and equipment at two California facilities which will not be utilized in future operations. The provision for various other charges of approximately $500,000 consisted of costs to complete the exit plan. As of June 30, 1996, the Company had settled all of these liabilities, except for the lease liabilities on idle facilities for which payments were scheduled to continue through 1999 (see Note 15). At June 30, 1997 and 1996 remaining amounts due under these leases were $0 and $1,200,000, respectively. As a result of successful negotiations of unutilized leased facilities, during 1996, the Company recorded a reduction of approximately $975,000 to both the provisions for leased facilities and excess purchase price over fair value of net assets acquired. F-14 46 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. REVOLVING CREDIT LOAN AND LONG-TERM DEBT Debt consists of the following:
JUNE 30, --------------------- 1997 1996 -------- -------- (IN THOUSANDS) Revolving credit loans......................................... $231,671 $186,400 Seller noninterest-bearing notes payable....................... 2,922 2,118 Seller note payable -- purchase spare parts.................... 1,608 Capitalized lease obligations, payable in varying installments at interest rates ranging from 7.25% to 13.01% at June 30, 1997......................................................... 1,308 2,385 ------- ------- 237,509 190,903 Less current portion........................................... 4,788 2,321 ------- ------- $232,721 $188,582 ======= =======
REVOLVING CREDIT LOANS On October 20, 1995, in connection with the BABSS acquisition (see Note 4) the Company entered into a Credit Agreement which provided for a term loan (the "1995 Term Loan") of $230,000,000 and a revolving credit facility of up to a maximum of $30,000,000. The 1995 Term Loan provided for 19 equal quarterly principal payments of $10,000,000 to be due and payable on the last day of each calendar quarter commencing December 31, 1995 with a final payment due on September 30, 2000. Loans under the revolving credit facility were to mature on September 30, 2000. Interest on the 1995 Term Loan and the revolving credit facility were at varying rates based, at the Company's option, on the Eurodollar rate or the Alternative Base Rate (NationsBanc prime rate), plus the Applicable Margins. Margins were based on the ratio of Total Funded Debt to EBITDA; the Eurodollar Margin ranged from 1.75% to 2.5%, while the Alternative Base Rate Margin ranged from 0.5% to 1.25%. In April 1996, the Company completed an initial public offering (see Note 13). The Company used a portion of the proceeds to repay approximately $70 million of the 1995 Term Loan. Also in April 1996, the Company converted the 1995 Term Loan and the existing $30 million Revolving Credit Facility into a $225 million variable rate, unsecured revolving credit facility ("the 1996 Revolving Credit Facility"). During fiscal 1997, the 1996 Revolving Credit Facility commitment was increased to $300 million, in connection with the acquisition of certain contracts and assets. The 1996 Revolving Credit Facility is at floating interest rates, based either on the LIBOR or prime rate, in either case plus an Applicable Margin, at the Company's option. As of June 30, 1997, the applicable rate was LIBOR plus .75% or approximately 6.5%. The 1996 Revolving Credit Facility enables the Company to borrow up to $300 million in the form of revolving credit loans with a maturity date of April 26, 2001 and with interest periods determined principally on a quarterly basis. To offset the variable rate characteristics of the borrowings, the Company entered into interest rate swap agreements with two banks resulting in fixed interest rates of 5.4% on $40.0 million notional principal amount through December 1997 and 5.5% on another $40.0 million notional principal amount through December 1998. During fiscal 1997, the Company terminated these swap agreements, resulting in an insignificant gain which has been deferred to the first quarter of fiscal 1998. Under the terms of the 1996 Revolving Credit Facility, the Company may use up to $25,000,000 for letters of credit, subject to the limitation of $300,000,000 in total credit. As of June 30, 1997, letters of credit in the face amount of $3,067,000 were outstanding. F-15 47 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The loan agreement relating to the 1996 Revolving Credit Facility contains various terms and covenants which provide for certain restrictions on the Company's indebtedness, liens, investments, disposition of assets and mergers and acquisitions and require the Company, among other things, to maintain minimum levels of consolidated net worth and certain minimum financial ratios. The borrower under the 1996 Revolving Credit Facility is DecisionOne Corporation. Repayment of the debt is guaranteed by the Company and its other subsidiaries except for its Canadian subsidiary. The Company's debt agreements and other agreements to which it is a party contain certain covenants restricting the payment of dividends on, or repurchases of, Company common stock. The Company had average borrowings of $221,069,000 and $172,065,000 during 1997 and 1996, respectively, at an average interest rate of 6.4% and 8.69%, respectively. Maximum borrowings during 1997 and 1996 were $243,350,000 and $268,748,000, respectively. Subsequent to June 30, 1997, in connection with the Company's merger with Quaker (see Note 3), the 1996 Revolving Credit Facility was repaid in full, including all interest due thereon. This refinancing was accomplished, in part, through the issuance of certain new debt instruments, consisting of senior discount notes, senior subordinated notes and a term loan/revolving credit facility which, in the aggregate, provide financing of approximately $810 million, subject to certain conditions. The new revolving credit facility provides the Company with $105 million of available financing, subject to a borrowing base, for working capital purposes subsequent to the merger. The Company's Canadian subsidiary has available a $1.5 million (Canadian) revolving line of credit agreement with a local financial institution. At June 30, 1997, approximately $471,000 (in U.S. dollars) was outstanding under this agreement. There were no amounts outstanding at June 30, 1996. SELLER NOTES PAYABLE In connection with certain acquisitions (see Note 4), the Company issued noninterest-bearing notes, the principal of which is primarily due upon settlement of contingent portions of the acquisition purchase price within a specified period subsequent to closing, generally not exceeding one year from the acquisition date. Contingencies typically pertain to actual amounts of monthly maintenance contract revenues acquired and prepaid contract liabilities assumed in comparison to amounts estimated in acquisition agreements. The Company imputes interest, based upon market rates, for long-term, non-interest-bearing obligations. During 1997, the Company issued a secured note payable to the seller for the purchase of repairable parts in the original amount of $1,854,000. The note accrues interest at an interest rate of approximately 8%, and requires quarterly payments of principal and interest of approximately $273,000 until maturity in December 1998. SUBORDINATED DEBENTURES In connection with the BABSS acquisition (see Note 4) on October 20, 1995, the Company issued and sold to its principal shareholders, an aggregate $30,000,000 principal amount of 10.101% Debentures (the "Affiliate Notes") due on October 20, 2001. The Affiliate Notes were subordinated to the 1995 Term Loan and the revolving credit facility. Interest on the Affiliate Notes was payable semiannually on the last business day of June and December of each year commencing on December 31, 1995. In connection with the issuance of the debentures, the Company issued 468,750 Common Stock Purchase Warrants (the "Warrants"). Each Warrant initially entitled the owner to buy one share of Common Stock for $0.10. The number of shares that can be purchased per Warrant steps up over 24 months in conjunction with the increasing conversion privilege applicable to the Preferred Stock such that, at the end of 24 months, each Warrant entitled the holder to buy approximately 1.21 shares of Common Stock at a price of F-16 48 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $0.10 per share. The Warrants were exercisable from October 20, 1997 until October 20, 2001, provided that if the Company had a public offering of its Common Stock meeting certain requirements before October 20, 1997, the Warrants became exercisable at the time of the public offering and the number of shares that could be purchased on exercise was fixed at that time and no longer increased in steps. The Warrants also became exercisable upon retirement of the Debentures. Each Warrant had an assigned value of $7.25333 which resulted in an original issue discount of $3,400,000 which was being amortized over the term of the Affiliate Notes. Upon consummation of its initial public offering in April 1996, the Company was required to pay up to the total amount outstanding under the Affiliate Notes and, accordingly, the Company used $30,000,000 of the proceeds to retire the Affiliate Notes. As a result, in 1996 the Company recorded an extraordinary loss in the amount of $3,211,000, net of taxes of $1,284,000, due to the acceleration of the amortization of original issue discount. In connection with the Company's merger with Quaker in August 1997 (see Note 3), the Warrants were converted into cash, with warrant holders receiving an amount equal to $23 less the exercise price for each Warrant. In connection with previous credit agreements, the Company issued warrants to purchase shares of the Company's common stock. At June 30, 1997, warrants to purchase 134,478 shares at an exercise price of $5.90 per share remained outstanding. In connection with the Company's merger with Quaker, these warrants were also converted into cash, with warrant holders receiving an amount equal to $23 less the exercise price for each warrant. 9. INCOME TAXES The provision (benefit) for income taxes consists of the following:
YEARS ENDED JUNE 30, -------------------------------- 1997 1996 1995 ------- ------- -------- (IN THOUSANDS) Current: Federal............................................ $10,909 $ 2,892 $ 16,065 State.............................................. 3,616 1,595 4,599 Foreign............................................ 1,080 548 (1,272) Deferred: Federal............................................ 6,460 8,945 (29,897) State.............................................. 16 641 (3,617) Foreign............................................ (113) (499) Benefit of operating loss carryforwards: Federal............................................ (7,729) State.............................................. (1,253) Foreign............................................ (252) ------- ------- -------- Provision (benefit) for income taxes................. $21,968 $13,870 $(23,104) ======= ======= ========
F-17 49 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The tax effects of temporary differences consisted of the following:
JUNE 30, ------------------- 1997 1996 ------- ------- (IN THOUSANDS) Gross deferred tax assets: Accounts receivable............................................ $ 4,771 $ 1,341 Inventory...................................................... 2,195 2,586 Accrued expenses............................................... 7,000 6,378 Unused leases.................................................. 390 Fixed assets................................................... 299 Intangibles.................................................... 6,196 5,670 Operating loss carryforwards................................... 4,868 14,252 Tax credit carryforwards....................................... 1,670 1,170 ------- ------- Gross deferred tax assets........................................ 27,090 31,696 Gross deferred tax liabilities: Repairable spare parts......................................... (8,918) (7,273) Fixed assets................................................... (108) ------- ------- Gross deferred tax liabilities................................... (9,026) (7,273) ------- ------- Net deferred tax asset........................................... $18,064 $24,423 ======= =======
Net operating loss and minimum tax credit carryforwards available at June 30, 1997 expire in the following years:
YEAR OF EXPIRATION AMOUNT ---------- -------------- (IN THOUSANDS) Federal operating losses............................... $ 12,877 2006-2008 State operating losses................................. 8,669 1998-2008 Investment tax credit.................................. 134 2004 Minimum tax credit..................................... 1,536 INDEFINITE
As a result of the Company's initial public offering in April, 1996, an "ownership change" occurred pursuant to Section 382 of the Internal Revenue Code. Accordingly, for Federal income tax purposes, net operating loss and tax credit carryforwards arising prior to the ownership change are limited during any future period to the Section 382 "limitation amount" of approximately $20.0 million per annum. In addition, the Company's merger with Quaker on August 7, 1997 (see Note 3) represents another such "ownership change" pursuant to Section 382. The Company estimates that the limitation on the use of tax loss carryforwards and other credits, for Federal income tax purposes, in any post-merger period will be reduced to approximately $9.0 million per annum. F-18 50 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation between the provision (benefit) for income taxes, computed by applying the statutory federal income tax rate of 35% for 1997, 1996 and 1995 to income before income taxes, and the actual provision (benefit) for income taxes follows:
1997 1996 1995 ---- ---- ------ Federal income tax provision at statutory tax rate........... 35.0% 35.0% 35.0% State income taxes, net of federal income tax provision...... 5.0 4.6 3.5 Foreign income taxes......................................... 0.4 (6.9) Unused lease credit.......................................... (0.1) Benefit of operating loss carryforward....................... (0.8) (49.1) Change in valuation allowance................................ (1.4) (108.9) Other........................................................ 1.0 2.6 0.3 ---- ---- ------ Actual income tax provision (benefit) effective tax rate..... 41.4% 40.0% (126.2)% ==== ==== ======
The Company has recorded a deferred tax asset of $4,868,000 reflecting the benefit of federal and state net operating loss carryforwards, which expire in varying amounts between 1998 and 2008. Realization depends on generating sufficient taxable income before expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will ultimately be realized. The valuation allowance for deferred tax assets as of July 1, 1994 was $44,160,000. The net changes in the valuation allowance for the years ended June 30, 1996 and 1995 were decreases of $686,000 and $43,474,000, respectively. Of these amounts, $252,000 and $8,982,000 resulted from the realization of net operating loss carryforwards. The remaining decreases of $434,000 and $34,492,000 for 1996 and 1995, respectively, resulted from the Company's expected future taxable income. 10. OTHER LIABILITIES Other (noncurrent) liabilities consisted of the following:
JUNE 30, -------------------- 1997 1996 -------- -------- (IN THOUSANDS) Accrued severance and unutilized lease losses.................... $ 4,532 $ 2,227 Other noncurrent liabilities..................................... 9,396 12,059 ------- ------- $ 13,928 $ 14,286 ======= =======
As more fully described in Note 15, accrued severance and unutilized lease losses represent remaining liabilities for estimated future employee severance costs and for lease/contract losses associated with duplicate facilities to be closed. These liabilities were recorded by the Company in connection with the Memorex Telex and BABSS acquisitions in November 1996 and October 1995, respectively. Other noncurrent liabilities include deferred operating lease liabilities related to scheduled rent increases, recorded in accordance with the provisions of SFAS No. 13, Accounting for Leases. Also included in other noncurrent liabilities are provisions relating to various tax matters. 11. STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN Under the 1988 Stock Option and Restricted Stock Purchase Plan, the name of which was subsequently changed to DecisionOne Stock Option and Restricted Stock Purchase Plan (the "Plan"), the Company, at the discretion of the Board of Directors, may issue restricted stock, incentive stock options and non-qualified F-19 51 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) options for shares of the Company's common stock. Vesting of the restricted stock and stock options is at the discretion of the Board of Directors and generally occurs at a rate of 25% per year. During 1994, the Board of Directors amended the Plan increasing the total number of shares issuable to approximately 2,350,000. Additionally, in November 1995 the Board of Directors amended the Plan increasing the total number of shares issuable to approximately 3,350,000, and in December 1996 to 5,350,000. The price of the incentive stock options issued to employees under the Plan is not less than 100% of the fair market value of the common shares at the date of issuance. The option price for nonqualified options is determined by the Board of Directors at the time of grant and may be less than the fair market value of the common shares at the time of grant. However, no such options were granted at prices less then 100% of the fair value of common shares at the date of issuance. Options expire through February 2007. Restricted shares which are not vested upon an employee's termination are subject to a repurchase right of the Company at a price equal to the amount paid by the employee. Presented below is the activity in the Plan for the years ended June 30, 1997, 1996 and 1995:
OPTIONS PRICE RANGE --------- --------------- Balance, June 30, 1994................................. 1,943,595 $.50 - $100.00 Options exercised.................................... (15,000) $.50 Options granted...................................... 410,000 $1.25 - $6.00 Options cancelled.................................... (75,275) $.50 - $100.00 --------- Balance, June 30, 1995................................. 2,263,320 $.50 - $6.00 Options exercised.................................... (329,850) $.50 - $6.00 Options granted...................................... 803,000 $8.00 - $27.50 Options cancelled.................................... (125,000) $1.25 - $8.00 --------- Balance, June 30, 1996................................. 2,611,470 $.50 - $27.50 Options exercised.................................... (477,544) $.50 - $8.00 Options granted...................................... 1,254,000 $14.00 - $22.13 Options cancelled.................................... (532,579) $1.25 - $27.50 --------- Balance, June 30, 1997................................. 2,855,347 $.50 - $26.75 =========
In connection with the Company's merger with Quaker on August 7, 1997 (see Note 3), all vested and unvested options then outstanding under the Plan were cancelled, and the holders of these options received the right to receive cash payments equal to the excess, if any, of $23.00 over the exercise price of each option. Certain option holders were afforded the opportunity to convert these options into options to purchase common stock of the merged Company, in lieu of cash payments. Pursuant to the 1997 Management Incentive Plan approved subsequent to the Merger, the Company granted 1,179,000 options at a weighted average exercise price of approximately $20.61 with a weighted average fair market value of $11.23. Because the Company accounts for the Plan under APB No. 25, no compensation cost has been recognized for stock options. Had compensation expense for the Plan been determined based on the fair value at the grant dates under the provisions of SFAS No. 123, the Company's pro forma net loss and pro forma loss F-20 52 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) per share (see Note 3) would have been increased to the following adjusted pro forma amounts (dollars in thousands, except per share amounts):
1997 ------- Pro forma net loss -- as reported.......................................... $ (183) Pro forma net loss -- as adjusted.......................................... $(2,741) Pro forma loss per share -- as reported.................................... $ (0.01) Pro forma loss per share -- as adjusted.................................... $ (0.19)
The fair value of options was estimated using the Black-Scholes option pricing model based on the following assumptions:
EXPECTED LIVES RISK-FREE INTEREST RATE EXPECTED VOLATILITY (YRS) ------------------------ -------------------- --------------- Grant issued in 1996.... 5.85%-6.85% 26.9% Grants issued in 1997... 6.47% 2
12. LEASE COMMITMENTS The Company conducts its operations primarily from leased warehouses and office facilities and uses certain computer, data processing and other equipment under operating lease agreements expiring on various dates through 2005. The future minimum lease payments for operating leases having initial or remaining noncancelable terms in excess of one year for the five years succeeding June 30, 1997 and thereafter are as follows (in thousands): 1998............................................................... $18,415 1999............................................................... 15,224 2000............................................................... 11,406 2001............................................................... 5,815 2002............................................................... 2,879 Thereafter......................................................... 4,757 ------- $58,496 =======
Rental expense amounted to approximately $17,367,000, $13,149,000 and $5,878,000, for the fiscal years ended 1997, 1996 and 1995, respectively. 13. SHAREHOLDERS' EQUITY During fiscal 1994 and 1996, the Company issued three classes of redeemable preferred stock (Series A, Series B and Series C preferred stock; collectively, the "Preferred Stock"), aggregating 376,416 preferred stock shares, in exchange for cash or in settlement of certain debt obligations. The Preferred Stock, which was valued at $100 per share, accrued dividends at rates ranging between $4 per share per annum and $6 per share per annum, to be paid as declared by the Company's Board of Directors. Additionally, the Preferred Stock was to be automatically converted into Company common stock if the Company were to complete a public offering of common stock which met certain specified criteria. On February 9, 1996, the Company amended its Certificate of Incorporation to increase the number of authorized shares of common stock to 100,000,000 shares and to authorize 5,000,000 shares of Preferred Stock. F-21 53 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In April 1996, the Company completed a public offering of 6,300,000 shares of common stock at $18.00 per share (the "Offering"). Prior to the Offering, there was no public market for the Company's common stock. The common stock is listed on the Nasdaq National Market under the symbol "DOCI". The net proceeds of the offering, after deducting applicable issuance costs and expenses were $104,740,000. The proceeds were used to repay approximately $70,000,000 of the 1995 Term Loan, $30,000,000 in Affiliate Notes, approximately $1,446,000 in accrued and declared dividends to holders of the Preferred Stock and for other general corporate purposes. In connection with the offering, the Preferred Stock was automatically converted into 11,271,924 shares of common stock. During the year ended June 30, 1996, certain shareholders exercised their preemptive right to subscribe for and purchase additional shares of common stock or other securities so issued at the same price as originally issued on certain occasions from 1992 through 1995. On December 4, 1995, the following securities were purchased: (a) 382,578 shares of common stock at a price of $4 per share; (b) 999 shares of Series A Preferred Stock, at a price of $100 per share; (c) 1,776 shares of Series B Preferred Stock, at a price of $100 per share; (d) 1,924 shares of common stock at a price of $.50 per share; (e) 311,141 shares of Series C Preferred Stock, at a price of $100 per share; and (f) 17,407 Common Stock Purchase Warrants at a price of $7.25333 per warrant which entitles the holder to purchase 17,407 shares of common stock at an exercise price of $.10 per share. The 17,407 Common Stock Purchase Warrants were exercised in 1996. In consideration of his service as a director and Chairman of the Board, the Company, in a prior year, granted an individual warrants to purchase an aggregate of 66,667 shares of common stock at an exercise price of $4.00 per share. In connection with the Company's merger with Quaker in August 1997 (see Note 3), these warrants were converted into cash, with the holder receiving an amount equal to $23 less the exercise price. As more fully described in Note 3, the Company merged with Quaker on August 7, 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 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 (see Note 8). 14. RETIREMENT PLANS The Company maintains a 401(k) plan for its employees which is funded through the contributions of its participants. A similar plan exists for former employees of an acquired company for which eligibility and additional contributions were frozen in September 1988. In addition, the Company assumed the liability of the defined benefit pension plan applicable to employees of a company acquired in 1986. The eligibility and benefits were frozen as of the date of the acquisition. F-22 54 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pension expense for the defined benefit pension plan was computed as follows:
YEARS ENDED JUNE 30, ------------------------- 1997 1996 1995 ----- ----- ----- (IN THOUSANDS) Interest cost.............................................. $ 521 $ 495 $ 482 Actual return on plan assets............................... (409) (449) (312) Net amortization and deferral.............................. 9 72 (42) ----- ----- ----- Periodic pension costs..................................... $ 121 $ 118 $ 128 ===== ===== =====
The discount rate used in determining the actuarial present value of the projected benefit obligation was 7.5% and the expected long-term rate of return on assets was 8.5% for 1997, 1996 and 1995. The following table sets forth the funded status of the frozen pension plan as of May 1, 1997 and 1996:
1997 1996 ------- ------- (IN THOUSANDS) Accumulated benefits (100% vested)............................... $ 7,290 $ 7,116 Fair value of plan assets........................................ 6,128 5,800 ------- ------- Unfunded projected benefit obligation.................. 1,162 1,316 Unrecognized net loss............................................ 1,873 1,848 Unrecognized net transition obligation........................... 470 504 Adjustment to recognized minimum liability....................... (2,343) (2,352) ------- ------- Accrued pension costs............................................ $ 1,162 $ 1,316 ======= =======
15. EMPLOYEE SEVERANCE AND UNUTILIZED LEASE COSTS During the second quarter of fiscal 1997, in connection with the Memorex Telex acquisition (see Note 4), the Company recorded a $3.4 million pre-tax charge for estimated future employee severance costs, and a $0.9 million pre-tax charge for unutilized lease/contract losses ("exit costs"), primarily associated with duplicate facilities to be closed. The $3.4 million charge, recorded in accordance with SFAS No. 112, Employers' Accounting for Postemployment Benefits, reflects the actuarially determined benefit costs for the separation of employees who are entitled to benefits under pre-existing separation pay plans. These costs are included in selling, general and administrative expenses in the accompanying consolidated statement of operations for the year ended June 30, 1997. In the second quarter of fiscal 1996, in connection with the acquisition of BABSS, the Company recorded pre-tax charges for exit costs of $6.9 million, and estimated future employee severance costs of $0.1 million. During the fourth quarter of fiscal 1996, the Company reversed $3.4 million of these employee severance and exit cost liabilities. The reversal was primarily the result of the Company's ability to utilize and sublease various facilities identified in the original $7.0 million combined liability. Such information was unknown to the Company when the original liability was recorded. See Note 10 for further information regarding accrued severance and unutilized lease losses. 16. COMMITMENTS AND CONTINGENT LIABILITIES The Company, or certain businesses as to which it is alleged that the Company is a successor, have been identified as potentially responsible parties in respect to four waste disposal sites that have been identified by the United States Environmental Protection Agency as Superfund sites. In addition, the Company received a notice several years ago that it may be a potentially responsible party with respect to a fifth, related site, but F-23 55 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) has not received any other communication with respect to that site. Under applicable law, all parties responsible for disposal of hazardous substances at those sites are jointly and severally liable for clean-up costs. The Company originally estimated that its share of the costs of the clean-up of one of these sites would be approximately $500,000 which is provided for in liabilities related to the discontinued products division in the accompanying consolidated balance sheets as of June 30, 1997 and 1996. Complete information as to the scope of required clean-up at these sites is not yet available and, therefore, management's evaluation may be affected as further information becomes available. However, in light of information currently available to management, including information regarding assessments of the sites to date and the nature of involvement of the Company's predecessor at the sites, it is management's opinion that the Company's potential additional liability, if any, for the cost of clean-up of these sites will not be material to the consolidated financial position, results of operations or liquidity of the Company. The Company is also party to various legal proceedings incidental to its business. Certain claims, suits and complaints arising in the ordinary course of business have been filed or are pending against the Company. In the opinion of management, these actions can be successfully defended or resolved without a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. During the fourth quarter of fiscal 1997, the Company received $2.0 million in full settlement of a claim against its former insurance carrier, related to unreimbursed losses. This settlement was reflected as a reduction of selling, general and administrative costs in the accompanying statement of operations. 17. RELATED PARTY TRANSACTIONS Prior to 1994, the Company entered into an agreement to purchase printer products from Genicom Corporation (Genicom). The Company and Genicom are under common ownership. The initial term of the agreement is for five years with an option to extend based on mutual agreement of the parties. Purchases from Genicom for the years ended June 30, 1997, 1996 and 1995 were approximately $472,000, $1,512,000 and $1,972,000, respectively. Accounts payable to Genicom amounted to approximately $30,000 and $14,000 as of June 30, 1997 and 1996, respectively. During the year ended June 30, 1996, the Company paid approximately $125,000 for expense reimbursements to certain shareholders for services rendered in connection with an acquisition in 1988. The amount was accrued for in prior years. In connection with the Company's financing of the BABSS acquisition on October 20, 1995, the Company issued subordinated debentures and redeemable preferred stock to certain related parties (see Notes 8 and 13). 18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of the unaudited quarterly financial information for the fiscal years ended 1997 and 1996:
QUARTER ENDED ----------------------------------------------------------- MARCH SEPTEMBER 30, DECEMBER 31,(1) 31, JUNE 30, ------------- --------------- -------- -------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1997 Revenues................................. $ 176,426 $ 191,253 $205,070 $213,201 Gross profit............................. 41,861 48,221 54,698 59,310 Net income............................... 5,455 4,954 9,507 11,168 Pro forma net income (loss) (Note 3)..... (2,306) (2,813) 1,787 3,149 Pro forma earnings (loss) per share (Note 3)..................................... (0.16) (0.20) 0.13 0.22
F-24 56 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTER ENDED -------------------------------------------------------------- MARCH SEPTEMBER 30, DECEMBER 31, 31, JUNE 30,(2) ------------- --------------- -------- ----------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1996 Revenues................................. $ 46,791 $ 149,703 $172,673 $ 171,024 Gross profit............................. 15,524 38,224 42,711 41,416 Income before extraordinary item......... 4,386 638 5,842 9,923 Net income............................... 4,386 638 5,842 7,996
- --------------- (1) Net income for the second quarter of 1997 includes a $3.4 million pre-tax charge for estimated future employee severance costs, and a $.9 million pre-tax charge for unutilized lease/contract losses, primarily associated with duplicate facilities to be closed in connection with the Memorex Telex acquisition (see Note 15). (2) Net income for the fourth quarter of 1996 includes (a) a $3.4 million reversal of the previously recorded restructuring charge for unutilized leases (Note 15); and (b) a $1.5 million adjustment related to recoveries of previously reserved receivables. * * * * * * F-25 57 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholder of DecisionOne Corporation: We have audited the accompanying consolidated balance sheets of DecisionOne Corporation (a wholly-owned subsidiary of DecisionOne Holdings Corp.) and subsidiaries (the "Company") as of June 30, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1997. Our audits also included the related financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of DecisionOne Corporation and subsidiaries as of June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 1 to the consolidated financial statements, on May 29, 1997, DecisionOne Holdings Corp. completed a restructuring of the legal organization of certain of its subsidiaries. The Company's consolidated financial statements have been presented giving effect to the reorganization for all periods presented in a manner similar to a pooling of interests. Deloitte & Touche LLP Philadelphia, Pennsylvania August 15, 1997 F-26 58 DECISIONONE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1997 AND 1996 (IN THOUSANDS)
1997 1996 -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents............................................ $ 10,877 $ 8,221 Accounts receivable, net of allowances of $14,869 and $9,580......... 127,462 92,650 Consumable parts, net of allowances of $17,889 and $19,537........... 34,518 29,770 Prepaid expenses and other assets.................................... 4,542 5,112 Deferred tax asset................................................... 5,236 8,018 -------- -------- Total current assets......................................... 182,635 143,771 REPAIRABLE PARTS, Net of accumulated amortization of $154,555 and $105,462............................................................. 199,900 154,970 PROPERTY AND EQUIPMENT................................................. 34,227 32,430 INTANGIBLES............................................................ 191,366 164,659 OTHER ASSETS........................................................... 14,977 18,680 -------- -------- TOTAL ASSETS........................................................... $623,105 $514,510 ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY CURRENT LIABILITIES: Current portion of long-term debt.................................... $ 4,788 $ 2,321 Accounts payable and accrued expenses................................ 95,516 89,564 Deferred revenues.................................................... 56,600 38,485 Income taxes and other liabilities................................... 4,664 479 -------- -------- Total current liabilities.................................... 161,568 130,849 REVOLVING CREDIT LOAN AND LONG-TERM DEBT............................... 232,721 188,582 OTHER LIABILITIES...................................................... 13,928 14,286 SHAREHOLDERS' EQUITY: Common stock, no par value; one share authorized, issued and outstanding in 1997 and 1996...................................... -- -- Additional paid-in capital........................................... 258,609 255,535 Accumulated deficit.................................................. (42,432) (73,516) Other................................................................ (1,289) (1,226) -------- -------- Total shareholder's equity................................... 214,888 180,793 -------- -------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY............................. $623,105 $514,510 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-27 59 DECISIONONE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (IN THOUSANDS)
1997 1996 1995 -------- -------- -------- REVENUES................................................... $785,950 $540,191 $163,020 COST OF REVENUES........................................... 581,860 402,316 113,483 -------- -------- -------- GROSS PROFIT............................................... 204,090 137,875 49,537 OPERATING EXPENSES: Selling, general and administrative expenses............. 112,870 72,829 21,982 Amortization of intangibles.............................. 23,470 15,673 6,776 -------- -------- -------- OPERATING INCOME........................................... 67,750 49,373 20,779 INTEREST EXPENSE, Net of interest income of $197 in 1997, $239 in 1996 and $53 in 1995............................. 14,698 14,714 2,468 -------- -------- -------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (BENEFIT), DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM..................................................... 53,052 34,659 18,311 PROVISION (BENEFIT) FOR INCOME TAXES....................... 21,968 13,870 (23,104) -------- -------- -------- INCOME BEFORE DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM..................................................... 31,084 20,789 41,415 DISCONTINUED OPERATIONS -- Income from operations of discontinued products division........................... 1,113 -------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEM........................... 31,084 20,789 42,528 EXTRAORDINARY ITEM, NET OF TAX BENEFIT OF $1,284........... 1,927 -------- -------- -------- NET INCOME................................................. $ 31,084 $ 18,862 $ 42,528 ======== ======== ======== PRO FORMA INFORMATION (UNAUDITED): Net income before interest expense adjustment............ $ 31,084 Interest expense adjustment, net of tax.................. (25,358) -------- Pro forma net income..................................... $ 5,726 ========
The accompanying notes are an integral part of these consolidated financial statements. F-28 60 DECISIONONE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT NUMBER OF SHARES OF COMMON STOCK)
FOREIGN TOTAL ADDITIONAL CURRENCY PENSION SHAREHOLDER'S PAID-IN ACCUMULATED TRANSLATION LIABILITY (DEFICIENCY) CAPITAL DEFICIT ADJUSTMENT ADJUSTMENT EQUITY ---------- ----------- ----------- ---------- ------------- BALANCE, JUNE 30, 1994...................................... $114,883 $(134,906) $ 457 $ (1,625) $ (21,191) Net income................................................ 42,528 42,528 Adjustment to pension liability........................... (80) (80) Foreign currency translation adjustment................... 223 223 Contributed capital....................................... 8 8 -------- --------- ---- ------- -------- BALANCE, JUNE 30, 1995...................................... 114,891 (92,378) 680 (1,705) 21,488 Net income................................................ 18,862 18,862 Adjustment to pension liability........................... (143) (143) Contributed capital....................................... 142,090 142,090 Foreign currency translation adjustment................... (58) (58) Dividends declared........................................ (1,446) (1,446) -------- --------- ---- ------- -------- BALANCE, JUNE 30, 1996...................................... 255,535 (73,516) 622 (1,848) 180,793 Net income................................................ 31,084 31,084 Adjustment to pension liability........................... (25) (25) Foreign currency translation adjustment................... (38) (38) Contributed capital....................................... 3,074 3,074 -------- --------- ---- ------- -------- BALANCE, JUNE 30, 1997...................................... $258,609 $ (42,432) $ 584 $ (1,873) $ 214,888 ======== ========= ==== ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-29 61 DECISIONONE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (IN THOUSANDS)
1997 1996 1995 --------- --------- -------- OPERATING ACTIVITIES: Net income............................................... $ 31,084 $ 18,862 $ 42,528 Adjustments to reconcile net income to net cash provided by operating activities: Income from discontinued operations................... (1,113) Depreciation.......................................... 13,549 8,309 1,779 Amortization of repairable parts...................... 63,870 37,869 7,688 Amortization of intangibles........................... 23,470 15,673 6,775 Provision for losses on accounts receivable........... 7,849 3,434 1,930 Provision for consumable parts obsolescence........... 2,554 1,171 1,995 Extraordinary item.................................... 1,927 Changes in operating assets and liabilities, net of effects from companies acquired, which provided (used) cash: Accounts receivable................................. (38,365) (1,900) (8,836) Consumable parts.................................... (6,038) (1,248) 931 Accounts payable and accrued expenses............... 3,885 256 (1,171) Deferred revenues................................... (25,427) (33,928) 6,811 Net changes in other assets and liabilities......... 12,543 1,469 (20,902) --------- --------- -------- Net cash provided by operating activities........ 88,974 51,894 38,415 --------- --------- -------- INVESTING ACTIVITIES: Capital expenditures..................................... (10,540) (7,278) (2,786) Repairable spare parts purchases, net.................... (86,446) (63,514) (12,154) Acquisitions of companies and contracts.................. (32,258) (275,562) (39,331) --------- --------- -------- Net cash used in investing activities............ (129,244) (346,354) (54,271) --------- --------- -------- FINANCING ACTIVITIES: Capital contributions.................................... 439 142,090 Proceeds from issuance of subordinated debentures........ 30,000 Payment of dividends..................................... (1,446) Payment of subordinated debentures....................... (30,000) Net proceeds from borrowings............................. 43,625 162,772 17,537 Principal payments under capital leases.................. (1,075) (3,423) Other.................................................... (63) 29 --------- --------- -------- Net cash provided by financing activities........ 42,926 300,022 17,537 --------- --------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS.................. 2,656 5,562 1,681 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............... 8,221 2,659 978 --------- --------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR..................... $ 10,877 $ 8,221 $ 2,659 ========= ========= ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Net cash paid during the year for: Interest.............................................. $ 15,640 $ 14,838 $ 2,065 Income taxes.......................................... 8,381 5,344 1,009 Noncash investing/financing activities: Issuance of seller notes in connection with acquisitions........................................ 2,224 587 2,866 Issuance of seller notes in exchange for repairable parts............................................... 1,855 Repairable parts received in lieu of cash for accounts receivable.......................................... 1,124
The accompanying notes are an integral part of these consolidated financial statements. F-30 62 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1997, 1996 AND 1995 1. NATURE OF BUSINESS DecisionOne Corporation (a wholly-owned subsidiary of DecisionOne Holdings Corp., herein called "Holdings") and its wholly-owned subsidiaries (the "Company") are providers of multivendor computer maintenance and technology support services. The Company offers its customers a single-source, independent (i.e., not affiliated with an original equipment manufacturer, or "OEM") solution for computer maintenance and technology support requirements, including hardware maintenance services, software support, end-user/ help desk services, network support and other technology support services. These services are provided by the Company across a broad range of computing environments, including mainframes, midrange and distributed systems, workgroups, personal computers ("PCs") and related peripherals. In addition, the Company provides outsourcing services for OEMs, software publishers, system integrators and other independent service organizations. The Company delivers its services through an extensive field service organization of approximately 4,000 field technicians in over 150 service locations throughout North America and through strategic alliances in selected international markets. Through June 30, 1995, the Company's services predominantly involved the provision of maintenance services to the midrange computer market. On October 20, 1995, the Company acquired Bell Atlantic Business Systems Services, Inc. ("BABSS") (see Note 4). BABSS provided computer maintenance and technology support services for computer systems ranging from the data center, which includes both mainframe and midrange systems, to desk top. Subsequent to the acquisition, Holding's principal operating subsidiary, Decision Servcom, Inc., was merged into BABSS, which had changed its name to DecisionOne Corporation. As a result, DecisionOne Corporation is the principal operating subsidiary of the Holdings. On May 29, 1997, DecisionOne Holdings Corp. Holdings Corp. ("Holdings") completed a restructuring of the legal organization of its subsidiaries (the "Corporate Reorganization"). The Corporate Reorganization involved Holdings' contribution to DecisionOne Corporation of ownership interests in its subsidiaries, all of which were under Holdings' control (the "Contributed Subsidiaries"). The Corporate Reorganization has been accounted for in a manner similar to a pooling of interests. Accordingly, the Company's consolidated financial statements include the accounts of the Contributed Subsidiaries for all periods presented. The Company's wholly owned, direct international subsidiaries are not significant to the Company's consolidated financial statements. 2. SIGNIFICANT ACCOUNTING POLICIES Consolidation -- The consolidated financial statements include the accounts of DecisionOne Corporation and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Pro Forma Information (Unaudited) -- The pro forma information included in the accompanying statement of operations and in Note 3 has been prepared to reflect the Company's and Holding's recapitalization and merger with Quaker Holding Co. ("Quaker") and related transactions as if these had occurred on July 1, 1996. Cash and Cash Equivalents -- Cash and cash equivalents are highly liquid investments with remaining maturities of three months or less at the time of purchase. Cash equivalents, consisting primarily of repurchase agreements with banks, are stated at cost, which approximates fair market value. Consumable Parts and Repairable Parts -- In order to provide maintenance and repair services to its customers, the Company is required to maintain significant levels of computer parts. These parts are classified as consumable parts or as repairable parts. Consumable parts, which are utilized during the repair process, are F-31 63 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) stated at cost, principally determined using the weighted average method, less an accumulated allowance for obsolescence and shrinkage. Consumable parts are reflected in cost of revenues during the period utilized. Repairable (rotable) parts, which can be refurbished and reused, are stated at original cost less accumulated amortization. Amortization of repairable parts is reflected in cost of revenues. Costs of refurbishing repairable parts are also included in cost of revenues as these costs are incurred. Amortization of repairable parts is based principally on the composite group method, using straight-line composite rates. Repairable parts generally have an economic life which corresponds to the normal life cycle of the related products, currently estimated to be three to five years. As consumable and repairable parts are retired, the weighted average gross amounts at which such parts have been carried are removed from the respective assets accounts, and charged to the accumulated allowance or accumulated amortization accounts, as applicable. Periodic revisions to amortization and allowance estimates are required, based upon the evaluation of several factors, including changes in product life cycles, usage levels and technology changes. Changes in these estimates are reflected on a prospective basis unless such changes result from an extraordinary retirement or from other events or circumstances which indicate that impairment may exist. Impairment is recognized when the net carrying value of the parts exceeds the estimated current and anticipated undiscounted net cash flows. Measurement of the amount of impairment, if any, is calculated based upon the difference between carrying value and fair value. Property and Equipment -- Property and equipment are stated at cost. Depreciation is provided for using the straight-line method over the estimated useful lives of the depreciable assets. Capitalized equipment leases and leasehold improvements are amortized over the shorter of the related lease terms or asset lives. Maintenance and repairs are charged to expense as incurred. Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is charged to operations. Business and Contract Acquisitions -- Business and contract acquisitions have been accounted for as purchase transactions, with the purchase price of each acquisition allocated to the assets acquired and liabilities assumed based upon their respective estimated fair values at the dates of acquisition. Consistent with the Company's parts retirement accounting methods, the gross value of parts acquired is generally stated at weighted average cost. Fair value adjustments, if any, are reflected as adjustments to the respective accumulated amortization or allowance accounts. The excess of the purchase price over identified net assets acquired is amortized, on a straight-line basis, over the expected period of future benefit (see Note 6). Typical contract acquisitions are comprised primarily of customer maintenance and support contracts of complementary entities, along with the accompanying consumable and repairable parts required to support these contracts and other identifiable intangibles, such as noncompete agreements. Liabilities assumed in business and contract acquisitions consist primarily of prepaid amounts related to multi-period customer maintenance and support contracts. These liabilities are recorded as deferred revenues at acquisition dates and are recognized as revenues when earned in accordance with the terms of the respective contracts. Intangible Assets -- Intangible assets are comprised of excess purchase price over the fair value of net assets acquired, acquired customer lists and other intangible assets, including the fair value of contractual profit participation rights and amounts assigned to noncompete agreements. Intangible assets, which arise principally from acquisitions, are generally amortized on a straight-line basis over their respective estimated useful lives (see Note 6). The Company evaluates the carrying value of intangible assets whenever events or changes in circumstances indicate that these carrying values may not be recoverable within the amortization period. Impairment is recognized when the net carrying value of the intangible asset exceeds the estimated current and anticipated discounted future net cash flows. Measurement of the amount of impairment, if any, is calculated based upon the difference between carrying value and fair value. F-32 64 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Revenue -- The Company enters into maintenance contracts whereby it services various manufacturers' equipment. Revenues from these contracts are recognized ratably over the terms of such contracts. Prepaid revenues from multi-period contracts are recorded as deferred revenues and are recognized ratably over the term of the contracts. Revenues derived from the maintenance of equipment not under contract are recognized as the service is performed. Revenues derived from other technology support services are recognized as the service is performed or ratably over the term of the contract. Foreign Currency Translation -- Gains and losses resulting from foreign currency translation are accumulated as a separate component of shareholders' equity. Gains and losses resulting from foreign currency transactions are included in operations. Credit Risk -- Concentration of credit risk with respect to trade receivables is limited due to the large number of customers comprising the Company's customer base and their dispersion across many industries. Fair Value of Financial Instruments -- The following disclosures of the estimated fair value of financial instruments were made in accordance with the requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Cash and Cash Equivalents, Accounts Receivable, and Accounts Payable -- The carrying amount of these items are a reasonable estimate of their fair value. Short-Term Debt and Long-Term Debt -- As more fully described in Note 8, under its revolving borrowing facility the Company incurs interest at variable rates based upon market conditions (i.e., based upon the prime rate or LIBOR). Rates applicable to other debt instruments, which consist primarily of short-term notes payable in connection with certain acquisitions, are comparable to those of similar instruments currently available to the Company. Accordingly, the carrying amount of debt is a reasonable estimate of its fair value. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates and assumptions. Discontinued Operations -- During fiscal 1993, in connection with the sale of its products division, the Company established estimated liabilities relating to the settlement of the remaining assets and liabilities of this division. In 1995, the Company revised its estimates as a result of settlement of these liabilities, and the consolidated statement of operations for 1995 reflects an increase in net income of $1,113,000 for the change in estimate. Derivative Financial Instruments -- Derivative financial instruments, which constitute interest rate swap agreements (see Note 8), are periodically used by the Company in the management of its variable interest rate exposure. Amounts to be paid or received under interest rate swap agreements are recognized as interest expense or interest income during the period in which these accrue. Gains realized, if any, on the early termination of interest rate swap contracts are deferred, to be recognized upon the termination of the related asset or liability or expiration of the original term of the swap contract, whichever is earlier. The Company does not hold any derivative financial instruments for trading purposes. Reclassifications -- Certain reclassifications have been made to the 1996 balances in order to conform with the 1997 presentation. F-33 65 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. The merger, which will be recorded as a recapitalization for accounting purposes as of the consummation date, occurred pursuant to an Agreement and Plan of Merger (the "Merger Agreement") by and among the Company, Holdings and Quaker dated May 4, 1997. The accompanying historical consolidated financial statements do not include any adjustments with respect to the consummation of the merger. In accordance with the terms of the Merger Agreement, which was formally approved by the Company's shareholders on August 7, 1997, Quaker merged with and into Holdings, and the holders of approximately 94.7% of shares of Holdings common stock outstanding immediately prior to the merger received $23 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 Holdings, as determined based upon shareholder elections and stock proration factors specified in the Merger Agreement. Immediately following the merger, continuing shareholders owned approximately 11.9% of shares of outstanding Holdings common stock. The aggregate value of the merger transaction was approximately $940 million, including refinancing of the Company's revolving credit facility (see Note 8). In connection with the merger, Holdings raised $85 million through the public issuance of discount debentures, and the Company issued publicly-held 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 and 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 Holdings shareholders, to pay the holders of Holdings stock options and stock warrants canceled or converted, as applicable, in connection with the merger, to repay the Company's existing revolving credit facility and to pay expenses incurred in connection with the merger. As a result of the merger, the Company and Holdings incurred various expenses, aggregating approximately $71 million on a pretax basis (approximately $64 million after related tax benefit), subject to adjustment, in connection with consummating the transaction. These costs consisted primarily of compensation costs, underwriting discounts and commissions, professional and advisory fees and other expenses. The Company will report this one-time charge during the first quarter of fiscal 1998. In addition to these expenses, the Company and Holdings also incurred approximately $22.3 million of capitalized debt issuance costs associated with the merger financing. These costs will be charged to expense over the terms of the related debt instruments. The following summarized unaudited pro forma information of the Company as of and for the year ended June 30, 1997 assumes that the merger had occurred on July 1, 1996. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the financial condition or of the results of operations which actually would have resulted had the merger occurred as of July 1, 1996 or which may result in the future. F-34 66 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED) (IN THOUSANDS) PRO FORMA BALANCE SHEET INFORMATION: Total assets................................................................... $707,785 Long term indebtedness (including current portion)............................. 641,376 Other liabilities.............................................................. 170,708 Shareholders' (deficit)........................................................ (104,299) PRO FORMA INCOME STATEMENT INFORMATION: Revenues....................................................................... $785,950 Operating income............................................................... 67,750 Income from continuing operations before income taxes.......................... 9,772 Net income..................................................................... 5,726
The pro forma net loss reflects a net increase in interest expense of approximately $43.3 million ($25.4 million after related pro forma tax effect), attributable to additional financing incurred in connection with the merger, net of repayment of the Company's existing revolving credit facility. 4. BUSINESS AND CONTRACT ACQUISITIONS During the years ended June 30, 1997, 1996 and 1995, the Company acquired certain net assets of other service companies as follows (in thousands):
EXCESS CONSIDERATION PURCHASE --------------------------------------------------------- PRICE OVER TOTAL FAIR VALUE NUMBER OF PURCHASE OTHER OF NET ASSETS YEARS ENDED ACQUISITIONS CASH NOTES PRICE INTANGIBLES ACQUIRED - ---------------------------------- ------------ -------- ------ -------- ----------- ------------- Significant business acquisitions: June 30, 1995................... 1 $ 27,413 $2,094 $ 29,507 $15,600 $ 7,394 June 30, 1996................... 1 250,549 250,549 72,581 60,533 Nonsignificant business or maintenance contract acquisitions: June 30, 1995................... 5 9,327 255 9,582 4,577 8,680 June 30, 1996................... 5 14,853 578 15,431 6,522 6,318 June 30, 1997................... 9 31,749 2,224 33,973 231 47,200
On August 31, 1994, the Company purchased certain net assets and liabilities of IDEA/Servcom, Inc. for approximately $29,500,000. This acquisition was funded by cash and the issuance of a $2,600,000 noninterest- bearing note to the seller. See seller notes payable section of Note 8. The excess of asset purchase price over the fair value of net assets acquired at the date of purchase was approximately $7,400,000. On October 20, 1995, the Company acquired all of the outstanding common stock of BABSS, a subsidiary of Bell Atlantic Corporation ("BAC") for approximately $250,549,000. The acquisition was funded with the proceeds from the issuance of $30,000,000 of Series C preferred stock, $30,000,000 of subordinated debentures and the balance from additional bank borrowings (see Notes 8 and 13). The excess of asset purchase price over the fair value of net assets acquired at the date of purchase was initially recorded as approximately $58,796,000. Subsequent to the acquisition, the Company recorded a net adjustment increasing the initial amount by $1,737,000 and adjusted other balance sheet accounts principally by the same amount. This resulted from the adjustment and reclassification of certain tax accruals offset by favorable negotiations on certain leased facilities (see Note 7). As part of the acquisition, the Company purchased from BAC contractual profit participation rights whereby the Company will receive a fixed percentage of the annual operating profits (3.2% or 3.5%, depending upon the level of profits) earned by a former foreign affiliate of F-35 67 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) BAC which provides computer maintenance and technology support services in Europe. The estimated value of the discounted estimated future cash flows over a twenty-year period from these contractual profit participation rights is $25,000,000. Included in nonsignificant maintenance contract acquisitions is the acquisition of substantially all of the contracts and related assets, including spare parts of the U.S. computer service business of Memorex Telex Corporation and certain of its affiliates (collectively, "Memorex Telex"). Memorex Telex had filed a petition in bankruptcy in the United States Bankruptcy Court (the "Court") in the District of Delaware on October 15, 1996; the Court approved the sale to the Company on November 1, 1996. The adjusted purchase price was $52.7 million, comprised of the assumption of certain liabilities under contracts of the service business, which were valued at $28.3 million, and base cash consideration of approximately $24.4 million, after certain purchase price adjustments, excluding transaction and closing costs. The estimated fair market values of certain assets acquired, as well as liabilities assumed, are subject to further adjustment as additional information becomes available to the Company. During the third quarter of fiscal 1997, the Company recorded an adjustment increasing the deferred revenues assumed in the Memorex Telex acquisition by approximately $2,300,000, to revise the estimated fair value of certain contract liabilities of the business assumed by the Company. The following summarized unaudited pro forma information for significant acquisitions that have a material effect on the Company's results of operations for the years ended June 30, 1996 and 1995 assumes that the acquisitions occurred as of July 1, 1994. The nonsignificant business and maintenance contract acquisitions are not considered material individually or in the aggregate. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the significant acquisitions been in effect on the dates indicated or which may result in the future.
YEARS ENDED JUNE 30, --------------------- 1996 1995 -------- -------- (IN THOUSANDS) (UNAUDITED) Revenues....................................................... $697,676 $679,284 Income from continuing operations before extraordinary item.... 31,080 20,153 Net income..................................................... 29,153 21,266
5. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
JUNE 30, --------------------- 1997 1996 -------- -------- (IN THOUSANDS) Land and buildings............................................. $ 6,318 $ 2,055 Equipment...................................................... 16,248 13,858 Computer hardware and software................................. 35,030 27,277 Furniture and fixtures......................................... 8,308 8,051 Leasehold improvements......................................... 4,628 4,125 -------- -------- 70,532 55,366 Accumulated depreciation and amortization...................... (36,305) (22,936) -------- -------- $ 34,227 $ 32,430 ======== ========
F-36 68 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The principal lives (in years) used in determining depreciation and amortization rates of various assets are: buildings (20-40); equipment (3-10); computer hardware and software (3-5); furniture and fixtures (5-10) and leasehold improvements (term of related leases). Depreciation and amortization expense was approximately $13,549,000, $8,309,000 and $1,779,000 for the fiscal years ended 1997, 1996 and 1995, respectively. 6. INTANGIBLES Intangibles consisted of the following:
JUNE 30, --------------------- 1997 1996 -------- -------- (IN THOUSANDS) Excess purchase price over fair value of net assets acquired... $130,548 $ 82,355 Customer lists................................................. 64,688 64,758 Contractual profit participation rights........................ 25,000 25,000 Noncompete agreements.......................................... 4,631 4,500 Other intangibles.............................................. 9,131 7,671 -------- -------- 233,998 184,284 Accumulated amortization....................................... (42,632) (19,625) -------- -------- $191,366 $164,659 ======== ========
The periods (in years) used in determining the amortization rates of intangible assets are: excess purchase price over fair value of net assets acquired (4-20); customer lists (3-8); contractual profit participation rights (20); noncompete agreements (3-5) and other (1-6). Amortization expense relating to intangibles was approximately $23,470,000, $15,673,000 and $6,775,000, for the fiscal years ended 1997, 1996 and 1995, respectively. 7. ACCRUED EXPENSES Accounts payable and accrued expenses consisted of the following:
JUNE 30, ------------------- 1997 1996 ------- ------- (IN THOUSANDS) Accounts payable................................................. $55,723 $53,347 Compensation and benefits........................................ 22,706 22,115 Interest......................................................... 563 1,505 Unused leases.................................................... 878 3,485 Pension accrual.................................................. 1,371 1,258 Accrued accounting and legal fees................................ 1,435 1,073 Non-income taxes and other....................................... 12,840 6,781 ------ ------ $95,516 $89,564 ====== ======
Prior to 1994, the Company received $2,600,000 in tax bills (primarily interest) from the Internal Revenue Service ("IRS") related to claims for tax and interest for the years 1981 through 1987. The Company paid approximately $500,000 of the claims upon receipt of the bills. Although the Company disputed the tax bills, an IRS mandated payment of $828,000 was made in 1996. As of June 30, 1996, the F-37 69 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company had an accrued liability of $1,883,000 related to this assessment. During fiscal 1997, the Company paid $1,729,000 in full settlement of these tax and interest bills. In connection with the acquisition of BABSS, which has been accounted for using the purchase method of accounting (see Note 4), the Company recorded approximately $11,000,000 in liabilities resulting from planned actions with respect to BABSS, which included the costs to exit certain leased facilities and to involuntarily terminate employees. The provision of approximately $3,500,000 for the costs to exit certain leased facilities principally relates to future lease payments on a warehouse in California which has been made idle. Approximately $4,000,000 was provided for severance and termination benefits of approximately 210 employees in the field, operations support, sales and administration. Approximately $3,000,000 was provided in connection with the exit plan for write-downs of spare parts and equipment at two California facilities which will not be utilized in future operations. The provision for various other charges of approximately $500,000 consisted of costs to complete the exit plan. As of June 30, 1996, the Company had settled all of these liabilities, except for the lease liabilities on idle facilities for which payments were scheduled to continue through 1999 (see Note 15). At June 30, 1997 and 1996 remaining amounts due under these leases were $0 and $1,200,000, respectively. As a result of successful negotiations of unutilized leased facilities, during 1996, the Company recorded a reduction of approximately $975,000 to both the provisions for leased facilities and excess purchase price over fair value of net assets acquired. 8. REVOLVING CREDIT LOAN AND LONG-TERM DEBT Debt consists of the following:
JUNE 30, --------------------- 1997 1996 -------- -------- (IN THOUSANDS) Revolving credit loans......................................... $231,671 $186,400 Seller noninterest-bearing notes payable....................... 2,922 2,118 Seller note payable -- purchase spare parts.................... 1,608 Capitalized lease obligations, payable in varying installments at interest rates ranging from 7.25% to 13.01% at June 30, 1997......................................................... 1,308 2,385 ------- ------- 237,509 190,903 Less current portion........................................... 4,788 2,321 ------- ------- $232,721 $188,582 ======= =======
REVOLVING CREDIT LOANS On October 20, 1995, in connection with the BABSS acquisition (see Note 4) the Company entered into a Credit Agreement which provided for a term loan (the "1995 Term Loan") of $230,000,000 and a revolving credit facility of up to a maximum of $30,000,000. The 1995 Term Loan provided for 19 equal quarterly principal payments of $10,000,000 to be due and payable on the last day of each calendar quarter commencing December 31, 1995 with a final payment due on September 30, 2000. Loans under the revolving credit facility were to mature on September 30, 2000. Interest on the 1995 Term Loan and the revolving credit facility were at varying rates based, at the Company's option, on the Eurodollar rate or the Alternative Base Rate (NationsBanc prime rate), plus the Applicable Margins. Margins were based on the ratio of Total Funded Debt to EBITDA; the Eurodollar Margin ranged from 1.75% to 2.5%, while the Alternative Base Rate Margin ranged from 0.5% to 1.25%. F-38 70 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In April 1996, the Company completed an initial public offering. The Company used a portion of the proceeds to repay approximately $70 million of the 1995 Term Loan. Also in April 1996, the Company converted the 1995 Term Loan and the existing $30 million Revolving Credit Facility into a $225 million variable rate, unsecured revolving credit facility ("the 1996 Revolving Credit Facility"). During fiscal 1997, the 1996 Revolving Credit Facility commitment was increased to $300 million, in connection with the acquisition of certain contracts and assets. The 1996 Revolving Credit Facility is at floating interest rates, based either on the LIBOR or prime rate, in either case plus an Applicable Margin, at the Company's option. As of June 30, 1997, the applicable rate was LIBOR plus .75% or approximately 6.5%. The 1996 Revolving Credit Facility enables the Company to borrow up to $300 million in the form of revolving credit loans with a maturity date of April 26, 2001 and with interest periods determined principally on a quarterly basis. To offset the variable rate characteristics of the borrowings, the Company entered into interest rate swap agreements with two banks resulting in fixed interest rates of 5.4% on $40.0 million notional principal amount through December 1997 and 5.5% on another $40.0 million notional principal amount through December 1998. During fiscal 1997, the Company terminated these swap agreements, resulting in an insignificant gain which has been deferred to the first quarter of fiscal 1998. Under the terms of the 1996 Revolving Credit Facility, the Company may use up to $25,000,000 for letters of credit, subject to the limitation of $300,000,000 in total credit. As of June 30, 1997, letters of credit in the face amount of $3,067,000 were outstanding. The loan agreement relating to the 1996 Revolving Credit Facility contains various terms and covenants which provide for certain restrictions on the Company's indebtedness, liens, investments, disposition of assets and mergers and acquisitions and require the Company, among other things, to maintain minimum levels of consolidated net worth and certain minimum financial ratios. The borrower under the 1996 Revolving Credit Facility is DecisionOne Corporation. Repayment of the debt is guaranteed by the Company, Holdings and the Company's other subsidiaries except for its Canadian subsidiary. The Company's debt agreements and other agreements to which it is a party contain certain covenants restricting the payment of dividends on, or repurchases of, Holdings common stock. The Company had average borrowings of $221,069,000 and $172,065,000 during 1997 and 1996, respectively, at an average interest rate of 6.4% and 8.69%, respectively. Maximum borrowings during 1997 and 1996 were $243,350,000 and $268,748,000, respectively. Subsequent to June 30, 1997, in connection with the Company's and Holdings' merger with Quaker (see Note 3), the 1996 Revolving Credit Facility was repaid in full, including all interest due thereon. This refinancing was accomplished, in part, through the issuance of certain new debt instruments, consisting of senior discount notes, senior subordinated notes and a term loan/revolving credit facility which, in the aggregate, provide financing of approximately $810 million (including financing obtained by Holdings), subject to certain conditions. The new revolving credit facility provides the Company with $105 million of available financing, subject to a borrowing base, for working capital purposes subsequent to the merger. The Company's Canadian subsidiary has available a $1.5 million (Canadian) revolving line of credit agreement with a local financial institution. At June 30, 1997, approximately $471,000 (in U.S. dollars) was outstanding under this agreement. There were no amounts outstanding at June 30, 1996. SELLER NOTES PAYABLE In connection with certain acquisitions (see Note 4), the Company issued noninterest-bearing notes, the principal of which is primarily due upon settlement of contingent portions of the acquisition purchase price within a specified period subsequent to closing, generally not exceeding one year from the acquisition date. F-39 71 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Contingencies typically pertain to actual amounts of monthly maintenance contract revenues acquired and prepaid contract liabilities assumed in comparison to amounts estimated in acquisition agreements. The Company imputes interest, based upon market rates, for long-term, non-interest-bearing obligations. During 1997, the Company issued a secured note payable to the seller for the purchase of repairable parts in the original amount of $1,854,000. The note accrues interest at an interest rate of approximately 8%, and requires quarterly payments of principal and interest of approximately $273,000 until maturity in December 1998. SUBORDINATED DEBENTURES In connection with the BABSS acquisition (see Note 4) on October 20, 1995, the Company issued and sold to Holdings principal shareholders, an aggregate $30,000,000 principal amount of 10.101% Debentures (the "Affiliate Notes") due on October 20, 2001. The Affiliate Notes were subordinated to the 1995 Term Loan and the revolving credit facility. Interest on the Affiliate Notes was payable semiannually on the last business day of June and December of each year commencing on December 31, 1995. In connection with the issuance of the debentures, Holdings issued 468,750 Common Stock Purchase Warrants (the "Warrants"). Each Warrant initially entitled the owner to buy one share of Common Stock for $0.10. The number of shares that can be purchased per Warrant steps up over 24 months in conjunction with the increasing conversion privilege applicable to the Preferred Stock such that, at the end of 24 months, each Warrant entitled the holder to buy approximately 1.21 shares of Common Stock at a price of $0.10 per share. The Warrants were exercisable from October 20, 1997 until October 20, 2001, provided that if Holdings had a public offering of its Common Stock meeting certain requirements before October 20, 1997, the Warrants became exercisable at the time of the public offering and the number of shares that could be purchased on exercise was fixed at that time and no longer increased in steps. The Warrants also became exercisable upon retirement of the Debentures. Each Warrant had an assigned value of $7.25333 which resulted in an original issue discount of $3,400,000 which was being amortized over the term of the Affiliate Notes. Upon consummation of Holdings initial public offering in April 1996, the Company was required to pay up to the total amount outstanding under the Affiliate Notes and, accordingly, the Company used $30,000,000 of the proceeds to retire the Affiliate Notes. As a result, in 1996 the Company recorded an extraordinary loss in the amount of $3,211,000, net of taxes of $1,284,000, due to the acceleration of the amortization of original issue discount. F-40 72 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. INCOME TAXES The provision (benefit) for income taxes consists of the following:
YEARS ENDED JUNE 30, -------------------------------- 1997 1996 1995 ------- ------- -------- (IN THOUSANDS) Current: Federal............................................ $10,909 $ 2,892 $ 16,065 State.............................................. 3,616 1,595 4,599 Foreign............................................ 1,080 548 (1,272) Deferred: Federal............................................ 6,460 8,945 (29,897) State.............................................. 16 641 (3,617) Foreign............................................ (113) (499) Benefit of operating loss carryforwards: Federal............................................ (7,729) State.............................................. (1,253) Foreign............................................ (252) ------- ------- -------- Provision (benefit) for income taxes................. $21,968 $13,870 $(23,104) ======= ======= ========
The tax effects of temporary differences consisted of the following:
JUNE 30, ------------------- 1997 1996 ------- ------- (IN THOUSANDS) Gross deferred tax assets: Accounts receivable............................................ $ 4,771 $ 1,341 Inventory...................................................... 2,195 2,586 Accrued expenses............................................... 7,000 6,378 Unused leases.................................................. 390 Fixed assets................................................... 299 Intangibles.................................................... 6,196 5,670 Operating loss carryforwards................................... 4,868 14,252 Tax credit carryforwards....................................... 1,670 1,170 ------- ------- Gross deferred tax assets........................................ 27,090 31,696 Gross deferred tax liabilities: Repairable spare parts......................................... (8,918) (7,273) Fixed assets................................................... (108) ------- ------- Gross deferred tax liabilities................................... (9,026) (7,273) ------- ------- Net deferred tax asset........................................... $18,064 $24,423 ======= =======
F-41 73 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net operating loss and minimum tax credit carryforwards available at June 30, 1997 expire in the following years:
YEAR OF EXPIRATION AMOUNT ---------- -------------- (IN THOUSANDS) Federal operating losses............................... $ 12,877 2006-2008 State operating losses................................. 8,669 1998-2008 Investment tax credit.................................. 134 2004 Minimum tax credit..................................... 1,536 INDEFINITE
As a result of the Company's initial public offering in April, 1996, an "ownership change" occurred pursuant to Section 382 of the Internal Revenue Code. Accordingly, for Federal income tax purposes, net operating loss and tax credit carryforwards arising prior to the ownership change are limited during any future period to the Section 382 "limitation amount" of approximately $20.0 million per annum. In addition, the Company's merger with Quaker on August 7, 1997 (see Note 3) represents another such "ownership change" pursuant to Section 382. The Company estimates that the limitation on the use of tax loss carryforwards and other credits, for Federal income tax purposes, in any post-merger period will be reduced to approximately $9.0 million per annum. A reconciliation between the provision (benefit) for income taxes, computed by applying the statutory federal income tax rate of 35% for 1997, 1996 and 1995 to income before income taxes, and the actual provision (benefit) for income taxes follows:
1997 1996 1995 ---- ---- ------ Federal income tax provision at statutory tax rate........... 35.0% 35.0% 35.0% State income taxes, net of federal income tax provision...... 5.0 4.6 3.5 Foreign income taxes......................................... 0.4 (6.9) Unused lease credit.......................................... (0.1) Benefit of operating loss carryforward....................... (0.8) (49.1) Change in valuation allowance................................ (1.4) (108.9) Other........................................................ 1.0 2.6 0.3 ---- ---- ------ Actual income tax provision (benefit) effective tax rate..... 41.4% 40.0% (126.2)% ==== ==== ======
The Company has recorded a deferred tax asset of $4,868,000 reflecting the benefit of federal and state net operating loss carryforwards, which expire in varying amounts between 1998 and 2008. Realization depends on generating sufficient taxable income before expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. The valuation allowance for deferred tax assets as of July 1, 1994 was $44,160,000. The net changes in the valuation allowance for the years ended June 30, 1996 and 1995 were decreases of $686,000 and $43,474,000, respectively. Of these amounts, $252,000 and $8,982,000 resulted from the realization of net operating loss carryforwards. The remaining decrease of $434,000 and $34,492,000 for 1996 and 1995, respectively, resulted from the Company's expected future taxable income. F-42 74 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. OTHER LIABILITIES Other (noncurrent) liabilities consisted of the following:
JUNE 30, -------------------- 1997 1996 -------- -------- (IN THOUSANDS) Accrued severance and unutilized lease losses.................... $ 4,532 $ 2,227 Other noncurrent liabilities..................................... 9,396 12,059 ------- ------- $ 13,928 $ 14,286 ======= =======
As more fully described in Note 15, accrued severance and unutilized lease losses represent remaining liabilities for estimated future employee severance costs and for lease/contract losses associated with duplicate facilities to be closed. These liabilities were recorded by the Company in connection with the Memorex Telex and BABSS acquisitions in November 1996 and October 1995, respectively. Other noncurrent liabilities include deferred operating lease liabilities related to scheduled rent increases, recorded in accordance with the provisions of SFAS No. 13, Accounting for Leases. Also included in other noncurrent liabilities are provisions relating to various tax matters. 11. LEASE COMMITMENTS The Company conducts its operations primarily from leased warehouses and office facilities and uses certain computer, data processing and other equipment under operating lease agreements expiring on various dates through 2005. The future minimum lease payments for operating leases having initial or remaining noncancelable terms in excess of one year for the five years succeeding June 30, 1997 and thereafter are as follows (in thousands): 1998............................................................... $18,415 1999............................................................... 15,224 2000............................................................... 11,406 2001............................................................... 5,815 2002............................................................... 2,879 Thereafter......................................................... 4,757 ------- $58,496 =======
Rental expense amounted to approximately $17,367,000, $13,149,000 and $5,878,000, for the fiscal years ended 1997, 1996 and 1995, respectively. 12. RETIREMENT PLANS The Company maintains a 401(k) plan for its employees which is funded through the contributions of its participants. A similar plan exists for former employees of an acquired company for which eligibility and additional contributions were frozen in September 1988. In addition, the Company assumed the liability of the defined benefit pension plan applicable to employees of a company acquired in 1986. The eligibility and benefits were frozen as of the date of the acquisition. F-43 75 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pension expense for the defined benefit pension plan was computed as follows:
YEARS ENDED JUNE 30, ------------------------- 1997 1996 1995 ----- ----- ----- (IN THOUSANDS) Interest cost.............................................. $ 521 $ 495 $ 482 Actual return on plan assets............................... (409) (449) (312) Net amortization and deferral.............................. 9 72 (42) ----- ----- ----- Periodic pension costs..................................... $ 121 $ 118 $ 128 ===== ===== =====
The discount rate used in determining the actuarial present value of the projected benefit obligation was 7.5% and the expected long-term rate of return on assets was 8.5% for 1997, 1996 and 1995. The following table sets forth the funded status of the frozen pension plan as of May 1, 1997 and 1996:
1997 1996 ------- ------- (IN THOUSANDS) Accumulated benefits (100% vested)............................... $ 7,290 $ 7,116 Fair value of plan assets........................................ 6,128 5,800 ------- ------- Unfunded projected benefit obligation.................. 1,162 1,316 Unrecognized net loss............................................ 1,873 1,848 Unrecognized net transition obligation........................... 470 504 Adjustment to recognized minimum liability....................... (2,343) (2,352) ------- ------- Accrued pension costs............................................ $ 1,162 $ 1,316 ======= =======
13. EMPLOYEE SEVERANCE AND UNUTILIZED LEASE COSTS During the second quarter of fiscal 1997, in connection with the Memorex Telex acquisition (see Note 4), the Company recorded a $3.4 million pre-tax charge for estimated future employee severance costs, and a $0.9 million pre-tax charge for unutilized lease/contract losses ("exit costs"), primarily associated with duplicate facilities to be closed. The $3.4 million charge, recorded in accordance with SFAS No. 112, Employers' Accounting for Postemployment Benefits, reflects the actuarially determined benefit costs for the separation of employees who are entitled to benefits under pre-existing separation pay plans. These costs are included in selling, general and administrative expenses in the accompanying consolidated statement of operations for the year ended June 30, 1997. In the second quarter of fiscal 1996, in connection with the acquisition of BABSS, the Company recorded pre-tax charges for exit costs of $6.9 million, and estimated future employee severance costs of $0.1 million. During the fourth quarter of fiscal 1996, the Company reversed $3.4 million of these employee severance and exit cost liabilities. The reversal was primarily the result of the Company's ability to utilize and sublease various facilities identified in the original $7.0 million combined liability. Such information was unknown to the Company when the original liability was recorded. See Note 10 for further information regarding accrued severance and unutilized lease losses. 14. COMMITMENTS AND CONTINGENT LIABILITIES The Company, or certain businesses as to which it is alleged that the Company is a successor, have been identified as potentially responsible parties in respect to four waste disposal sites that have been identified by the United States Environmental Protection Agency as Superfund sites. In addition, the Company received a notice several years ago that it may be a potentially responsible party with respect to a fifth, related site, but F-44 76 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) has not received any other communication with respect to that site. Under applicable law, all parties responsible for disposal of hazardous substances at those sites are jointly and severally liable for clean-up costs. The Company originally estimated that its share of the costs of the clean-up of one of these sites would be approximately $500,000 which is provided for in liabilities related to the discontinued products division in the accompanying consolidated balance sheets as of June 30, 1997 and 1996. Complete information as to the scope of required clean-up at these sites is not yet available and, therefore, management's evaluation may be affected as further information becomes available. However, in light of information currently available to management, including information regarding assessments of the sites to date and the nature of involvement of the Company's predecessor at the sites, it is management's opinion that the Company's potential additional liability, if any, for the cost of clean-up of these sites will not be material to the consolidated financial position, results of operations or liquidity of the Company. The Company is also party to various legal proceedings incidental to its business. Certain claims, suits and complaints arising in the ordinary course of business have been filed or are pending against the Company. In the opinion of management, these actions can be successfully defended or resolved without a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. During the fourth quarter of fiscal 1997, the Company received $2.0 million in full settlement of a claim against its former insurance carrier, related to unreimbursed losses. This settlement was reflected as a reduction of selling, general and administrative costs in the accompanying statement of operations. 15. RELATED PARTY TRANSACTIONS Prior to 1994, the Company entered into an agreement to purchase printer products from Genicom Corporation (Genicom). The Company and Genicom are under common ownership. The initial term of the agreement is for five years with an option to extend based on mutual agreement of the parties. Purchases from Genicom for the years ended June 30, 1997, 1996 and 1995 were approximately $472,000, $1,512,000 and $1,972,000, respectively. Accounts payable to Genicom amounted to approximately $30,000 and $14,000 as of June 30, 1997 and 1996, respectively. During the year ended June 30, 1996, the Company paid approximately $125,000 for expense reimbursements to certain shareholders for services rendered in connection with an acquisition in 1988. The amount was accrued for in prior years. F-45 77 SCHEDULE II DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES DECISIONONE CORPORATION VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS ------------------------- BALANCE AT CHARGES TO CHARGES TO BALANCE AT BEGINNING OF CORP. AND OTHER END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - ------------------------------ ------------ ---------- ---------- ---------- ---------- Year Ended June 30, 1995: Accounts Receivable -- Allowance for uncollectable accounts................. $ 1,461 $1,930 $ 3,225 $ 6,616 Consumable parts -- Allowance for Obsolescence............. $ 8,370 $1,995 $ 1,423(b) $ 11,788 Year Ended June 30, 1996: Allowance for uncollectable accounts.................... $ 6,616 $ 3,434 $ (470)(a) $ 9,580 Consumable parts -- Allowance for Obsolescence............. $ 11,788 $1,171 $ 10,193(b) $ (3,615) $ 19,537 Year Ended June 30, 1997: Accounts Receivable -- Allowance for Uncollectable Accounts.................... $ 9,580 $7,848 $ 1,593(b) $ (4,152)(a) $ 14,869 Consumable parts -- Allowance for Obsolescence.... $ 19,537 $2,554 $ 3,849(b) $ (8,051) $ 17,889
- --------------- (a) Amount primarily represents net recoveries (write-offs) during the year. (b) Amount primarily represents allowance recorded as a result of acquisitions during the year. S-5 78 DECISIONONE CORPORATION EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ------------------------------------------------------------------------------------ 4.1 Specimen of the Company's 9 3/4 Senior Subordinated Notes due 2007 (included in Exhibit 4.2). 4.2 9 3/4% Senior Subordinated Note Indenture dated as of August 7, 1997 between the Company and State Street Bank and Trust as Trustee. 10.10 U.S. $575,000,000 Credit Agreement dated as of August 7, 1997 by and among the Company, various financial institutions, DLJ Capital Funding Inc. (as Syndication Agent), NationsBank of Texas, N.A. (as Administrative Agent) and BankBoston, N.A. (as Documentation Agent). 23 Consent of Deloitte & Touche LLP
EX-4.2 2 SENIOR SUBORDINATED NOTE INDENTURE 1 EXHIBIT 4.2 EXECUTION COPY ================================================================================ DECISIONONE CORPORATION 9 3/4% SENIOR SUBORDINATED NOTES DUE 2007 ------------------------------------ INDENTURE Dated as of August 7, 1997 ------------------------------------ ------------------------------------ STATE STREET BANK AND TRUST COMPANY TRUSTEE ------------------------------------ ================================================================================ 2 TABLE OF CONTENTS
Page ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE....................................... 1 Section 1.01. Definitions...................................................................... 1 Section 1.02. Other Definitions. .............................................................. 17 Section 1.03. Incorporation By Reference of Trust Indenture Act................................ 17 Section 1.04. Rules of Construction............................................................ 18 Section 1.05. Compliance Certificates and Opinions............................................. 18 Section 1.06. Form of Documents Delivered To Trustee........................................... 19 Section 1.07. Acts of Holders.................................................................. 20 ARTICLE 2 THE NOTES........................................................................ 21 Section 2.01. Form and Dating.................................................................. 21 Section 2.02. Execution and Authentication..................................................... 21 Section 2.03. Registrar and Paying Agent....................................................... 21 Section 2.04. Paying Agent to Hold Money in Trust.............................................. 22 Section 2.05. Lists of Holders of the Notes.................................................... 22 Section 2.06. Transfer and Exchange............................................................ 22 Section 2.07. Replacement Notes................................................................ 23 Section 2.08. Outstanding Notes................................................................ 23 Section 2.09. Treasury Notes................................................................... 24 Section 2.10. Temporary Notes.................................................................. 24 Section 2.11. Cancellation..................................................................... 24 Section 2.12. Defaulted Interest............................................................... 24 Section 2.13. Record Date...................................................................... 25 Section 2.14. CUSIP Number..................................................................... 25 Section 2.15. Computation of Interest.......................................................... 25 ARTICLE 3 REDEMPTION AND PREPAYMENT........................................................ 25 Section 3.01. Election to Redeem; Notice to Trustee............................................ 25 Section 3.02. Selection by Trustee of Notes to Be Redeemed..................................... 25 Section 3.03. Notice of Redemption............................................................. 26 Section 3.04. Effect of Notice of Redemption................................................... 27 Section 3.05. Deposit of Redemption Price...................................................... 27 Section 3.06. Notes Payable on Redemption Date................................................. 27 Section 3.07. Notes Redeemed in Part........................................................... 27 Section 3.08. Optional Redemption.............................................................. 27 Section 3.09. Mandatory Redemption............................................................. 28 Section 3.10. Offer to Purchase by Application of Excess Proceeds.............................. 28 ARTICLE 4 COVENANTS........................................................................ 30 Section 4.01. Payment of Principal, Premium and Interest....................................... 30 Section 4.02. Maintenance of Office or Agency.................................................. 30 Section 4.03. Money for Payments to Be Held In Trust........................................... 31 Section 4.04. Reports.......................................................................... 32 Section 4.05. Statement as to Compliance; Notice of Default.................................... 33 Section 4.06. Payment of Taxes and Other Claims................................................ 33 Section 4.07 Stay, Extension and Usuary Laws...................................................34 Section 4.08. Corporate Existence.............................................................. 34 Section 4.09. Offer to Repurchase Upon Change of Control....................................... 34 Section 4.10. Asset Sales...................................................................... 36
i 3 Section 4.11. Limitation on Restricted Payments................................................ 37 Section 4.12. Limitation on Incurrence of Indebtedness and Issuance of Preferred Stock.................................................................. 42 Section 4.13. Transactions with Affiliates..................................................... 44 Section 4.14. Dividend and Other Payment Restrictions Affecting Subsidiaries................... 45 Section 4.15. Limitations on Guarantees of Indebtedness by Restricted Subsidiaries............. 45 Section 4.16 Limitation on Liens...............................................................44 Section 4.17 Sale and Leaseback Transactions ..................................................46 Section 4.18 Anti-Layering.................................................................... 46 Section 4.19 Sales of Accounts Receivables.................................................... 47 ARTICLE 5 SUCCESSORS .......................................................................47 Section 5.01. Merger, Consolidation, or Sale of All or Substantially All Assets................ 47 Section 5.02. Successor Corporation Substituted................................................ 48 ARTICLE 6 DEFAULTS AND REMEDIES ............................................................48 Section 6.01. Events of Default and Notice Thereof............................................. 48 Section 6.02. Acceleration..................................................................... 50 Section 6.03. Other Remedies................................................................... 50 Section 6.04. Waiver of Past Defaults.......................................................... 50 Section 6.05. Control by Majority. .............................................. 51 Section 6.06. Limitation on Suits.............................................................. 51 Section 6.07. Rights of Holders of Notes to Receive Payment.................................... 51 Section 6.08. Collection Suit by Trustee....................................................... 51 Section 6.09. Trustee May File Proofs of Claim................................................. 51 Section 6.10. Priorities....................................................................... 52 Section 6.11. Undertaking for Costs............................................................ 52 ARTICLE 7 TRUSTEE.......................................................................... 53 Section 7.01. Duties of Trustee................................................................ 53 Section 7.02. Rights of Trustee................................................................ 54 Section 7.03. Individual Rights of Trustee..................................................... 54 Section 7.04. Trustee's Disclaimer..............................................................54 Section 7.05. Notice of Defaults............................................................... 55 Section 7.06. Reports by Trustee to Holders of the Notes....................................... 55 Section 7.07. Compensation and Indemnity....................................................... 55 Section 7.08. Replacement of Trustee........................................................... 56 Section 7.09. Successor Trustee by Merger, etc................................................. 57 Section 7.10. Eligibility; Disqualification.................................................... 57 Section 7.11. Preferential Collection of Claims Against the Company............................ 57 Section 7.12. Rights of Holders with Respect to Time Method and Place.......................... 57 ARTICLE 8 LEGAL DEFEASANCE AND COVENANT DEFEASANCE......................................... 57 Section 8.01. Option to Effect Defeasance or Covenant Defeasance............................... 57
ii 4 Section 8.02. Legal Defeasance and Discharge................................................... 57 Section 8.03. Covenant Defeasance.............................................................. 58 Section 8.04. Conditions to Defeasance or Covenant Defeasance.................................. 58 Section 8.05. Deposited Money and U.S. Government Obligations to be Held in Trust; Other Miscellaneous Provisions......................................................... 59 Section 8.06. Repayment to Company............................................................. 60 Section 8.07. Reinstatement.................................................................... 60 ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER Section 9.01. Without Consent of Holders of Notes.............................................. 61 Section 9.02. With Consent of Holders of Notes................................................. 61 Section 9.03. Compliance with TIA.............................................................. 63 Section 9.04. Revocation and Effect of Consents................................................ 63 Section 9.05. Notation on or Exchange of Notes................................................. 63 ARTICLE 10 SUBORDINATION.................................................................... 63 Section 10.01. Agreement to Subordinate......................................................... 63 Section 10.02. Liquidation; Dissolution; Bankruptcy............................................. 64 Section 10.03. Default on Designated Senior Debt................................................ 64 Section 10.04. Acceleration of Securities....................................................... 65 Section 10.05. When Distribution Must Be Paid Over.............................................. 65 Section 10.06. Notice by Company................................................................ 66 Section 10.07. Subrogation...................................................................... 66 Section 10.08. Relative Rights.................................................................. 66 Section 10.09. Subordination May Not Be Impaired by Company..................................... 66 Section 10.10. Distribution or Notice to Representative......................................... 66 Section 10.11. Rights of Trustee and Paying Agent............................................... 67 Section 10.12. Authorization to Effect Subordination............................................ 67 Section 10.13. No Waiver of Subordination Provisions............................................ 67 Section 10.14. Certain Definitions.............................................................. 68 ARTICLE 11 SATISFACTION AND DISCHARGE .......................................................68 Section 11.01 Satisfaction and Discharge of Indenture.......................................... 68 Section 11.02 Application of Trust Money...................................................... 69 ARTICLE 12 MISCELLANEOUS ....................................................................69 Section 12.01. Conflict of Any Provision of Indenture with TIA.................................. 69 Section 12.02. Notices.......................................................................... 69 Section 12.03. Communication by Holders of Notes with Other Holders of Notes.................... 70 Section 12.04. Certificate and Opinion as to Conditions Precedent............................... 70 Section 12.05. Legal Holidays................................................................... 71 Section 12.06. No Personal Liability of Directors, Officers, Employees and Stockholders......... 71 Section 12.07. Governing Law.................................................................... 71 Section 12.08. No Adverse Interpretation of Other Agreements.................................... 71
iii 5 Section 12.09. Successors and Assigns........................................................... 71 Section 12.10. Severability..................................................................... 71 Section 12.11. Counterpart Originals............................................................ 72 Section 12.12. Table of Contents, Headings, etc................................................. 72
EXHIBITS A Form of Note B Form of Supplemental Indenture to be Delivered by Guarantors iv 6 CROSS-REFERENCE TABLE*
Trust Indenture Indenture Section Act Section 310(a)(1)...........................................................7.10 (a)(2).........................................................7.10 (a)(3).........................................................N.A. (a)(4).........................................................N.A. (a)(5).........................................................7.10 (b)............................................................7.10 (c)............................................................N.A. 311(a)..............................................................7.11 (b)............................................................7.11 (c)............................................................N.A. 312(a)..............................................................11.03 (b)............................................................11.03 (c)............................................................11.03 313(a)..............................................................7.06 (b)(1).........................................................N.A. (b)(2).........................................................7.06; 7.07 (c)............................................................7.06; 10.02 (d)............................................................7.06 314(a)..............................................................4.04; 11.02 (b)............................................................N.A. (c)(1).........................................................11.04 (c)(2).........................................................11.04 (c)(3).........................................................N.A. (d)............................................................N.A. (f)............................................................N.A. 315(a)..............................................................7.01 (b)............................................................7.05; 11.02 (c)............................................................7.01 (d)............................................................7.01 (e)............................................................6.11 316(a)(last sentence)...............................................2.09 (a)(1)(A)......................................................6.05 (a)(1)(B)......................................................6.04 (a)(2).........................................................N.A. (b)............................................................6.07 317(a)(1)...........................................................6.08 (a)(2).........................................................6.09 (b)............................................................2.04 318(a)..............................................................11.01 (b)............................................................N.A. (c)............................................................11.01
N.A. means not applicable. *This Cross-Reference Table is not part of the Indenture. v 7 INDENTURE dated as of August 7, 1997 between DecisionOne Corporation, a Delaware corporation (the "Company"), and State Street Bank and Trust Company, as trustee (the "Trustee"). The Company and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the 9 3/4% Senior Subordinated Notes due 2007 (the "Notes"). ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. DEFINITIONS. Set forth below are certain defined terms used in this Indenture. "Accounts Receivable Subsidiary" means any newly created, Wholly Owned Subsidiary of the Company (i) which is formed solely for the purpose of, and which engages in no activities other than activities in connection with, financing accounts receivable of the Company and/or its Restricted Subsidiaries, (ii) which is designated by the Board of Directors of the Company as an Accounts Receivables Subsidiary pursuant to a Board Resolution set forth in an Officers' Certificate and delivered to the Trustee, (iii) that has total assets at the time of such designation with a book value not exceeding $500,000 plus the reasonable fees and expenses required to establish such Accounts Receivable Subsidiary and any accounts receivable financing, (iv) no portion of Indebtedness or any other obligation (contingent or otherwise) of which (a) is at any time recourse to or obligates the Company or any Restricted Subsidiary of the Company in any way, other than pursuant to (I) representations and covenants entered into in the ordinary course of business in connection with the sale of accounts receivable to such Accounts Receivable Subsidiary or (II) any guarantee of any such accounts receivable financing by the Company or any Restricted Subsidiary that is permitted to be incurred pursuant to the covenant described in Section 4.12 hereof, or (b) subjects any property or asset of the Company or any Restricted Subsidiary of the Company, directly or indirectly, contingently or otherwise, to the satisfaction thereof, other than pursuant to (I) representations and covenants entered into in the ordinary course of business in connection with sales of accounts receivable or (II) any guarantee of any such accounts receivable financing by the Company that is permitted to be incurred pursuant to the covenant described in Section 4.12 hereof, (v) with which neither the Company nor any Restricted Subsidiary of the Company has any contract, agreement, arrangement or understanding other than contracts, agreements, arrangements and understandings entered into in the ordinary course of business in connection with sales of accounts receivable in accordance with the covenant described in Section 4.19 hereof and fees payable in the ordinary course of business in connection with servicing accounts receivable and (vi) with respect to which neither the Company nor any Restricted Subsidiary of the Company has any obligation (a) to subscribe for additional shares of Capital Stock or other Equity Interests therein or make any additional capital contribution or similar payment or transfer thereto other than in connection with the sale of accounts receivable to such Accounts Receivable Subsidiary in accordance with the covenant described in Section 4.19 hereof or (b) to maintain or preserve the solvency or any balance sheet term, financial condition, level of income or results of operations thereof. "Acquired Debt" means, with respect to any specified Person, (i) Indebtedness of any other Person existing at the time such other Person merges with or into or becomes a Subsidiary of such specified Person including, without limitation, Indebtedness incurred in connection with, or in 8 contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person or assumed in connection with the acquisition of any asset used or useful in a Permitted Business acquired by such Person. "Adjusted Consolidated Net Income" means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period plus, to the extent deducted in calculating Consolidated Net Income, the sum of (i) 100% of the aggregate amortization of intangibles plus, with respect to the Company, up to $25.0 million arising from any write-off of intangibles reflected on the Company's balance sheet as of March 31, 1997 for such period of such Person and its Restricted Subsidiaries less any tax benefit recorded by such Person as a result of such amortization, (ii) 100% of non-cash compensation expense for such period incurred by such Person and its Restricted Subsidiaries related to stock options or other Equity Interests granted to the employees or directors of such Person and its Restricted Subsidiaries, (iii) expenses and charges of the Company related to the Merger which are paid, taken or otherwise accounted for within 90 days of the consummation of the Merger and (iv) 100% of any loss realized in connection with the extinguishment of Indebtedness pursuant to the Intercompany Loan. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with") as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise. "Agent" means any Registrar, Paying Agent or co-registrar. "Asset Sale" means (i) the sale, lease, conveyance or other disposition of any assets (including, without limitation, by way of a sale and leaseback) other than (A) in the ordinary course of business or (B) sales of accounts receivables to the Accounts Receivables Subsidiary in accordance with Section 4.19 hereof (provided that the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole will be governed by Section 4.09 hereof and/or Section 5.01 hereof and not by the provisions of Section 4.10 hereof); and (ii) the issue by any Restricted Subsidiary of the Company of any Equity Interests of such Restricted Subsidiary and the sale by the Company or any of its Restricted Subsidiaries of Equity Interests of any of the Company's Subsidiaries, in the case of clauses (i) and (ii), whether in a single transaction or series of related transactions (a) that have a fair market value in excess of $1.0 million or (b) for net proceeds in excess of $1.0 million. Notwithstanding the foregoing: (1) a transfer of assets by the Company to a Restricted Subsidiary or by a Restricted Subsidiary to the Company or to another Restricted Subsidiary, (2) an issuance of Equity Interests by a Restricted Subsidiary to the Company or to another Restricted Subsidiary, (3) a Restricted Payment that is permitted by Section 4.11 hereof, (4) the sale and leaseback of any assets within 90 days of the acquisition of such assets, (5) foreclosures on assets and (6) a disposition of Cash Equivalents in the ordinary course of business will not be deemed to be Asset Sales. "Attributable Debt" in respect of a sale and leaseback transaction means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee for net rental payments during the remaining 2 9 term of the lease included in such sale and leaseback transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "Bankruptcy Law" means Title 11, U.S. Code or any similar foreign, federal or state law for the relief of debtors. "Board of Directors" means the board of directors of the Company or any duly authorized committee of such board of directors. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification and delivered to the Trustee. "Business" shall have the meaning assigned to such term in Article 11, Rule 11-01(d) of Regulation S-X, promulgated pursuant to the Securities Act, as such regulation is in effect on the date of this Indenture. "Business Day" means any day other than a Legal Holiday. "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means, (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Cash Equivalents" means (i) Government Securities, (ii) any certificate of deposit maturing not more than 365 days after the date of acquisition issued by, or time deposit of, an Eligible Institution or any lender under the New Credit Facility, (iii) commercial paper maturing not more than 365 days after the date of acquisition of an issuer (other than an Affiliate of the Company) with a rating, at the time as of which any investment therein is made, of "A-3" (or higher) according to S&P or "P-2" (or higher) according to Moody's or carrying an equivalent rating by a nationally recognized rating agency if both of the two named rating agencies cease publishing ratings of investments, (iv) any bankers acceptances or money market deposit accounts issued by an Eligible Institution and (v) any fund investing exclusively in investments of the types described in clauses (i) through (iv) above. "Change of Control" means the occurrence of any of the following: (i) any sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation) in one or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole to any "person" (as defined in Section 13(d) of the Exchange Act) or "group" (as defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) other than the Principals and their Related Parties; (ii) the adoption of a plan for the liquidation or dissolution of the Company; (iii) the Company consolidates with, or merges with or into, another "person" (as defined above) or "group" (as defined 3 10 above) in a transaction or series of related transactions in which the Voting Stock of the Company is converted into or exchanged for cash, securities or other property, other than any transaction where (A) the outstanding Voting Stock of the Company is converted into or exchanged for Voting Stock (other than Disqualified Stock) of the surviving or transferee corporation and (B) either (1) the "beneficial owners" (as defined in Rule 13d-3 under the Exchange Act) of the Voting Stock of the Company immediately prior to such transaction own, directly or indirectly through one or more Subsidiaries, not less than a majority of the total Voting Stock of the surviving or transferee corporation immediately after such transaction or (2) if, immediately prior to such transaction the Company is a direct or indirect Subsidiary of any other Person (such other Person, the "Holding Company"), then the "beneficial owners" (as defined above) of the Voting Stock of such Holding Company immediately prior to such transaction own, directly or indirectly through one or more Subsidiaries, not less than a majority of the Voting Stock of the surviving or transferee corporation immediately after such transaction; (iv) the consummation of any transaction or series of related transactions (including, without limitation, by way of merger or consolidation) the result of which is that any "person" (as defined above) or "group" (as defined above) other than the Principals and their Related Parties becomes the "beneficial owner" (as defined above) of more than 50% of the voting power of the Voting Stock of the Company or any Holding Company of the Company or (v) the first day on which a majority of the members of the Board of Directors of the Company or any Holding Company of the Company are not Continuing Directors. "Closing Date" means the closing date of the sale and original issuance of the Notes under this Indenture. "Commission" means the Securities and Exchange Commission. "Consolidated Cash Flow" means, with respect to any Person for any period, the Consolidated Net Income of such Person and its Restricted Subsidiaries for such period, plus, to the extent deducted in computing Consolidated Net Income, (i) provision for taxes based on income or profits of such Person and its Restricted Subsidiaries for such period, (ii) Fixed Charges of such Person for such period, (iii) depreciation and amortization (including amortization of goodwill and other intangibles) and all other non-cash charges (excluding any such non-cash charge to the extent that it represents (x) an accrual of or reserve for cash charges in any future period, (y) amortization of a prepaid cash expense that was paid in a prior period or (z) amortization attributable to rotable inventory which has been capitalized in accordance with GAAP) of such Person and its Restricted Subsidiaries for such period, (iv) any net loss realized in connection with any Asset Sale and any extraordinary or non-recurring loss, in each case, on a consolidated basis determined in accordance with GAAP and (v) expenses and charges of the Company related to the Merger which are paid, taken or otherwise accounted for within 90 days of the consummation of the Merger. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, the Fixed Charges of, and the depreciation and amortization and other non-cash charges of, a Restricted Subsidiary of a Person shall be added to Consolidated Net Income to compute Consolidated Cash Flow only to the extent (and in the same proportion) that the Net Income of such Restricted Subsidiary was included in calculating the Consolidated Net Income of such Person. "Consolidated Interest Expense" means, with respect to any Person for any period, the sum of: (a) the interest expense of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP (including amortization of original issue discount, non-cash interest payments, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to Attributable Debt, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments, if any, 4 11 pursuant to Hedging Obligations; provided, however, that in no event shall any amortization of deferred financing costs be included in Consolidated Interest Expense) and (b) consolidated capitalized interest of such Person and its Restricted Subsidiaries for such period, whether paid or accrued. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided, however, that (i) the Net Income or loss of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid to the referent Person or a Restricted Subsidiary thereof in cash, (ii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to, the date of such acquisition shall be excluded, (iii) the cumulative effect of a change in accounting principles, shall be excluded, and (iv) the Net Income of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not, at the date of determination, permitted without any prior governmental approval (which has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company or any Holding Company of the Company who (i) was a member of such Board of Directors immediately after consummation of the Merger, including the Offering and the application of the net proceeds thereof, or (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election or any successor Continuing Directors appointed by such Continuing Directors (or their successors). "Corporate Trust Office of the Trustee" shall be at the address of the Trustee specified in Section 11.02 hereof or such other address as to which the Trustee may give notice to the Company. "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "Designated Preferred Stock" means preferred stock of the Company (other than Disqualified Stock) that is issued for cash (other than to a Restricted Subsidiary) and is so designated as Designated Preferred Stock, pursuant to an Officers' Certificate executed by the principal executive officer and the principal financial officer of the Company, on the issuance date thereof, the cash proceeds of which are excluded from the calculation set forth in clause (c) of Section 4.11 hereof. "Designated Senior Debt" means (i) so long as Indebtedness is outstanding pursuant to the New Credit Facility, all such Indebtedness incurred under the New Credit Facility and, thereafter, (ii) any other Senior Debt or Guarantor Senior Debt permitted under this Indenture the principal amount of which is $50.0 million or more and that has been designated by the Company as "Designated Senior Debt." 5 12 "Disqualified Stock" means, with respect to any Person, any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, is exchangeable for Indebtedness (except to the extent exchangeable at the option of such Person subject to the terms of any debt instrument to which such Person is a party), or is redeemable at the option of the Holder thereof, in whole or in part, on or prior to August 1, 2007; provided, however, that if such Capital Stock is issued to any plan for the benefit of employees of the Company or its Subsidiaries or by any such plan to such employees, such Capital Stock shall not constitute Disqualified Stock solely because it may be required to be repurchased by the Company in order to satisfy applicable statutory or regulatory obligations. "Eligible Institution" means a commercial banking institution that has combined capital and surplus not less than $100.0 million or its equivalent in foreign currency, whose short-term debt is rated "A-3" or higher according to S&P or "P-2" or higher according to Moody's or carrying an equivalent rating by a nationally recognized rating agency if both of the two named rating agencies cease publishing ratings of investments. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Equity Offering" means any (i) issuance of common stock or preferred stock by the Company (other than to Holdings and other than Disqualified Stock) or Holdings (other than Disqualified Stock) that is registered pursuant to the Securities Act, other than issuances registered on Form S-8 under the Securities Act and issuances registered on Form S-4 under the Securities Act, and (ii) any private issuance of common stock or preferred stock by the Company (other than to Holdings and other than Disqualified Stock) or Holdings (other than Disqualified Stock), excluding, in the case of clauses (i) and (ii) above, issuances of common stock pursuant to employee benefit plans of Holdings or the Company or otherwise as compensation to employees of the Company or Holdings. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder. "Existing Indebtedness" means Indebtedness of the Company and its Restricted Subsidiaries (other than Indebtedness under the New Credit Facility) in existence on the date of this Indenture until such amounts are repaid. "Fixed Charge Coverage Ratio" means with respect to any Person for any period, the ratio of the Consolidated Cash Flow of such Person and its Restricted Subsidiaries for such period to the Fixed Charges of such Person and its Restricted Subsidiaries for such period. In the event that the Company or any of its Restricted Subsidiaries incurs, assumes, guarantees, redeems or repays any Indebtedness (other than revolving credit borrowings) or issues or redeems preferred stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but on or prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, guarantee, redemption or repayment of Indebtedness, or such issuance or redemption of preferred stock, as if the same had occurred at the beginning of the applicable four-quarter reference period. For purposes of making the computation referred to above, (i) the Consolidated Cash Flow of the Company shall include (a) the Consolidated Cash Flow of the 6 13 Company and its Restricted Subsidiaries for the latest four-quarter period for which consolidated internal financial statements of the Company are available as derived from such financial statements plus or minus (b) with respect to any Business or Qualified Contracts that have been acquired by the Company or any of its Restricted Subsidiaries, including through mergers or consolidations, after the first day of the applicable four-quarter period and prior to the Calculation Date, the result of (1) the Consolidated Cash Flow of such Business or Qualified Contracts for the most recent three-month period prior to such acquisition for which internal financial statements in respect of such acquired Business or Qualified Contracts are available times four multiplied by (2) a fraction the numerator of which is 365 minus the number of days during the relevant four-quarter period for which the results of operations of such Business or Qualified Contracts were included in clause (a) of this sentence and the denominator of which is 365, (ii) the acquisition of any Business or Qualified Contracts that has been made by the Company or any of its Restricted Subsidiaries, including through mergers or consolidations and including any related financing transactions after the first day of the applicable four-quarter period and on or prior to the Calculation Date shall give pro forma effect to financing transactions (including the incurrence of Acquired Debt) in connection with the acquisition of such Business or Qualified Contracts, as if such acquisition had occurred at the beginning of the applicable reference period, and (iii) the Consolidated Cash Flow and expenses attributable to discontinued operations as determined in accordance with GAAP, and operations, Businesses and Qualified Contracts disposed of prior to the Calculation Date shall be excluded. For purposes of the foregoing clause (i), the Consolidated Cash Flow attributable to any Business or Qualified Contracts acquired by the Company or any Restricted Subsidiary of the Company shall be calculated utilizing the actual revenues attributable to such Business or Qualified Contracts for the applicable period and the expenses that would have been attributable to such Business or Qualified Contracts had the Company acquired such Business or Qualified Contracts at the beginning of the applicable three-month period, as determined in good faith by the Company, taking into account the Company's historical expenses in connection with the provision of similar services for similar equipment under similar contracts. If since the beginning of the applicable four-quarter period any Person (that subsequently becomes a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made or engaged in any Investment, disposition of operations, Businesses or Qualified Contracts, or merger or consolidation, or shall have discontinued any operations or acquired any Business or Qualified Contracts that would have required adjustment pursuant to this definition had such Person been a Restricted Subsidiary at the time of such Investment, disposition, merger, consolidation, discontinued operation or acquisition, then "Consolidated Cash Flow" shall be calculated giving pro forma effect thereto for such period as if such Investment, acquisition, disposition, merger, consolidation or discontinued operation had occurred at the beginning of the applicable four-quarter period. "Fixed Charges" means, with respect to any Person for any period, the sum, without duplication, of (i) the Consolidated Interest Expense of such Person for such period and (ii) any interest expense on Indebtedness of another Person that is guaranteed by the referent Person or one of its Restricted Subsidiaries or secured by a Lien on assets of such Person or one of its Restricted Subsidiaries (whether or not such guarantee or Lien is called upon) and (iii) the product of (a) all cash dividend payments of the Company and any Guarantor on any series of preferred stock of the Company or such Guarantor times (b) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person, expressed as a decimal, in each case, on a consolidated basis and in accordance with GAAP. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public 7 14 Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States, which are in effect on the date of this Indenture; provided, however, that all reports and other financial information provided by the Company to the Holders, the Trustee and/or the Commission shall be prepared in accordance with GAAP, as in effect on the date of such report or other financial information. "Government Securities" means direct obligations of, or obligations guaranteed by, the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States of America is pledged. "guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Guarantor" means any Restricted Subsidiary that shall have guaranteed, pursuant to a supplemental indenture and the requirements therefor set forth in this Indenture, the payment of all principal of, and interest and premium, if any, on, the Notes and all other amounts payable under the Notes or this Indenture, which guarantee shall be subordinate to all Senior Debt and pari passu with or senior to all other Indebtedness of such Restricted Subsidiary. "Guarantor Senior Debt" means, with respect to any Guarantor, (i) all Obligations of such Guarantor outstanding under the New Credit Facility and all Hedging Obligations payable to a lender under the New Credit Facility or any of its affiliates, including, without limitation, in each case, interest accruing subsequent to the filing of, or which would have accrued but for the filing of, a petition in bankruptcy, whether or not such interest is an allowable claim in such bankruptcy proceeding, (ii) any other Indebtedness permitted to be incurred by such Guarantor under the terms of this Indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Subsidiary Guarantee of such Guarantor and (iii) all Obligations with respect to the foregoing. Notwithstanding anything to the contrary in the foregoing, Guarantor Senior Debt will not include (a) any liability for federal, state, local or other taxes owed or owing by such Guarantor or any of its Subsidiaries, (b) any Indebtedness of such Guarantor to any of its Subsidiaries or other Affiliates, (c) any accounts payable or trade liabilities arising in the ordinary course of business (including instruments evidencing such liabilities) other than obligations in respect of bankers' acceptances and letters of credit under the New Credit Facility, (d) any Indebtedness that is incurred in violation of this Indenture, (e) Indebtedness which, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to such Guarantor, (f) any Indebtedness, guarantee or obligation of such Guarantor which is subordinate or junior to any other Indebtedness, guarantee or obligation of such Guarantor, (g) Indebtedness evidenced by the Subsidiary Guarantee of such Guarantor and (h) Capital Stock of such Guarantor. "Hedging Obligations" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates or foreign exchange rates. "Holder" means a Person in whose name a Note is registered. 8 15 "Holdings" means DecisionOne Holdings Corp., a Delaware corporation, the corporate parent of the Company, or its successors. "Indebtedness" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or representing Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property, except any such balance that constitutes an accrued expense or trade payable, or representing any Hedging Obligations, if and to the extent any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all indebtedness of others secured by a Lien on any asset of such Person (whether or not such indebtedness is assumed by such Person), the maximum fixed repurchase price of Disqualified Stock issued by such Person and the liquidation preference of preferred stock issued by such Person, in each case, if held by any Person other than the Company or a Wholly Owned Restricted Subsidiary of the Company, and, to the extent not otherwise included, the guarantee by such Person of any indebtedness of any other Person; provided that Indebtedness shall not include the pledge by the Company of the Capital Stock of an Unrestricted Subsidiary of the Company to secure Non- Recourse Debt of such Unrestricted Subsidiary. "Indenture" means this Indenture, as amended or supplemented from time to time. "Initial Sale" means (i) the first transaction after the commencement of any accounts receivable financing arrangement in which accounts receivable are sold by the Company and/or its Restricted Subsidiaries to an Accounts Receivable Subsidiary and (ii) the first transaction following any amendment to any such arrangement pursuant to which the class of eligible receivables to be purchased pursuant to such arrangement is expanded in which such expanded class of accounts receivable are sold by the Company and/or its Restricted Subsidiaries to an Accounts Receivable Subsidiary. "Intercompany Note" means the note issued by Holdings to the Company on the Closing Date to evidence the loan by the Company to Holdings of $59,100,000 of the proceeds of the Offerings which proceeds, together with dividends to Holdings will fund the merger consideration and costs and expenses in connection therewith. "Investments" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of direct or indirect loans (including guarantees), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, and all other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP; provided that an acquisition of assets, Equity Interests or other securities by the Company for consideration consisting of common equity securities of the Company shall not be deemed to be an Investment. If the Company or any Subsidiary of the Company sells or otherwise disposes of any Equity Interests of any direct or indirect Subsidiary of the Company such that, after giving effect to any such sale or disposition, such Person is no longer a Subsidiary of the Company, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of Section 4.11 hereof. 9 16 "Investors' Agreement" means the investors' agreement, dated as of August 7, 1997, among Holdings, DLJ Merchant Banking Partners II, L.P. and affiliated funds, a limited number of institutional investors and certain members of management of Holdings and the Company, as amended from time to time. "Legal Holiday" means a Saturday, Sunday or a day on which banking institutions in the City of New York, the city where the principal office of the Trustee is located, or at a place of payment are authorized by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest). "Management Loans" means one or more loans by the Company or Holdings to officers and/or directors of the Company and any of its Restricted Subsidiaries to finance the purchase by such officers and directors of common stock of Holdings; provided, however, that the aggregate principal amount of all such Management Loans outstanding at any time shall not exceed $10.0 million. "Merger" means the merger of Quaker Holdings Corp., a Delaware corporation, with and into Holdings, with Holdings continuing as the surviving corporation. "Moody's" means Moody's Investor Services, Inc. "Net Income" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) or (b) the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries, and (ii) any extraordinary or nonrecurring gain (but not loss), together with any related provision for taxes on such extraordinary or nonrecurring gain (but not loss), and (iii) with respect to the Company, the after-tax amount of any interest income with respect to the Intercompany Note. "Net Proceeds" means the aggregate cash proceeds received by the Company or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), amounts required to be applied to the repayment of Indebtedness (other than Indebtedness of the Company or any Restricted Subsidiary referred to in clause (a) of the second paragraph of Section 4.10 hereof) secured by a Lien on the asset or assets that are the subject of such Asset Sale and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. 10 17 "New Credit Facility" means that certain credit agreement, dated as of August 7, 1997, by and among the Company, Donaldson, Lufkin & Jenrette Securities Corporation, as arranger, DLJ Capital Funding, Inc., as syndication agent, and the lenders party thereto, including any related notes, guarantees, collateral documents, instruments and agreement executed in connection therewith, and in each case as amended, modified, renewed, refunded, replaced, refinanced from time to time, including any agreement extending or shortening the maturity of or refinancing or refunding all or any portion of the Indebtedness thereunder or increasing the amount that may be borrowed under such agreement or any successor agreement, whether or not among the same parties. "Non-Recourse Debt" means Indebtedness (i) no default with respect to, which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of the Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (ii) as to which the lenders have been notified in writing that they will not have any recourse to the stock (other than the stock of an Unrestricted Subsidiary pledged by the Company to secure debt of such Unrestricted Subsidiary) or assets of the Company or any of its Restricted Subsidiaries; provided, however, that in no event shall Indebtedness of any Unrestricted Subsidiary fail to be Non-Recourse Debt solely as a result of any default provisions contained in a guarantee thereof by the Company or any of its Restricted Subsidiaries if the Company or such Restricted Subsidiary was otherwise permitted to incur such guarantee pursuant to this Indenture. "Notes" means the Company's 9 3/4% Senior Subordinated Notes due 2007 issued in compliance with this Indenture. "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Offering" means the offering and sale of the Notes by the Company pursuant to a prospectus, dated as of July 30, 1997, contained or incorporated in the Registration Statement. "Offerings" means the Offering and the concurrent offering by Quaker Holding Co., a Delaware corporation, of units consisting of 11 1/2% Senior Discount Debentures due 2008 and warrants to purchase shares of common stock of Holdings pursuant to a prospectus, dated as of July 30, 1997, contained or incorporated in a Registration Statement on Form S-1 (No. 333-28539) filed with the Commission on June 3, 1997 and all exhibits, schedules and amendments thereto. "Officer" means the Chairman of the Board, the President, any Vice President or the Secretary of the Company. "Officers' Certificate" means a certificate signed on behalf of the Company by two officers of the Company, one of whom must be the Chairman of the Board, the President, a Vice President or the Secretary of the Company that meets the requirements set forth in Section 1.05 hereof. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company and who shall be acceptable to the Trustee, in form and substance satisfactory to the Trustee. Each such opinion shall include the statements provided for in TIA Section 314(e) to the extent applicable. 11 18 "Other Qualified Notes" means any outstanding Indebtedness that ranks pari passu in right of payment with the Notes issued pursuant to an indenture or other agreement, in either case, having a provision substantially similar to the provision contained in Section 4.10 hereof. "Pari Passu Indebtedness" means Indebtedness of the Company or any Guarantor that ranks pari passu in right of payment to the Notes or any Subsidiary Guarantee. "Permitted Business" means the equipment maintenance or support services business or any business reasonably ancillary or related thereto. "Permitted Investments" means (i) Investments in the Company or in a Restricted Subsidiary of the Company, (ii) Investments in cash or Cash Equivalents, (iii) Investments by the Company or any Restricted Subsidiary of the Company in a Person if, as a result of such Investment, (a) such person becomes a Restricted Subsidiary of the Company or (b) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Restricted Subsidiary of the Company, (iv) Investments in accounts and notes receivable acquired in the ordinary course of business, (v) any non-cash consideration received in connection with an Asset Sale that complies with Section 4.10 hereof, (vi) loans and advances to officers, directors and employees for business-related travel expenses, moving expenses and other similar expenses, in each case, incurred in the ordinary course of business, (vii) any guarantees permitted to be made pursuant to Section 4.12 hereof, (viii) Investments in any Accounts Receivable Subsidiary made in connection with the formation of Accounts Receivable Subsidiary or received in consideration of sales of accounts receivable, in each case, in accordance with Section 4.19 hereof, (ix) the Intercompany Note and (x) the Management Loans. "Permitted Junior Securities" means Equity Interests in the Company or debt securities of the Company or the relevant Guarantor that are subordinated to all Senior Debt (and any debt securities issued in exchange for Senior Debt) or Guarantor Senior Debt (and any debt securities issued in exchange for Guarantor Senior Debt), as applicable, to substantially the same extent as, or to a greater extent than, the Notes are subordinated to Senior Debt or the Subsidiary Guarantees are subordinated to Guarantor Senior Debt, as applicable, pursuant to this Indenture. "Permitted Refinancing Indebtedness" means any Indebtedness of the Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Restricted Subsidiaries; provided that: (i) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount of (or accredit value, if applicable), plus accrued interest on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of reasonable expenses and premiums incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness has a final maturity date at least as late as the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Notes, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the Notes on terms at least as favorable to the Holders of Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (iv) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is Pari Passu Indebtedness, such Permitted 12 19 Refinancing Indebtedness has a final maturity date on or later than the final maturity date of, and is subordinated or pari passu in right of payment to, the Notes on terms at least as favorable to the Holders of Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded and (v) such Indebtedness is incurred either by the Company or by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Principals" means DLJ Merchant Banking, Inc., DLJ Offshore Partners II, C.V., DLJ Diversified Partners, L.P., DLJMB Funding II, Inc., UK Investment Plan 1997 Partners and DLJ First ESC LLC and each of their respective Affiliates. "Qualified Contract" means any contract for the provision of computer maintenance and/or technology support services with respect to which the Company and its Restricted Subsidiaries have not received notice that the counterparty to such contract intends to terminate such contract prior to the expiration of its term or not to renew such contract at the end of its term. "Qualified Proceeds" means any of the following or any combination of the following: (i) cash, (ii) Cash Equivalents, (iii) assets that are used or useful in a Permitted Business and (iv) the Capital Stock of any Person engaged in a Permitted Business if, in connection with the receipt by the Company or any Restricted Subsidiary of the Company of such Capital Stock, (a) such Person becomes a Restricted Subsidiary of the Company or any Restricted Subsidiary of the Company or (b) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or any Restricted Subsidiary of the Company. "Receivables Fees" means distributions or payments made directly or by means of discounts with respect to any participation interests issued or sold in connection with, and other fees paid to a Person that is not a Restricted Subsidiary in connection with, any receivables financing permitted pursuant to Section 4.19 hereof. "Registration Statement" means the Registration Statement (No. 333-28411) on Form S-1 relating to the Notes filed with the Commission on June 3, 1997 and all exhibits, schedules and amendments thereto. "Related Party" means, with respect to the Principals, (i) any controlling stockholder or partner of any Principal on the date of this Indenture, or (ii) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding (directly or through one or more Subsidiaries) a 51% or more controlling interest of which consist of the Principals and/or such other Persons referred to in the immediately preceding clauses (i) or (ii). "Responsible Officer," when used with respect to the Trustee, means any officer in the Corporate Trust Office of the Trustee and also means, with respect to a particular corporate trust matter, any other officer or employee to whom such matter is referred because of his knowledge of and familiarity with the particular subject. 13 20 "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "S&P" means Standard & Poor's Ratings Group. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder. "Senior Debt" means (i) all Obligations of the Company outstanding under the New Credit Facility and all Hedging Obligations payable to a lender under the New Credit Facility or any of its affiliates, including, without limitation, in each case, interest accruing subsequent to the filing of, or which would have accrued but for the filing of, a petition for bankruptcy, whether or not such interest is an allowable claim in such bankruptcy proceeding, (ii) any other Indebtedness permitted to be incurred by the Company under the terms of this Indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Notes and (iii) all Obligations with respect to the foregoing. Notwithstanding anything to the contrary in the foregoing, Senior Debt will not include (a) any liability for federal, state, local or other taxes owed or owing by the Company or any of its Subsidiaries, (b) any Indebtedness of the Company to any of its Subsidiaries or other Affiliates, (c) any accounts payable or trade liabilities arising in the ordinary course of business (including instruments evidencing such liabilities) other than obligations in respect of bankers' acceptances and letters of credit under the New Credit Facility, (d) any Indebtedness that is incurred in violation of this Indenture, (e) Indebtedness which, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to the Company, (f) any Indebtedness, guarantee or obligation of the Company which is subordinate or junior in right of payment to any other Indebtedness, guarantee or obligation of the Company, (g) Indebtedness evidenced by the Notes and (h) Capital Stock of the Company. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the date of this Indenture. "Specified Agreements" means the Investors' Agreement and the Tax Sharing Agreement. "Subordinated Indebtedness" means any Indebtedness of the Company or any Guarantor which is expressly by its terms subordinated in right of payment to the Notes or any Subsidiary Guarantee. "Subordinated Note Obligations" means all Obligations with respect to the Notes, including, without limitation, principal, premium (if any) and interest payable pursuant to the terms of the Notes and this Indenture (including upon the acceleration or redemption thereof), together with and including any amounts received or receivable upon the exercise of rights of rescission or other rights of action (including claims for damages) or otherwise. "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of Voting Stock is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person 14 21 (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or one or more Subsidiaries of such Person (or any combination thereof); provided, however, that the Accounts Receivable Subsidiary and its Subsidiaries shall not be deemed Subsidiaries of the Company or any of its other Subsidiaries. "Subsidiary Guarantee" means any guarantee of the obligations of the Company under this Indenture and the Notes by any Person in accordance with the provisions of this Indenture pursuant to a supplemental indenture substantially in the form attached hereto as Exhibit B. "Tax Sharing Agreement" means the tax sharing agreement, dated as of August 7, 1997, between the Company and Holdings, as amended from time to time. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. SectionSection 77aaa-77bbbb) as in effect on the date on which this Indenture is qualified under the TIA. "Trustee" means the party named as such above unless and until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter means such successor. "Unrestricted Subsidiary" means any Subsidiary that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution, but only to the extent that such Subsidiary: (i) has no Indebtedness other than Non-Recourse Debt; (ii) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary of the Company unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; (iii) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (a) to subscribe for additional Equity Interests or (b) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels, of operating results; and (iv) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries. Any such designation by the Board of Directors shall be evidenced to the Trustee by filing with the Trustee a certified copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions and was permitted by Section 4.11 hereof. If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as a Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of this Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under Section 4.12 hereof, the Company shall be in default of such covenant). The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if (i) such Indebtedness is permitted under Section 4.12 hereof and (ii) no Default or Event of Default would be in existence following such designation. "Voting Stock" means any class or classes of Capital Stock pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of 15 22 directors, managers or trustees of any Person (irrespective of whether or not, at the time, stock of any other class or classes shall have, or might have, voting power by reason of the happening of any contingency). "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the then outstanding principal amount of such Indebtedness into (ii) the total of the product obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment. "Wholly Owned Restricted Subsidiary" of any Person means a Restricted Subsidiary of such Person all the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Restricted Subsidiaries of such Person or by such Person and one or more Wholly Owned Restricted Subsidiaries of such Person. "Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Subsidiaries of such Person or by such Person and one or more Wholly Owned Subsidiaries of such Person. SECTION 1.02. OTHER DEFINITIONS.
Term Defined in Section "Act"........................................................... 1.07 "Affiliate Transaction"......................................... 4.13 "Asset Sale Offer".............................................. 3.09 "Change of Control Offer"....................................... 4.09 "Change of Control Payment"..................................... 4.09 "Change of Control Payment Date"................................ 4.09 "Covenant Defeasance"........................................... 8.03 "distribution".................................................. 10.14 "Event of Default".............................................. 6.01 "Excess Proceeds"............................................... 4.10 "Financier"..................................................... 4.19 "Guaranteed Debt"............................................... 4.15 "incur"......................................................... 4.12 "Legal Defeasance".............................................. 8.02 "Offer Amount".................................................. 3.09 "Offer Period".................................................. 3.09 "Paying Agent".................................................. 2.03 "payment"....................................................... 10.14
16 23 "Payment Blockage Notice"....................................... 10.03 "Payment Default"............................................... 6.01 "Permitted Debt"................................................ 4.12 "Purchase Date.................................................. 3.09 "Promissory Note"............................................... 4.19 "Registrar"..................................................... 2.03 "Restricted Payments"........................................... 4.11 "Successor Company"............................................. 5.01
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Notes; "indenture security Holder" means a Holder of a Note; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; "obligor" on the Notes means the Company and any successor obligors upon the Notes. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. SECTION 1.04. RULES OF CONSTRUCTION. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; (5) provisions apply to successive events and transactions; and 17 24 (6) references to sections of or rules under the Securities Act shall be deemed to include substitute, replacement or successor sections or rules adopted by the Commission from time to time. SECTION 1.05. COMPLIANCE CERTIFICATES AND OPINIONS. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture (including any covenant compliance with which constitutes a condition precedent) relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that, in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion (other than the certificates required by Section 4.05(a) hereof) with respect to compliance with a condition or covenant provided for in this Indenture shall comply with the provisions of TIA 314(e) and shall include: (a) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of each such individual, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 1.06. FORM OF DOCUMENTS DELIVERED TO TRUSTEE. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representation with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise 18 25 of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 1.07. ACTS OF HOLDERS. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to TIA Section 315) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved in any reasonable manner that the Trustee deems sufficient. (c) The ownership of Notes shall be proved by a register kept by the Registrar. (d) If the Company shall solicit from the Holders any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, by or pursuant to a Board Resolution, fix in advance a record date for the determination of such Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company shall have no obligation to do so. Notwithstanding TIA Section 316(c), any such record date shall be the record date specified in or pursuant to such Board Resolution, which shall be a date not more than 30 days prior to the first solicitation of Holders generally in connection therewith and no later than the date such solicitation is completed. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of Notes then outstanding have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for this purpose the Notes then outstanding shall be computed as of such record date; provided that no such request, demand, authorization, direction, notice, consent, waiver or other Act by the Holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. (e) Any request, demand, authorization, direction, notice, consent, waiver or other Act by the Holder of any Note shall bind every future Holder of the same Note or the Holder of every Note issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof, in respect of 19 26 anything done, suffered or omitted to be done by the Trustee, any Paying Agent or the Company in reliance thereon, whether or not notation of such action is made upon such Note. ARTICLE 2 THE NOTES SECTION 2.01. FORM AND DATING The Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A hereto, the terms of which are incorporated in and made a part of this Indenture. The Notes may have notations, legends or endorsements approved as to form by the Company and required by law, stock exchange rule, agreements to which the Company is subject, or usage. Each Note shall be dated the date of its authentication. The Notes shall be issuable in registered form, without coupons, and only in denominations of $1,000 and integral multiples thereof. SECTION 2.02. EXECUTION AND AUTHENTICATION. One Officer of the Company shall sign the Notes for the Company by manual or facsimile signature. The Company's seal shall be reproduced on the Notes and may be in facsimile form. If an Officer of the Company whose signature is on a Note no longer holds that office at the time the Note is authenticated, the Note shall nevertheless be valid. A Note shall not be valid until authenticated by the manual signature of the Trustee. The signature of the Trustee shall be conclusive evidence that the Note has been authenticated under this Indenture. The form of Trustee's certificate of authentication to be borne by the Notes shall be substantially as set forth in Exhibit A hereto. The Trustee shall, upon a written order of the Company signed by an Officer of the Company, authenticate Notes for original issue up to an aggregate principal amount stated in the Notes. The aggregate principal amount of Notes outstanding at any time shall not exceed such amount except as provided in Section 2.07 hereof. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Notes. Unless limited by the terms of such appointment, an authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate of the Company. SECTION 2.03. REGISTRAR AND PAYING AGENT. The Company shall maintain (i) an office or agency where Notes may be presented for registration of transfer or for exchange (including any co-registrar, the "Registrar") and (ii) an office or agency where Notes may be presented for payment ("Paying Agent") within the City of and the State of New York or, at the option of the Company, payment of interest may be made by check mailed to the Holders at their respective addresses set forth in the register of Holders; provided that all payments with respect to Notes represented by one or more permanent global Notes will be paid by wire transfer of 20 27 immediately available funds to the account of the Depository Trust Company or any successor thereto. The Registrar shall keep a register of the Notes and of their transfer and exchange. The Company may appoint one or more co-Registrars and one or more additional paying agents. The term "Paying Agent" includes any additional paying agent. The Company may change any Paying Agent, Registrar or co-Registrar without prior notice to any Holder. The Company shall notify the Trustee in writing and the Trustee shall notify the Holders of the name and address of any Agent not a party to this Indenture. The Company may act as Paying Agent, Registrar or co-Registrar. The Company shall enter into an appropriate agency agreement with any Agent not a party to this Indenture, which shall be subject to any obligations imposed by the provisions of the TIA. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall notify the Trustee of the name and address of any such Agent. If the Company fails to maintain a Registrar or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as such, and shall be entitled to appropriate compensation in accordance with Section 7.07 hereof. The Company initially appoints the Trustee as Registrar, Paying Agent and agent for service of notices and demands in connection with the Notes. SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST. The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent shall hold in trust for the benefit of the Holders or the Trustee all money held by the Paying Agent for the payment of principal of, premium, if any, and interest on the Notes, and shall notify the Trustee of any Default by the Company in making any such payment. While any such Default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee and to account for any funds disbursed. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company) shall have no further liability for the money delivered to the Trustee. If the Company acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. SECTION 2.05. LISTS OF HOLDERS OF THE NOTES. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders and shall otherwise comply with TIA Section 312(a). If the Trustee is not the Registrar, the Company shall furnish to the Trustee at least seven (7) Business Days before each interest payment date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Holders, including the aggregate principal amount of the Notes held by each thereof, and the Company shall otherwise comply with TIA Section 312(a). SECTION 2.06. TRANSFER AND EXCHANGE. When Notes are presented to the Registrar with a request to register the transfer or to exchange them for an equal principal amount of Notes of other denominations, the Registrar shall register the transfer or make the exchange if its requirements for such transactions are met; provided, however, that any Note presented or surrendered for registration of transfer or exchange shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar and the Trustee duly executed by the Holder thereof or by his attorney duly authorized in writing. To permit registrations of 21 28 transfer and exchanges, the Company shall issue and the Trustee shall authenticate Notes at the Registrar's request, subject to such rules as the Trustee may reasonably require. Neither the Company nor the Registrar shall be required to (i) issue, register the transfer of or exchange Notes during a period beginning at the opening of business on a Business Day fifteen (15) days before the day of any selection of Notes for redemption or purchase under Section 3.01 hereof and ending at the close of business on the day of selection, (ii) register the transfer of or exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part or (iii) register the transfer or exchange of a Note between a record date and the next succeeding interest payment date. No service charge shall be made to any Holder for any registration of transfer or exchange (except as otherwise expressly permitted herein), but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than such transfer tax or similar governmental charge payable upon exchanges pursuant to Sections 2.10, 3.06 or 9.05 hereof, which shall be paid by the Company). Prior to due presentment to the Trustee for registration of the transfer of any Note, the Trustee, any Agent and the Company may deem and treat the Person in whose name any Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of, premium, if any, and interest on such Note and for all other purposes whatsoever, whether or not such Note is overdue, and none of the Trustee, any Agent nor the Company shall be affected by notice to the contrary. SECTION 2.07. REPLACEMENT NOTES. If any mutilated Note is surrendered to the Trustee, or the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Note and the ownership thereof, the Company shall issue and the Trustee, upon the written order of the Company signed by an Officer of the Company, shall authenticate a replacement Note if the Trustee's requirements for replacements of Notes are met. If required by the Trustee or the Company, an indemnity bond must be supplied by the Holder that is sufficient in the reasonable judgment of the Trustee and the Company to protect the Company, the Trustee, each Agent and each authenticating agent from any loss which any of them may suffer if a Note is replaced. The Company and the Trustee may charge for its expenses in replacing a Note. Every replacement Note is an additional Obligation of the Company and shall be entitled to all of the benefits of this Indenture equally and ratably with all other Notes duly issued hereof. SECTION 2.08. OUTSTANDING NOTES. The Notes outstanding at any time are all the Notes authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation and those described in this Section 2.08 as not outstanding. If a Note is replaced pursuant to Section 2.07 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Note is held by a bona fide purchaser. If the principal amount of any Note is considered paid under Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to accrue. Subject to Section 2.09 hereof, a Note does not cease to be outstanding because the Company or an Affiliate of the Company holds the Note. 22 29 SECTION 2.09. TREASURY NOTES. In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Company or any Affiliate of the Company shall be considered as though not outstanding, except that for purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes which a Responsible Officer of the Trustee knows to be so owned shall be so considered. Notwithstanding the foregoing, Notes that are to be acquired by the Company or an Affiliate of the Company pursuant to an exchange offer, tender offer or other agreement shall not be deemed to be owned by such entity until legal title to such Notes passes to such entity. SECTION 2.10. TEMPORARY NOTES. Until definitive Notes are ready for delivery, the Company may prepare and upon the written order of the Company signed by an Officer of the Company the Trustee shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of definitive Notes but may have variations that the Company and the Trustee consider appropriate for temporary Notes. Without unreasonable delay, the Company shall prepare and the Trustee, upon receipt of the written order of the Company signed by an Officer of the Company, shall authenticate definitive Notes in exchange for temporary Notes. Until such exchange, temporary Notes shall be entitled to the same rights, benefits and privileges as definitive Notes. SECTION 2.11. CANCELLATION. The Company at any time may deliver Notes to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Notes surrendered to them for registration of transfer, exchange or payment. The Trustee shall cancel all Notes surrendered for registration of transfer, exchange, payment, replacement or cancellation. Subject to Section 2.07 hereof, the Company may not issue new Notes to replace Notes that it has redeemed or paid or that have been delivered to the Trustee for cancellation. All cancelled Notes held by the Trustee shall be destroyed and certification of their destruction delivered to the Company, unless by a written order, signed by an Officer of the Company, the Company shall direct that cancelled Notes be returned to it. SECTION 2.12. DEFAULTED INTEREST. If the Company defaults in a payment of interest on the Notes, the Company shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date, which date shall be at the earliest practicable date but in all events at least five (5) Business Days prior to the payment date, in each case at the rate provided in the Notes and in Section 4.01 hereof. The Company shall fix or cause to be fixed each such special record date and payment date, and shall, promptly thereafter, notify the Trustee of any such date. At least fifteen (15) days before the special record date, the Company (or the Trustee, in the name of and at the expense of the Company) shall mail to Holders, at their addresses as they appear on the register of Notes maintained by the Registrar, a notice that states the special record date, the related payment date and the amount of such interest to be paid. 23 30 SECTION 2.13. RECORD DATE. The record date for purposes of determining the identity of Holders entitled to vote or consent to any action by vote or consent authorized or permitted under this Indenture shall be determined as provided for in TIA Section 316(c). SECTION 2.14. CUSIP NUMBER. The Company in issuing the Notes may use a "CUSIP" number and, if it does so, the Trustee shall use the CUSIP number in notices of redemption or exchange as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Notes and that reliance may be placed only on the other identification numbers printed on the Notes. The Company will promptly notify the Trustee of any change in the CUSIP number. SECTION 2.15. COMPUTATION OF INTEREST. Interest on the Notes will be computed on the basis of a 360-day year comprised of twelve 30-day months. ARTICLE 3 REDEMPTION AND PREPAYMENT SECTION 3.01. ELECTION TO REDEEM; NOTICE TO TRUSTEE. The election of the Company to redeem any Notes pursuant to Section 3.08 shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company, the Company shall, at least 45 but not more than 60 days prior to the redemption date fixed by it (unless a shorter notice period shall be satisfactory to the Trustee for its convenience), notify the Trustee pursuant to an Officers' Certificate of (i) such redemption date, (ii) the principal amount of Notes to be redeemed and (iii) the clause of this Indenture pursuant to which the redemption shall occur. SECTION 3.02. SELECTION BY TRUSTEE OF NOTES TO BE REDEEMED. If less than all of the Notes are to be redeemed at any time, selection of Notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not so listed, on a pro rata basis, by lot or by such other method as the Trustee deems fair and appropriate, provided that no Notes with a principal amount of $1,000 or less shall be redeemed in part. The Trustee shall promptly notify the Company and the Registrar in writing of the Notes selected for redemption and, in the case of any Notes selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to redemption of Notes shall relate, in the case of any Note redeemed or to be redeemed only in part, to the portion of the principal amount of such Note which has been or is to be redeemed. 24 31 SECTION 3.03. NOTICE OF REDEMPTION. Subject to the provisions of Section 3.10 hereof, notice of redemption shall be mailed by first class mail, postage prepaid, at least 30 but not more than 60 days before the redemption date to each Holder of Notes to be redeemed at its registered address. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. All notices of redemption shall state: (a) the redemption date; (b) the redemption price; (c) if less than all Notes then outstanding are to be redeemed, the identification (and, in the case of a Note to be redeemed in part, the principal amount) of the particular Notes to be redeemed; (d) that on the redemption date the redemption price will become due and payable upon each such Note or portion thereof, and that (unless the Company shall default in payment of the redemption price) interest thereon shall cease to accrue on or after said date; (e) the places or places where such Notes are to be surrendered for payment of the redemption price; (f) that Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price; (g) the CUSIP number, if any, relating to such Notes, and (h) in the case of a Note to be redeemed in part, the principal amount of such Note to be redeemed and that after the redemption date upon surrender of such Note, a new Note or Notes in the aggregate principal amount equal to the unredeemed portion thereof will be issued. Notice of redemption of Notes to be redeemed at the election of the Company shall be given by the Company or, at its request, by the Trustee in the name and at the expense of the Company. 25 32 SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed in accordance with Sections 3.03, 3.10 or 4.09 hereof, Notes called for redemption become irrevocably due and payable on the redemption date at the redemption price. A notice of redemption may not be conditional. SECTION 3.05. DEPOSIT OF REDEMPTION PRICE. Prior to 11:00 a.m. on any redemption date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 4.03 hereof) an amount of money in same day funds (or New York Clearing House funds if such deposit is made prior to the applicable redemption date) sufficient to pay the redemption price of, and accrued interest on, all the Notes or portions thereof which are to be redeemed on that date. SECTION 3.06. NOTES PAYABLE ON REDEMPTION DATE. Notice of redemption having been given as aforesaid, the Notes so to be redeemed shall, on the redemption date, become due and payable at the redemption price therein specified and from and after such date (unless the Company shall default in the payment of the redemption price and accrued interest) such Notes shall cease to bear interest. Upon surrender of any such Note for redemption in accordance with said notice, such Note shall be paid by the Company at the redemption price together with accrued interest to the redemption date. If any Note called for redemption shall not be so paid upon surrender thereof for redemption, the principal thereof (and premium, if any, thereon) shall, until paid, bear interest from the redemption date at the rate borne by such Note. SECTION 3.07. NOTES REDEEMED IN PART. Any Note which is to be redeemed only in part shall be surrendered at the office or agency of the Company maintained for such purpose pursuant to Section 4.02 hereof (with, if the Company, the Registrar or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company, the Registrar or the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and a new Note in principal amount equal to the unpurchased or unredeemed portion will be issued in the name of the Holder thereof upon cancellation of the original Note. On and after the purchase or redemption date, unless the Company defaults in payment of the purchase or redemption price, interest shall cease to accrue on Notes or portions thereof purchased or called for redemption. SECTION 3.08. OPTIONAL REDEMPTION. (a) Except as described in this Section 3.08, the Notes will not be redeemable at the Company's option prior to August 1, 2002. Thereafter, the Notes will be subject to redemption at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' written notice, at the redemption prices (expressed as percentages of principal amount) set forth below, together with accrued and unpaid interest thereon to the applicable redemption date, if redeemed during the 26 33 twelve-month period beginning on August 1 of each of the years indicated below:
YEAR Redemption - ---- Price ---------- 2002................................................................... 104.875% 2003................................................................... 103.250% 2004................................................................... 101.625% 2005 and thereafter.................................................... 100.000%
In addition, prior to August 1, 2000, the Company may, at its option, on any one or more occasions, redeem up to 35% of the original aggregate principal amount of Notes at a redemption price equal to 109.750% of the principal amount thereof, plus accrued and unpaid interest thereon, to the redemption date, with the net cash proceeds of one or more Equity Offerings by (i) the Company or (ii) Holdings to the extent the net cash proceeds thereof are contributed to the Company as a capital contribution to the common equity of the Company; provided that at least 65% of the original aggregate principal amount of Notes remains outstanding immediately after the occurrence of each such redemption; and provided, further, that any such redemption shall occur within 90 days of the date of the closing of each such Equity Offering. (b) Any redemption pursuant to this Section 3.08 shall be made pursuant to the provisions of Sections 3.01 through 3.07 hereof. SECTION 3.09. MANDATORY REDEMPTION. Except as set forth under Sections 4.09 and 4.10 hereof, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes. SECTION 3.10. OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS. In the event that, pursuant to Section 4.10 hereof, the Company shall be required to commence an offer to all Holders to purchase Notes (an "Asset Sale Offer"), it shall follow the procedures specified below. The Asset Sale Offer shall remain open for a period of 20 Business Days following its commencement and no longer, except to the extent that a longer period is required by applicable law (the "Offer Period"). No later than five Business Days after the termination of the Offer Period (the "Purchase Date"), the Company shall purchase the principal amount of Notes required to be purchased pursuant to Section 4.10 hereof (the "Offer Amount") or, if less than the Offer Amount has been tendered, all Notes tendered in response to the Asset Sale Offer. If the Purchase Date is on or after an interest payment record date and on or before the related interest payment date, any accrued and unpaid interest shall be paid to the Person in whose name a Note is registered at the close of business on such record date, and no additional interest shall be payable to Holders who tender Notes pursuant to the Asset Sale Offer. Upon the commencement of an Asset Sale Offer, the Company shall send, by first class mail, a notice to the Trustee and each of the Holders, with a copy to the Trustee. The notice shall contain all 27 34 instructions and materials necessary to enable such Holders to tender Notes pursuant to the Asset Sale Offer. The Asset Sale Offer shall be made to all Holders. The notice, which shall govern the terms of the Asset Sale Offer, shall state: (a) that the Asset Sale Offer is being made pursuant to this Section 3.10 and Section 4.10 hereof and the length of time the Asset Sale Offer shall remain open; (b) the Offer Amount, the purchase price and the Purchase Date; (c) that any Note not tendered or accepted for payment shall continue to accrue interest; (d) that, unless the Company defaults in making such payment, any Note accepted for payment pursuant to the Asset Sale Offer shall cease to accrue interest after the Purchase Date; (e) that Holders electing to have a Note purchased pursuant to any Asset Sale Offer shall be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, or transfer by book-entry transfer, to the Company, a depositary, if appointed by the Company, or a Paying Agent at the address specified in the notice not later than the third Business Day preceding the end of the Offer Period; (f) that Holders shall be entitled to withdraw their election if the Company, the depositary or the Paying Agent, as the case may be, receives, not later than the third Business Day preceding the end of the Offer Period, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Note the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Note purchased; (g) that, if the aggregate principal amount of Notes surrendered by Holders exceeds the Offer Amount, the Company shall select the Notes to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Notes in denominations of $1,000, or integral multiples thereof, shall be purchased); and (h) that Holders whose Notes were purchased only in part shall be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered (or transferred by book-entry transfer). On or before 12:00 p.m. (New York City time) on each Purchase Date, the Company shall, irrevocably deposit with the Trustee or Paying Agent in immediately available funds the aggregate purchase price with respect to a principal amount of Notes equal to the Offer Amount, together with accrued and unpaid interest thereon to the Purchase Date, to be held for payment in accordance with the terms of this Section 3.10. On the Purchase Date, the Company shall, to the extent lawful, (i) accept for payment, on a pro rata basis to the extent necessary, the Offer Amount of Notes or portions thereof tendered pursuant to the Asset Sale Offer, or if less than the Offer Amount has been tendered, all Notes tendered, (ii) deliver or cause the Paying Agent or depositary, as the case may be, to deliver to the Trustee Notes so accepted and (iii) deliver to the Trustee an Officers' Certificate stating that such Notes or portions thereof were accepted for payment by the Company in accordance with the terms of this 28 35 Section 3.10. The Company, the depositary or the Paying Agent, as the case may be, shall promptly (but in any case not later than three Business Days after the Purchase Date) mail or deliver to each tendering Holder an amount equal to the purchase price of the Notes tendered by such Holder and accepted by the Company for purchase, plus any accrued and unpaid interest, thereon to the Purchase Date, and the Company shall promptly issue a new Note, and the Trustee, upon written request from the Company shall authenticate and mail or deliver such new Note to such Holder, equal in principal amount to any unpurchased portion of the Note surrendered. Any Note not so accepted shall be promptly mailed or delivered by the Company to the Holder thereof. The Company shall send a notice to each Holder stating the results of the Asset Sale Offer on the Purchase Date. Other than as specifically provided in this Section 3.10, any purchase pursuant to this Section 3.10 shall be made pursuant to the provisions of Sections 3.01 through 3.07 hereof. ARTICLE 4 COVENANTS SECTION 4.01. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST. The Company shall pay or cause to be paid the principal of, premium, if any, and interest on the Notes on the dates and in the manner provided in the Notes. Principal, premium, if any, and interest shall be considered paid on the date due if the Paying Agent, if other than the Company or a Subsidiary thereof, holds as of 11:00 a.m. Eastern Time on the due date money deposited by the Company in immediately available funds and designated for and sufficient to pay all principal, premium, if any, and interest then due. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the then applicable interest rate on the Notes to the extent lawful; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace period) at the same rate to the extent lawful. SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY. The Company will maintain, in The City of New York, an office or agency where Notes may be presented or surrendered for payment, where Notes may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company will give prompt written notice to the Trustee of any change in the location of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may from time to time designate one or more other offices or agencies (in or outside of The City of New York) where the Notes may be presented or surrendered for any or all such purposes, and may from time to time rescind such designation; provided, however, that no such designation or recession shall in any manner relieve the Company of its obligation to maintain an office 29 36 or agency in The City of New York for such purposes. The Company will give prompt written notice to the Trustee of any such designation or recession and any change in the location of any such office or agency. The Company hereby designates the Corporate Trust Office of the Trustee as one such office or agency of the Company in accordance with Section 2.03 hereof. SECTION 4.03. MONEY FOR PAYMENTS TO BE HELD IN TRUST. If the Company shall at any time act as its own Paying Agent, it will, on or before each due date of the principal of, premium, if any, or interest on any of the Notes, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal, premium, if any, or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided, and will promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents for the Notes, it will, on or before each due date of the principal of, premium, if any, or interest on any Notes, deposit with a Paying Agent a sum in same day funds (or New York Clearing House funds if such deposit is made prior to the date on which such deposit is required to be made) sufficient to pay the principal, premium, if any, or interest so becoming due (or at the option of the Company, payment of interest may be mailed by check to the Holders of the Notes at their respective addresses set forth in the register of Holders of Notes; provided that all payments with respect to Notes represented by one or more permanent global Notes will be paid by wire transfer of immediately available funds to the account of the Depository Trust Company or any successor thereto) such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of such action or any failure so to act. The Company will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (a) hold all sums held by it for the payment of the principal of, premium, if any, or interest on Notes in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (b) give the Trustee notice of any default by the Company (or any other obligor upon the Notes) in the making of any payment of principal, premium, if any, or interest; (c) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent; and (d) acknowledge, accept and agree to comply in all respects with the provisions of this Indenture relating to the duties, rights and obligations of such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such 30 37 payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, or interest on any Note and remaining unclaimed for two years after such principal, premium, if any, or interest has become due and payable shall be paid to the Company at the request of the Company or (if then held by the Company) shall be discharged from such trust; and the Holder of such Note shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, shall at the expense of the Company cause notice to be promptly sent to each Holder that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 4.04. REPORTS. Whether or not required by the rules and regulations of the Commission, so long as any Notes are outstanding, the Company will furnish to the Trustee and the Holders of Notes (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" that describes the financial condition and results of operations of the Company and its Restricted Subsidiaries and, with respect to the annual information only, a report thereon by the Company's certified independent accountants and (ii) all current reports that would be required to be filed with the Commission on Form 8-K if the Company were required to file such reports. In addition whether or not required by the rules and regulations of the Commission, the Company will file a copy of all such information and reports with the Commission for public availability (unless the Commission will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. SECTION 4.05. STATEMENT AS TO COMPLIANCE; NOTICE OF DEFAULT. (a) The Company shall deliver to the Trustee, within 90 days after the end of each fiscal year ending after the date of this Indenture, an Officers' Certificate stating whether, to such Officers' knowledge, the Company is in compliance with all covenants and conditions to be complied with by it under this Indenture (including with respect to any Restricted Payments made during such year, the basis upon which the calculations required by Section 4.07 hereof were computed, which calculations may be based on the Company's latest financial statements), and further stating, as to each Officer signing such certificate, that to the best of his or her knowledge each entity is not in default in the performance or observance of any terms, provisions and conditions of this Indenture (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action the Company is taking or proposes to take with respect thereto) and that to the best of his or her knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of or interest or premium, if any, on the Notes is prohibited or if such event has occurred, a description of the event and what action the Company is taking or proposes to take with respect thereto. For purposes of this Section 4.05, such compliance shall be determined without regard to any period of grace or requirement of notice under this Indenture. 31 38 (b) So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the annual reports delivered pursuant to Section 4.04(a) hereof shall be accompanied by a written statement of the Company's independent public accountants (who shall be a firm of established national reputation) that in making the examination necessary for certification of such financial statements, nothing has come to their attention that would lead them to believe that the Company has violated any provisions of Article Four or Article Five hereof or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. (c) The Company shall, within five Business Days, upon becoming aware of any Default or Event of Default or any default under any document, instrument or agreement representing Indebtedness of the Company or any Restricted Subsidiary, deliver to the Trustee an Officers' Certificate specifying such Default or Event of Default. SECTION 4.06. PAYMENT OF TAXES AND OTHER CLAIMS. The Company shall pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all material taxes, assessments and governmental charges levied or imposed upon it or any Subsidiary or upon the income, profits or property of the Company or any of its Subsidiaries and (b) all material lawful claims for labor, materials and supplies, which, if unpaid, might by law become a lien upon the property of the Company or any of its Subsidiaries that could produce a material adverse effect on the consolidated financial condition of the Company; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and in respect of which appropriate reserves (in the good faith judgment of management of the Company) are being maintained in accordance with GAAP. SECTION 4.07. STAY, EXTENSION, USURY LAWS. The Company and each Guarantor, if any, covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law whatever enacted, now or at any time hereafter in force, that may affect that covenants or the performance of this Indenture; and the Company and each Guarantor, if any, (to the extent that it may lawfully do so) hereby waives all benefit or advantage of any such law, and covenants that it shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law has been enacted. SECTION 4.08. CORPORATE EXISTENCE. Subject to Article Five hereof, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and that of each Subsidiary of the Company and the corporate rights (charter and statutory), corporate licenses and corporate franchises of the Company and its Subsidiaries, except where a failure to do so, singly or in the aggregate, is not likely to have a materially adverse effect upon the business, assets, financial conditions or results of operations of the Company and the Subsidiaries taken as a whole determined on a consolidated basis in accordance with GAAP; provided that prior to the occurrence and continuance of an Event of Default, the Company shall not be required to preserve any such existence (except of the Company), right, license or franchise 32 39 if the Board of Directors of the Company shall determine and deliver to the Trustee an Officers' Certificate to the effect that the preservation thereof is no longer desirable in the conduct of the business of the Company or such Subsidiary and that the loss thereof is not disadvantageous in any material respect to the Holders. SECTION 4.09. OFFER TO REPURCHASE UPON CHANGE OF CONTROL. (a) Upon the occurrence of a Change of Control, each Holder of Notes shall have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest thereon to the date of purchase (the "Change of Control Payment"). (b) Within 30 days following any Change of Control, the Company shall mail a notice to each Holder of Notes issued under this Indenture, with a copy to the Trustee, with the following statements and/or information: (1) a Change of Control Offer is being made pursuant to this Section 4.09 and that all Notes properly tendered pursuant to such Change of Control Offer will be accepted for payment; (2) the purchase price and the purchase date, which will be no earlier than 30 days nor later than 60 days from the date such notice is mailed, except as may be otherwise required by applicable law (the "Change of Control Payment Date"); (3) any Note not properly tendered will remain outstanding and continue to accrue interest; (4) unless the Company defaults in the payment of the Change of Control Payment, all Notes accepted for payment pursuant to the Change of Control Offer will cease to accrue interest on the Change of Control Payment Date; (5) Holders electing to have any Notes purchased pursuant to a Change of Control Offer will be required to surrender the Notes, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Notes completed, to the Paying Agent and at the address specified in the notice prior to the close of business on the third Business Day preceding the Change of Control Payment Date; (6) Holders will be entitled to withdraw their tendered Notes and their election to require the Company to purchase such Notes, provided that the paying agent receives, not later than the close of business on the third Business Day preceding the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of Notes tendered for purchase, and a statement that such Holder is withdrawing his tendered Notes and his election to have such Notes purchased; and 33 40 (7) that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered, which unpurchased portion must be equal to $1,000 in principal amount or an integral multiple thereof. (c) Prior to complying with the provisions of this Section 4.09, but in any event within 30 days following a Change of Control, the Company shall either repay all outstanding Senior Debt, or offer to repay in full all outstanding Senior Debt and repay the Senior Debt with respect to which such offer has been accepted, or obtain the requisite consents, if any, under all outstanding Senior Debt to permit the repurchase of the Notes required by this Section 4.09. (d) The Company shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws or regulations are applicable in connection with the repurchase of the Notes pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with the provisions of this Indenture, the Company shall comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations described in this Indenture by virtue thereof. (e) On the Change of Control Payment Date, the Company shall, to the extent lawful, (i) accept for payment all Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Notes or portions thereof so tendered and (iii) deliver or cause to be delivered to the Trustee the Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of Notes or portions thereof being purchased by the Company. The Paying Agent shall promptly mail to each Holder of Notes so tendered the Change of Control Payment for such Notes, and the Trustee shall promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any; provided that each such new Note will be in a principal amount of $1,000 or an integral multiple thereof. The Company shall publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. (f) The Change of Control provisions described in this Section 4.09 will be applicable whether or not any other provisions of this Indenture are applicable. SECTION 4.10. ASSET SALES. The Company will not, and will not permit any of its Restricted Subsidiaries to, engage in an Asset Sale unless (i) the Company (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value (evidenced by a Board Resolution set forth in an Officers' Certificate delivered to the Trustee) of the assets or Equity Interests issued or sold or otherwise disposed of and (ii) at least 75% of the consideration therefor received by the Company or such Restricted Subsidiary is in the form of (I) cash or Cash Equivalents or (II) property or assets that are used or useful in a Permitted Business, or Capital Stock of any Person primarily engaged in a Permitted Business if, as a result of the acquisition by the Company or any Restricted Subsidiary thereof, such Person becomes a Restricted Subsidiary; provided that the amount of (x) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet or in the notes thereto), of the Company or any Restricted Subsidiary (other than contingent liabilities and liabilities of the Company that are by their terms subordinated to the Notes or any guarantee thereof) that 34 41 are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Company or such Restricted Subsidiary from further liability and (y) any notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are converted by the Company or such Restricted Subsidiary into cash or Cash Equivalents (to the extent of the cash or Cash Equivalents received) within 180 days following the closing of such Asset Sale, will be deemed to be cash for purposes of this provision; provided further, that the 75% limitation referred to above shall not apply to any sale, transfer or other disposition of assets in which the cash portion of the consideration received therefor, determined in accordance with the foregoing proviso, is equal to or greater than what the after-tax net proceeds would have been had such transaction complied with the aforementioned 75% limitation. Within 365 days after the Company's or any Restricted Subsidiary's receipt of any Net Proceeds from an Asset Sale, the Company or such Restricted Subsidiary shall apply such Net Proceeds (a) to permanently reduce Indebtedness under Senior Debt or Guarantor Senior Debt (and to correspondingly reduce commitments with respect thereto), to permanently reduce Indebtedness of a Restricted Subsidiary that is not a Guarantor or Pari Passu Indebtedness (provided that if the Company shall so repay Pari Passu Indebtedness, it will equally and ratably reduce Indebtedness under the Notes if the Notes are then redeemable or, if the Notes may not be then redeemed, the Company shall make an offer pursuant to Section 3.10 hereof to purchase at 100% of the principal amount thereof the amount of Notes that would otherwise be redeemed or (b) to an investment in property, capital expenditures or assets that are used or useful in a Permitted Business, or Capital Stock of any Person primarily engaged in a Permitted Business if, as a result of the acquisition by the Company or any Restricted Subsidiary thereof, such Person becomes a Restricted Subsidiary. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the preceding sentence of this paragraph will be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $15.0 million, the Company shall be required to make an Asset Sale Offer to purchase the maximum principal amount of Notes that may be purchased out of the Excess Proceeds at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to the date of purchase, in accordance with the procedures set forth in Section 3.10 hereof. To the extent that the aggregate amount of Notes tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro rata basis. Upon completion of such Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero. The Company shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Notes pursuant to an Asset Sale Offer. To the extent that the provisions of any securities laws or regulations conflict with the provisions of this Indenture relating to such Asset Sale Offer, the Company will comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations described in this Indenture by virtue thereof. SECTION 4.11. LIMITATION ON RESTRICTED PAYMENTS The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any other payment or distribution on account of any Equity Interests of the Company or any of its Restricted Subsidiaries (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company or dividends or distributions 35 42 payable to the Company or any Wholly Owned Restricted Subsidiary); (ii) purchase, redeem or otherwise acquire or retire for value any Equity Interests of the Company, any of its Restricted Subsidiaries or any other Affiliate of the Company (other than any such Equity Interests owned by the Company or any Restricted Subsidiary of the Company); (iii) make any principal payment on, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness of the Company that is subordinated in right of payment to the Notes, except in accordance with the scheduled mandatory redemption or repayment provisions set forth in the original documentation governing such Indebtedness (but not pursuant to any mandatory offer to repurchase upon the occurrence of any event); or (iv) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (iv) above being collectively referred to as "Restricted Payments"), unless: (a) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof, and (b) immediately after giving effect to such transaction on a pro forma basis, the Company would have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 4.12 hereof, and (c) such Restricted Payment, together with the aggregate of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the date of this Indenture (excluding Restricted Payments permitted by clauses (i) (to the extent that the declaration of any dividend referred to therein reduces amounts available for Restricted Payments pursuant to this clause (c)), (ii), (iii), (v), (vi), (vii), (viii), (x), (xi), (xii), (xv), (xvii) and (xviii) of the next succeeding paragraph), is less than the sum of (1) 50% of the Adjusted Consolidated Net Income of the Company for the period (taken as one accounting period) from the beginning of the first calendar month commencing after the date of this Indenture to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Adjusted Consolidated Net Income for such period is a deficit, minus 100% of such deficit), plus (2) 100% of the Qualified Proceeds received by the Company since the date of this Indenture from contributions to the Company's capital or the issue or sale since the date of the this Indenture of Equity Interests of the Company or of convertible debt securities of the Company that have been converted into such Equity Interests (other than Equity Interests (or convertible debt securities) sold to a Subsidiary of the Company and other than Designated Preferred Stock, Disqualified Stock or convertible debt securities that have been converted into Disqualified Stock), plus (3) the amount equal to the net reduction in Investments in Persons after the date of this Indenture who are not Restricted Subsidiaries (other than Permitted Investments) resulting from (x) Qualified Proceeds received as a dividend, repayment of a loan or advance or other transfer of assets (valued at the fair market value thereof) to the Company or any Restricted Subsidiary from such Persons, (y) Qualified Proceeds received upon the sale or liquidation of such Investment and (z) the redesignation of Unrestricted Subsidiaries (other than any Unrestricted Subsidiary designated as such pursuant to clause (ix) or (xvi) of the following paragraph) whose assets are used or useful in, or which is engaged in, one or more Permitted Businesses as Restricted Subsidiaries (valued (proportionate to the Company's equity interest in such Subsidiary) at the fair market value of the net assets of such Subsidiary at the time of such redesignation) not to exceed, in the case of clauses (x), (y) and (z), the amount of Investments previously made by the Company or any Restricted Subsidiary in such Person, which amount was a Restricted Payment, plus (4) all cash payments received after the date of this Indenture by the Company from Holdings with respect to the Intercompany Note; provided that no proceeds received by the Company from the issue or sale of any Equity Interests of the Company will be counted in determining the amount available for Restricted Payments under this clause (c) to the extent such proceeds 36 43 were used to redeem, repurchase, retire or acquire any Equity Interests or Subordinated Indebtedness of the Company pursuant to clauses (ii) and (iv) of the next succeeding paragraph. The foregoing provisions shall not prohibit: (i) the payment of any dividend within 60 days after the date of declaration thereof, if at such date of declaration such payment would have complied with the provisions of this Indenture; (ii) the redemption, repurchase, retirement or other acquisition of any Equity Interests of the Company or Subordinated Indebtedness of the Company or any Guarantor in exchange for, or out of the net proceeds of, the substantially concurrent sale (other than to a Subsidiary of the Company) of Equity Interests of the Company (other than Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement or other acquisition shall be excluded from clause (c)(2) of the preceding paragraph; (iii) the defeasance, redemption, repurchase or other acquisition of Subordinated Indebtedness with the net proceeds from an incurrence of Permitted Refinancing Indebtedness; (iv) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Company or Holdings held by any member of the Company's or any of the Company's Restricted Subsidiaries' management pursuant to any management equity subscription agreement or stock option agreement and any dividend to Holdings to fund any such repurchase, redemption or acquisition; provided that (A) the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests shall not exceed (I) $5.0 million in any calendar year (with unused amounts in any calendar year being carried over to succeeding calendar years subject to a maximum (without giving effect to the following clause (II)) of $10.0 million in any calendar year) plus (II) the aggregate cash proceeds received by the Company during such calendar year from any reissuance of Equity Interests by Holdings or the Company to members of management of the Company and its Restricted Subsidiaries and (B) no Default or Event of Default shall have occurred and be continuing immediately after such transaction; provided further that the aggregate cash proceeds referred to in clause (II) above shall be excluded from clause (c)(2) of the preceding paragraph; (v) the payment of dividends or the making of loans or advances by the Company to Holdings not to exceed $2.0 million in any fiscal year for costs and expenses incurred by Holdings in its capacity as a holding company or for services rendered by Holdings on behalf of the Company; (vi) the payment of dividends by a Restricted Subsidiary on any class of common stock of such Restricted Subsidiary if (A) such dividend is paid pro rata to all holders of such class of common stock and (B) at least 51% of such class of common stock is held by the Company or one or more of its Restricted Subsidiaries; (vii) the repurchase of any class of common stock of a Restricted Subsidiary if (A) such repurchase is made pro rata with respect to such class of common stock and (B) at least 51% of such class of common stock is held by the Company or one or more of its Restricted Subsidiaries; 37 44 (viii) payments to Holdings (A) pursuant to the Tax Sharing Agreement as in effect on the date of this Indenture and (B) pursuant to the Tax Sharing Agreement as amended from time to time; provided however; that in no event shall the amount permitted to be paid pursuant to this clause (viii) (B) exceed the amount the Company would be required to pay for income taxes were it to file a consolidated tax return for itself and its consolidated Restricted Subsidiaries; (ix) any other Restricted Investment made in a Permitted Business which, together with all other Restricted Investments made pursuant to this clause (ix) since the date of this Indenture, does not exceed $30.0 million (in each case, after giving effect to all subsequent reductions in the amount of any Restricted Investment made pursuant to this clause (ix), either as a result of (A) the repayment or disposition thereof for cash or (B) as a result of the redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary (valued proportionate to the Company's equity interest in such Subsidiary at the time of such redesignation) at the fair market value of the net assets of such Subsidiary at the time of such redesignation), in the case of clause (A) and (B), not to exceed the amount of such Restricted Investment previously made pursuant to this clause (ix); provided that no Default or Event of Default shall have occurred and be continuing immediately after making such Restricted Investment; (x) the declaration and payment of dividends to holders of any class or series of Disqualified Stock of the Company or any Guarantor issued after the date of this Indenture in accordance with the covenant described in Section 4.14 hereof; provided that no Default or Event of Default shall have occurred and be continuing immediately after such declaration or payment; (xi) repurchases of Equity Interests deemed to occur upon exercise of stock options if such Equity Interests represent a portion of the exercise price of such options; (xii) (A) payments made by the Company in respect of statutory appraisal rights (and any settlement thereof) and (B) payments made by the Company to fund the cash consideration payable in the Merger (including pursuant to statutory appraisal rights and any settlement thereof) to security holders of Holdings (including without limitation, the Cash Merger Consideration, the Option Cash Proceeds and the Warrant Cash Proceeds (each as defined in the Registration Statement)) and fees and expenses of the Company and Holdings in connection with the Merger and (C) dividends to Holdings for any such payments referred to in clause (B); (xiii) a Restricted Payment to pay for the repurchase, retirement or other acquisition or retirement for value of Equity Interests of Holdings outstanding on the date of this Indenture and which are not held by the Principals or any member of management of Holdings or any Subsidiary of Holdings on the date of this Indenture (including any Equity Interests issued in respect of such Equity Interests as a result of a stock split, recapitalization, merger, combination, consolidation or otherwise, but excluding any Equity Interests issued pursuant to any management equity plan or stock option plan or similar agreement), provided that the aggregate Restricted Payments made under this clause (xiii) shall not exceed $40.0 million, provided further that prior to the first anniversary of the consummation of the Merger, the aggregate amount of Restricted Payments made under this clause (xiii) shall not exceed $20.0 million, provided further that notwithstanding the foregoing proviso, the Company shall be permitted to make Restricted Payments under this clause (xiii) only if after giving effect thereto, the Company would be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 4.12 hereof; provided that no 38 45 Default or Event of Default shall have occurred and be continuing immediately after making such Restricted Payment; (xiv) the payment of dividends on the Company's common stock, following the first public offering of the Company's or Holdings' common stock after the date of this Indenture, of up to 6.0% per annum of (A) the net proceeds received by the Company from such public offering of its common stock or (B) the net proceeds received by the Company from such public offering of Holdings' common stock as common equity or preferred equity (other than Disqualified Stock), other than, in each case, with respect to public offerings with respect to the Company's or Holdings' common stock registered on Form S-8; provided that no Default or Event of Default shall have occurred and be continuing immediately after any such payment of dividends; (xv) the declaration and payment of dividends to holders of any class or series of Designated Preferred Stock issued after the date of this Indenture; provided, however, immediately after the date of issuance of such Designated Preferred Stock, after giving effect to such issuance on a pro forma basis, the Company would have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 4.12 hereof. (xvi) any other Restricted Payment which, together with all other Restricted Payments made pursuant to this clause (xvi) since the date of this Indenture, does not exceed $20.0 million (in each case, after giving effect to all subsequent reductions in the amount of any Restricted Investment made pursuant to this clause (xvi) either as a result of (A) the repayment or disposition thereof for cash or (B) the redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary (valued proportionate to the Company's equity interest in such Subsidiary at the time of such redesignation) at the fair market value of the net assets of such Subsidiary at the time of such redesignation), in the case of clause (A) and (B), not to exceed the amount of such Restricted Investment previously made pursuant to this clause (xvi); provided that no Default or Event of Default shall have occurred and be continuing immediately after making such Restricted Payment; (xvii) the pledge by the Company of the Capital Stock of an Unrestricted Subsidiary of the Company to secure Non-Recourse Debt of such Unrestricted Subsidiary; and (xviii) distributions or payments of Receivables Fees. The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default. For purposes of making such designation, all outstanding Investments by the Company and its Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of this Section 4.11. All such outstanding Investments will be deemed to constitute Restricted Investments in an amount equal to the greater of (i) the net book value of such Investments at the time of such designation and (ii) the fair market value of such Investments at the time of such designation. Such designation will only be permitted if such Restricted Investment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The amount of (i) all Restricted Payments (other than restricted Payments made in cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Company or such Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment and (ii) Qualified Proceeds (other than cash) shall be the fair market value on the date 39 46 of receipt thereof by the Company of such Qualified Proceeds. The fair market value of any non-cash Restricted Payment and Qualified Proceeds shall be determined by the Board of Directors whose resolution with respect thereto shall be delivered to the Trustee, such determination to be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if such fair market value exceeds $20.0 million. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee and Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this Section 4.11 were computed, which calculations shall be based upon the Company's latest available financial statements. SECTION 4.12. LIMITATION ON INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK. (i) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become, directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt), (ii) that neither the Company nor any Guarantor will issue any Disqualified Stock and (iii) the Company will not permit any of the Company's Restricted Subsidiaries that are not Guarantors to issue any shares of preferred stock; provided, however, that the Company and any Guarantor may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock, if the Company's Fixed Charge Coverage Ratio for the Company's most recently ended four fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock is issued would have been at least 2.00 to 1.00, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred, or the Disqualified Stock had been issued, as the case may be, at the beginning of such four-quarter period. The foregoing provisions will not apply to (collectively, "Permitted Debt"): (i) the incurrence by the Company and the Guarantors of Indebtedness under the New Credit Facility; provided that the aggregate principal amount of all Indebtedness (with letters of credit and bankers' acceptances being deemed to have a principal amount equal to the maximum amount thereunder available to be drawn) outstanding under the New Credit Facility after giving effect to such incurrence does not exceed an amount equal to $625.0 million; (ii) the incurrence by the Company and any Guarantor of Indebtedness represented by the Notes and the Subsidiary Guarantees; (iii) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case, incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property used in the business of the Company or such Restricted Subsidiary, in aggregate principal amount not to exceed $25.0 million at any time outstanding; (iv) Existing Indebtedness; (v) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund, Indebtedness that was permitted by this Indenture; (vi) Indebtedness of the Company to a Restricted Subsidiary; provided that any such Indebtedness is made pursuant to an intercompany note and is subordinated in right of payment 40 47 to the Notes; provided further that any subsequent issuance or transfer of any Capital Stock or other event which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of any such Indebtedness (except to the Company or another Restricted Subsidiary) shall be deemed, in each case, to be an incurrence of such Indebtedness; (vii) Indebtedness of a Restricted Subsidiary to the Company or another Restricted Subsidiary; provided that (i) any such Indebtedness is made pursuant to an intercompany note and (ii) if a Guarantor incurs such Indebtedness to a Restricted Subsidiary that is not a Guarantor, such Indebtedness is subordinated in right of payment to the Subsidiary Guarantee of such Guarantor; provided further that any subsequent issuance or transfer of any Capital Stock of any Restricted Subsidiary to whom such Indebtedness is owed or any other event which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of any such Indebtedness (except to the Company or another Restricted Subsidiary) shall be deemed, in each case, to be an incurrence of such Indebtedness; (viii) the incurrence by the Company or any of its Restricted Subsidiaries of Hedging Obligations that are incurred for the purpose of fixing or hedging (a) interest rate risk with respect to any floating rate Indebtedness of such Person that is permitted by the terms of this Indenture to be outstanding or (b) exchange rate risk with respect to agreements or Indebtedness of such Person payable denominated in a currency other than U.S. dollars; provided that such agreements do not increase the Indebtedness of the obligor outstanding at any time other than as a result of fluctuations in foreign currency exchange rates or interest rates or by reason of fees, indemnities and compensation payable thereunder; (ix) the incurrence by the Company or any of its Restricted Subsidiaries of Acquired Debt in an aggregate principal amount at any time outstanding not to exceed $25.0 million; (x) the incurrence by the Company of Indebtedness (in addition to Indebtedness permitted by any other clause of this paragraph) in an aggregate principal amount at any time outstanding not to exceed the sum of $35.0 million; (xi) Indebtedness arising from agreements of the Company or a Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, incurred or assumed in connection with the disposition of any business, assets or a Restricted Subsidiary, other than guarantees of Indebtedness incurred by any Person acquiring all or any portion of such business, assets or a Restricted Subsidiary for the purpose of financing such acquisition; provided, however, that (i) such Indebtedness is not reflected on the balance sheet of the Company or any Restricted Subsidiary (contingent obligations referred to in a footnote to financial statements and not otherwise reflected on the balance sheet will not be deemed to be reflected on such balance sheet for purposes of this clause (i)) and (ii) the maximum assumable liability in respect of all such Indebtedness shall at no time exceed the gross proceeds including noncash proceeds (the fair market value of such noncash proceeds being measured at the time received and without giving effect to any subsequent changes in value) actually received by the Company and its Restricted Subsidiaries in connection with such disposition; (xii) obligations in respect of performance and surety bonds and completion guarantees provided by the Company or any Restricted Subsidiary in the ordinary course of business; and (xiii) any guarantee by a Restricted Subsidiary of the Company of Senior Debt or Pari Passu Indebtedness of the Company that was permitted to be incurred under this Indenture; provided that, prior to or concurrently with the issuance of such guarantee such Restricted Subsidiary complies with the terms described in Section 4.15 hereof. 41 48 For purposes of determining compliance with this Section 4.12, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (i) through (xiii) above or is entitled to be incurred pursuant to the first paragraph of this covenant, the Company shall, in its sole discretion, classify such item of Indebtedness in any manner that complies with this covenant and such item of Indebtedness will be treated as having been incurred pursuant to only one of such clauses or pursuant to the first paragraph hereof. Accrual of interest and the accretion of accreted value will not be deemed to be an incurrence of Indebtedness for purposes of this covenant. SECTION 4.13. TRANSACTIONS WITH AFFILIATES The Company shall not, and shall not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms that are no less favorable to the Company or such Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person and (ii) if such Affiliate Transaction involves aggregate payments in excess of $5.0 million, the Company delivers to the Trustee either (x) a resolution of the Board of Directors of the Company set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (i) above and such Affiliate Transaction is approved by a majority of the members of the Board of Directors of the Company or (y) an opinion as to the fairness to the Holders of the Notes of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing; provided, however, that (a) any employment agreement entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary, (b) transactions between or among the Company and/or its Restricted Subsidiaries, (c) transactions between the Company or its Restricted Subsidiaries on the one hand, and the Underwriter or its Affiliates on the other hand, involving the provision of financial, consulting or underwriting services by the Underwriter or its Affiliates, provided that the fees payable to the Underwriter or its Affiliates do not exceed the usual and customary fees of the Underwriter and its Affiliates for similar services, (d) transactions in accordance with the Specified Agreements, as amended; provided that no such amendment contains any provisions that are materially adverse to the Holders of the Notes, (e) payment of employee benefits, including bonuses, retirement plans and stock options, in the ordinary course of business, consistent with past practice, (f) the payment of reasonable and customary fees to, and indemnity provided on behalf of, officers, directors, employees or consultants of the Company or any Restricted Subsidiary; (g) Restricted Payments permitted by the provisions of clauses (i), (iv), (v), (vi), (vii), (viii), (xi), (xii) and (xvii) of the second paragraph of Section 4.11 hereof, (h) payments and transactions in connection with the Merger and the application of the net proceeds from the Offering, including the payment of any fees and expenses with respect thereto, (i) transactions pursuant to the Intercompany Note and any forgiveness of Indebtedness thereunder, (j) transactions permitted by the provisions of Section 4.19 hereof and (k) transactions pursuant to the Management Loans, in each case, shall not be deemed Affiliate Transactions. SECTION 4.14. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to: (i) (a) pay dividends or make any other distributions to the Company or any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest or participation in, or measured by, its profits or (b) pay any Indebtedness owed to the Company or any of its Restricted Subsidiaries; (ii) make loans or advances to the Company or any of its Restricted Subsidiaries; or (iii) transfer any of its properties or assets to the Company or any of its Restricted 42 49 Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (a) Existing Indebtedness, as in effect on the date of this Indenture; (b) the New Credit Facility and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof; provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacement or refinancings are no more restrictive with respect to such dividend and other payment restrictions in the aggregate than those contained in the New Credit Facility, as in effect on the date of this Indenture; (c) this Indenture and the Notes; (d) applicable law or any applicable rule, regulation or order; (e) any agreement or other instrument of a Person acquired by the Company or any of its Restricted Subsidiaries, as in effect at the time of such acquisition (but not created in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired; (f) customary non-assignment provisions in leases entered into in the ordinary course of business and consistent with past practices; (g) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (iii) above on the property so acquired; (h) contracts for the sale of assets, including, without limitation, customary restrictions with respect to a Subsidiary pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Subsidiary; or (i) Permitted Refinancing Indebtedness; provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive with respect to such dividend and other payment restrictions in the aggregate than those contained in the agreements governing the Indebtedness being refinanced. SECTION 4.15. LIMITATIONS ON GUARANTEES OF INDEBTEDNESS BY RESTRICTED SUBSIDIARIES. (a) The Company shall not permit any Restricted Subsidiary to guarantee the payment of any Indebtedness of the Company or any Indebtedness of any other Restricted Subsidiary (in each case, the "Guaranteed Debt") unless (i) if such Restricted Subsidiary is not a Guarantor, such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to this Indenture providing for a Subsidiary Guarantee of payment of the Notes by such Restricted Subsidiary, (ii) if the Notes or the Subsidiary Guarantee (if any) of such Restricted Subsidiary are subordinated in right of payment to the Guaranteed Debt, the Subsidiary Guarantee under the supplemental indenture shall be subordinated to such Restricted Subsidiary's guarantee with respect to the Guaranteed Debt substantially to the same extent as the Notes or the Subsidiary Guarantee are subordinated to the Guaranteed Debt under this Indenture, (iii) if the Guaranteed Debt is by its express terms subordinated in right of payment to the Notes or the Subsidiary Guarantee (if any) of such Restricted Subsidiary, any such guarantee of such Restricted Subsidiary with respect to the Guaranteed Debt shall be subordinated in right of payment to such Restricted Subsidiary's Subsidiary Guarantee with respect to the Notes substantially to the same extent as the Guaranteed Debt is subordinated to the Notes or the Subsidiary Guarantee (if any) of such Restricted Subsidiary, (iv) such Restricted Subsidiary waives and will not in any manner whatsoever claim or take the benefit or advantage of, any rights of reimbursement, indemnity or subrogation or any other rights against the Company or any other Restricted Subsidiary as a result of any payment by such Restricted Subsidiary under its Subsidiary Guarantee, and (v) such Restricted Subsidiary shall deliver to the Trustee an Opinion of Counsel to the effect that (A) such Subsidiary Guarantee of the Notes has been duly executed and authorized and (B) such Subsidiary Guarantee of the Notes constitutes a valid, binding and enforceable obligation of such Restricted Subsidiary, except insofar as enforcement thereof may be limited by bankruptcy, insolvency or similar laws (including, without limitation, all laws relating to fraudulent transfers) and except insofar as enforcement thereof is subject to general principles of equity. (b) Notwithstanding the foregoing and the other provisions of this Indenture, any Subsidiary Guarantee by a Restricted Subsidiary of the Notes shall provide by its terms that it shall be automatically and unconditionally released and discharged upon (i) any sale, exchange or transfer, to any Person not an Affiliate of the Company, of all of the Company's Capital Stock in, or all or substantially all the assets 43 50 of, such Restricted Subsidiary (which sale, exchange or transfer is not prohibited by this Indenture) or (ii) the release or discharge of the guarantee which resulted in the creation of such Subsidiary Guarantee, except a discharge or release by or as a result of payment under such guarantee. SECTION 4.16 LIMITATIONS ON LIENS The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Lien that secures obligations under any Pari Passu Indebtedness or Subordinated Indebtedness of the Company or any asset or property now owned or hereafter acquired by the Company or any of its Restricted Subsidiaries, or any income or profits therefrom or assign or convey any right to receive income therefrom, unless the Notes or the Subsidiary Guarantees, as applicable, are equally and ratably secured with the Pari Passu Indebtedness or Subordinated Indebtedness so secured until such time as such Pari Passu Indebtedness or Subordinated Indebtedness is no longer secured by a Lien; provided, that in any case involving a Lien securing Subordinated Indebtedness, such Lien is subordinated to the Lien securing the Notes or the Subsidiary Guarantees, as applicable, to the same extent that such Subordinated Indebtedness is subordinated to the Notes or the Subsidiary Guarantees, as applicable. SECTION 4.17 SALE AND LEASEBACK TRANSACTIONS The Company shall not, and shall not permit any of its Restricted Subsidiaries to, enter into any sale and leaseback transaction; provided that the Company and any Guarantor may enter into a sale and leaseback transaction if (i) the Company or such Guarantor could have (a) incurred Indebtedness in an amount equal to the Attributable Debt relating to such sale and leaseback transaction pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 4.12 hereof and (b) incurred a Lien to secure such Indebtedness pursuant to the covenant described in Section 4.16 hereof, (ii) the gross cash proceeds of such sale and leaseback transaction are at least equal to the fair market value (as determined in good faith by the Board of Directors and set forth in an Officers' Certificate delivered to the Trustee) of the property that is the subject of such sale and leaseback transaction and (iii) the transfer of assets in such sale and leaseback transaction is permitted by, and the proceeds of such transaction are applied in compliance with, Section 4.10 hereof. SECTION 4.18 ANTI-LAYERING. (i) The Company shall not directly or indirectly incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to any Senior Debt and senior in any respect in right of payment to the Notes and (ii) no Guarantor shall incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to its Guarantor Senior Debt and senior in any respect in right of payment to such Guarantor's Subsidiary Guarantee. SECTION 4.19 SALES OF ACCOUNTS RECEIVABLES. The Company may, and any of its Restricted Subsidiaries may, sell at any time and from time to time, accounts receivable to any Accounts Receivable Subsidiary; provided that (i) the aggregate consideration received in each such sale is at least equal to the aggregate fair market value of the receivables sold, as determined by the Board of Directors of the Company in good faith, (ii) no less than 80% of the consideration received in each such sale consists of either cash or a promissory note (a "Promissory Note") which is subordinated to no Indebtedness or obligation other than the financial institution or other entities providing the financing to the Accounts Receivable Subsidiary with respect to such accounts receivable (the "Financier") and the remainder of such consideration consists of an Equity Interest in such Accounts Receivable Subsidiary; provided further that the Initial Sale will include 44 51 all accounts receivable of the Company and/or its Restricted Subsidiaries that are party to such arrangements that constitute eligible receivables under such arrangements, (iii) the cash proceeds received from the Initial Sale less reasonable and customary transaction costs will be deemed to be Net Proceeds and will be applied in accordance with the second paragraph of Section 4.10 hereof, and (iv) the Company and its Restricted Subsidiaries will sell all accounts receivable that constitute eligible receivables under such arrangements to the Accounts Receivable Subsidiary no less frequently than on a weekly basis. The Company (i) will not permit any Accounts Receivable Subsidiary to sell any accounts receivable purchased from the Company or any of its Restricted Subsidiaries to any other person except on an arm's-length basis and solely for consideration in the form of cash or Cash Equivalents, (ii) will not permit the Accounts Receivable Subsidiary to engage in any business or transaction other than the purchase, financing and sale of accounts receivable of the Company and its Restricted Subsidiaries and activities incidental thereto, (iii) will not permit any Accounts Receivable Subsidiary to incur Indebtedness in an amount in excess of 97% of the book value of such Accounts Receivable Subsidiary's total assets, as determined in accordance with GAAP, (iv) will, at least as frequently as monthly, cause the Accounts Receivable Subsidiary to remit to the Company as payment for additional receivables or on the Promissory Notes or as a dividend, all available cash or Cash Equivalents not held in a collection account pledged to a Financier, to the extent not applied to pay or maintain reserves for reasonable operating expenses of the Accounts Receivable Subsidiary or to satisfy reasonable minimum capital requirements based on then current market practices of rating agencies in similar transactions involving receivables of a similar type and quality, as determined by the Board of Directors of the Company in good faith and (v) will not, and will not permit any of its Subsidiaries to, sell accounts receivable to any Accounts Receivable Subsidiary upon (1) the occurrence of an Event of Default with respect to the Company and its Restricted Subsidiaries and (2) the occurrence of certain events of bankruptcy or insolvency with respect to such Accounts Receivable Subsidiary. ARTICLE 5 SUCCESSORS SECTION 5.01. MERGER, CONSOLIDATION, OR SALE OF ALL OR SUBSTANTIALLY ALL ASSETS The Company shall not consolidate or merge with or into (whether or not the Company is the surviving entity), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions to, another Person unless (i) the Company is the surviving corporation or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the Person formed by or surviving any such consolidation or merger (if other than the Company) or the Person to which such sale, assignment, transfer, lease, conveyance or other disposition will have been made assumes all the obligations of the Company under the Notes and this Indenture pursuant to a supplemental indenture in form reasonably satisfactory to the Trustee; (iii) immediately after such transaction, no Default or Event of Default exists; (iv) the Company or the Person formed by or surviving any such consolidation or merger, or to which such sale, assignment, transfer, lease, conveyance or other disposition will have been made will, at the time of such transaction after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 4.12 hereof and (v) each Guarantor, if any, unless it is the other party to the transactions described above, shall have by supplemental indenture confirmed that its Subsidiary Guarantee shall apply to such Person's obligations under this Indenture and the Notes. The foregoing clause (iv) will not prohibit (a) a merger between the Company and a Wholly Owned Subsidiary of a Wholly Owned Subsidiary of 45 52 Holdings created for the purpose of holding the Capital Stock of the Company, (b) a merger between the Company and a Wholly Owned Restricted Subsidiary or (c) a merger between the Company and an Affiliate incorporated solely for the purpose of reincorporating the Company in another State of the United States so long as, in each case, the amount of Indebtedness of the Company and its Restricted Subsidiaries is not increased thereby. SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED. Upon any consolidation or merger, or any sale, assignment, transfer, lease or conveyance or other disposition of all or substantially all of the assets of the Company in accordance with Section 5.01 hereof, the successor corporation formed by such consolidation or into or with which the Company is merged or to which such sale, assignment, transfer, lease, conveyance or other disposition is made shall succeed to, and be substituted for (so that from and after the date of such consolidation, merger, sale, lease, conveyance or other disposition, the provisions of this Indenture referring to the "Company" shall refer instead to the successor corporation and not to the Company) and may exercise every right and power of the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein; provided, however, that the predecessor Company shall not be relieved from the obligation to pay the principal of and interest on the Notes except in the case of a sale of all of the Company's assets that meets the requirements of Section 5.01 hereof; provided, further, that solely for purposes of computing Consolidated Net Income for purposes of clause (c) of the first paragraph of Section 4.11 hereof, the Consolidated Net Income of any Person other than the Company or any of its Restricted Subsidiaries shall be included only for periods subsequent to the effective time of such consolidation or merger, sale, assignment, transfer, lease or conveyance or other disposition of assets. ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.01. EVENTS OF DEFAULT AND NOTICE THEREOF. Each of the following constitutes an "Event of Default": (a) default which continues for 30 days in the payment when due of interest on the Notes (whether or not prohibited by Article 10 hereof); (b) default in payment when due of principal or premium, if any, on the Notes at maturity, upon redemption or otherwise (whether or not prohibited by Article 10 hereof); (c) failure by the Company or any Guarantor for 30 days after receipt of notice from the Trustee or Holders of at least 30% in principal amount of the Notes then outstanding to comply with the provisions of Sections 3.10, 4.09, 4.10, 4.11, 4.12, 4.17 or Article 5 hereof. (d) failure by the Company or any Guarantor for 60 days after notice from the Trustee or the Holders of at least 30% in principal amount of the Notes then outstanding to comply with its other agreements in this Indenture or the Notes; (e) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of this Indenture, which default (i) is caused by a failure to pay Indebtedness at its stated final maturity (after giving effect to any applicable grace period 46 53 provided in such Indebtedness) (a "Payment Default") or (ii) results in the acceleration of such Indebtedness prior to its stated final maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $20.0 million or more; (f) failure by the Company or any of its Restricted Subsidiaries to pay final judgments aggregating in excess of $20.0 million (net of any amounts with respect to which a reputable and creditworthy insurance company has acknowledged liability in writing), which judgments are not paid, discharged or stayed within 60 days after their entry; (g) the Company or any of its Restricted Subsidiaries that is a Significant Subsidiary pursuant to or within the meaning of the Bankruptcy Law: (i) commences a voluntary case, (ii) consents to the entry of an order for relief against it in an involuntary case, (iii) consents to the appointment of a Custodian of it or for all or substantially all of its property, (iv) makes a general assignment for the benefit of its creditors, (v) generally is not paying its debts as they become due; or (h) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company or any of its Restricted Subsidiaries that is a Significant Subsidiary in an involuntary case; (ii) appoints a Custodian of the Company or any of its Restricted Subsidiaries that is a Significant Subsidiary or for all or substantially all of the property of the Company or any of its Restricted Subsidiaries that is a Significant Subsidiary; (iii) orders the liquidation of the Company or any of its Restricted Subsidiaries that is a Significant Subsidiary; and the order or decree remains unstayed and in effect for 60 consecutive days; and (i) the termination of any Subsidiary Guarantee for any reason not permitted by this Indenture, or the denial of any Guarantor or any Person acting on behalf of any Guarantor of such Guarantor's obligations under its respective Subsidiary Guarantee. SECTION 6.02. ACCELERATION If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 30% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately; provided, however, that, so long as any Indebtedness permitted to be incurred pursuant to the New Credit Facility shall be outstanding, no such acceleration shall be effective until the earlier of 47 54 (i) acceleration of any such Indebtedness under the New Credit Facility or (ii) five business days after the giving of written notice to the Company and the representative under the New Credit Facility of such acceleration. Notwithstanding the foregoing, in the case of an Event of Default specified in clause (g) or clause (h) of Section 6.01 hereof, all outstanding Notes will become due and payable without further action or notice. Holders of the Notes may not enforce this Indenture or the Notes except as provided in this Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. In the event of a declaration of acceleration of the Notes because an Event of Default has occurred and is continuing as a result of the acceleration of any Indebtedness described in clause (e) of Section 6.01 hereof, the declaration of acceleration of the Notes shall be automatically annulled if the holders of any Indebtedness described in clause (e) of Section 6.01 hereof have rescinded the declaration of acceleration in respect of such Indebtedness within 30 days of the date of such declaration and if (y) the annulment of the acceleration of the Notes would not conflict with any judgment or decree of a court of competent jurisdiction and (z) all existing Events of Default, except nonpayment of principal or interest on the Notes that became due solely because of the acceleration of the Notes, have been cured or waived. SECTION 6.03. OTHER REMEDIES. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal, premium, if any, and interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder of a Note in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. SECTION 6.04. WAIVER OF PAST DEFAULTS. The Holders of a majority in aggregate principal amount of the Notes then outstanding, by notice to the Trustee, may on behalf of the Holders of all of the Notes waive any existing Default or Event of Default and its consequences under this Indenture, except a continuing Default or Event of Default in the payment of interest or premium on, or principal of, the Notes. The Trustee may withhold from Holders of the Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal, premium, if any, or interest) if it determines that withholding notice is in such Holders' interest. SECTION 6.05. CONTROL BY MAJORITY. The Holders of a majority in aggregate principal amount of the then outstanding Notes may direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, that the Trustee determines may be unduly prejudicial to the rights of other Holders of Notes or that may involve the Trustee in personal liability. The Trustee may take any other action which it deems proper which is not inconsistent with any such direction. SECTION 6.06. LIMITATION ON SUITS. No Holder of a Note will have any right to institute any proceeding with respect to this Indenture or for any remedy hereunder, unless (i) such Holder shall have previously given to the Trustee written notice of a continuing Event of Default with respect to the Notes, (ii) the Holders of at least 30% in 48 55 aggregate principal amount of the Notes then outstanding shall have made written request to the Trustee to institute such proceeding and, if requested by the Trustee, provided reasonable indemnity to the Trustee, with respect to such proceeding and (iii) the Trustee shall not have received from the Holders of a majority in aggregate principal amount of the Notes then outstanding a direction inconsistent with such request and shall have failed to institute such proceeding within 60 days. SECTION 6.07. RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder of a Note to receive payment of principal, premium, if any, and interest on any Note, on or after the respective due dates expressed in any Note, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 6.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default specified in Section 6.01(a) or (b) hereof occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal of, premium, if any, and interest remaining unpaid on the Notes and interest on overdue principal and, to the extent lawful, interest and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee is authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders of the Notes allowed in any judicial proceedings relative to the Company (or any other obligor upon the Notes), its creditors or its property and shall be entitled and empowered to collect, receive and distribute any money or other property payable or deliverable on any such claims and any custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, as administrative expenses associated with any such proceeding and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties that the Holders may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10. PRIORITIES. If the Trustee collects any money pursuant to this Article Six, it shall pay out the money, subject to Article 10 hereof, in the following order: 49 56 First: to the Trustee, its agents and attorneys for amounts due under Section 7.07 hereof, including payment of all compensation, expense and liabilities incurred, and all advances made, by the Trustee and the costs and expenses of collection; Second: to holders of Senior Debt and Guarantor Senior Debt to the extent required by Article 10 hereof or any Subsidiary Guarantee; Third: to Holders of Notes for amounts due and unpaid on the Notes for principal, premium, if any, and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal, premium and, if any, and interest, respectively; Fourth: without duplication, to the Holders for any other Obligations owing to the Holders under this Indenture and the Notes; and Fifth: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders of Notes pursuant to this Section 6.10. SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder of a Note pursuant to Section 6.07 hereof, or a suit by Holders of more than 10% in principal amount of the then outstanding Notes. ARTICLE 7 TRUSTEE SECTION 7.01. DUTIES OF TRUSTEE. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in its exercise, as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (1) the duties of the Trustee shall be determined solely by the express provisions of this Indenture and the Trustee need perform only those duties that are specifically set forth in this Indenture and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture, provided, that 50 57 the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section 7.01; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05 hereof. (d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), (c), (e) and (f) of this Section 7.01 and Section 7.02 hereof. (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee shall be under no obligation to exercise any of its rights and powers under this Indenture unless the Holders shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. SECTION 7.02. RIGHTS OF TRUSTEE. (a) The Trustee may conclusively rely upon any document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereof in good faith and in reliance thereon. (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within the rights or powers conferred upon it by this Indenture. (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer of the Company. 51 58 (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction. SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with the Company with the same rights it would have if it were not Trustee. However, in the event that the Trustee acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Commission for permission to continue as trustee or resign. Any Agent may do the same with like rights and duties. The Trustee is also subject to Sections 7.10 and 7.11 hereof. SECTION 7.04. TRUSTEE'S DISCLAIMER. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Notes, it shall not be accountable for the Company's use of the proceeds from the Notes or any money paid to the Company or upon the direction of the Company under any provision of this Indenture, it shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee, and it shall not be responsible for any statement or recital herein or any statement in the Notes or any other document furnished or issued in connection with the sale of the Notes or pursuant to this Indenture other than its certificate of authentication. SECTION 7.05. NOTICE OF DEFAULTS. If a Default or Event of Default occurs and is continuing and if it is actually known to the Trustee, the Trustee shall mail to Holders of Notes a notice of the Default or Event of Default within 90 days after it occurs. Except in the case of a Default or Event of Default in payment of principal of, premium, if any, or interest on any Note, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of the Holders of the Notes. SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES. Within 60 days after each May 15 beginning with the May 15 following the date of this Indenture, and for so long as Notes remain outstanding, the Trustee shall mail to the Holders of the Notes a brief report dated as of such reporting date that complies with TIA Section 313(a) (but if no event described in TIA Section 313(a) has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with TIA Section 313(b)(2). The Trustee shall also transmit by mail all reports as required by TIA Section 313(c). A copy of each report at the time of its mailing to the Holders of Notes shall be mailed to the Company and filed with the Commission and each stock exchange on which the Notes are listed in accordance with TIA Section 313(d). The Company shall promptly notify the Trustee when the Notes are listed on any stock exchange. SECTION 7.07. COMPENSATION AND INDEMNITY. The Company shall pay to the Trustee, from time to time as may be agreed upon between them, reasonable compensation for its acceptance of this Indenture and services hereof. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The 52 59 Company shall reimburse the Trustee promptly upon request for all reasonable disbursements, advances and expenses incurred or made by it in addition to the compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. The Company shall indemnify and hold harmless the Trustee against any and all losses, liabilities or expenses incurred by it arising out of or in connection with the acceptance or administration of its duties under this Indenture, including the costs and expenses of enforcing this Indenture against the Company (including this Section 7.07) and defending itself against any claim (whether asserted by the Company or any Holder or any other person) or liability in connection with the exercise or performance of any of its powers or duties hereof, except to the extent any such loss, liability or expense may be attributable to its negligence or bad faith. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereof. The Company shall defend the claim and the Trustee shall reasonably cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The obligations of the Company under this Section 7.07 shall survive the satisfaction and discharge of this Indenture. To secure the Company's payment obligations in this Section 7.07, the Trustee shall have a Lien prior to the Notes on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular Notes. Such Lien shall survive the satisfaction and discharge of this Indenture. When the Trustee incurs expenses or renders services after the occurrence of an Event of Default specified in Section 6.01(g) or (h) hereof, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law. The Trustee shall comply with the provisions of TIA Section 313(b)(2) to the extent applicable. SECTION 7.08. REPLACEMENT OF TRUSTEE. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.08. The Trustee may resign in writing at any time and be discharged from the trust hereby created by so notifying the Company. The Holders of a majority in principal amount of the then outstanding Notes may remove the Trustee by so notifying the Trustee and the Company in writing. The Company may remove the Trustee if: (a) the Trustee fails to comply with Section 7.10 hereof, (b) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (c) a Custodian or public officer takes charge of the Trustee or its property; or (d) the Trustee becomes incapable of acting. 53 60 If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company, or the Holders of at least 10% in principal amount of the then outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee, after written request by any Holder of a Note who has been a Holder of a Note for at least six months, fails to comply with Section 7.10 hereof, such Holder of a Note may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders of the Notes. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, provided all sums owing to the Trustee hereof have been paid and subject to the Lien provided for in Section 7.07 hereof. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Company's obligations under Section 7.07 hereof shall continue for the benefit of the retiring Trustee. SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business (including the trust created by this Indenture) to, another corporation, the successor corporation without any further act shall be the successor Trustee. SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. There shall at all times be a Trustee hereof that is a corporation organized and doing business under the laws of the United States of America or of any state thereof that is authorized under such laws to exercise corporate trustee power, that is subject to supervision or examination by federal or state authorities and that has, or is a wholly owned subsidiary of a bank holding company that has, a combined capital and surplus of at least $100 million as set forth in its most recent published annual report of condition. This Indenture shall always have a Trustee who satisfies the requirements of TIA Section 310(a)(1), (2) and (5). The Trustee is subject to TIA Section 310(b). SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE COMPANY. The Trustee is subject to TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. SECTION 7.12. RIGHTS OF HOLDERS WITH RESPECT TO TIME METHOD AND PLACE Subject to the limitations of this Article 7, a majority in principal amount of the outstanding Notes issued hereof shall have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee. 54 61 ARTICLE 8 LEGAL DEFEASANCE AND COVENANT DEFEASANCE SECTION 8.01. OPTION TO EFFECT DEFEASANCE OR COVENANT DEFEASANCE. The Company may, at its option by Board Resolution, at any time, with respect to the Notes, elect to have either Section 8.02 or Section 8.03 hereof be applied to all Notes and Subsidiary Guarantees then outstanding upon compliance with the conditions set forth below in this Article Eight. SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE. Upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.02, the Company and the Guarantors, if any, shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be deemed to have been discharged from their respective obligations with respect to all Notes and Subsidiary Guarantees then outstanding on the date the conditions set forth below are satisfied ("Legal Defeasance"). For this purpose such defeasance means that the Company and any Guarantor shall be deemed to have paid and discharged the entire indebtedness represented by the Notes and any Subsidiary Guarantees outstanding, which shall thereafter be deemed to be "outstanding" only for the purposes of Section 8.05 and the other Sections of this Indenture referred to in clauses (i) and (ii) of this Section 8.02, and to have satisfied all its other obligations under such Notes, Subsidiary Guarantees and this Indenture (and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (i) the rights of Holders of outstanding Notes to receive payments in respect of the principal of, premium, if any, and interest on such Notes when such payments are due or on the redemption date, as the case may be, solely from amounts deposited with the Trustee as provided in Section 8.04 hereof, (ii) the Company's obligations with respect to the Notes under Sections 2.03, 2.04, 2.05, 2.06, 2.07, 2.10, 4.02 and 4.03 hereof, (iii) the rights, powers, trusts, duties, indemnities and immunities of the Trustee and the Company's obligations in connection therewith and (iv) this Section 8.02. SECTION 8.03. COVENANT DEFEASANCE. Upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.03, the Company and each Guarantor shall be released from its obligations under the covenants contained in Article Five and in Sections 4.04, 4.09, 4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16, 4.17, 4.18 and 4.19 with respect to the outstanding Notes and Subsidiary Guarantees, if any, on and after the date the conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"), and the Notes and the Subsidiary Guarantees, if any, shall thereafter be deemed to be not "outstanding" for the purposes of any direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder (it being understood that such Notes and Subsidiary Guarantees, if any, shall not be deemed outstanding for financial accounting purposes). For this purpose, such Covenant Defeasance means that, with respect to the outstanding Notes and Subsidiary Guarantees, if any, the Company and any Guarantor may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.01(c) hereof, but, except as specified above, the remainder of this Indenture and such Notes and Subsidiary Guarantees, if any, shall be unaffected thereby. In addition, upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.03, Sections 6.01(d) through 6.01(f) and Section 6.01(i) shall not constitute Events of Default. 55 62 SECTION 8.04. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE. The following shall be the conditions to application of either Section 8.02 or Section 8.03 hereof to the outstanding Notes and Subsidiary Guarantees: (i) the Company shall have irrevocably deposited with the Trustee, in trust, for the benefit of the Holders of the Notes and without retaining any legal interest corpus of such trust, cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest due on the outstanding Notes on the stated maturity thereof or on the applicable optional redemption date, as the case may be, and the Company must specify whether the Notes are being defeased to maturity or to a particular redemption date; (ii) in the case of Legal Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that (A) the Company has received from, or there has been published by, the United States Internal Revenue Service a ruling or (B) since the Closing Date, there has been a change in the applicable U.S. federal income tax law, in either case to the effect that, and based thereon such opinion of counsel in the United States shall confirm that, subject to customary assumptions and exclusions, the Holders of the outstanding Notes will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such Legal Defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that, subject to customary assumptions and exclusions, the Holders of the outstanding Notes will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such Covenant Defeasance and will be subject to such U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit) or, insofar as Events of Default set forth in Section 6.01(g) and (h), at any time in the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be satisfied until the expiration of such period); (v) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, any material agreement or instrument (other than this Indenture) to which the Company or a Guarantor, if any, is a party or by which the Company or a Guarantor, if any, is bound; (vi) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that, as of the date of such opinion and subject to customary assumptions and exclusions (which assumptions and exclusions shall not relate to the operation of Section 547 of the United States Bankruptcy Code or any analogous New York State law provision or related judicial decisions) after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally, and that the Trustee has a perfected security interest in such trust funds for the ratable benefit of the Holders; (vii) the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of Notes over the other 56 63 creditors of the Company with the intent of defeating, hindering, delaying or defrauding any creditors of the Company or a Guarantor, if any; (viii) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel in the United States (which Opinion of Counsel may be subject to customary assumptions and exclusions) each stating that all conditions precedent provided for or relating to the Legal Defeasance or the Covenant Defeasance, as the case may be, have been complied with; and (ix) the Trustee shall have received such other documents and assurances as the Trustee shall reasonably require. SECTION 8.05. DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS. Subject to the provisions of the last paragraph of Section 4.03 hereof, all money and Government Securities (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 8.05, the "Trustee") pursuant to Section 8.04 hereof in respect of the Notes then outstanding shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Notes of all sums due and to become due thereon in respect of principal (and premium, if any) and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the cash or Government Securities deposited pursuant to Section 8.04 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the Notes then outstanding. Anything in this Article Eight to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time at the Company's request any money or Government Securities held by it as provided in Section 8.04 hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee (which may be the opinion delivered under Section 8.04(i) hereof), are in excess of the amount thereof which would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance. SECTION 8.06. REPAYMENT TO COMPANY. Subject to Section 7.07 hereof the Trustee shall promptly pay to the Company, after written request by the Company therefor, any money held at such time in excess of the amounts required to pay any of the Company's Obligations then owing with respect to the Notes. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, or interest, if any, on any Note and remaining unclaimed for one year after such principal, and premium, if any, or interest, if any, have become due and payable shall be paid to the Company on its request or (if then held by the Company) shall be discharged from such trust; and the Holder of such Note shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in The New York Times and The Wall Street Journal (national edition), notice that such money remains unclaimed and 57 64 that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 8.07. REINSTATEMENT. If the Trustee or Paying Agent is unable to apply any United States dollars or Government Securities in accordance with Section 8.02 hereof or Section 8.03 hereof, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's and any Guarantor's obligations under this Indenture, the Notes and the Subsidiary Guarantees, if any, shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.02 hereof or Section 8.03 hereof, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.02 hereof or Section 8.03 hereof, as the case may be; provided, however, that if the Company or any Guarantor makes any payment of principal of (or premium, if any) or interest on any Note following the reinstatement of its obligations, the Company or any Guarantor shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER SECTION 9.01. WITHOUT CONSENT OF HOLDERS OF NOTES. Notwithstanding Section 9.02 hereof, without the consent of any Holder of Notes, the Company, a Guarantor (with respect to a Subsidiary Guarantee to which it is a party or this Indenture) and the Trustee may amend or supplement this Indenture, or Notes or the Subsidiary Guarantees: (a) to cure any ambiguity, defect or inconsistency; (b) to provide for uncertificated Notes in addition to or in place of certificated Notes; (c) to comply with Article 5 hereof; (d) to provide for the assumption of the Company's or any Guarantor's obligations to the Holders of the Notes in the case of a merger, consolidation, sale, assignment, transfer, lease or other conveyance or other disposition of assets; (e) to make any change that would provide any additional rights or benefits to the Holders of the Notes or that does not, in the opinion of counsel, adversely affect the legal rights hereunder of any such Holder; (f) to add covenants for the benefit of the Holders or to surrender any right or power conferred upon the Company; (g) to comply with requirements of the Commission in order to effect or maintain the qualification of this Indenture under the Trust Indenture Act; or (h) to allow any Guarantor to guarantee the Notes. Upon the written request of the Company accompanied by a Board Resolution authorizing the execution of any such amended or supplemental indenture, and upon receipt by the Trustee of an Officers' Certificate and an Opinion of Counsel, the Trustee shall join with the Company and the Guarantors, if 58 65 any, in the execution of any amended or supplemental indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee shall not be obligated to enter into such amended or supplemental indenture that affects its own rights, duties or immunities under this Indenture or otherwise. SECTION 9.02. WITH CONSENT OF HOLDERS OF NOTES. Except as provided below in this Section 9.02, this Indenture, the Notes and a Subsidiary Guarantee, if any, issued hereunder may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or a tender offer or exchange offer for, the Notes), and, subject to Sections 6.02, 6.04 and 6.07 hereof, any existing default or compliance with any provision of this Indenture, the Notes or the Subsidiary Guarantees may be waived with the consent of the Holders of a majority in principal amount of the outstanding Notes (including, without limitation, consents obtained in connection with a purchase of, or a tender offer or exchange offer for, the Notes). Upon the request of the Company accompanied by a Board Resolution authorizing the execution of any such amended or supplemental indenture, and upon the filing with the Trustee of evidence satisfactory to the Trustee of the consent of the Holders of Notes as aforesaid, and upon receipt by the Trustee of an Officers' Certificate and an Opinion of Counsel, the Trustee shall join with the Company and any Guarantor in the execution of such amended or supplemental indenture unless such amended or supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such amended or supplemental Indenture. The consent of the Holders is not necessary under this Section 9.02 to approve the particular form of any proposed amendment. It is sufficient if such consent approves the substance of the proposed amendment. After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Company shall mail to the Holders of Notes affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amended or supplemental indenture or waiver. Subject to Sections 6.04 and 6.07 hereof, the Holders of a majority in aggregate principal amount of the Notes then outstanding may waive compliance in a particular instance by the Company with any provision of this Indenture, the Notes or the Subsidiary Guarantees, if any. However, without the consent of each Holder affected, an amendment or waiver may not (with respect to any Note or Subsidiary Guarantee held by a non-consenting Holder): (i) reduce the principal amount of the Notes whose Holders must consent to an amendment, supplement or waiver; (ii) reduce the principal of or change the fixed maturity of any Note or alter the provisions with respect to the redemption of the Notes (other than provisions relating to Sections 4.09 and 4.10 hereof); (iii) reduce the rate of or change the time for payment of interest on any Note; (iv) waive a Default or Event of Default in the payment of principal of, premium, if any, or interest on the Notes (except a rescission of acceleration of the Notes by the Holders of at least a majority in aggregate principal amount of such Notes and a waiver of the payment default that resulted from such acceleration) or in respect of a covenant or a 59 66 provision contained herein or in any Subsidiary Guarantee which cannot be amended or modified without the consent of all Holders; (v) make any Note payable in money other than that stated in such Notes; (vi) make any change in Section 6.04 or Section 6.07 hereof; (vii) waive a redemption or repurchase payment with respect to any Note (other than a payment required by Sections 3.10, 4.09 or 4.10 hereof); (viii) except as provided under Article 8 and the relevant Subsidiary Guarantee, release a Guarantor from its obligations under its Subsidiary Guarantee, or make any change in a Subsidiary Guarantee that would adversely affect the Holders; or (ix) make any change in the foregoing amendment and waiver provisions of this Article 9. Notwithstanding the foregoing, any (i) amendment or waiver to Section 4.09 hereof and (ii) any amendment or waiver relating to Article 10 hereof or the subordination provisions of the Subsidiary Guarantees will require the consent of the Holders of at least two-thirds in aggregate principal amount of the Notes then outstanding if such amendment would adversely affect the rights of Holders of Notes. SECTION 9.03. COMPLIANCE WITH TIA. Every amendment or supplement to this Indenture or the Notes shall be set forth in an amended or supplemental indenture that complies with the TIA as then in effect. SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS. Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Note is a continuing consent by the Holder of a Note and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder of a Note or subsequent Holder of a Note may revoke the consent as to its Note if the Trustee receives written notice of revocation before the date the waiver, supplement or amendment becomes effective. An amendment, supplement or waiver becomes effective in accordance with its terms and thereafter binds every Holder. SECTION 9.05. NOTATION ON OR EXCHANGE OF NOTES. The Trustee may, but shall not be required to, place an appropriate notation about an amendment, supplement or waiver on any Note thereafter authenticated. The Company in exchange for all Notes may issue and the Trustee shall authenticate new Notes that reflect the amendment, supplement or waiver. Failure to make the appropriate notation or issue a new Note shall not affect the validity and effect of such amendment, supplement or waiver. SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall sign any amended or supplemental indenture authorized pursuant to this Article Nine if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. The Company may not sign an amendment or supplemental indenture until the Board of Directors approves it. In signing or refusing to sign any amended or supplemental indenture the Trustee shall be entitled to receive and (subject to Section 7.01 hereof) shall be fully protected in relying upon 60 67 an Officers's Certificate and an Opinion of Counsel stating that the execution of such amended or supplemental indenture is authorized or permitted by this Indenture, that it is not inconsistent herewith, and that it will be valid and binding upon the Company and the Guarantors, if any, in accordance with its terms. ARTICLE 10 SUBORDINATION SECTION 10.01. AGREEMENT TO SUBORDINATE. The Company agrees, and each Holder by accepting a Note agrees, that the payment of the Subordinated Note Obligations shall be subordinated in right of payment, as set forth in this Article 10, to the prior payment in full in cash or cash equivalents of all Senior Debt, whether outstanding on the date hereof or thereafter incurred. For purposes of this Article 10, "cash equivalents" means Government Securities maturing not more than 90 days from the date of determination. The provisions of this Article 10 shall constitute a continuing offer to all Persons that, in reliance upon such provisions, become holders of, or continue to hold Senior Debt; such provisions are made for the benefit of holders of Senior Debt and they or each of them may enforce the rights of holders of Senior Debt hereunder, subject to the terms and provisions hereof. SECTION 10.02. LIQUIDATION; DISSOLUTION; BANKRUPTCY. Upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, an assignment for the benefit of creditors or any marshalling of the Company's assets and liabilities, the holders of all Obligations due in respect of such Senior Debt shall be entitled to receive payment in full in cash or cash equivalents of such Senior Debt (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Debt) before the Holders of Notes will be entitled to receive any payment with respect to Subordinated Note Obligations (except that Holders of Notes may receive Permitted Junior Securities and payments made from the trusts described in Article 8 hereof), and until all Obligations with respect to Senior Debt are paid in full in cash or cash equivalents, any distribution to which the Holders of Notes would be entitled shall be made to the holders of Senior Debt (except that Holders of Notes may receive Permitted Junior Securities and payments made from the trusts described in Article 8 hereof). SECTION 10.03. DEFAULT ON DESIGNATED SENIOR DEBT. The Company may not make any payment upon or in respect of the Subordinated Note Obligations (except Permitted Junior Securities and payments made from the trusts described in Article 8 hereof) if: (a) a default in the payment of the principal of (including reimbursement obligations in respect of letters of credit), premium, if any, or interest on, or commitment fees related to, Designated Senior Debt occurs and is continuing beyond any applicable period of grace, or (b) any other default occurs and is continuing with respect to Designated Senior Debt that permits holders of the Designated Senior Debt as to which such default relates to accelerate its maturity and the Trustee receives a notice of such default (a "Payment 61 68 Blockage Notice") from the Company or the holders of any Designated Senior Debt (or their representative). Payments on the Notes may and shall be resumed (a) in the case of a payment default, upon the date on which such default is cured or waived and (b) in case of a nonpayment default, the earlier of the date on which such nonpayment default is cured or waived or 179 days after the date on which the applicable Payment Blockage Notice is received, unless the maturity of any Designated Senior Debt has been accelerated. No new period of payment blockage may be commenced unless and until 360 days have elapsed since the effectiveness of the immediately prior Payment Blockage Notice. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice unless such default shall have been cured or waived for a period not less than 90 days. The Company may and shall resume payments on the Notes (including any missed payments): (a) in the case of a payment default described in clause (i) above, upon the date on which such default is cured or waived or shall have ceased to exist or such Designated Senior Debt shall have been discharged or paid in full in cash or cash equivalents; and (b) in the case of a nonpayment default described in clause (ii) above, the earlier of (x) the date on which such nonpayment default is cured or waived, (y) 179 days after the date on which the applicable Payment Blockage Notice is received (each such period, the "Payment Blockage Period") or (z) the date such Payment Blockage Period shall be terminated by written notice to the Trustee from the requisite holders of such Designated Senior Debt necessary to terminate such period or from their representative. SECTION 10.04. ACCELERATION OF SECURITIES. If the Company fails to make any payment on the Notes when due or within any applicable grace period, whether or not on account of the payment blockage provision referred to above, such failure shall constitute an Event of Default and shall entitle the holders of the Notes to accelerate the maturity thereof, subject to the terms of Section 6.02 hereof. The Company shall promptly notify holders of Senior Debt if payment of the Notes is accelerated because of an Event of Default. SECTION 10.05. WHEN DISTRIBUTION MUST BE PAID OVER. In the event that the Trustee or any Holder receives any payment of any Subordinated Note Obligations at a time when the Trustee or such Holder, as applicable, has actual knowledge that such payment is prohibited by Section 10.02 or 10.03 hereof, such payment shall be held by the Trustee or such Holder, in trust for the benefit of, and shall be paid forthwith over and delivered, upon written request, to, the holders of Senior Debt as their interests may appear or their representative under the indenture or other agreement (if any) pursuant to which Senior Debt may have been issued, as their respective interests may appear, for application to the payment of all Obligations with respect to Senior Debt remaining unpaid to the extent necessary to pay such Obligations in full in accordance with their terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt. In the event that any Holder receives any payment of any Subordinated Note Obligations at any time when such payment is prohibited by Section 10.02 or 10.03 hereof, such payment shall be held by such Holder, in trust for the benefit of, and shall be paid forthwith over and delivered, upon written request to, the Holders of Senior Debt as their interests may appear or their representative under the indenture or other agreement (if any) pursuant to which Senior Debt may have been issued, as their interest may appear, for the application to the payment of all Obligations with respect to Senior Debt 62 69 remaining unpaid to the extend necessary to pay such Obligations in full accordance with their terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt. With respect to the holders of Senior Debt, the Trustee undertakes to perform only such obligations on the part of the Trustee as are specifically set forth in this Article 10, and no implied covenants or obligations with respect to the holders of Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Debt, and shall not be liable to any such holders if the Trustee shall pay over or distribute to or on behalf of Holders or the Company or any other Person money or assets to which any holders of Senior Debt shall be entitled by virtue of this Article 10, except if such payment is made as a result of the willful misconduct or gross negligence of the Trustee. SECTION 10.06. NOTICE BY COMPANY. The Company shall promptly notify the Trustee and the Paying Agent of any facts known to the Company that would cause a payment of any Subordinated Note Obligations to violate this Article 10, but failure to give such notice shall not affect the subordination of the Notes to the Senior Debt as provided in this Article 10. SECTION 10.07. SUBROGATION. After all Senior Debt is paid in full in cash or cash equivalents and until the Notes are paid in full in cash, Holders of Notes shall be subrogated (equally and ratably with all other Indebtedness pari passu with the Notes) to the rights of holders of Senior Debt to receive distributions applicable to Senior Debt to the extent that distributions otherwise payable to the Holders of Notes have been applied to the payment of Senior Debt. A distribution made under this Article 10 to holders of Senior Debt that otherwise would have been made to Holders of Notes is not, as between the Company and Holders, a payment by the Company on the Senior Debt. SECTION 10.08. RELATIVE RIGHTS. This Article 10 defines the relative rights of Holders of Notes and holders of Senior Debt. Nothing in this Indenture shall: (a) impair, as between the Company and Holders of Notes, the obligation of the Company, which is absolute and unconditional, to pay principal of, premium, if any, and interest on the Notes in accordance with their terms; (b) affect the relative rights of Holders of Notes and creditors of the Company other than their rights in relation to holders of Senior Debt; or (c) prevent the Trustee or any Holder of Notes from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders and owners of Senior Debt to receive distributions and payments otherwise payable to Holders of Notes. If the Company fails because of this Article 10 to pay principal of, premium, if any, or interest on a Note on the due date, the failure is nevertheless a Default or an Event of Default. 63 70 SECTION 10.09. SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY. No right of any holder of Senior Debt to enforce the subordination of the Indebtedness evidenced by the Notes shall be impaired by any act or failure to act by the Company or any Holder or by the failure of the Company or any Holder to comply with this Indenture. SECTION 10.10. DISTRIBUTION OR NOTICE TO REPRESENTATIVE. Whenever a distribution is to be made or a notice given to holders of Senior Debt, the distribution may be made and the notice given to their representative. Upon any payment or distribution of assets of the Company referred to in this Article 10, the Trustee and the Holders of Notes shall be entitled to rely upon any order or decree made by any court of competent jurisdiction or upon any certificate of such representative or of the liquidating trustee or agent or other Person making any distribution to the Trustee or to the Holders of Notes for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Debt and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 10. SECTION 10.11. RIGHTS OF TRUSTEE AND PAYING AGENT. Notwithstanding the provisions of this Article 10 or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment or distribution by the Trustee, and the Trustee and the Paying Agent may continue to make payments on the Notes, unless the Trustee shall have received at its Corporate Trust Office at least two Business Days prior to the date of such payment written notice of facts that would cause the payment of any Subordinated Note Obligations to violate this Article 10. Only the Company or a representative may give the notice. Nothing in this Article 10 shall impair the claims of, or payments to, the Trustee under or pursuant to Section 7.07 hereof. The Trustee in its individual or any other capacity may hold Senior Debt with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. SECTION 10.12. AUTHORIZATION TO EFFECT SUBORDINATION. Each Holder of Notes, by the Holder's acceptance thereof, authorizes and directs the Trustee on such Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article 10, and appoints the Trustee to act as such Holder's attorney-in-fact for any and all such purposes. If the Trustee does not file a proper proof of claim or proof of debt in the form required in any proceeding relating to any Bankruptcy Law at least 30 days before the expiration of the time to file such claim, a representative of Designated Senior Debt is hereby authorized to file an appropriate claim for and on behalf of the Holders of the Notes. SECTION 10.13. NO WAIVER OF SUBORDINATION PROVISIONS. (a) No right of any present or future holder of any Senior Debt to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act, in good faith, by any such holder. (b) Without in any way limiting the generality of paragraph (a) of this Section 10.13, the holders of Senior Debt may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders, without incurring responsibility to the Holders of the Notes and without 64 71 impairing or releasing the subordination provided in this Article 10 or the obligations hereunder of the Holders to the holders of Senior Debt, do any one or more of the following: (1) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, any Senior Debt or any instrument evidencing the same or any agreement under which Senior Debt is outstanding; (2) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Debt; (3) release any Person liable in any manner for the collection of Senior Debt; and (4) exercise or refrain from exercising any rights against the Company and any other Person. SECTION 10.14. CERTAIN DEFINITIONS. For purposes of this Section 10, the terms "distribution" and "payment" include payments, distributions and other transfers of assets by or on behalf of the Company (including redemptions, repurchases or other acquisitions of the Notes) from any source, of any kind or character, whether direct or indirect, by set-off or otherwise, whether in cash, property or securities. ARTICLE 11 SATISFACTION AND DISCHARGE SECTION 11.01 SATISFACTION AND DISCHARGE OF INDENTURE. This Indenture shall be discharged and will cease to be of further effect as to all Notes issued hereunder, when either (a) all such Notes theretofore authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid and Notes for whose payment money has theretofore been deposited in trust and thereafter repaid to the Company) have been delivered to the Trustee for cancellation; or (b) (i) all such Notes not theretofore delivered to such Trustee for cancellation have become due and payable by reason of the making of a notice of redemption or otherwise or will become due and payable within one year and the Company or a Guarantor, if any, has irrevocably deposited or caused to be deposited with such Trustee as trust funds in trust an amount of money sufficient to pay and discharge the entire Indebtedness on such Notes not theretofore delivered to the Trustee for cancellation for principal, premium, if any, and accrued interest to the date of maturity or redemption; (ii) no Default or Event of Default with respect to this Indenture or the Notes shall have occurred and be continuing on the date of such deposit or shall occur as a result of such deposit and such deposit will not result in a breach or violation of, or constitute a default under, any other instrument to which the Company or a Guarantor, if any, is a party or by which the Company or a Guarantor, if any, is bound; (iii) the Company or a Guarantor, if any, has paid or caused to be paid all sums payable by it under this Indenture; and (iv) the Company has delivered irrevocable instructions to the Trustee under this Indenture to apply the deposited money toward the payment of such Notes at maturity or the redemption date, as the case may be. 65 72 In addition, the Company must deliver an Officers' Certificate and an Opinion of Counsel to the Trustee stating that all conditions precedent to satisfaction and discharge have been satisfied. SECTION 11.02 APPLICATION OF TRUST MONEY Subject to the provisions of the last paragraph of Section 4.03 hereof, all money deposited with the Trustee pursuant to Section 11.01 hereof shall be held in trust and applied by it, in accordance with the provisions of the Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as Paying Agent) as the Trustee may determine, to Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with the Trustee. If the Trustee or Paying Agent is unable to apply any money or Government Securities in accordance with Section 11.01 hereof by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Notes shall be revived and reinstated as though such deposit had occurred pursuant to Section 11.01 hereof; provided that if the Company has made any payment of principal of, premium, if any, or interest on any Notes because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money or Government Securities held by the Trustee or Paying Agent. ARTICLE 12 MISCELLANEOUS SECTION 12.01. CONFLICT OF ANY PROVISION OF INDENTURE WITH TIA. If any provision of this Indenture limits, qualifies, or conflicts with the duties imposed by TIA Section 318(c), the imposed duties shall control. SECTION 12.02. NOTICES. Any notice or communication by the Company, any Guarantor or the Trustee to the others is duly given if in writing and delivered in Person or mailed by first class mail (registered or certified, return receipt requested), telecopier or overnight air courier guaranteeing next day delivery, to the others' address: If to the Company or any Guarantor: DecisionOne Corporation 50 East Swedesford Road Frazer, Pennsylvania 19355 Attention: Thomas M. Molchan, Esq. Facsimile: (610) 296-6000 66 73 With a copy to: Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 Attention: Richard D. Truesdell, Esq. Facsimile: (212) 450-4800 If to the Trustee: State Street Bank and Trust Company 777 Main Street, 11th Floor Hartford, Connecticut 06115 Attention: Corporate Trust Department Facsimile: (860) 986-7920 The Company or the Trustee, by notice to the others may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Any notice or communication to a Holder shall be mailed by first class mail, certified or registered, return receipt requested, or by overnight air courier guaranteeing next day delivery to its address shown on the register kept by the Registrar. Any notice or communication shall also be so mailed to any Person described in TIA Section 313(c), to the extent required by the TIA. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. SECTION 12.03. COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES. Holders may communicate pursuant to TIA Section 312(b) with other Holders with respect to their rights under this Indenture or the Notes. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). SECTION 12.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (a) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 1.05 hereof) stating that, in the 67 74 opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been satisfied; and (b) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 1.05 hereof) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been satisfied. SECTION 12.05. LEGAL HOLIDAYS. In any case where any interest payment date, any date established for payment of defaulted interest pursuant to Section 2.12 hereof, or any maturity date with respect to any Note shall not be a Business Day, then (notwithstanding any other provisions of this Indenture, the Notes or any Subsidiary Guarantee) payment of interest or principal (and premium, if any) need not be made on such date but may be made on the next succeeding Business Day with the same force and effect as if made on the interest payment date or date established for payment of defaulted interest pursuant to Section 2.12 hereof or the maturity date, as applicable, and no interest shall accrue with respect to such payment for the period from and after such interest payment date or date established for payment of defaulted interest pursuant to Section 2.12 or maturity date , as the case may be, to the next succeeding Business Day. SECTION 12.06. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS. No director, officer, employee, incorporator or stockholder of the Company or any Guarantor, if any, shall have any liability for any obligations of the Company or the Guarantors, if any, under the Notes, the Subsidiary Guarantees, if any, or this Indenture or for any claim based on, in respect of, or by reason of such obligations or their creation. Each Holder of the Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. SECTION 12.07. GOVERNING LAW. THIS INDENTURE, THE NOTES AND THE SUBSIDIARY GUARANTEES, IF ANY, SHALL BE, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CHOICE OF LAW RULES THEREOF. SECTION 12.08. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Indenture may not be used to interpret any other indenture, loan or debt agreement of the Company or its Subsidiaries or of any other Person. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 12.09. SUCCESSORS AND ASSIGNS. All covenants and agreements in this Indenture by the Company shall bind its respective successors and assigns, whether so expressed or not. All covenants and agreements in this Indenture by the Trustee shall bind its respective successors and assigns, whether so expressed or not. 68 75 SECTION 12.10. SEVERABILITY. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 12.11. COUNTERPART ORIGINALS. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. SECTION 12.12. TABLE OF CONTENTS, HEADINGS, ETC. The Table of Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part of this Indenture and shall in no way modify or restrict any of the terms or provisions hereof. [Signatures on following page] 69 76 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed in New York, New York as of the day and year first above written. DECISIONONE CORPORATION Dated: August 7, 1997 By:_________________________________ Name: Title: STATE STREET BANK AND TRUST COMPANY Dated: August 7, 1997 By:_________________________________ Name: Title: 70 77 EXHIBIT A (Face of Note) [Unless and until it is exchanged in whole or in part for Notes in definitive form, this Note may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. The Depository Trust Company shall act as the Depositary until a successor shall be appointed by the Company. Unless this certificate is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) ("DTC"), to the Company or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as may be requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as may be requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein.(1) 9 3/4% Senior Subordinated Notes due 2007 No. Cusip No: DECISIONONE CORPORATION promises to pay to Cede & Co. or registered assigns, the principal sum of $_________________ (_______________________________ Dollars) on August 1, 2007. Interest Payment Dates: February 1 and August 1 Record Dates: January 15 and July 15 DECISIONONE CORPORATION By:______________________________ Name: Title: - ---------- (1) This paragraph should be included only if the Note is issued in global form. A-1 78 This is one of the 9 3/4% Senior Subordinated Notes due 2007 referred to in the within-mentioned Indenture: STATE STREET BANK AND TRUST COMPANY, as Trustee By: _____________________________ Authorized Signature A-2 79 (Back of Note) 9 3/4% Senior Subordinated Notes due 2007 Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below. 1. INTEREST. DecisionOne Corporation, a Delaware corporation (the "Company"), promises to pay interest on the principal amount of this Note at 9 3/4% per annum from August 7, 1997 until August 1, 2007. The Company shall pay interest semi-annually in arrears on February 1 and August 1 of each year, or if any such day is not a Business Day, on the next succeeding Business Day (each an "Interest Payment Date"). Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the Closing Date; provided that if there is no existing Default in the payment of interest, and if this Note is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date; provided, further, that the first Interest Payment Date shall be February 1, 1998. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal and premium, if any, from time to time on demand at a rate equal to the per annum rate on the Notes then in effect; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. METHOD OF PAYMENT. The Company will pay interest on the Notes (except defaulted interest) to the Persons who are registered Holders of Notes at the close of business on January 15 and July 15 next preceding the Interest Payment Date, even if such Notes are cancelled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. The Notes will be payable as to principal, premium, if any, and interest at the office or agency of the Company maintained for such purpose within or without the City and State of New York, or, at the option of the Company, payment of interest may be made by check mailed to the Holders at their addresses set forth in the register of Holders; provided that all payments with respect to Notes represented by one or more permanent global Notes will be paid by wire transfer of immediately available funds to the account of the Depository Trust Company or any successor thereto. Such payment shall be in such coin or currency of the United Sates of America as at the time of payment is legal tender for payment of public and private debts. 3. PAYING AGENT AND REGISTRAR. Initially, State Street Bank and Trust Company, the Trustee under the Indenture, will act as Paying Agent and Registrar. The Notes may be presented for registration of transfer and exchange at the offices of the Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company or any of its Subsidiaries may act in any such capacity. 4. INDENTURE. The Company issued the Notes under an Indenture dated as of August 7, 1997 (the "Indenture") between the Company and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code SectionSection 77aaa-77bbbb). The Notes are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. The A-3 80 Notes are general unsecured obligations of the Company limited to $150,000,000 in aggregate principal amount. 5. OPTIONAL REDEMPTION. Except as set forth in the next paragraph, the Notes will not be redeemable at the Company's option prior to August 1, 2002. Thereafter, the Notes will be subject to redemption at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' written notice, at the redemption prices (expressed as a percentage of principal amount) set forth below, together with accrued and unpaid interest thereon, to the applicable redemption date, if redeemed during the twelve-month period beginning on August 1 of each of the years indicated below:
YEAR REDEMPTION PRICE 2002 ................................................. 104.875% 2003 ................................................. 103.250% 2004 ................................................. 101.625% 2005 and thereafter .................................. 100.000%
In addition, prior to August 1, 2000, the Company may, at its option, on any one or more occasions redeem up to 35% of the original aggregate principal amount of Notes at a redemption price equal to 109.750% of the principal amount thereof, plus accrued and unpaid interest thereon to the redemption date, with the net cash proceeds of one or more Equity Offerings by (i) the Company or (ii) Holdings to the extent the net cash proceeds thereof are contributed to the Company as a capital contribution to the common equity of the Company; provided that at least 65% of the original aggregate principal amount of Notes remains outstanding immediately after the occurrence of each such redemption; and provided, further that any such redemption shall occur within 90 days of the date of closing of each such Equity Offering. 6. MANDATORY REDEMPTION. Other than as set forth in paragraph 8, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes. 7. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Notes are to be redeemed at its registered address. Notes may be redeemed in part but only in whole multiples of $1,000. On and after the redemption date interest ceases to accrue on Notes or portions thereof called for redemption. 8. REPURCHASE AT OPTION OF HOLDERS. (a) Upon the occurrence of a Change of Control, the Company shall make an offer (a "Change of Control Offer") to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of the Notes at a price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (the "Change of Control Payment"). Within 30 days following any Change of Control, the Company shall mail a notice to each Holder of Notes issued under the Indenture, with a copy to the Trustee, containing the information set forth in Section 4.09 of the Indenture. Holders of Notes that are subject to an offer to purchase may elect to have such Notes purchased by completing the form entitled "Option of Holder to Elect Purchase" on the reverse side of this Note. (b) Within 365 days after the Company's or any Restricted Subsidiary's receipt of any Net Proceeds from an Asset Sale, the Company or such Restricted Subsidiary shall apply such A-4 81 Net Proceeds (a) to permanently reduce Indebtedness under Senior Debt or Guarantor Senior Debt (and to correspondingly reduce commitments with respect thereto), to permanently reduce Indebtedness of a Restricted Subsidiary that is not a Guarantor or Pari Passu Indebtedness (provided that if the Company shall so repay Pari Passu Indebtedness, it will equally and ratably reduce Indebtedness under the Notes if the Notes are then redeemable or, if the Notes may not be then redeemed, the Company shall make an offer pursuant to Section 3.10 of the Indenture to purchase at 100% of the principal amount thereof the amount of Notes that would otherwise be redeemed or (b) to an investment in property, capital expenditures or assets that are used or useful in a Permitted Business, or Capital Stock of any Person primarily engaged in a Permitted Business if, as a result of the acquisition by the Company or any Restricted Subsidiary thereof, such Person becomes a Restricted Subsidiary. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the preceding sentence of this paragraph will be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $15.0 million, the Company shall be required to make an Asset Sale Offer to purchase the maximum principal amount of Notes that may be purchased out of the Excess Proceeds at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to the date of purchase, in accordance with the procedures set forth in Section 3.10 of the Indenture. To the extent that the aggregate amount of Notes tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of Notes surrendered by holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro rata basis. Upon completion of such Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero. 9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. Neither the Company nor the Registrar need exchange or register the transfer of any Note or portion of a Note selected for redemption. Also, neither the Company nor the Registrar need exchange or register the transfer of any Notes for a period of 15 days before a selection of Notes to be redeemed. 10. PERSONS DEEMED OWNERS. The registered Holder of a Note may be treated as its owner for all purposes. 11. SUBORDINATION. Each Holder by accepting a Note agrees that the payment of principal of, premium, if any, and interest on each Note is subordinated in right of payment, to the extent and in the manner provided in Article 10 of the Indenture, to the prior payment in full in cash or cash equivalents of all Senior Debt (whether outstanding on the date of the Indenture or thereafter created, incurred, assumed or guaranteed; provided that such creation, incurrence, assumption or guarantee is in accordance with the provisions set forth in the Indenture), and this subordination provision is for the benefit of the holders of Senior Debt. 12. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions, the Indenture, the Notes or any Subsidiary Guarantee may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the then outstanding Notes, and, subject to the terms of the Indenture and any applicable Subsidiary Guarantee, any existing default (other than a default in the payment of the principal of, premium, if any, or interest on, the Notes) or compliance with any provision of the Indenture, the Notes or any Subsidiary Guarantee may be A-5 82 waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes. Without the consent of any Holder, the Indenture, the Notes and any Subsidiary Guarantee may be amended or supplemented to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes, to comply with Article 5 of the Indenture, to provide for the assumption of the Company's or any Guarantor's obligations to Holders of the Notes, to make any change that would provide any additional rights or benefits to the Holders of the Notes or that does not adversely affect the legal rights under the Indenture of any such Holder, to add covenants for the benefit of the Holders or to surrender any right or power conferred upon the Company, to comply with the requirements of the Commission in order to effect or maintain the qualification of the Indenture under the TIA, to add a Guarantor under the Indenture, or to provide for the appointment of a successor trustee in compliance with the requirements of Section 7.08 of the Indenture. 13. DEFAULTS AND REMEDIES. Each of the following constitutes an "Event of Default": (a) default for 30 days in the payment when due of interest on the Notes (whether or not prohibited by Article 10 of the Indenture); (b) default in payment when due of principal or premium, if any, on the Notes at maturity, upon redemption or otherwise (whether or not prohibited by Article 10 of the Indenture); (c) failure by the Company or any Guarantor for 30 days after receipt of notice from the Trustee or Holders of at least 30% in principal amount of the Notes then outstanding to comply with the provisions of Sections 3.10, 4.09, 4.10, 4.11, 4.12 or Article 5 of the Indenture; (d) failure by the Company or any Guarantor for 60 days after notice from the Trustee or the Holders of at least 30% in principal amount of the Notes then outstanding to comply with its other agreements in the Indenture or the Notes; (e) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of the Indenture, which default (i) is caused by a failure to pay Indebtedness at its stated final maturity (after giving effect to any applicable grace period provided in such Indebtedness) (a "Payment Default") or (ii) results in the acceleration of such Indebtedness prior to its stated final maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $20.0 million or more; (f) failure by the Company or any of its Restricted Subsidiaries to pay final judgments aggregating in excess of $20.0 million (net of any amounts with respect to which a reputable and creditworthy insurance company has acknowledged liability in writing), which judgments are not paid, discharged or stayed within 60 days after their entry; (g) certain events of bankruptcy with respect to the Company or any of its Restricted Subsidiaries that is a Significant Subsidiary; and (h) the termination of any Subsidiary Guarantee for any reason not permitted by this Indenture, or the denial of any Guarantor or any Person acting on behalf of any Guarantor of such Guarantor's obligations under its respective Subsidiary Guarantee. If an Event of Default occurs and is continuing under the Indenture, the Trustee or the Holders of at least 30% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately; provided, however, that, so long as any Indebtedness permitted to be incurred pursuant to the New Credit Facility shall be outstanding, no such acceleration shall be effective until the earlier of (i) acceleration of any such Indebtedness under the New Credit Facility or (ii) five business days after the giving of written notice to the Company and the representative under the New Credit Facility of such acceleration. Notwithstanding the foregoing, in the case of an Event of Default arising under clause (f) or (g) of the preceding paragraph, all outstanding Notes will become due and payable without further A-6 83 action or notice. Holders of the Notes may not enforce the Indenture or the Notes except as provided under the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. In the event of a declaration of acceleration of the Notes because an Event of Default has occurred and is continuing as a result of the acceleration of any Indebtedness described in clause (e) of Section 6.01 of the Indenture, the declaration of acceleration of the Notes shall be automatically annulled if the holders of any Indebtedness described in clause (e) of Section 6.01 of the Indenture have rescinded the declaration of acceleration in respect of such Indebtedness within 30 days of the date of such declaration and if (y) the annulment of the acceleration of the Notes would not conflict with any judgment or decree of a court of competent jurisdiction and (z) all existing Events of Default, except nonpayment of principal or interest on the Notes that became due solely because of the acceleration of the Notes, have been cured or waived. The Trustee may withhold from Holders of Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal, premium, if any, or interest) if it determines that withholding notice is in their interest. In addition, the Trustee shall have no obligation to accelerate the Notes if in the best judgment of the Trustee acceleration is not in the best interest of the Holders of such Notes. 14. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company, and may otherwise deal with the Company, as if it were not the Trustee. 15. NO RECOURSE AGAINST OTHERS. A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under these Notes or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Holder by accepting any of these Notes waives and releases all such liability. 16. AUTHENTICATION. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 17. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TENANT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 18. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 19. GOVERNING LAW. The internal law of the State of New York shall govern and be used to construe the terms of this Note. The Company shall furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to: DecisionOne Corporation 50 East Swedesford Road Frazer, Pennsylvania 19355 A-7 84 Attention: General Counsel Facsimile: (610) 408-3820 A-8 85 ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to - -------------------------------------------------------------------------------- (Insert assignee's soc. sec. or tax I.D. no.) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint_________________________________________________________ to transfer this Note on the books of the Company. The agent may substitute another to act for him. - -------------------------------------------------------------------------------- Date:______________________ Your Signature:__________________________ (Sign exactly as your name appears on the face of this Note) Signature Guarantee. A-9 86 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Note purchased by the Company pursuant to Section 4.09 or 4.10 of the Indenture, check the box below: [ ] Section 4.09 [ ] Section 4.10 If you want to elect to have only part of the Note purchased by the Company pursuant to Section 4.09 or Section 4.10 of the Indenture, state the amount you elect to have purchased: $____________ Date:______________ Your Signature:__________________________ (Sign exactly as your name appears on the Note) Tax Identification No.:__________________ Signature Guarantee. A-10 87 SCHEDULE OF EXCHANGES OF DEFINITIVE NOTES(2) The following exchanges of a part of this global Note for Notes in definitive form have been made:
Principal Amount of this Signature of Amount of decrease in Amount of increase in Global Note authorized Principal Amount of Principal Amount of following such decrease officer of Date of Exchange this Global Note this Global Note (or increase) Trustee - ---------------------- ----------------------- ------------------------ ------------------------ ------------
- -------- (2) This should be included only if the Note is issued in global form. A-11 88 EXHIBIT B FORM OF SUPPLEMENTAL INDENTURE TO BE DELIVERED BY GUARANTORS SUPPLEMENTAL INDENTURE (this "Supplemental Indenture") dated as of ____________________, between _____________________ (the "Guarantor"), a subsidiary of DecisionOne Corporation (or its successor), a company incorporated under the laws of the State of Delaware (the "Company"), and State Street Bank and Trust Company, as trustee under the indenture referred to below (the "Trustee"). W I T N E S E T H WHEREAS, the Company has heretofore executed and delivered to the Trustee an indenture (the "Indenture"), dated as of August 7, 1997, providing for the issuance of an aggregate principal amount at maturity of $150,000,000 of 9 3/4% Senior Subordinated Notes due 2007 (the "Notes"); WHEREAS, Section 4.12 of the Indenture provides that the Company may cause the Guarantor to execute and deliver to the Trustee a subsidiary guarantee on the terms and conditions set forth herein; WHEREAS, Section 4.15 of the Indenture provides that, under certain circumstances, the Company is required to cause the Guarantor to execute and deliver to the Trustee a Subsidiary Guarantee on the terms and conditions set forth herein; and WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is authorized to execute and deliver this Supplemental Indenture. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Guarantor and the Trustee mutually covenant and agree for the equal and ratable benefit of the Holders of the Notes as follows: 1. CAPITALIZED TERMS. Capitalized terms used herein without definition shall have the meanings assigned to them in the Indenture. 2. INDENTURE PROVISION PURSUANT TO WHICH GUARANTEE IS GIVEN. This Supplemental Indenture is being executed and delivered pursuant to Sections 4.12 and 4.15 of the Indenture. 3. AGREEMENTS TO GUARANTEE. The Guarantor hereby agrees as follows: (a) The Guarantor, jointly and severally with all other Guarantors, if any, unconditionally guarantees to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, regardless of the validity and enforceability of the Indenture, the Notes and the obligations of the Company under the Indenture and the Notes, that: (i) the principal of, premium, if any, and interest on the Notes shall be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal of, premium, if any, and interest on the Notes, to the extent lawful, and all other obligations of the Company to the Holders or the Trustee thereunder shall be promptly paid in full, all in accordance with the terms thereof; and B-1 89 (ii) in case of any extension of time for payment or renewal of any Notes or any of such other obligations, that the same shall be promptly paid in full when due in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. Notwithstanding the foregoing, in the event that this Subsidiary Guarantee would constitute or result in a violation of any applicable fraudulent conveyance or similar law of any relevant jurisdiction, the liability of the Guarantor under this Supplemental Indenture and its Subsidiary Guarantee shall be limited to such amount as will not, after giving effect thereto, and to all other liabilities of the Guarantor, result in such amount constituting a fraudulent transfer or conveyance. 4. EXECUTION AND DELIVERY OF SUBSIDIARY GUARANTEES (a) To evidence its Subsidiary Guarantee set forth in this Supplemental Indenture, the Guarantor hereby agrees that a notation of such Subsidiary Guarantee substantially in the form of Annex A hereto shall be endorsed by an officer of such Guarantor on each Note authenticated and delivered by the Trustee after the date hereof. (b) Notwithstanding the foregoing, the Guarantor hereby agrees that its Subsidiary Guarantee set forth herein shall remain in full force and effect notwithstanding any failure to endorse on each Note a notation of such Subsidiary Guarantee. (c) If an officer whose signature is on this Supplemental Indenture or on the Subsidiary Guarantee no longer holds that office at the time the Trustee authenticates the Note on which a Subsidiary Guarantee is endorsed, the Subsidiary Guarantee shall be valid nevertheless. (d) The delivery of the Note by the Trustee, after the authentication thereof under the Indenture, shall constitute due delivery of the Subsidiary Guarantee set forth in this Supplemental Indenture on behalf of the Guarantor. (e) The Guarantor hereby agrees that its obligations hereof shall be unconditional, regardless of the validity, regularity or enforceability of the Notes or the Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Notes with respect to any provisions hereof or thereof, the recovery of any judgement against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. (f) The Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenants that its Subsidiary Guarantee made pursuant to this Supplemental Indenture will not be discharged except by complete performance of the obligations contained in the Notes and the Indenture or pursuant to Section 5(b) of this Supplemental Indenture. (g) If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Supplemental Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then, and in every such case, subject to any determination in such proceeding, the Guarantor, the Trustee and the Holders shall be restored severally and respectively to their former positions hereof and thereafter all rights and remedies of the Guarantor, the Trustee and the Holders shall continue as though no such proceeding had been instituted. B-2 90 (h) The Guarantor hereby waives and will not in any manner whatsoever claim or take the benefit or advantage of, any rights of reimbursement, indemnity or subrogation or any other rights against the Company or any other Guarantor as a result of any payment by such Guarantor under its Subsidiary Guarantee. The Guarantor further agrees that, as between the Guarantors, on the one hand, and the Holders and the Trustee, on the other hand: (i) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article Six of the Indenture for the purposes of the Subsidiary Guarantee made pursuant to this Supplemental Indenture, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby; and (ii) in the event of any declaration of acceleration of such obligations as provided in Article Six, such obligations (whether or not due and payable) shall forthwith become due and payable by the Guarantor for the purpose of the Subsidiary Guarantee made pursuant to this Supplemental Indenture. (i) The Guarantor shall have the right to seek contribution from any other non-paying Guarantor, if any, so long as the exercise of such right does not impair the rights of the Holders under the Subsidiary Guarantee made pursuant to this Supplemental Indenture. (j) The Guarantor covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of the Indenture or this Subsidiary Guarantee; and the Guarantor (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. 5. GUARANTOR MAY CONSOLIDATE, ETC. ON CERTAIN TERMS (a) Except as set forth in Articles Four and Five of the Indenture, nothing contained in the Indenture, this Supplemental Indenture or in the Notes shall prevent any consolidation or merger of the Guarantor with or into the Company or any other Guarantor or shall prevent any transfer, sale or conveyance of the property of the Guarantor as an entirety or substantially as an entirety, to the Company or any other Guarantor. (b) Except as set forth in Article Five of the Indenture, upon the sale or disposition of all of the Capital Stock of the Guarantor by the Company or the Subsidiary of the Company, or upon the consolidation or merger of the Guarantor with or into any Person, or the sale of all or substantially all of the assets of the Guarantor (in each case, other than to an Affiliate of the Company), such Guarantor shall be deemed automatically and unconditionally released and discharged from all obligations under this Subsidiary Guarantee without any further action required on the part of the Trustee or any Holder if no Default shall have occurred and be continuing; provided, that in the event of an Asset Sale (including a sale of the Capital Stock of the Guarantor), the Net Cash Proceeds therefrom are treated in accordance with Section 4.10 of the Indenture. Except with respect to transactions set forth in the preceding sentence, the Company and the Guarantor covenant and agree that upon any such consolidation, merger or transfer of assets, the performance of all covenants and conditions of this Supplemental Indenture to be performed by such Guarantor shall be expressly assumed by supplemental indenture satisfactory in form to the Trustee, by the corporation formed by such consolidation, or into which the Guarantor shall have merged, or by the corporation which shall have acquired such property. Upon receipt of an B-3 91 Officers' Certificate of the Company or the Guarantor, as the case may be, to the effect that the Company or such Guarantor has complied with the first sentence of this Section 5(b), the Trustee shall execute any documents reasonably requested by the Company or the Guarantor, at the cost of the Company or such Guarantor, as the case may be, in order to evidence the release of such Guarantor from its obligations under its Guarantee endorsed on the Notes and under the Indenture and this Supplemental Indenture. 6. RELEASES UPON RELEASE OF GUARANTEE OF GUARANTEED INDEBTEDNESS. Concurrently with the releasee or discharge of the Guarantor's guarantee of the payment of [DESCRIBE INDEBTEDNESS THE GUARANTEE OF WHICH GAVE RISE TO THE DELIVERY OF THIS SUPPLEMENTAL INDENTURE] ("Guaranteed Debt") (other than a release or discharge by or as a result of payment under such guarantee of Guaranteed Indebtedness), the Guarantor shall be automatically and unconditionally released and relieved of its obligations under this Supplemental Indenture and its Subsidiary Guarantee made pursuant to Section 4 of this Supplemental Indenture. Upon delivery by the Company to the Trustee of an Officer's Certificate to the effect that such release or discharge has occurred, the Trustee shall execute any documents reasonably required in order to evidence the release of the Guarantor from its obligations under this Supplemental Indenture and its Subsidiary Guarantee made pursuant hereto; provided such documents shall not affect or impair the rights of the Trustee and Paying Agent under Section 7.07 of the Indenture.(3) 7. SUBORDINATION. (a) AGREEMENT TO SUBORDINATE. The Guarantor agrees, and each Holder by accepting this Subsidiary Guarantee agrees, that the payment of the Subordinated Note Obligations by the Guarantor shall be subordinated in right of payment, as set forth in this Section 7, to the prior payment in full in cash or cash equivalents of all Guarantor Senior Debt of such Guarantor whether outstanding on the date hereof or hereafter incurred. For purposes of this Section 7, "cash equivalents" means Government Securities maturing not more than 90 days from the date of determination. (b) LIQUIDATION; DISSOLUTION; BANKRUPTCY. Upon any distribution to creditors of the Guarantor in a liquidation or dissolution of the Guarantor or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Guarantor or its property, an assignment for the benefit of creditors or any marshalling of the Guarantor's assets and liabilities, the holders of Guarantor Senior Debt of the Guarantor shall be entitled to receive payment in full in cash or cash equivalents of such Guarantor Senior Debt (including interest after the commencement of any such proceeding at the rate specified in the applicable Guarantor Senior Debt) before the Holders will be entitled to receive any payment by the Guarantor with respect to the Subordinated Note Obligations (except that holders of Notes may receive Permitted Junior Indebtedness and payments made from the trusts described in Article 8 of the Indenture), and until all Guarantor Senior Debt of the Guarantor is paid in full in cash or cash equivalents, any distribution to which the Holders of Notes would be entitled shall be made to the holders of such Guarantor Senior Debt (except that holders of Notes may receive Permitted Junior Securities and payments made from the trusts described in Article 8 of the Indenture). (c) DEFAULT ON DESIGNATED SENIOR DEBT. The Guarantor may not make any payment upon or in respect of the Subordinated Note Obligations (except Permitted Junior Securities and payments made from the trusts described in Article 8 of the Indenture) if: (i) a default in the payment of the principal of (including reimbursement obligations in respect of letters of credit), premium, if any, or interest on, or commitment fees related to Designated Senior Debt occurs and is continuing beyond any applicable period - -------- (3) To be included if the Supplemental Indenture is executed and delivered pursuant to Section 4.15 of the Indenture. B-4 92 of grace, or (ii) any other default occurs and is continuing with respect to Designated Senior Debt of the Guarantor that permits holders of such Designated Senior Debt as to which such default relates to accelerate its maturity and the Trustee receives a notice of such default (a "Payment Blockage Notice") from the Company or the holders of any Designated Senior Debt (or their representative). Payments on Notes may and shall be resumed (a) in the case of a payment default, upon the date on which such default is cured or waived and (b) in case of a nonpayment default, the earlier of the date on which such nonpayment default is cured or waived or 179 days after the date on which the applicable Payment Blockage Notice is received, unless the maturity of any Designated Senior Debt has been accelerated. No new period of payment blockage may be commenced unless and until 360 days have elapsed since the effectiveness of the immediately prior Payment Blockage Notice. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice unless such default shall have been cured or waived for a period of not less than 90 days. The Guarantor may and shall resume payments on the Notes (including any missed payments): (a) in the case of a payment default described in clause (i) above, upon the date on which such default is cured or waived or shall have ceased to exist or such Designated Senior Debt shall have been discharged or paid in full in cash or cash equivalents; and (b) in the case of a non-payment default described in clause (ii) above, the earlier of (x) the date on which such nonpayment default is cured or waived, (y) 179 days after the date on which the applicable Payment Blockage Notice is received (each such period, the "Payment Blockage Period") or (z) the date such Payment Blockage Period shall be terminated by written notice to the Trustee from the requisite holders of such Designated Senior Debt necessary to terminate such period or from their representative. (d) ACCELERATION OF SECURITIES. If the Guarantor fails to make any payment on the Notes when due or within any applicable grace period, whether or not on account of the payment blockage provision referred to above, such failure shall constitute an Event of Default and shall entitle the holders of the Notes to accelerate the maturity thereof, subject to the terms of Section 6.02 of the Indenture. The Guarantor shall promptly notify holders of Senior Debt if payment of the Notes is accelerated because of an Event of Default. (e) WHEN DISTRIBUTION MUST BE PAID OVER. In the event that the Trustee or any Holder receives any payment of any Subordinated Note Obligations at a time when the Trustee or such Holder, as applicable, has actual knowledge that such payment is prohibited by Section (b) or (c) above, such payment shall be held by the Trustee or such Holder, in trust for the benefit of, and shall be paid forthwith over and delivered, upon written request, to, the holders of Guarantor Senior Debt of the Guarantor as their interests may appear or their representative under the indenture or other agreement (if any) pursuant to which such Guarantor Senior Debt may have been issued, as their respective interests may appear, for application to the payment of all Obligations with respect to such Guarantor Senior Debt remaining unpaid to the extent necessary to pay such Obligations in full in accordance with their terms, after giving effect to any concurrent payment or distribution to or for the holders of Guarantor Senior Debt of the Guarantor. With respect to the holders of Senior Debt, the Trustee undertakes to perform only such obligations on the part of the Trustee as are specifically set forth in Article 10 of the Indenture, and no implied covenants or obligations with respect to the holders of Senior Debt. In the event that any Holder receives any payment of any Subordinated Note Obligations at any time when such payment is prohibited by Section (b) or (c) above, such payment shall be held by such Holder, in trust for the benefit of, and shall be paid forthwith over and delivered, upon written request to, the Holders of Guarantor Senior Debt of the Guarantor as their interest may appear or their representative under the indenture or other agreement (if any) pursuant to which such Guarantor Senior Debt may have been issued, as their interest may appear, for the application to the payment of all Obligations with respect to such Guarantor Senior Debt B-5 93 remaining unpaid to the extend necessary to pay such Obligations in full accordance with their terms, after giving effect to any concurrent payment or distribution to or for the holders of Guarantor Senior Debt of the Guarantor. With respect to the holders of Guarantor Senior Debt, the Trustee undertakes to perform only such obligations on the part of the Trustee as are specifically set forth in this Section 7, and no implied covenants or obligations with respect to the holders of Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Guarantor Senior Debt, and shall not be liable to any such holders if the Trustee shall pay over or distribute to or on behalf of Holders or the Guarantor or any other Person money or assets to which any holders of Guarantor Senior Debt shall be entitled by virtue of this Section 7, except if such payment is made as a result of the willful misconduct or gross negligence of the Trustee. (f) NOTICE BY GUARANTOR. The Guarantor shall promptly notify the Trustee and the Paying Agent of any facts known to the Guarantor that would cause a payment of any Subordinated Note Obligations to violate this Section 7, but failure to give such notice shall not affect the subordination of this Guarantor to Guarantor Senior Debt as provided in this Section 7. (g) SUBROGATION. After all Guarantor Senior Debt is paid in full in cash or cash equivalents and until the Notes are paid in full in cash, Holders of Notes shall be subrogated (equally and ratably with all other Indebtedness pari passu with the Notes) to the rights of holders of Guarantor Senior Debt to receive distributions applicable to Guarantor Senior Debt to the extent that distributions otherwise payable to the Holders of Notes have been applied to the payment of Guarantor Senior Debt. A distribution made under this Section 7 to holders of Guarantor Senior Debt that otherwise would have been made to Holders of Notes is not, as between the Guarantor and Holders, a payment by the Guarantor on the Guarantor Senior Debt. (h) RELATIVE RIGHTS. This Section 7 defines the relative rights of Holders of Notes and holders of Guarantor Senior Debt. Nothing in this Subsidiary Guarantee shall: (1) impair, as between the Guarantor and Holders of Notes, the obligation of the Guarantor, which is absolute and unconditional, to pay principal of, premium, if any, and interest on the Notes in accordance with their terms; (2) affect the relative rights of Holders of Notes and creditors of the Guarantor other than their rights in relation to holders of Guarantor Senior Debt; or (3) prevent the Trustee or any Holder of Notes from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders and owners of Guarantor Senior Debt to receive distributions and payments otherwise payable to Holders of Notes. If the Guarantor fails because of this Section 7 to pay principal of, premium, if any, or interest on a Note on the due date, the failure is nevertheless a Default or an Event of Default. (i) SUBORDINATION MAY NOT BE IMPAIRED BY GUARANTOR. No right of any holder of Guarantor Senior Debt to enforce the subordination of the Indebtedness evidenced by the Notes shall be impaired by any act or failure to act by the Guarantor or any Holder or by the failure of the Guarantor or any Holder to comply with this Indenture. (j) DISTRIBUTION OR NOTICE TO REPRESENTATIVE. Whenever a distribution is to be made or a notice given to holders of Guarantor Senior Debt, the distribution may be made and the notice given to their representative. Upon any payment or distribution of assets of the Guarantor referred to in this Section 7, the Trustee and the Holders of Notes shall be entitled to rely upon any order or decree made by any court of competent jurisdiction or upon any certificate of such representative or of the liquidating trustee or agent B-6 94 or other Person making any distribution to the Trustee or to the Holders of Notes for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Guarantor Senior Debt and other Indebtedness of the Guarantor, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Section 7. (k) RIGHTS OF TRUSTEE AND PAYING AGENT. Notwithstanding the provisions of this Section 7 or any provision of the Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment or distribution by the Trustee, and the Trustee and the Paying Agent may continue to make payments on the Notes, unless the Trustee shall have received at its Corporate Trust Office at least two Business Days prior to the date of such payment written notice of facts that would cause the payment of any Subordinated Note Obligations to violate this Section 7. Only the Guarantor or a representative may give the notice. Nothing in this Section 7 shall impair the claims of, or payments to, the Trustee under or pursuant to Section 7.07 of the Indenture. The Trustee in its individual or any other capacity may hold Guarantor Senior Debt with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. (l) AUTHORIZATION TO EFFECT SUBORDINATION. Each Holder of Notes, by the Holder's acceptance thereof, authorizes and directs the Trustee on such Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Section 7, and appoints the Trustee to act as such Holder's attorney-in-fact for any and all such purposes. If the Trustee does not file a proper proof of claim or proof of debt in the form required in any proceeding relating to any Bankruptcy Law at least 30 days before the expiration of the time to file such claim, a representative of Designated Senior Debt is hereby authorized to file an appropriate claim for and on behalf of the Holders of the Notes. (m) NO WAIVER OF SUBORDINATION PROVISIONS. No right of any present or future holder of any Guarantor Senior Debt to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act, in good faith, by any such holder. Without in any way limiting the generality of the foregoing sentence of this Section 7(m), the holders of Guarantor Senior Debt may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders, without incurring responsibility to the Holders of the Notes and without impairing or releasing the subordination provided in this Section 7 or the obligations hereunder of the Holders to the holders of Guarantor Senior Debt, do any one or more of the following: (1) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, any Guarantor Senior Debt or any instrument evidencing the same or any agreement under which Guarantor Senior Debt is outstanding; (2) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Guarantor Senior Debt; (3) release any Person liable in any manner for the collection of Guarantor Senior Debt; and (4) exercise or refrain from exercising any rights against the Company or any Guarantor and any other Person. (n) CERTAIN DEFINITIONS. For purposes of this Section 7, the terms "distribution" and "payment" include payments, distributions and other transfers of assets by or on behalf of the Guarantor (including redemptions, repurchases or other acquisitions of the Notes) from any source, of any kind or character, whether direct or indirect, by set-off or otherwise, whether in cash, property or securities. 8. NEW YORK LAW TO GOVERN. The internal law of the State of New York shall govern and be used to construe this Supplemental Indenture. 9. COUNTERPARTS. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. B-7 95 10. EFFECT OF HEADINGS. The Section headings herein are for convenience only and shall not effect the construction hereof. [Signatures on following page] B-8 96 IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed and attested, all as of the date first above written. Dated:____________, _______________ [Guarantor] By:______________________________________ Name: Title: Dated:____________, _______________ as Trustee By:______________________________________ Name: Title: B-9 97 ANNEX A TO SUPPLEMENTAL INDENTURE FORM OF NOTATION OF SUBSIDIARY GUARANTEE ON NOTE Each Guarantor (as defined in the Indenture) has jointly and severally unconditionally guaranteed (a) the due and punctual payment of the principal of, premium, if any, and interest on the Notes, whether at stated maturity or an Interest Payment Date, by acceleration, call for redemption or otherwise, (b) the due and punctual payment of interest on the overdue principal and premium of, and interest, to the extent lawful, on the Notes and (c) that in case of any extension of time of payment or renewal of any Notes or any of such other obligations, the same will be promptly paid in full when due in accordance with the terms of the extension of renewal, whether at stated maturity, by acceleration or otherwise. Notwithstanding the foregoing, in the event that the Subsidiary Guarantee would constitute or result in a violation of any applicable fraudulent conveyance or similar law of any relevant jurisdiction, the liability of the Guarantor under its Subsidiary Guarantee shall be limited to such amount as will not, after giving effect thereto, and to all other liabilities of the Guarantor, result in such amount constituting a fraudulent transfer or conveyance. The Subsidiary Guarantee shall not be valid or obligatory for any purpose until the certificate of authentication on the Note upon which the Subsidiary Guarantee is noted shall have been executed by the Trustee under the Indenture by the manual or facsimile signature of one of its authorized officers. Dated:____________, _______________ [Guarantor] By:______________________________________ Name: Title: B-10 EX-10.10 3 US $575,000,000 CREDIT AGREEMENT 1 EXHIBIT 10.15 U.S. $575,000,000 CREDIT AGREEMENT, dated as of August 7, 1997, among DECISIONONE CORPORATION, as the Borrower, VARIOUS FINANCIAL INSTITUTIONS, as the Lenders, DLJ CAPITAL FUNDING, INC., as the Syndication Agent for the Lenders, NATIONSBANK OF TEXAS, N.A., as the Administrative Agent for the Lenders, and BANKBOSTON, N.A., as the Documentation Agent for the Lenders. ARRANGED BY DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION 2 TABLE OF CONTENTS Section Page ARTICLE I DEFINITIONS AND ACCOUNTING TERMS 1.1. Defined Terms......................................................3 1.2. Use of Defined Terms..............................................36 1.3. Cross-References..................................................36 1.4. Accounting and Financial Determinations...........................36 ARTICLE II COMMITMENTS, BORROWING AND ISSUANCE PROCEDURES, NOTES AND LETTERS OF CREDIT 2.1. Commitments.......................................................37 2.1.1. Term Loan Commitments.............................................38 2.1.2. Revolving Loan Commitment and Swing Line Loan Commitment..........38 2.1.3. Letter of Credit Commitment.......................................39 2.1.4. Lenders Not Permitted or Required to Make the Loans...............40 2.1.5. Issuer Not Permitted or Required to Issue Letters of Credit.......40 2.2. Reduction of the Commitment Amounts...............................40 2.2.1. Optional..........................................................40 2.2.2. Mandatory.........................................................41 2.3. Borrowing Procedures and Funding Maintenance......................41 2.3.1. Term Loans and Revolving Loans....................................41 2.3.2. Swing Line Loans..................................................42 2.4. Continuation and Conversion Elections.............................43 2.5. Funding...........................................................43 2.6. Issuance Procedures...............................................44 2.6.1. Other Lenders' Participation......................................44 2.6.2. Disbursements; Conversion to Revolving Loans......................45 2.6.3. Reimbursement.....................................................45 2.6.4. Deemed Disbursements..............................................46 2.6.5. Nature of Reimbursement Obligations...............................46 2.7. Register; Notes...................................................47 -i- 3 ARTICLE III REPAYMENTS, PREPAYMENTS, INTEREST AND FEES 3.1. Repayments and Prepayments; Application...........................48 3.1.1. Repayments and Prepayments........................................48 3.1.2. Application.......................................................52 3.2. Interest Provisions...............................................53 3.2.1. Rates.............................................................53 3.2.2. Post-Maturity Rates...............................................53 3.2.3. Payment Dates.....................................................54 3.3. Fees..............................................................54 3.3.1. Commitment Fee....................................................54 3.3.2. Administrative Agent Fee..........................................55 3.3.3. Letter of Credit Fee..............................................55 ARTICLE IV CERTAIN LIBO RATE AND OTHER PROVISIONS 4.1. LIBO Rate Lending Unlawful........................................55 4.2. Deposits Unavailable..............................................56 4.3. Increased LIBO Rate Loan Costs, etc...............................56 4.4. Funding Losses....................................................56 4.5. Increased Capital Costs...........................................57 4.6. Taxes.............................................................57 4.7. Payments, Computations, etc.......................................59 4.8. Sharing of Payments...............................................60 4.9. Setoff............................................................60 4.10. Mitigation........................................................61 4.11. Replacement of Lenders............................................61 ARTICLE V CONDITIONS TO CREDIT EXTENSIONS 5.1. Initial Credit Extension..........................................62 5.1.1. Resolutions, etc..................................................62 5.1.2. Transaction Documents.............................................62 5.1.3. Consummation of Merger............................................62 5.1.4. Closing Date Certificate..........................................62 -ii- 4 5.1.5. Delivery of Notes.................................................62 5.1.6. [Intentionally Omitted]...........................................63 5.1.7. Pledge Agreements.................................................63 5.1.8. Security Agreement................................................63 5.1.9. Financial Information, etc........................................64 5.1.10. Solvency, etc.....................................................64 5.1.11. Equity Issuance, Discount Debenture Issuance, Subordinated Debt Issuance, Closing Date Dividend and Intercompany Loan...........64 5.1.12. Litigation........................................................65 5.1.13. Material Adverse Change...........................................65 5.1.14. Reliance Letters..................................................65 5.1.15. Opinions of Counsel...............................................65 5.1.16. Insurance.........................................................65 5.1.17. Perfection Certificate............................................65 5.1.18. Closing Fees, Expenses, etc.......................................65 5.1.19. Satisfactory Legal Form...........................................66 5.2. All Credit Extensions.............................................66 5.2.1. Compliance with Warranties, No Default, etc.......................66 5.2.2. Credit Extension Request..........................................66 ARTICLE VI REPRESENTATIONS AND WARRANTIES 6.1. Organization, etc.................................................67 6.2. Due Authorization, Non-Contravention, etc.........................67 6.3. Government Approval, Regulation, etc..............................67 6.4. Validity, etc.....................................................67 6.5. Financial Information.............................................68 6.6. No Material Adverse Change........................................68 6.7. Litigation, Labor Controversies, etc..............................68 6.8. Subsidiaries......................................................68 6.9. Ownership of Properties...........................................68 6.10. Taxes.............................................................68 6.11. Pension and Welfare Plans.........................................69 6.12. Environmental Matters.............................................69 6.13. Regulations G, U and X............................................70 6.14. Accuracy of Information...........................................70 6.15. Solvency..........................................................71 -iii- 5 ARTICLE VII COVENANTS 7.1. Affirmative Covenants.............................................71 7.1.1. Financial Information, Reports, Notices, etc......................71 7.1.2. Compliance with Laws, etc.........................................73 7.1.3. Maintenance of Properties.........................................73 7.1.4. Insurance.........................................................73 7.1.5. Books and Records.................................................74 7.1.6. Environmental Covenant............................................74 7.1.7. Future Subsidiaries; Material Subsidiaries........................75 7.1.8. Future Leased Property and Future Acquisitions of Real Property; Future Acquisition of Other Property............................76 7.1.9. Use of Proceeds, etc..............................................77 7.1.10. Hedging Obligations...............................................77 7.1.11. Undertaking.......................................................77 7.2. Negative Covenants................................................78 7.2.1. Business Activities...............................................78 7.2.2. Indebtedness......................................................78 7.2.3. Liens.............................................................79 7.2.4. Financial Covenants...............................................81 7.2.5. Investments.......................................................82 7.2.6. Restricted Payments, etc..........................................84 7.2.7. Capital Expenditures, etc.........................................87 7.2.8. Consolidation, Merger, etc........................................88 7.2.9. Asset Dispositions, etc...........................................88 7.2.10. Modification of Certain Agreements................................89 7.2.11. Transactions with Affiliates......................................89 7.2.12. Negative Pledges, Restrictive Agreements, etc.....................90 7.2.13. Stock of Subsidiaries.............................................90 7.2.14. Sale and Leaseback................................................90 ARTICLE VIII EVENTS OF DEFAULT 8.1. Listing of Events of Default......................................90 8.1.1. Non-Payment of Obligations........................................91 8.1.2. Breach of Warranty................................................91 8.1.3. Non-Performance of Certain Covenants and Obligations..............91 8.1.4. Non-Performance of Other Covenants and Obligations................91 -iv- 6 8.1.5. Default on Other Indebtedness.....................................91 8.1.6. Judgments.........................................................91 8.1.7. Pension Plans.....................................................92 8.1.8. Change in Control.................................................92 8.1.9. Bankruptcy, Insolvency, etc.......................................92 8.1.10. Impairment of Security, etc.......................................93 8.1.11. Subordinated Notes................................................93 8.2. Action if Bankruptcy, etc.........................................93 8.3. Action if Other Event of Default..................................93 ARTICLE IX THE AGENTS 9.1. Actions...........................................................94 9.2. Funding Reliance, etc.............................................95 9.3. Exculpation.......................................................95 9.4. Successor.........................................................95 9.5. Credit Extensions by each Agent...................................96 9.6. Credit Decisions..................................................96 9.7. Copies, etc.......................................................96 9.8. The Syndication Agent, the Documentation Agent and the Administrative Agent............................................96 ARTICLE X MISCELLANEOUS PROVISIONS 10.1. Waivers, Amendments, etc..........................................97 10.2. Notices...........................................................98 10.3. Payment of Costs and Expenses.....................................98 10.4. Indemnification...................................................99 10.5. Survival.........................................................101 10.6. Severability.....................................................101 10.7. Headings.........................................................101 10.8. Execution in Counterparts, Effectiveness, etc....................101 10.9. Governing Law; Entire Agreement..................................101 10.10. Successors and Assigns...........................................102 10.11. Sale and Transfer of Loans and Notes; Participations in Loans and Notes........................................................102 10.11.1. Assignments......................................................102 10.11.2. Participations...................................................104 10.12. Other Transactions...............................................105 -v- 7 10.13. Forum Selection and Consent to Jurisdiction......................105 10.14. Waiver of Jury Trial.............................................106 10.15. Confidentiality..................................................106 SCHEDULE I - Disclosure Schedule SCHEDULE II - Percentages and Administrative Information SCHEDULE III - Existing Letters of Credit EXHIBIT A-1 - Form of Revolving Note EXHIBIT A-2 - Form of Term-A Note EXHIBIT A-3 - Form of Term-B Note EXHIBIT A-4 - Form of Swing Line Note EXHIBIT B-1 - Form of Borrowing Request EXHIBIT B-2 - Form of Borrowing Base Certificate EXHIBIT B-3 - Form of Issuance Request EXHIBIT C - Form of Continuation/Conversion Notice EXHIBIT D - Form of Closing Date Certificate EXHIBIT E - Form of Compliance Certificate EXHIBIT F-1 - Form of Borrower Security Agreement EXHIBIT F-2 - Form of Subsidiary Security Agreement EXHIBIT G-1 - Form of Holdings Guaranty and Pledge Agreement EXHIBIT G-2 - Form of Borrower Pledge Agreement EXHIBIT G-3 - Form of Subsidiary Pledge Agreement EXHIBIT H - Form of Subsidiary Guaranty EXHIBIT I - Form of Perfection Certificate EXHIBIT J - Form of Lender Assignment Agreement EXHIBIT K-1 - Form of New York Counsel Opinion EXHIBIT K-2 - Form of Pennsylvania Counsel Opinion EXHIBIT K-3 - Form of Associate General Counsel Opinion EXHIBIT L - Form of Restricted Payments Compliance Certificate -vi- 8 CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of August 7, 1997, is among DecisionOne Corporation, a Delaware corporation (the "Borrower"), the various financial institutions as are or may become parties hereto (collectively, the "Lenders"), DLJ Capital Funding, Inc. ("DLJ"), as syndication agent (the "Syndication Agent") for the Lenders, NationsBank of Texas, N.A. ("NationsBank"), as administrative agent (the "Administrative Agent") for the Lenders and BankBoston, N.A., as documentation agent (the "Documentation Agent") for the Lenders (the Syndication Agent and the Administrative Agent are sometimes referred to herein as the "Agents" and each as an "Agent"). W I T N E S S E T H: WHEREAS, DLJ Merchant Banking Partners II, L.P., DLJ Offshore Partners II, C.V., DLJ Diversified Partners, L.P., DLJMB Funding II, Inc., UK Investment Plan 1997 Partners and DLJ First ESC LLC own all of the issued and outstanding capital stock of Quaker Holding Co., a newly-formed Delaware corporation ("MergerSub"); WHEREAS, DLJ Merchant Banking Partners II, L.P., DLJ Offshore Partners II, C.V., DLJ Diversified Partners, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners-A L.P., DLJ Millennium Partners, L.P., DLJ Millennium Partners-A, L.P., UK Investment Plan 1997 Partners, DLJ EAB Partners, L.P. and DLJ First ESC LLC (collectively, the "DLJMB Entities") and certain institutional investors (whose aggregate investments will not cause the fully diluted holdings of Voting Stock in MergerSub (each as defined below) of the DLJMB Entities to be less than 51%) (such institutional investors, together with the DLJMB Entities, the "Equity Investors") intend to consummate a merger and recapitalization of DecisionOne Holdings Corp., a Delaware corporation ("DOH"), whereby, among other things, MergerSub will be merged (the "Merger") with and into DOH (such recapitalization, Merger and all transactions related thereto, including those described in the recitals hereto, being herein collectively referred to as the "Transaction"), with DOH being the surviving corporation; WHEREAS, the Borrower is a wholly-owned Subsidiary of DOH and, after giving effect to the Merger, will be a wholly-owned Subsidiary of the corporation surviving such Merger (DOH, at all times prior to the consummation of the Merger, and such surviving corporation, at all times after the consummation of the Merger, being herein collectively referred to as "Holdings"); WHEREAS, in connection with the Transaction, and pursuant to the Transaction Documents, the following capital-raising transactions will occur prior to or contemporaneously with the consummation of the Merger and the making of the initial Credit Extensions hereunder: 9 (a) MergerSub shall receive cash proceeds of approximately $225,000,000 from the issuance of common stock (and warrants, if warrants are issued, to purchase common stock (the "Warrants")) representing in excess of 85% of the fully diluted Capital Stock of Holdings (exclusive of management shares, incentives and options) to the Equity Investors (the "Equity Issuance"); (b) MergerSub shall receive gross cash proceeds of not less than $85,000,000 from the issuance of its senior discount debentures and warrants to purchase common stock (the "Discount Debentures", with the issuance thereof being herein referred to as the "Discount Debenture Issuance"); and (c) the Borrower will issue not more than $150,000,000 in principal amount of its senior subordinated notes (the "Subordinated Notes", with the issuance thereof being herein referred to as the "Subordinated Debt Issuance"); WHEREAS, in connection with the Transaction and the ongoing working capital and general corporate needs of the Borrower and its Subsidiaries, the Borrower desires to obtain the following financing facilities from the Lenders: (a) a Term-A Loan Commitment and a Term-B Loan Commitment pursuant to which Borrowings of Term Loans will be made to the Borrower on the Closing Date in a maximum, original principal amount of $195,000,000 (in the case of Term-A Loans) and $275,000,000 (in the case of Term-B Loans); (b) a Revolving Loan Commitment (to include availability for Revolving Loans, Swing Line Loans and Letters of Credit) pursuant to which Borrowings of Revolving Loans, in a maximum aggregate principal amount (together with all Swing Line Loans and Letter of Credit Outstandings) not to exceed $105,000,000 will be made to the Borrower from time to time on and subsequent to the Closing Date but prior to the Revolving Loan Commitment Termination Date; provided, however, that not more than $10,000,000 of the proceeds from Revolving Loans may be used for purposes of consummating the Transaction, including the payment of related costs and expenses; (c) a Letter of Credit Commitment pursuant to which the Issuer will issue Letters of Credit for the account of the Borrower and its Subsidiaries from time to time on and subsequent to the Closing Date but prior to the Revolving Loan Commitment Termination Date in a maximum aggregate Stated Amount at any one time outstanding not to exceed $25,000,000 (provided, that the aggregate outstanding principal amount of Revolving Loans, Swing Line Loans and Letter of Credit Outstandings at any time shall not exceed the then existing Revolving Loan Commitment Amount); and (d) a Swing Line Loan Commitment pursuant to which Borrowings of Swing Line Loans in an aggregate outstanding principal amount not to exceed $10,000,000 will be made on and subsequent to the Closing Date but prior to the Revolving Loan 2 10 Commitment Termination Date (provided, that the aggregate outstanding principal amount of such Swing Line Loans, together with Revolving Loans and Letter of Credit Outstandings, at any time shall not exceed the then existing Revolving Loan Commitment Amount); WHEREAS, on the Closing Date, contemporaneously with the consummation of the Merger, the Discount Debenture Issuance, the Subordinated Debt Issuance and the initial Borrowing of Term Loans and Revolving Loans hereunder, the Borrower shall distribute to Holdings as a dividend (the "Closing Date Dividend") and/or make an intercompany loan (the "Intercompany Loan") in an amount equal to all of the net proceeds of the Subordinated Debt Issuance and the initial Borrowing of Term Loans and Revolving Loans (other than any such proceeds used by the Borrower to repay existing Indebtedness of the Borrower and its Subsidiaries and to pay fees and expenses related to the Transaction) for purposes of consummating the Merger, which Intercompany Loan shall be evidenced by a promissory note issued by Holdings to the Borrower (the "Intercompany Note"); WHEREAS, the Lenders are willing, on the terms and subject to the conditions hereinafter set forth (including Article V), to extend the Commitments and make the Loans described herein to the Borrower and issue (or participate in) Letters of Credit for the account of the Borrower and its Subsidiaries; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.1. Defined Terms. The following terms (whether or not underscored) when used in this Agreement, including its preamble and recitals, shall, except where the context otherwise requires, have the following meanings (such meanings to be equally applicable to the singular and plural forms thereof): "Account" means any account (as that term is defined in Section 9-106 of the UCC) of the Borrower or any of its wholly-owned U.S. Subsidiaries arising from the sale or lease of goods or the rendering of services. "Account Debtor" is defined in clause (b) of the definition of "Eligible Account". "Adjusted EBITDA" means, for any applicable period, the sum (without duplication) for the Borrower and its Restricted Subsidiaries on a consolidated basis of (a) Net Income, 3 11 plus (b) the amount deducted in determining Net Income representing non-cash charges or expenses, including depreciation and amortization (excluding any non-cash charges representing (i) an accrual of or reserve for cash charges in any future period, (ii) amortization of a prepaid cash expense paid in a prior period or (iii) amortization in respect of repairable parts which have been capitalized in accordance with GAAP), plus (c) the amount deducted in determining Net Income representing income taxes (whether paid or deferred), plus (d) the amount deducted in determining Net Income representing Interest Expense and fees, expenses and management bonuses (to the extent, in the case of management bonuses, paid at or prior to the Closing Date) incurred in connection with the Transaction, and financing costs, plus (e) the amount deducted in determining Net Income representing any net loss realized in connection with any sale, lease, conveyance or other disposition of any asset (other than in the ordinary course of business or from the Borrower or any of its Restricted Subsidiaries to the Borrower or any of its Restricted Subsidiaries) or any extraordinary or non-recurring loss, minus (f) Restricted Payments of the type referred to in clause (c)(i) of Section 7.2.6 made during such period. "Administrative Agent" is defined in the preamble and includes each other Person as shall have subsequently been appointed as the successor Administrative Agent pursuant to Section 9.4. "Administrative Agent's Fee Letter" means the confidential fee letter, dated July 17, 1997, between the Borrower and the Administrative Agent. "Affiliate" of any Person means any other Person which, directly or indirectly, controls, is controlled by or is under common control with such Person (excluding any trustee under, or any committee with responsibility for administering, any Plan). A Person shall be deemed to be "controlled by" any other Person if such other Person possesses, directly or indirectly, power (i) 4 12 to vote 10% or more of the securities (on a fully diluted basis) having ordinary voting power for the election of directors or managing general partners, or (ii) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. "Agents" means, collectively, the Administrative Agent and the Syndication Agent. "Agreement" means, on any date, this Credit Agreement as originally in effect on the Closing Date and as thereafter from time to time amended, supplemented, amended and restated, or otherwise modified and in effect on such date. "Alternate Base Rate" means, for any day and with respect to all Base Rate Loans, the higher of: (a) 0.50% per annum above the latest Federal Funds Rate; and (b) the rate of interest in effect for such day as most recently publicly announced or established by the Administrative Agent in Dallas, Texas, as its "base rate." (The "base rate" is a rate set by the Administrative Agent based upon various factors including the Administrative Agent's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above or below such announced rate.) Any change in the base rate established or announced by the Administrative Agent shall take effect at the opening of business on the day of such establishment or announcement. "Annualized" means (i) with respect to the end of the first Fiscal Quarter of the Borrower ending after the Closing Date, the applicable amount for such Fiscal Quarter multiplied by four, (ii) with respect to the second Fiscal Quarter of the Borrower ending after the Closing Date, the applicable amount for such Fiscal Quarter and the immediately preceding Fiscal Quarter multiplied by two, and (iii) with respect to the third Fiscal Quarter of the Borrower ending after the Closing Date, the applicable amount for such Fiscal Quarter and the immediately preceding two Fiscal Quarters multiplied by one and one-third. "Applicable Commitment Fee" means, (i) for each day from the Closing Date through (but excluding) the date upon which the Compliance Certificate for the second full Fiscal Quarter ending after the Closing Date is delivered or required to be delivered by the Borrower to the Administrative Agent pursuant to clause (c) of Section 7.1.1, a fee which shall accrue at a rate of 1/2 of 1% per annum, and (ii) for each day thereafter, a fee which shall accrue at the applicable rate per annum set forth below under the column entitled "Applicable Commitment Fee", determined by reference to the applicable Leverage Ratio referred to below: 5 13
APPLICABLE LEVERAGE RATIO COMMITMENT FEE -------------- -------------- GREATER THAN OR EQUAL TO 5.0:1 0.500% GREATER THAN OR EQUAL TO 4.0:1 AND LESS THAN 5.0:1 0.375% GREATER THAN OR EQUAL TO 3.0:1 AND LESS THAN 4.0:1 0.300% LESS THAN 3.0:1 0.250%
The Leverage Ratio used to compute the Applicable Commitment Fee for any day referred to in clause (ii) above shall be the Leverage Ratio set forth in the Compliance Certificate most recently delivered by the Borrower to the Administrative Agent on or prior to such day pursuant to clause (c) of Section 7.1.1. Changes in the Applicable Commitment Fee resulting from a change in the Leverage Ratio shall become effective (as of the first day following the Fiscal Quarter in respect of which such Compliance Certificate was required to be delivered) upon delivery by the Borrower to the Administrative Agent of a new Compliance Certificate pursuant to clause (c) of Section 7.1.1. In the event such Compliance Certificate indicates a Leverage Ratio that would result in an Applicable Commitment Fee which is greater or lesser than the Applicable Commitment Fee theretofore in effect, then (A) such greater or lesser Applicable Commitment Fee shall be deemed to have been in effect for all purposes of this Agreement from the first day following the Fiscal Quarter in respect of which such Compliance Certificate was required to be delivered by the Borrower to the Administrative Agent pursuant to clause (c) of Section 7.1.1 and (B) if the Borrower shall have theretofore made any payment of Commitment Fees in respect of the period from the first day following the Fiscal Quarter in respect of which such Compliance Certificate was required to be delivered to the actual date of delivery of such Compliance Certificate, then, on the next Quarterly Payment Date, either (x) if the new Applicable Commitment Fee rate is greater than the Applicable Commitment Fee rate theretofore in effect, the Borrower shall pay, as a supplemental payment of Commitment Fees, an amount which equals the difference between the amount of Commitment Fees that would otherwise have been paid based on such new Leverage Ratio and the amount of such Commitment Fees actually so paid, or, (y) if the new Applicable Commitment Fee rate is less than the Applicable Commitment Fee rate theretofore in effect, an amount shall be deducted from the interest on Revolving Loans and Commitment Fees and Letter of Credit fees under the first sentence of Section 3.3.3 then otherwise payable in an amount which equals the difference between the amount of Commitment Fees so paid and the amount of Commitment Fees that would otherwise have been paid based on such new Leverage Ratio (or, if no such payment is owed by the Borrower to the Revolving Lenders on such next Quarterly Payment Date, or if such amount owed by the Borrower is less than such difference, the Revolving Lenders shall pay to 6 14 the Borrower on such next Quarterly Payment Date the amount of such difference less the amount, if any, owed by the Borrower to such Lenders on such Quarterly Payment Date). "Applicable Margin" means at all times during the applicable periods set forth below, (a) with respect to the unpaid principal amount of each Term-B Loan maintained as a (i) Base Rate Loan, 1.50% per annum and (ii) LIBO Rate Loan, 2.75% per annum; and (b) from the Closing Date through (but excluding) the date upon which the Compliance Certificate for the second full Fiscal Quarter ending after the Closing Date is delivered by the Borrower to the Administrative Agent pursuant to clause (c) of Section 7.1.1, with respect to the unpaid principal amount of each (i) Swing Line Loan (each of which shall be borrowed and maintained only as a Base Rate Loan) and each Revolving Loan and Term-A Loan maintained as a Base Rate Loan, 1.25% per annum, and (ii) Revolving Loan and Term-A Loan maintained as a LIBO Rate Loan, 2.50% per annum; and (c) at all times after the date of such delivery of the Compliance Certificate described in clause (b) above, with respect to the unpaid principal amount of each Swing Line Loan (each of which shall be borrowed and maintained only as a Base Rate Loan) and each Revolving Loan and Term-A Loan, by reference to the applicable Leverage Ratio and at the applicable percentage per annum set forth below under the column entitled "Applicable Margin for Base Rate Loans", in the case of Base Rate Loans, or by reference to the Leverage Ratio and at the applicable percentage per annum set forth below under the column entitled "Applicable Margin for LIBO Rate Loans" in the case of LIBO Rate Loans: APPLICABLE MARGIN FOR REVOLVING LOANS AND TERM-A LOANS
APPLICABLE APPLICABLE MARGIN FOR BASE MARGIN FOR LIBO LEVERAGE RATIO RATE LOANS RATE LOANS -------------- ---------- ---------- GREATER THAN OR EQUAL TO 5.0:1 1.25% 2.50% GREATER THAN OR EQUAL TO 4.0:1 AND LESS THAN 5.0:1 0.75% 2.00% GREATER THAN OR EQUAL TO 3.0:1 AND LESS THAN 4.0:1 0.25% 1.50% LESS THAN 3.0:1 0.00% 1.00%
7 15 The Leverage Ratio used to compute the Applicable Margin for Swing Line Loans, Revolving Loans and Term-A Loans for any day referred to in clause (c) above shall be the Leverage Ratio set forth in the Compliance Certificate most recently delivered by the Borrower to the Administrative Agent on or prior to such day pursuant to clause (c) of Section 7.1.1. Changes in the Applicable Margin for Swing Line Loans, Revolving Loans and Term-A Loans resulting from a change in the Leverage Ratio shall become effective (as of the first day following the Fiscal Quarter in respect of which such Compliance Certificate was required to be delivered) upon delivery by the Borrower to the Administrative Agent of a new Compliance Certificate pursuant to clause (c) of Section 7.1.1. In the event such Compliance Certificate indicates a Leverage Ratio that would result in an Applicable Margin which is greater or lesser than the Applicable Margin theretofore in effect, then (A) such greater or lesser Applicable Margin shall be deemed to be in effect for all purposes of this Agreement from the first day following the Fiscal Quarter in respect of which such Compliance Certificate was required to be delivered by the Borrower to the Administrative Agent pursuant to clause (c) of Section 7.1.1 and (B) if the Borrower shall have theretofore made any payment of interest in respect of Swing Line Loans, Revolving Loans or Term-A Loans, or of Letter of Credit fees pursuant to the first sentence of Section 3.3.3, in any such case in respect of the period from the first day following the Fiscal Quarter in respect of which such Compliance Certificate was required to be delivered to the actual date of delivery of such Compliance Certificate, then, on the next Quarterly Payment Date, either (x) if the new Applicable Margin rate is greater than the Applicable Margin rate theretofore in effect, the Borrower shall pay as a supplemental payment of interest and/or Letter of Credit fees, an amount which equals the difference between the amount of interest and Letter of Credit fees that would otherwise have been paid based on such new Leverage Ratio and the amount of such interest and Letter of Credit fees actually so paid, or, (y) if the new Applicable Margin rate is less than the Applicable Margin rate theretofore in effect, an amount shall be deducted from the interest on Revolving Loans, Commitment Fees and Letter of Credit fees (in the case of differences in respect of interest on Revolving Loans and Letter of Credit fees) or from the interest on Term-A Loans (in the case of differences in respect of interest on Term-A Loans) thereafter payable by the Borrower in an amount which equals the difference between the amount of interest and Letter of Credit fees so paid and the amount of interest and Letter of Credit fees that would otherwise have been paid based on such new Leverage Ratio (or, if no such payment by the Borrower to the Revolving Lenders or Term-A Lenders, as the case may be, will thereafter accrue hereunder, or if the amount that so accrues is less than such difference, the Revolving Lenders or the Term-A Lenders, as the case may be, will promptly pay to the Borrower an amount equal to such difference less the amount, if any, of such accrued and unpaid payments). "Arranger" means Donaldson, Lufkin & Jenrette Securities Corporation, a Delaware corporation. "Assignee Lender" is defined in Section 10.11.1. "Assignor Lender" is defined in Section 10.11.1. 8 16 "Assumed Indebtedness" means Indebtedness of a Person which is (i) in existence at the time such Person becomes a Restricted Subsidiary of the Borrower or (ii) is assumed in connection with an Investment in or acquisition of such Person, and has not been incurred or created by such Person in connection with, or in anticipation or contemplation of, such Person becoming a Restricted Subsidiary of the Borrower. "Authorized Officer" means, relative to any Obligor, those of its officers whose signatures and incumbency shall have been certified to the Administrative Agent and the Lenders pursuant to Section 5.1.1. "BankBoston" means BankBoston, N.A. in its capacity as issuer of the Existing Letters of Credit. "Base Financial Statements" is defined in clause (a) of Section 5.1.9. "Base Rate Loan" means a Loan bearing interest at a fluctuating rate determined by reference to the Alternate Base Rate. "Borrower" is defined in the preamble. "Borrower Pledge Agreement" means the Pledge Agreement executed and delivered by an Authorized Officer of the Borrower pursuant to clause (b) of Section 5.1.7, substantially in the form of Exhibit G-2 hereto, as amended, supplemented, amended and restated or otherwise modified from time to time. "Borrower Security Agreement" means the Security Agreement executed and delivered by an Authorized Officer of the Borrower pursuant to Section 5.1.8, substantially in the form of Exhibit F-1 hereto, as amended, supplemented, amended and restated or otherwise modified from time to time. "Borrowing" means Loans of the same type and, in the case of LIBO Rate Loans, having the same Interest Period made by the relevant Lenders on the same Business Day and pursuant to the same Borrowing Request in accordance with Section 2.1. "Borrowing Base Amount" means, at any time, the Net Asset Value of all Eligible Accounts and Eligible Inventory at such time as determined in accordance with the definition of "Net Asset Value" and as certified by the Borrower to the Lenders in the most recently delivered Borrowing Base Certificate, including the Borrowing Base Certificate delivered on the Closing Date pursuant to clause (c) of Section 5.1.9. "Borrowing Base Certificate" means a certificate duly completed and executed by the president, chief executive officer, treasurer, assistant treasurer, controller or chief financial Authorized Officer of the Borrower, substantially in the form of Exhibit B-2 hereto. 9 17 "Borrowing Request" means a loan request and certificate duly executed by an Authorized Officer of the Borrower, substantially in the form of Exhibit B-1 hereto. "Business Day" means any day which is neither a Saturday or Sunday nor a legal holiday on which banks are authorized or required to be closed in New York City and, with respect to Borrowings of, Interest Periods with respect to, payments of principal and interest in respect of, and conversions of Base Rate Loans into, LIBO Rate Loans, on which dealings in Dollars are carried on in the London interbank market. "Capital Expenditures" means for any period, the sum, without duplication, of (i) the aggregate amount of all expenditures of the Borrower and its Restricted Subsidiaries for fixed or capital assets made during such period which, in accordance with GAAP, would be classified as capital expenditures, and (ii) the aggregate amount of the principal component of all Capitalized Lease Liabilities incurred during such period by the Borrower and its Restricted Subsidiaries. "Capital Stock" means, (i) in the case of a corporation, any and all capital or corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) in respect of corporate stock, (iii) in the case of a partnership or limited liability company, any and all partnership or membership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Capitalized Lease Liabilities" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Cash Equivalent Investment" means, at any time: (a) any evidence of Indebtedness issued directly by the United States of America or any agency thereof or guaranteed by the United States of America or any agency thereof; (b) commercial paper, maturing not more than nine months from the date of issue, which is issued by (i) a corporation (other than an Affiliate of any Obligor) organized under the laws of any state of the United States or of the District of Columbia and rated at least A-l by S&P or P-l by Moody's, or (ii) any Lender (or its holding company); (c) any time deposit, certificate of deposit or bankers acceptance, maturing not more than one year after such time, maintained with or issued by either (i) a commercial banking institution (including U.S. branches of foreign banking institutions) that is a member of the Federal Reserve System and has a combined capital and surplus and undivided profits of not less than $500,000,000, or (ii) any Lender; 10 18 (d) short-term tax-exempt securities rated not lower than MIG-1/1+ by either Moody's or S&P with provisions for liquidity or maturity accommodations of 183 days or less; (e) repurchase agreements which (i) are entered into with any entity referred to in clause (b) or (c) above or any other financial institution whose unsecured long-term debt (or the unsecured long-term debt of whose holding company) is rated at least A- or better by S&P or Baa1 or better by Moody's and maturing not more than one year after such time, (ii) are secured by a fully perfected security interest in securities of the type referred to in clause (a) above and (iii) have a market value at the time of such repurchase agreement is entered into of not less than 100% of the repurchase obligation of such counterparty entity with whom such repurchase agreement has been entered into; or (f) any money market or similar fund the assets of which are comprised exclusively of any of the items specified in clauses (a) through (d) above and as to which withdrawals are permitted at least every 90 days. "Casualty Event" means the damage, destruction or condemnation, as the case may be, of any property of the Borrower or any of its Subsidiaries. "Casualty Proceeds" means, with respect to any Casualty Event, the amount of any insurance proceeds or condemnation awards received by the Borrower or any of its Subsidiaries in connection therewith, but excluding any proceeds or awards required to be paid to a creditor (other than the Lenders) which holds a first-priority Lien permitted by Section 7.2.3 on the property which is the subject of such Casualty Event. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. "CERCLIS" means the Comprehensive Environmental Response Compensation Liability Information System List. "Certificate of Merger" means the Certificate of Merger relating to the Merger of DOH and MergerSub, as filed with the Secretary of State of Delaware on August 7, 1997. "Change in Control" means (i) the failure of Holdings at any time to own, free and clear of all Liens and encumbrances (other than Liens permitted to exist under clauses (b), (d) and (g) of Section 7.2.3), all right, title and interest in 100% of the Capital Stock of the Borrower; (ii) the failure of the DLJMB Entities at any time to own at least 20% (on a fully diluted basis) of the economic and voting interest in the Voting Stock of Holdings; or (iii) the failure of the DLJMB Entities and their Affiliates at any time to have the right to designate or nominate no less than 51% of the Board of Directors of Holdings or the Borrower. 11 19 "Charter Document" means, relative to any Obligor, its certificate of incorporation, its by-laws and all shareholder agreements, voting trusts and similar arrangements to which such Obligor is a party applicable to any of its authorized shares of Capital Stock. "Closing Date" means the date of the initial Borrowing, not to be later than August 31, 1997. "Closing Date Certificate" means a certificate of an Authorized Officer of the Borrower substantially in the form of Exhibit D hereto, delivered pursuant to Section 5.1.4. "Closing Date Dividend" is defined in the sixth recital. "Code" means the Internal Revenue Code of 1986, as amended. "Commitment" means, as the context may require, (i) a Lender's Term-A Loan Commitment, Term-B Loan Commitment, Revolving Loan Commitment or Letter of Credit Commitment or (ii) the Swing Line Lender's Swing Line Loan Commitment. "Commitment Amount" means, as the context may require, the Term-A Loan Commitment Amount, the Term-B Loan Commitment Amount, the Revolving Loan Commitment Amount, the Letter of Credit Commitment Amount or the Swing Line Loan Commitment Amount. "Commitment Letter" means the commitment letter, dated April 30, 1997, among DLJ Merchant Banking II, Inc., the Arranger and the Syndication Agent, including all annexes and exhibits thereto. "Commitment Termination Date" means, as the context may require, the Revolving Loan Commitment Termination Date or any Term Loan Commitment Termination Date. "Commitment Termination Event" means (i) the occurrence of any Event of Default described in clauses (b) through (d) of Section 8.1.9 with respect to any Obligor (other than immaterial Subsidiaries), or (ii) the occurrence and continuance of any other Event of Default and either (x) the declaration of the Loans to be due and payable pursuant to Section 8.3, or (y) in the absence of such declaration, the giving of notice to the Borrower by the Administrative Agent, acting at the direction of the Required Lenders, that the Commitments have been terminated. "Compliance Certificate" means a certificate duly completed and executed by the president, chief executive officer, treasurer, assistant treasurer, controller or chief financial Authorized Officer of the Borrower, substantially in the form of Exhibit E hereto. "Contingent Liability" means any agreement, undertaking or arrangement by which any Person guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or 12 20 indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the indebtedness, obligation or any other liability of any other Person (other than by endorsements of instruments in the course of collection), or guarantees the payment of dividends or other distributions upon the shares of any other Person. The amount of any Person's obligation under any Contingent Liability shall (subject to any limitation set forth therein) be deemed to be the outstanding principal amount of the debt, obligation or other liability guaranteed thereby. "Continuation/Conversion Notice" means a notice of continuation or conversion and certificate duly executed by an Authorized Officer of the Borrower, substantially in the form of Exhibit C hereto. "Controlled Group" means all members of a controlled group of corporations and all members of a controlled group of trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414(b) or 414(c) of the Code or Section 4001 of ERISA, or for purposes of Section 412 of the Code, Section 414(m) or Section 414(o) of the Code. "Credit Extension" means, as the context may require, (i) the making of a Loan by a Lender, or (ii) the issuance of any Letter of Credit, or the extension of any Stated Expiry Date of any previously issued Letter of Credit, by the Issuer. "Credit Extension Request" means, as the context may require, any Borrowing Request or Issuance Request. "Current Assets" means, on any date, without duplication, all assets which, in accordance with GAAP, would be included as current assets on a consolidated balance sheet of the Borrower and its Restricted Subsidiaries at such date as current assets (excluding, however, amounts due and to become due from Affiliates of the Borrower which have arisen from transactions which are other than arm's-length and in the ordinary course of its business). "Current Liabilities" means, on any date, without duplication, all amounts which, in accordance with GAAP, would be included as current liabilities on a consolidated balance sheet of the Borrower and its Restricted Subsidiaries at such date, excluding current maturities of Debt. "Debt" means, without duplication, the outstanding principal amount of all Indebtedness of the Borrower and its Restricted Subsidiaries that (i) is of the type referred to in clause (a), (b) (other than undrawn commercial letters of credit and undrawn letters of credit in respect of workers' compensation, insurance, performance and surety bonds and similar obligations, in each case incurred in the ordinary course of business) or (c) of the definition of "Indebtedness" and (ii) any Contingent Liability in respect of any of the foregoing types of Indebtedness. "DecisionOne Business" is defined in Section 7.2.1. 13 21 "Default" means any Event of Default or any condition, occurrence or event which, after notice or lapse of time or both, would, unless cured or waived, constitute an Event of Default. "Disbursement" is defined in Section 2.6.2. "Disbursement Date" is defined in Section 2.6.2. "Disbursement Due Date" is defined in Section 2.6.2. "Disclosure Schedule" means the Disclosure Schedule attached hereto as Schedule I, as it may be amended, supplemented or otherwise modified from time to time by the Borrower with the written consent of the Required Lenders. "Discount Debenture" is defined in clause (b) of the fourth recital. "Discount Debenture Issuance" is defined in clause (b) of the fourth recital. "DLJ" is defined in the preamble. "DLJMB Entities" is defined in the second recital. "Documentation Agent" is defined in the preamble and includes each other Person as shall have subsequently been appointed as the successor Documentation Agent pursuant to Section 9.4. "DOH" is defined in the second recital. "Dollar" and the sign "$" mean lawful money of the United States. "Eligible Account" means, with respect to the Borrower and any of its wholly-owned U.S. Subsidiaries that are Material Subsidiaries at time of determination thereof, any Account as to which each of the following requirements has been fulfilled to the reasonable satisfaction of the Administrative Agent: (a) the Borrower or such Subsidiary owns such Account free and clear of all Liens other than any Lien permitted to exist under clause (a), (c), (d) or (f) of Section 7.2.3; (b) such Account is a legal, valid, binding and enforceable obligation of the Person obligated under such Account (the "Account Debtor"); (c) such Account is not, in the case of any Account in excess of $250,000, subject to any bona fide dispute, setoff, counterclaim or other right, claim or defense on the part of the Account Debtor or any other Person denying liability under such Account; 14 22 provided, however, that any such Account shall constitute an Eligible Account to the extent it is not subject to any such dispute, setoff, counterclaim or other right, claim or defense; (d) the Borrower or such Subsidiary has the full and unqualified right to assign and grant a Lien on such Account to the Administrative Agent, for its benefit and that of the Lenders, as security for the Obligations (and the Administrative Agent shall have a perfected, first-priority (other than inchoate statutory Liens otherwise permitted by Section 7.2.3) Lien on such Account); (e) such Account is evidenced by an invoice rendered to the Account Debtor (which shall include computer records) or is reflected by computer records maintained by the Borrower or such Subsidiary evidencing such Account and is not evidenced by any instrument or chattel paper (as the terms "instrument" and "chattel paper" are defined in Section 9-105 of the UCC), unless such instrument or chattel paper has been delivered to the Administrative Agent; (f) such Account arose from the sale of goods or services by the Borrower or such Subsidiary in the ordinary course of the Borrower's or such Subsidiary's business; (g) with respect to such Account, no Account Debtor is (i) an Affiliate of the Borrower or any of its Subsidiaries, or (ii) the subject of any reorganization, bankruptcy, receivership, custodianship, insolvency or other condition analogous with respect to such Account Debtor to those described in clauses (a) through (d) of Section 8.1.9; (h) such Account is not outstanding more than 120 days from the original invoice date for such Account; (i) such Account is not, in the case of any Account in excess of $250,000, an Account owing by an Account Debtor having, at the time of any determination of Eligible Accounts, in excess of 10% of the aggregate outstanding amount of all Accounts of such Account Debtor (other than any Accounts which are the subject of bona fide disputes between such Account Debtor and the Borrower or such Subsidiary, as the case may be) outstanding more than 90 days past the original invoice date for such Account; and (j) the Account Debtor in respect of such Account is located within the United States, Puerto Rico or Canada unless the obligations (or that portion of such obligations which is acceptable to the Administrative Agent) of an Account Debtor not located within the United States, Puerto Rico or Canada are secured by a letter of credit, guaranty or eligible bankers' acceptance having terms, and from such issuers and confirmation banks, as are acceptable to the Administrative Agent. 15 23 "Eligible Inventory" means, with respect to the Borrower and any of its wholly-owned U.S. Subsidiaries that are Material Subsidiaries, at the time of any determination thereof, any Inventory arising in the ordinary course of business and as to which each of the following requirements has been fulfilled to the reasonable satisfaction of the Agents: (a) such Inventory is located in the United States (including Puerto Rico); (b) the Borrower or its wholly-owned U.S. Subsidiary that is a Material Subsidiary owning such Inventory, as the case may be, has full and unqualified right to assign and grant a Lien in such Inventory to the Administrative Agent, for the benefit of the Agents and the Lenders, as security for the Obligations; (c) the Borrower or one of its wholly-owned U.S. Subsidiaries that are Material Subsidiaries owns such Inventory free and clear of all Liens in favor of any Person other than any Lien permitted to exist under clause (a), (c), (d) or (f) of Section 7.2.3; and (d) none of such Inventory (in the case of Inventory other than repairable parts) is obsolete, unsaleable, damaged, otherwise unfit for sale or consumption or further processing or unusable in support of customer maintenance contracts. "Environmental Laws" means all applicable federal, state or local statutes, laws, ordinances, codes, rules and regulations (including consent decrees and administrative orders) relating to public health and safety and protection of the environment. "Equity Investors" is defined in the second recital. "Equity Issuance" is defined in clause (a) of the fourth recital. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Event of Default" is defined in Section 8.1. "Excess Cash Flow" means, for any applicable period, the excess (if any), of (a) Adjusted EBITDA for such applicable period; over (b) the sum, without duplication (for such applicable period) of (i) the cash portion of Interest Expense for such applicable period; 16 24 plus (ii) scheduled payments and mandatory prepayments, to the extent actually made, of the principal amount of the Term Loans or any other funded Debt (including Capitalized Lease Liabilities) and mandatory prepayments of the principal amount of the Revolving Loans pursuant to clause (b) or (g) of Section 3.1.1 in connection with a reduction of the Revolving Loan Commitment Amount, in each case for such applicable period; plus (iii) all federal, state and foreign income taxes actually paid in cash by the Borrower and its Restricted Subsidiaries for such applicable period; plus (iv) Capital Expenditures actually made during such applicable period pursuant to clause (a) of Section 7.2.7 (excluding Capital Expenditures constituting Capitalized Lease Liabilities and by way of the incurrence of Indebtedness permitted pursuant to Section 7.2.2(c) to a vendor of any assets permitted to be acquired pursuant to Section 7.2.7 to finance the acquisition of such assets); plus (v) the amount of the net increase (if any) of Current Assets, other than cash and Cash Equivalent Investments, over Current Liabilities of the Borrower and its Restricted Subsidiaries for such applicable period; plus (vi) Investments permitted and actually made, in cash, pursuant to clause (k) of Section 7.2.5 during such applicable period; plus (vii) the amount of the net increase of Inventory constituting repairable parts which are not classified as Current Assets on the balance sheet of the Borrower and its Restricted Subsidiaries for such applicable period; plus (viii) Restricted Payments of the type described in clauses (c)(ii), (c)(iii) and (c)(iv) of Section 7.2.6 made during such period; 17 25 plus (ix) gains on sales of assets (other than sales permitted under clause (a) of Section 7.2.9). "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Existing Credit Agreement" means the Revolving Credit Agreement, dated as of April 26, 1996, among Holdings, the Borrower, the lenders and the agents parties thereto. "Existing Letters of Credit" means those letters of credit issued under the Existing Credit Agreement prior to the Closing Date and which remain outstanding on the Closing Date, as disclosed on Schedule III hereto. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to (i) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or (ii) if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it. "Fee Letter" means the confidential fee letter, dated as of April 30, 1997, among DLJ Merchant Banking II, Inc., the Arranger and the Syndication Agent. "Fiscal Quarter" means any fiscal quarter of a Fiscal Year. "Fiscal Year" means any twelve-month period ending on June 30 of any calendar year. "Fixed Charge Coverage Ratio" means, at the end of any Fiscal Quarter, subject to clause (b) of Section 1.4, the ratio computed for the period consisting of such Fiscal Quarter and each of the three immediately prior Fiscal Quarters of (a) Adjusted EBITDA for all such Fiscal Quarters to (b) the sum (without duplication) of (i) Capital Expenditures actually made during all such Fiscal Quarters pursuant to clause (a) of Section 7.2.7 (excluding Capital Expenditures constituting Capitalized Lease Liabilities and by way of the incurrence of Indebtedness permitted pursuant to Section 7.2.2(c) to a vendor of any assets 18 26 permitted to be acquired pursuant to Section 7.2.7 to finance the acquisition of such assets); plus (ii) the cash portion of Interest Expense for all such Fiscal Quarters, provided that for the first three Fiscal Quarters ending after the Closing Date, Interest Expense shall be determined on an Annualized basis; plus (iii) all scheduled payments of principal of the Term Loans and other funded Debt (including the principal portion of any Capitalized Lease Liabilities) during all such Fiscal Quarters, provided that for the first three Fiscal Quarters ending after the Closing Date, such payments shall be determined on an Annualized basis; plus (iv) Restricted Payments permitted pursuant to clause (d) of Section 7.2.6 made during such period; plus (v) all federal, state and foreign income taxes actually paid in cash by the Borrower and its Restricted Subsidiaries and Restricted Payments made by the Borrower pursuant to clause (c)(ii) of Section 7.2.6 during such period. "F.R.S. Board" means the Board of Governors of the Federal Reserve System or any successor thereto. "GAAP" is defined in Section 1.4. "Hazardous Material" means (a) any "hazardous substance", as defined by CERCLA; (b) any "hazardous waste", as defined by the Resource Conservation and Recovery Act, as amended; (c) any petroleum product; or (d) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material or substance within the meaning of any other applicable Environmental Law. 19 27 "Hedging Obligations" means, with respect to any Person, all liabilities of such Person under interest rate swap agreements, interest rate cap agreements and interest rate collar agreements, and all other agreements or arrangements designed to protect such Person against fluctuations in interest rates or currency exchange rates. "herein", "hereof", "hereto", "hereunder" and similar terms contained in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular Section, paragraph or provision of this Agreement or such other Loan Document. "Holdings" is defined in the third recital. "Holdings Guaranty and Pledge Agreement" means the Guaranty and Pledge Agreement executed and delivered by an Authorized Officer of Holdings pursuant to clause (a) of Section 5.1.7, substantially in the form of Exhibit G-1 hereto, as amended, supplemented, amended and restated or otherwise modified from time to time. "Impermissible Qualification" means, relative to the opinion or certification of any independent public accountant as to any financial statement of any Obligor, any qualification or exception to such opinion or certification (i) which is of a "going concern" or similar nature, (ii) which relates to the limited scope of examination of matters relevant to such financial statement (except, in the case of matters relating to any acquired business or assets, in respect of the period prior to the acquisition by such Obligor of such business or assets), or (iii) which relates to the treatment or classification of any item in such financial statement and which, as a condition to its removal, would require an adjustment to such item the effect of which would be to cause such Obligor to be in default of any of its obligations under Section 7.2.4. "including" means including without limiting the generality of any description preceding such term, and, for purposes of this Agreement and each other Loan Document, the parties hereto agree that the rule of ejusdem generis shall not be applicable to limit a general statement, which is followed by or referable to an enumeration of specific matters, to matters similar to the matters specifically mentioned. "Indebtedness" of any Person means, without duplication: (a) all obligations of such Person for borrowed money or for the deferred purchase price of property or services (exclusive of deferred purchase price arrangements in the nature of open or other accounts payable owed to suppliers on normal terms in connection with the purchase of goods and services in the ordinary course of business) and all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; 20 28 (b) all obligations, contingent or otherwise, relative to the face amount of all letters of credit, whether or not drawn, and banker's acceptances issued for the account of such Person; (c) all Capitalized Lease Liabilities; (d) net liabilities of such Person under all Hedging Obligations; (e) whether or not so included as liabilities in accordance with GAAP, all Indebtedness of the types referred to in clauses (a) through (d) above (excluding prepaid interest thereon) secured by a Lien (other than a Lien on Capital Stock of an Unrestricted Subsidiary) on property owned or being purchased by such Person (including Indebtedness arising under conditional sales or other title retention agreements), whether or not such Indebtedness shall have been assumed by such Person or is limited in recourse; provided, however, that, to the extent such Indebtedness is limited in recourse to the assets securing such Indebtedness, the amount of such Indebtedness shall be limited to the fair market value of such assets; and (f) all Contingent Liabilities of such Person in respect of any of the foregoing. For all purposes of this Agreement, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture in which such Person is a general partner or a joint venturer (to the extent such Person is liable for such Indebtedness). "Indemnified Liabilities" is defined in Section 10.4. "Indemnified Parties" is defined in Section 10.4. "Initial Public Offering" mean for any Person, any sale of the Capital Stock of such Person to the public pursuant to an initial primary offering registered under the Securities Act of 1933. "Intercompany Loan" is defined in the sixth recital. "Intercompany Note" is defined in the sixth recital. "Interest Coverage Ratio" means, at the end of any Fiscal Quarter, subject to clause (b) of Section 1.4, the ratio computed for the period consisting of such Fiscal Quarter and each of the three immediately prior Fiscal Quarters of: (a) Adjusted EBITDA (for all such Fiscal Quarters) 21 29 to (b) the cash portion of Interest Expense (for all such Fiscal Quarters; provided that for the first three Fiscal Quarters ending after the Closing Date, Interest Expense shall be determined on an Annualized basis). "Interest Expense" means, for any applicable period, the aggregate consolidated interest expense of the Borrower and its Restricted Subsidiaries for such applicable period, as determined in accordance with GAAP, including the portion of any payments made in respect of Capitalized Lease Liabilities allocable to interest expense, but excluding (to the extent included in interest expense) up-front fees and expenses and the amortization of all deferred financing costs. "Interest Period" means, as to any LIBO Rate Loan, the period commencing on the Borrowing date of such Loan or on the date on which the Loan is converted into or continued as a LIBO Rate Loan, and ending on the date one, two, three, six or, if available in the Administrative Agent's reasonable determination, nine or twelve months thereafter as selected by the Borrower in its Borrowing Request or its Conversion/Continuation Notice; provided however that: (i) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day; (ii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; (iii) no Interest Period for any Loan shall extend beyond the Stated Maturity Date for such Loan; (iv) no Interest Period applicable to a Term Loan or portion thereof shall extend beyond any date upon which is due any scheduled principal payment in respect of the Term Loans unless the aggregate principal amount of Term Loans represented by Base Rate Loans, or by LIBO Rate Loans having Interest Periods that will expire on or before such date, equals or exceeds the amount of such principal payment; and (v) there shall be no more than twenty Interest Periods in effect at any one time; provided that with respect to the initial Borrowing, Interest Period means the period commencing on (and including) the Business Day on which the Borrowing is made and ending on (and including) the last Business Day of the month following the month in which such initial Borrowing is made. 22 30 "Inventory" means, any "inventory" (as that term is defined in Section 9-109(4) of the UCC) of the Borrower or any of its wholly owned U.S. Subsidiaries. "Investment" means, relative to any Person, (i) any loan or advance made by such Person to any other Person (excluding commission, travel and similar advances to officers, directors and employees (or individuals acting in similar capacities) made in the ordinary course of business), and (ii) any ownership or similar interest (in the nature of Capital Stock) held by such Person in any other Person. The amount of any Investment shall be the original principal or capital amount thereof less all returns of principal or equity thereon (and without adjustment by reason of the financial condition of such other Person) and shall, if made by the transfer or exchange of property other than cash, be deemed to have been made in an original principal or capital amount equal to the fair market value of such property at the time of such transfer or exchange. "Investor's Agreement" means the Investor's Agreement, dated as of August 7, 1997, among DLJ Merchant Banking Partners II, L.P., DLJ Merchant Banking Partners II-A, L.P., DLJ Offshore Partners, C.V., DLJ Offshore Partners II, C.V., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A., L.P., DLJ Millennium Partners, L.P., DLJ Millennium Partners-A, L.P., DLJMB Funding II, Inc., DLJ EAB Partners, L.P., DLJ First ESC LLC, UK Investment Plan 1997 Partners, MergerSub and certain other stockholders listed on the signature pages thereof (as amended or otherwise modified from time to time in accordance with Section 7.2.10). "IPO Subsidiary" means Properties Holding Corporation, a Delaware corporation, a direct, wholly-owned Subsidiary of the Borrower. "Issuance Request" means a Letter of Credit request and certificate duly executed by an Authorized Officer of the Borrower, substantially in the form of Exhibit B-3 hereto. "Issuer" means the Administrative Agent in its capacity as issuer of Letters of Credit and any Lender as may be designated by the Borrower (and consented to by the Agents and such Lender, such consent by the Agents not to be unreasonably withheld) in its capacity as issuer of Letters of Credit, and solely for purposes of the Existing Letters of Credit, BankBoston as issuer of the Existing Letters of Credit. "Lender Assignment Agreement" means a Lender Assignment Agreement substantially in the form of Exhibit J hereto. "Lenders" is defined in the preamble. "Letter of Credit" is defined in Section 2.1.3. "Letter of Credit Commitment" means, with respect to the Issuer, the Issuer's obligation to issue Letters of Credit pursuant to Section 2.1.3 and, with respect to each of the other Lenders 23 31 that has a Revolving Loan Commitment, the obligation of each such Lender to participate in such Letters of Credit pursuant to Section 2.6.1. "Letter of Credit Commitment Amount" means, on any date, a maximum amount of $25,000,000, as such amount may be reduced from time to time pursuant to Section 2.2. "Letter of Credit Outstandings" means, on any date, an amount equal to the sum of (a) the then aggregate amount which is undrawn and available under all issued and outstanding Letters of Credit, plus (b) the then aggregate amount of all unpaid and outstanding Reimbursement Obligations in respect of such Letters of Credit. "Leverage Ratio" means, at the end of any Fiscal Quarter, subject to clause (b) of Section 1.4, the ratio of (a) total Debt less cash and Cash Equivalent Investments of the Borrower and its Restricted Subsidiaries on a consolidated basis outstanding at such time; to (b) Adjusted EBITDA for the period of four consecutive Fiscal Quarters ended on such date. "LIBO Rate" means, relative to any Interest Period for LIBO Rate Loans, the rate of interest per annum determined by the Administrative Agent to be the arithmetic mean (rounded upward to the next 1/100th of 1%) of the rates of interest per annum at which dollar deposits in the approximate amount of the Loan to be made or continued as, or converted into, a LIBO Rate Loan by the Administrative Agent and having a maturity comparable to such Interest Period would be offered to the Administrative Agent in the London interbank market at its request at approximately 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period. "LIBO Rate Loan" means a Loan bearing interest, at all times during an Interest Period applicable to such Loan, at a fixed rate of interest determined by reference to the LIBO Rate (Reserve Adjusted). "LIBO Rate (Reserve Adjusted)" means, relative to any Loan to be made, continued or maintained as, or converted into, a LIBO Rate Loan for any Interest Period, the rate of interest 24 32 per annum (rounded upwards to the next 1/100th of 1%) determined by the Administrative Agent as follows: LIBO Rate = LIBO Rate (Reserve Adjusted) 1.00 - LIBOR Reserve Percentage The LIBO Rate (Reserve Adjusted) for any Interest Period for LIBO Rate Loans will be adjusted automatically as to all LIBO Rate Loans then outstanding as of the effective date of any change in the LIBOR Reserve Percentage. "LIBOR Office" means, relative to any Lender, the office of such Lender designated as such on Schedule II hereto or designated in the Lender Assignment Agreement pursuant to which such Lender became a Lender hereunder or such other office of a Lender as shall be so designated from time to time by notice from such Lender to the Borrower and the Administrative Agent, which shall be making or maintaining LIBO Rate Loans of such Lender hereunder. "LIBOR Reserve Percentage" means, relative to any Interest Period for LIBO Rate Loans, the percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day (whether or not applicable to any Lender) under regulations issued from time to time by the F.R.S. Board for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the F.R.S. Board). "Lien" means any security interest, mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or otherwise), charge against or interest in property, or any filing or recording of any instrument or document in respect of the foregoing, to secure payment of a debt or performance of an obligation or any other priority or preferential treatment of any kind or nature whatsoever that has the practical effect of creating a security interest in property. "Loan" means, as the context may require, a Revolving Loan, a Term-A Loan, a Term-B Loan or a Swing Line Loan, of any type. "Loan Document" means this Agreement, the Notes, the Letters of Credit, each Rate Protection Agreement under which the counterparty to such agreement is (or at the time such Rate Protection Agreement was entered into, was) a Lender or an Affiliate of a Lender relating to Hedging Obligations of the Borrower or any of its Subsidiaries, each Borrowing Request, each Issuance Request, each Borrowing Base Certificate, the Fee Letter, the Administrative Agent's Fee Letter, each Pledge Agreement, the Subsidiary Guaranty, each Mortgage (upon execution and delivery thereof), each Security Agreement and each other agreement, document or instrument delivered in connection with this Agreement or any other Loan Document, whether or not specifically mentioned herein or therein. 25 33 "Material Adverse Effect" means (a) a material adverse effect on the financial condition, operations, assets, business or properties of the Borrower and its Restricted Subsidiaries, taken as a whole, (b) a material impairment of the ability of the Borrower or any other Obligor to perform its respective material obligations under the Loan Documents to which it is or will be a party, or (c) an impairment of the validity or enforceability of, or a material impairment of the rights, remedies or benefits available to the Issuer, the Agents, the Arranger or the Lenders under, this Agreement or any other Loan Document. "Material Documents" means the Merger Agreement, the Investor's Agreement, the Tax Sharing Agreement and the Borrower's Articles of Incorporation, each as amended or otherwise modified from time to time as permitted in accordance with the terms hereof or of any other Loan Document. "Material Subsidiary" means (i) any direct or indirect Restricted Subsidiary of the Borrower which holds, owns or contributes, as the case may be, 5% or more of the gross revenues or assets of the Borrower and its Restricted Subsidiaries, on a consolidated basis, and (ii) any Restricted Subsidiary of the Borrower designated by the Borrower as a Material Subsidiary. The Borrower shall designate one or more Restricted Subsidiaries of the Borrower as Material Subsidiaries if, in the absence of such designation, the aggregate gross revenues or assets of all Restricted Subsidiaries of the Borrower that are not Material Subsidiaries would exceed 5% of the gross revenues or assets of the Borrower and its Restricted Subsidiaries, on a consolidated basis. "Merger" is defined in the second recital. "Merger Agreement" means the Agreement and Plan of Merger, dated as of May 4, 1997 and amended on July 15, 1997 (as amended, or otherwise modified from time to time in accordance with Section 7.2.10) between DOH and MergerSub. "MergerSub" is defined in the first recital. "Moody's" means Moody's Investors Service, Inc. "Mortgage" means, collectively, each Mortgage or Deed of Trust executed and delivered pursuant to the terms of this Agreement, including Section 7.1.8(b) or 7.1.12, in form and substance reasonably satisfactory to the Agents. "NationsBank" is defined in the preamble. "Net Asset Value" means, at any time of any determination, (i) with respect to Eligible Accounts, 85% of an amount equal to (x) the book value of all Eligible Accounts as reflected on the books of the Borrower and its Material Subsidiaries in accordance with GAAP, net of (y) all credits, discounts and allowances (and net of all unissued credits in the form of competitive allowances or otherwise) in respect of such Eligible Accounts and (ii) with respect to Eligible 26 34 Inventory, an amount equal to (x) in the case of Eligible Inventory that is classified as a Current Asset on the balance sheet of the Borrower or applicable Material Subsidiary in accordance with GAAP, 50% of, and (y) in the case of Eligible Inventory that is classified as repairable parts on the balance sheet of the Borrower or applicable Material Subsidiary in accordance with GAAP, 30% of, in each case net book value (determined on a weighted average cost basis) of all such Eligible Inventory as reflected on the books of the Borrower and its U.S. Subsidiaries that are Material Subsidiaries as at such time, valued in accordance with GAAP. "Net Debt Proceeds" means, with respect to the incurrence, sale or issuance by the Borrower or any of its Restricted Subsidiaries of any Debt (other than Debt incurred as part of the Transaction and other Debt permitted by Section 7.2.2 as in effect on the date hereof), the excess of: (a) the gross cash proceeds received by the Borrower or any of its Restricted Subsidiaries from such incurrence, sale or issuance, over (b) all reasonable and customary underwriting commissions and legal, investment banking, brokerage and accounting and other professional fees, sales commissions and disbursements and all other reasonable fees, expenses and charges, in each case actually incurred in connection with such incurrence, sale or issuance. "Net Disposition Proceeds" means, with respect to any sale, transfer or other disposition of any assets of the Borrower or any of its Restricted Subsidiaries (other than transfers made as part of the Transaction and other sales permitted pursuant to clause (a) or clause (b) of Section 7.2.9), the excess of (a) the gross cash proceeds received by the Borrower or any of its Restricted Subsidiaries from any such sale, transfer or other disposition and any cash payments received in respect of promissory notes or other non-cash consideration delivered to the Borrower or such Restricted Subsidiary in respect thereof, less (b) the sum (without duplication) of (i) all reasonable and customary fees and expenses with respect to legal, investment banking, brokerage, accounting and other professional fees, sales commissions and disbursements and all other reasonable fees, expenses and charges, in each case actually incurred in connection with such sale, transfer or other disposition, (ii) all taxes and other governmental costs and expenses actually paid or estimated by the Borrower (in good faith) to be payable in cash in connection with such sale, transfer or other disposition, and (iii) payments made by the Borrower or any of its Restricted Subsidiaries to retire Indebtedness (other than the 27 35 Loans) of the Borrower or any of its Restricted Subsidiaries where payment of such Indebtedness is required in connection with such sale, transfer or other disposition; provided, however, that if, after the payment of all taxes with respect to such sale, transfer or other disposition, the amount of estimated taxes, if any, pursuant to clause (b)(ii) above exceeded the tax amount actually paid in cash in respect of such sale, transfer or other disposition, the aggregate amount of such excess shall, at such time, constitute Net Disposition Proceeds. "Net Equity Proceeds" means with respect to the sale or issuance by the Borrower or Holdings to any Person of any of its capital stock or any warrants or options with respect to its capital stock or the exercise of any such warrants or options after the Closing Date (other than pursuant to (i) capital contributions or capital stock issuances (from other than one or more public offerings of common stock of Holdings pursuant to an effective registration statement under the Securities Act of 1933, as amended, or widely-distributed private offerings exempted from the registration requirements of Section 5 of the Securities Act of 1933, as amended ), (ii) any subscription agreement, incentive plan or similar arrangement with any officer, employee or director of Holdings, the Borrower or any Subsidiary of the Borrower, (iii) any loan by the Borrower or Holdings, to such officer, employee or director solely for the purpose of purchasing such shares pursuant to clause (h) of Section 7.2.5, (iv) proceeds from the sale of any capital stock to any officer, director or employee of Holdings, the Borrower or any Subsidiary of the Borrower in an aggregate amount not to exceed $15,000,000 after the Closing Date or (v) the Equity Issuance or (vi) the exercise of the Warrants, any warrants sold to the purchasers of Discount Debentures in connection with the Discount Debenture Issuance or any options or warrants issued to any officer, employee or director of Holdings, the Borrower or any Subsidiary of the Borrower), the excess of: (a) the gross cash proceeds received by Holdings, the Borrower and the Borrower's Restricted Subsidiaries from such sale, exercise or issuance, over (b) all reasonable and customary underwriting commissions and legal, investment banking, brokerage, accounting and other professional fees, sales commissions and disbursements and all other reasonable fees, expenses and charges, in each case actually incurred in connection with such sale or issuance. "Net Income" means, for any period, the net income of the Borrower and its Subsidiaries for such period on a consolidated basis, excluding extraordinary or non-recurring gains; provided, however, that the Net Income or loss of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid to the Borrower or a Restricted Subsidiary in cash. 28 36 "Non-Recourse Debt" means Indebtedness (i) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of the Borrower or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity, and (ii) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of the Borrower or any of its Restricted Subsidiaries (other than stock of Unrestricted Subsidiaries pledged by the Borrower to secure Debt of such Unrestricted Subsidiary); provided, however, that in no event shall Indebtedness of any Unrestricted Subsidiary fail to be Non-Recourse Debt solely as a result of any default provisions contained in a guarantee thereof by the Borrower or any of its Restricted Subsidiaries if the Borrower or such Restricted Subsidiary was otherwise permitted to incur such guarantee under this Agreement. "Non-U.S. Lender" means any Lender (including each Assignee Lender) that is not (i) a citizen or resident of the United States, (ii) a corporation, partnership or other entity created or organized in or under the laws of the United States or any state thereof, or (iii) an estate or trust that is subject to U.S. Federal income taxation regardless of the source of its income. "Non-U.S. Subsidiary" means a Subsidiary of the Borrower that is not a U.S. Subsidiary. "Note" means, as the context may require, a Revolving Note, a Term-A Note, a Term-B Note or a Swing Line Note. "Obligations" means all obligations (monetary or otherwise) of the Borrower and each other Obligor arising under or in connection with this Agreement, any Rate Protection Agreement, the Notes, each Letter of Credit and each other Loan Document. "Obligor" means the Borrower or any other Person (other than any Agent, the Documentation Agent, the Arranger, the Issuer, the Swing Line Lender or any Lender) obligated under any Loan Document. "Participant" is defined in Section 10.11.2. "PBGC" means the Pension Benefit Guaranty Corporation and any successor entity. "Pension Plan" means a "pension plan", as such term is defined in section 3(2) of ERISA, which is subject to Title IV of ERISA (other than a multiemployer plan as defined in section 4001(a)(3) of ERISA), and to which the Borrower or any corporation, trade or business that is, along with the Borrower, a member of a Controlled Group, has or within the prior six years has had any liability, including any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA. 29 37 "Percentage" means, relative to any Lender, the applicable percentage relating to Term-A Loans, Term-B Loans or Revolving Loans, as the case may be, as set forth opposite its name on Schedule II hereto under the applicable column heading or set forth in Lender Assignment Agreement(s) under the applicable column heading, as such percentage may be adjusted from time to time pursuant to Lender Assignment Agreement(s) executed by such Lender and its Assignee Lender(s) and delivered pursuant to Section 10.11 or, in the case of a Lender's Percentage relating to Revolving Loans, pursuant to clause (c) of Section 2.1.2. A Lender shall not have any Commitment to make Revolving Loans, Term-A Loans or Term-B Loans (as the case may be) if its percentage under the respective column heading is zero. "Perfection Certificate" means the Perfection Certificate executed and delivered by an Authorized Officer of the Borrower pursuant to Section 5.1.18, substantially in the form of Exhibit I hereto, as amended, supplemented, amended and restated or otherwise modified from time to time. "Person" means any natural person, corporation, partnership, firm, association, trust, government, governmental agency, limited liability company or any other entity, whether acting in an individual, fiduciary or other capacity. "Plan" means any Pension Plan or Welfare Plan. "Pledge Agreement" means, as the context may require, the Borrower Pledge Agreement, the Holdings Guaranty and Pledge Agreement or the Subsidiary Pledge Agreement. "Pro Forma Balance Sheet" is defined in clause (b) of Section 5.1.9. "Quarterly Payment Date" means the last day of each of March, June, September and December, or, if any such day is not a Business Day, the next succeeding Business Day, commencing with September 30, 1997. "Rate Protection Agreement" means, collectively, any interest rate swap, cap, collar or similar agreement entered into by the Borrower pursuant to the terms of this Agreement under which the counterparty to such agreement is (or at the time such Rate Protection Agreement was entered into, was) a Lender or an Affiliate of a Lender. "Refunded Swing Line Loans" is defined in clause (b) of Section 2.3.2. "Register" is defined in clause (b) of Section 2.7. "Reimbursement Obligation" is defined in Section 2.6.3. "Release" means a "release", as such term is defined in CERCLA. 30 38 "Replacement Notice" is defined in Section 4.11. "Replacement Lender" is defined in Section 4.11. "Required Lenders" means, at any time, (i) prior to the date of the making of the initial Credit Extension hereunder, Lenders having at least 51% of the sum of the Revolving Loan Commitments, Term-A Loan Commitments and Term-B Loan Commitments, and (ii) on and after the date of the initial Credit Extension, Lenders holding at least 51% of the Total Exposure Amount. "Resource Conservation and Recovery Act" means the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., as in effect from time to time. "Restricted Payments" is defined in Section 7.2.6. "Restricted Subsidiary" means any Subsidiary of the Borrower other than an Unrestricted Subsidiary. "Revolving Loan" is defined in Section 2.1.2. "Revolving Loan Commitment" is defined in Section 2.1.2. "Revolving Loan Commitment Amount" means, on any date, $105,000,000, as such amount may be increased from time to time pursuant to clause (c) of Section 2.1.2 or reduced from time to time pursuant to Section 2.2. "Revolving Loan Commitment Termination Date" means the earliest of (i) August 31, 1997 if the Term Loans have not been made on or prior to such date, (ii) the sixth anniversary of the Closing Date, (iii) the date on which the Revolving Loan Commitment Amount is terminated in full or reduced to zero pursuant to Section 2.2, and (iv) the date on which any Commitment Termination Event occurs. "Revolving Note" means a promissory note of the Borrower payable to any Lender, substantially in the form of Exhibit A-1 hereto (as such promissory note may be amended, endorsed or otherwise modified from time to time), evidencing the aggregate Indebtedness of the Borrower to such Lender resulting from outstanding Revolving Loans, and also means all other promissory notes accepted from time to time in substitution therefor or renewal thereof. "S&P" means Standard & Poor's Ratings Group, a division of McGraw Hill, Inc. "Security Agreement" means, as the context may require, the Borrower Security Agreement or the Subsidiary Security Agreement. 31 39 "Solvent" means, with respect to any Person on a particular date, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including contingent liabilities, of such Person, (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature, and (d) such Person is not engaged in business or a transaction, and such person is not about to engage in business or a transaction, for which such Person's property would constitute an unreasonably small capital. The amount of contingent liabilities at any time shall be computed as the amount that, in light of all the facts and circumstances existing at such time, can reasonably be expected to become an actual or matured liability. "Stated Amount" of each Letter of Credit means the total amount available to be drawn under such Letter of Credit upon the issuance thereof. "Stated Expiry Date" is defined in Section 2.6. "Stated Maturity Date" means (i) in the case of any Revolving Loan, the sixth anniversary of the Closing Date, (ii) in the case of any Term-A Loan, the sixth anniversary of the Closing Date and (iii) in the case of any Term-B Loan, the eighth anniversary of the Closing Date or, in the case of any such day that is not a Business Day, the first Business Day following such day. "Subordinated Debt Issuance" is defined in clause (c) of the fourth recital. "Subordinated Notes" is defined in clause (c) of the fourth recital. "Subsidiary" means, with respect to any Person, any corporation, partnership or other business entity of which more than 50% of the outstanding Capital Stock (or other ownership interest) having ordinary voting power to elect a majority of the board of directors, managers or other voting members of the governing body of such entity (irrespective of whether at the time Capital Stock (or other ownership interests) of any other class or classes of such entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by such Person, by such Person and one or more other Subsidiaries of such Person, or by one or more other Subsidiaries of such Person. "Subsidiary Guarantor" means each Material Subsidiary of the Borrower that is a U.S. Subsidiary that is required, pursuant to clause (a) of Section 7.1.7, to execute and deliver a Subsidiary Guaranty. "Subsidiary Guaranty" means the Guaranty, if any, executed and delivered by an Authorized Officer of a Subsidiary Guarantor pursuant to Section 7.1.7, substantially in the form of Exhibit H hereto, as amended, supplemented, amended and restated or otherwise modified from time to time. 32 40 "Subsidiary Pledge Agreement" means the Pledge Agreement, if any, executed and delivered by an Authorized Officer of certain Material Subsidiaries of the Borrower that are U.S. Subsidiaries pursuant to Section 7.1.7, substantially in the form of Exhibit G-3 hereto, as amended, supplemented, amended and restated or otherwise modified from time to time. "Subsidiary Security Agreement" means the Security Agreement, if any, executed and delivered by an Authorized Officer of certain Material Subsidiaries of the Borrower that are U.S. Subsidiaries pursuant to Section 7.1.7, substantially in the form of Exhibit F-2 hereto, as amended, supplemented, amended and restated or otherwise modified from time to time. "Swing Line Lender" means the Administrative Agent in its capacity as Swing Line Lender hereunder. "Swing Line Loan" is defined in clause (b) of Section 2.1.2. "Swing Line Loan Commitment" is defined in clause (b) of Section 2.1.2. "Swing Line Loan Commitment Amount" means, on any date, $10,000,000, as such amount may be reduced from time to time pursuant to Section 2.2. "Swing Line Note" means a promissory note of the Borrower payable to the Swing Line Lender, in the form of Exhibit A-5 hereto (as such promissory note may be amended, endorsed or otherwise modified from time to time), evidencing the aggregate Indebtedness of the Borrower to the Swing Line Lender resulting from outstanding Swing Line Loans, and also means all other promissory notes accepted from time to time in substitution therefor or renewal thereof. "Syndication Agent" is defined in the preamble and includes each other Person as shall have subsequently been appointed as the successor Syndication Agent pursuant to Section 9.4. "Tax Sharing Agreement" means the Tax Sharing Agreement, dated as of August 7, 1997, among the Borrower, Holdings, DecisionOne Supplies, Inc., the IPO Subsidiary, IC Properties Corporation, the Trademark Subsidiary and Decision Data Investment Corporation, as the same may be amended, supplemented or otherwise modified from time to time in accordance with Section 7.2.10. "Taxes" is defined in Section 4.6. "Term-A Loan" is defined in clause (a) of Section 2.1.1. "Term-A Loan Commitment" is defined in clause (a) of Section 2.1.1. "Term-A Loan Commitment Amount" means $195,000,000. 33 41 "Term-A Loan Commitment Termination Date" means the earliest of (i) August 31, 1997, if the Term-A Loans have not been made on or prior to such date, (ii) the Closing Date (immediately after the making of the Term-A Loans on such date), and (iii) the date on which any Commitment Termination Event occurs. "Term-A Note" means a promissory note of the Borrower payable to the order of any Lender, in the form of Exhibit A-2 hereto (as such promissory note may be amended, endorsed or otherwise modified from time to time), evidencing the aggregate Indebtedness of the Borrower to such Lender resulting from outstanding Term-A Loans, and also means all other promissory notes accepted from time to time in substitution therefor or renewal thereof. "Term-B Loan" is defined in clause (b) of Section 2.1.1. "Term-B Loan Commitment" is defined in clause (b) of Section 2.1.1. "Term-B Loan Commitment Amount" means $275,000,000. "Term-B Loan Commitment Termination Date" means the earliest of (i) August 31, 1997, if the Term-B Loans have not been made on or prior to such date, (ii) the Closing Date (immediately after the making of the Term-B Loans on such date), and (iii) the date on which any Commitment Termination Event occurs. "Term-B Note" means a promissory note of the Borrower payable to the order of any Lender, in the form of Exhibit A-3 hereto (as such promissory note may be amended, endorsed or otherwise modified from time to time), evidencing the aggregate Indebtedness of the Borrower to such Lender resulting from outstanding Term-B Loans, and also means all other promissory notes accepted from time to time in substitution therefor or renewal thereof. "Term Loan Commitment Termination Date" means, as the context may require, the Term-A Loan Commitment Termination Date or the Term-B Loan Commitment Termination Date. "Term Loans" means collectively, the Term-A Loans and the Term-B Loans. "Total Exposure Amount" means, on any date of determination, the then outstanding principal amount of all Term Loans and the then effective Revolving Loan Commitment Amount or, if no Revolving Loan Commitment is outstanding, the then outstanding principal amount of all Revolving Loans, Swing Line Loans and Letter of Credit Outstandings. "Trademark Subsidiary" means Properties Development Corporation, a Delaware corporation, which is a direct, wholly-owned Subsidiary of the Borrower. "Tranche" means, as the context may require, the Loans constituting Term-A Loans, Term-B Loans, Revolving Loans or Swing Line Loans. 34 42 "Transaction" is defined in the second recital. "Transaction Documents" means each of the Material Documents and all other agreements, documents, instruments, certificates, filings, consents, approvals, board of directors resolutions and opinions furnished pursuant to or in connection with the Merger, the Equity Issuance, the Discount Debenture Issuance, the Subordinated Debt Issuance, the Intercompany Loan and the transactions contemplated hereby or thereby, each as amended, supplemented, amended and restated or otherwise modified from time to time as permitted in accordance with the terms hereof or of any other Loan Document. "type" means, relative to any Loan, the portion thereof, if any, being maintained as a Base Rate Loan or a LIBO Rate Loan. "UCC" means the Uniform Commercial Code as in effect from time to time in the State of New York. "United States" or "U.S." means the United States of America, its fifty states and the District of Columbia. "U.S. Subsidiary" means any Subsidiary of the Borrower that is incorporated or organized in or under the laws of the United States or any state thereof. "Unrestricted Subsidiary" means any Subsidiary of the Borrower that is designated by a resolution of the Board of Directors of the Borrower as an Unrestricted Subsidiary, but only to the extent that such Subsidiary: (i) has no Indebtedness other than Non-Recourse Debt; (ii) is not party to any agreement, contract, arrangement or understanding with the Borrower or any Restricted Subsidiary of the Borrower unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Borrower or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Borrower; (iii) is a Person with respect to which neither the Borrower nor any of its Restricted Subsidiaries has any direct or indirect obligation (a) to subscribe for additional Capital Stock or warrants, options or other rights to acquire Capital Stock or (b) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; and (iv) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Borrower or any of its Restricted Subsidiaries. If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes hereof. The Board of Directors of the Borrower may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Borrower of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if no Default or Event of Default would be in existence following such designation. 35 43 "Voting Stock" means any class or classes of Capital Stock pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of any Person (irrespective of whether or not, at the time, stock of any other class or classes shall have, or might have, voting power by reason of the happening of any contingency). "Waiver" means an agreement in favor of the Agents for the benefit of the Lenders in form and substance reasonably satisfactory to the Agents. "Warrants" is defined in clause (a) of the fourth recital. "Welfare Plan" means a "welfare plan", as such term is defined in section 3(1) of ERISA, and to which the Borrower has any liability. "wholly-owned Subsidiary" shall mean, with respect to any Person, any Subsidiary of such Person all of the Capital Stock (and all rights and options to purchase such Capital Stock) of which, other than directors' qualifying shares, are owned, beneficially and of record, by such Person and/or one or more wholly-owned Subsidiaries of such Person. SECTION 1.2. Use of Defined Terms. Unless otherwise defined or the context otherwise requires, terms for which meanings are provided in this Agreement shall have such meanings when used in the Disclosure Schedule and in each other Loan Document, notice and other communication delivered from time to time in connection with this Agreement or any other Loan Document. SECTION 1.3. Cross-References. Unless otherwise specified, references in this Agreement and in each other Loan Document to any Article or Section are references to such Article or Section of this Agreement or such other Loan Document, as the case may be, and, unless otherwise specified, references in any Article, Section or definition to any clause are references to such clause of such Article, Section or definition. SECTION 1.4. Accounting and Financial Determinations. (a) Unless otherwise specified, all accounting terms used herein or in any other Loan Document shall be interpreted, all accounting determinations and computations hereunder or thereunder (including under Section 7.2.4) shall be made, and all financial statements required to be delivered hereunder or thereunder shall be prepared in accordance with, those generally accepted accounting principles ("GAAP"), as in effect on June 30, 1996 and, unless otherwise expressly provided herein, shall be computed or determined on a consolidated basis and without duplication. (b) For purposes of computing the Fixed Charge Coverage Ratio, Interest Coverage Ratio and Leverage Ratio as of the end of any Fiscal Quarter, (i) the Adjusted EBITDA for the period of four Fiscal Quarters ending at the end of such Fiscal Quarter shall include (a) Adjusted 36 44 EBITDA for such period of four Fiscal Quarters (determined without regard to this clause (b)) plus or minus (b) with respect to any business or assets that have been acquired by the Borrower or any of its Restricted Subsidiaries, including through mergers or consolidations, after the first day of such period of four Fiscal Quarters and prior to the end of such period, the result of (1) Adjusted EBITDA of such business or assets for the most recent three-month period prior to such acquisition for which internal financial statements in respect of such acquired business or assets are available times four multiplied by (2) a fraction the numerator of which is 365 (or, in the case of a leap year, 366) minus the number of days during the relevant period of four Fiscal Quarters for which the results of operations of such business or assets were included in clause (a) of this sentence and the denominator of which is 365 (or, in the case of a leap year, 366), (ii) the acquisition of any business or assets that has been made by the Borrower or any of its Restricted Subsidiaries, including through mergers or consolidations and including any related financing transactions after the first day of the applicable period of four Fiscal Quarters and on or prior to the end of such period, shall give pro forma effect to financing transactions (including the incurrence of Assumed Indebtedness) in connection with the acquisition of such business or assets, as if such acquisition had occurred at the beginning of the applicable period of four Fiscal Quarters and (iii) Adjusted EBITDA and expenses attributable to discontinued operations as determined in accordance with GAAP, and operations, businesses and assets disposed of prior to the end of such period of four Fiscal Quarters, shall be excluded. For purposes of the foregoing clause (i), Adjusted EBITDA attributable to any business or assets acquired by the Borrower or any Restricted Subsidiary shall be calculated utilizing the actual revenues attributable to such business or assets for the applicable three-month period and the expenses that would have been attributable to such business or assets had the Borrower acquired such business or assets at the beginning of the applicable three-month period, as determined in good faith by the Borrower, taking into account the Borrower's historical expenses in connection with the provision of similar services for similar equipment under similar contracts. If since the beginning of the applicable period of four Fiscal Quarters any Person (that subsequently becomes a Restricted Subsidiary or was merged with or into the Borrower or any Restricted Subsidiary since the beginning of such period) shall have made or engaged in any Investment, disposition of operations, businesses or assets, or merger or consolidation, or shall have discontinued any operations or acquired any business or assets that would have required adjustment of the Fixed Charge Ratio, Interest Coverage Ratio or Leverage Ratio pursuant to this subsection (b) had such Person been a Restricted Subsidiary at the time of such Investment, disposition, merger, consolidation, discontinued operation or acquisition, then the Fixed Charge Coverage Ratio, Interest Coverage Ratio and Leverage Rates shall be calculated giving pro forma effect thereto for such period as if such Investment, acquisition, disposition, merger, consolidation or discontinued operation had occurred at the beginning of the applicable period of four Fiscal Quarters. 37 45 ARTICLE II COMMITMENTS, BORROWING AND ISSUANCE PROCEDURES, NOTES AND LETTERS OF CREDIT SECTION 2.1. Commitments. On the terms and subject to the conditions of this Agreement (including Sections 2.1.4, 2.1.5 and Article V), (a) each Lender severally agrees to make Loans (other than Swing Line Loans) pursuant to the Commitments and the Swing Line Lender agrees to make Swing Line Loans pursuant to the Swing Line Loan Commitment, in each case as described in this Section 2.1; and (b) each Issuer severally agrees that it will issue Letters of Credit pursuant to Section 2.1.3, and each other Lender that has a Revolving Loan Commitment severally agrees that it will purchase participation interests in such Letters of Credit pursuant to Section 2.6.1. SECTION 2.1.1. Term Loan Commitments. Subject to compliance by the Borrower with the terms of Sections 2.1.4, 5.1 and 5.2, on (but solely on) the Closing Date (which shall be a Business Day), each Lender that has a Percentage in excess of zero of the Term-A Loan Commitment or the Term-B Loan Commitment, as applicable, (a) will make loans (relative to such Lender, its "Term-A Loans") to the Borrower equal to such Lender's Percentage of the aggregate amount of the Borrowing or Borrowings of Term-A Loans requested by the Borrower to be made on the Closing Date (with the commitment of each such Lender described in this clause (a) herein referred to as its "Term-A Loan Commitment"); and (b) will make loans (relative to such Lender, its "Term-B Loans") to the Borrower equal to such Lender's Percentage of the aggregate amount of the Borrowing or Borrowings of Term-B Loans requested by the Borrower to be made on the Closing Date (with the commitment of each such Lender described in this clause (b) herein referred to as its "Term-B Loan Commitment"). No amounts paid or prepaid with respect to Term-A Loans or Term-B Loans may be reborrowed. SECTION 2.1.2. Revolving Loan Commitment and Swing Line Loan Commitment. Subject to compliance by the Borrower with the terms of Section 2.1.4, Section 5.1 and Section 5.2, from time to time on any Business Day occurring concurrently with (or after) the making of the Term Loans but prior to the Revolving Loan Commitment Termination Date, (a) each Lender that has a Percentage of the Revolving Loan Commitment in excess of zero will make loans (relative to such Lender, its "Revolving Loans") to the 38 46 Borrower equal to such Lender's Percentage of the aggregate amount of the Borrowing or Borrowings of Revolving Loans requested by the Borrower to be made on such day. The Commitment of each Lender described in this Section 2.1.2 is herein referred to as its "Revolving Loan Commitment". On the terms and subject to the conditions hereof, the Borrower may from time to time borrow, prepay and reborrow Revolving Loans. (b) the Swing Line Lender will make a loan (a "Swing Line Loan") to the Borrower equal to the principal amount of the Swing Line Loan requested by the Borrower to be made on such day. The Commitment of the Swing Line Lender described in this clause (b) is herein referred to as its "Swing Line Loan Commitment". On the terms and subject to the conditions hereof, the Borrower may from time to time borrow, prepay and reborrow Swing Line Loans. (c) At any time that no Default has occurred and is continuing, the Borrower may notify the Agents that the Borrower is requesting that, on the terms and subject to the conditions contained in this Agreement, the Lenders and/or other lenders not then a party to this Agreement provide up to an aggregate amount of $50,000,000 in additional Revolving Loan Commitments. Upon receipt of such notice, the Syndication Agent shall use its best commercially reasonable efforts to arrange for the Lenders or other financial institutions to provide such additional Revolving Loan Commitments; provided that the Syndication Agent will first offer each of the Lenders that then has a Percentage of the Revolving Loan Commitment a pro rata portion of any such additional Revolving Loan Commitment. Alternatively, any Lender may commit to provide the full amount of the requested additional Revolving Loan Commitment and then offer portions of such additional Revolving Loan Commitment to the other Lenders or other financial institutions, subject to the proviso to the immediately preceding sentence. Nothing contained in this clause (c) or otherwise in this Agreement is intended to commit any Lender or any Agent to provide any portion of any such additional Revolving Loan Commitments. If and to the extent that any Lenders and/or other lenders agree, in their sole discretion, to provide any such additional Revolving Loan Commitments, (i) the Revolving Loan Commitment Amount shall be increased by the amount of the additional Revolving Loan Commitments agreed to be so provided, (ii) the Percentages of the respective Lenders in respect of the Revolving Loan Commitment shall be proportionally adjusted, (iii) at such time and in such manner as the Borrower and the Syndication Agent shall agree (it being understood that the Borrower and the Agents will use their best commercially reasonable efforts to avoid the prepayment or assignment of any LIBO Rate Loan on a day other than the last day of the Interest Period applicable thereto), the Lenders shall assign and assume outstanding Revolving Loans and participations in outstanding Letters of Credit so as to cause the amounts of such Revolving Loans and participations in Letters of Credit held by each Lender to conform to the respective Percentages of the Revolving Loan Commitment of the Lenders and (iv) the Borrower shall execute and deliver any additional Notes or other amendments or modifications to this Agreement or any other Loan Document as the Agents may reasonably request. 39 47 SECTION 2.1.3. Letter of Credit Commitment. (a) Subject to compliance by the Borrower with the terms of Section 2.1.5, Section 5.1 and Section 5.2, from time to time on any Business Day occurring concurrently with (or after) the Closing Date but prior to the Revolving Loan Commitment Termination Date, the Issuer will (i) issue one or more standby or commercial letters of credit (each referred to as a "Letter of Credit") for the account of the Borrower in the Stated Amount requested by the Borrower on such day, or (ii) extend the Stated Expiry Date of an existing standby or commercial Letter of Credit previously issued hereunder to a date not later than the earlier of (x) the sixth anniversary of the Closing Date and (y) one year from the date of such extension; provided that, notwithstanding the terms of clause (ii) above, a Letter of Credit may, if required by the beneficiary thereof, contain "evergreen" provisions pursuant to which the Stated Expiry Date shall be automatically extended, unless notice to the contrary shall have been given to the beneficiary by the Issuer or the account party more than a specified period prior to the then existing Stated Expiry Date. (b) Each Existing Letter of Credit shall for all purposes of this Agreement be deemed to be a "Letter of Credit" issued hereunder on the Closing Date. SECTION 2.1.4. Lenders Not Permitted or Required to Make the Loans. No Lender shall be permitted or required to, and the Borrower shall not request any Lender to, make (a) any Term-A Loan or Term-B Loan (as the case may be) if, after giving effect thereto, the aggregate original principal amount of all the Term-A Loans or Term-B Loans (as the case may be) of such Lender would exceed such Lender's Percentage of the Term-A Loan Commitment Amount (in the case of Term-A Loans) or the Term-B Loan Commitment Amount (in the case of Term-B Loans); (b) any Revolving Loan if, after giving effect thereto, the aggregate outstanding principal amount of all the Revolving Loans of such Lender, together with such Lender's Percentage of the aggregate amount of all Letter of Credit Outstandings, and such Lender's Percentage of the outstanding principal amount of all Swing Line Loans, would exceed such Lender's Percentage of the lesser of (x) the then existing Revolving Loan Commitment Amount and (y) the then applicable Borrowing Base Amount; or (c) any Swing Line Loan if, after giving effect thereto, the aggregate outstanding principal amount of all Swing Line Loans would exceed the lesser of (x) the then existing Swing Line Loan Commitment Amount and (y) an amount equal to (i) the lesser of (A) the then applicable Borrowing Base Amount and (B) the then existing Revolving Loan Commitment Amount less (ii) the sum of the aggregate outstanding principal amount of all Revolving Loans and Letter of Credit Outstandings. 40 48 SECTION 2.1.5. Issuer Not Permitted or Required to Issue Letters of Credit. No Issuer shall be permitted or required to issue, extend or renew any Letter of Credit if, after giving effect thereto, (a) the aggregate amount of all Letter of Credit Outstandings would exceed the Letter of Credit Commitment Amount or (b) the sum of the aggregate amount of all Letter of Credit Outstandings plus the aggregate principal amount of all Revolving Loans and Swing Line Loans then outstanding would exceed the lesser of (x) the Revolving Loan Commitment Amount and (y) the then applicable Borrowing Base Amount. SECTION 2.2. Reduction of the Commitment Amounts. The Commitment Amounts are subject to reductions from time to time pursuant to this Section 2.2. SECTION 2.2.1. Optional. The Borrower may, from time to time on any Business Day occurring after the time of the initial Credit Extension hereunder, voluntarily reduce the Revolving Loan Commitment Amount; provided, however, that all such reductions shall require at least three Business Days' prior notice to the Administrative Agent and be permanent, and any partial reduction of any Commitment Amount shall be in an aggregate amount of $500,000 or any larger integral multiple of $100,000. Any such reduction of the Revolving Loan Commitment Amount which reduces the Revolving Loan Commitment Amount below the Letter of Credit Commitment Amount or the Swing Line Loan Commitment Amount shall result in an automatic and corresponding reduction of the Letter of Credit Commitment Amount or the Swing Line Loan Commitment Amount, as the case may be, to an aggregate amount not in excess of the Revolving Loan Commitment Amount, as so reduced, without any further action on the part of the Issuer or the Swing Line Lender. SECTION 2.2.2. Mandatory. Following the prepayment in full of the Term Loans, the Revolving Loan Commitment Amount shall, without any further action, automatically and permanently be reduced on the date the Term Loans would otherwise have been required to be prepaid on account of any Net Disposition Proceeds, Net Debt Proceeds, Excess Cash Flow, Net Equity Proceeds or Casualty Proceeds, in an amount equal to the amount by which the Term Loans would otherwise have been required to be prepaid if Term Loans had been outstanding. Any such reduction of the Revolving Loan Commitment Amount which reduces the Revolving Loan Commitment Amount below the Letter of Credit Commitment Amount or the Swing Line Loan Commitment Amount shall result in an automatic and corresponding reduction of the Letter of Credit Commitment Amount or the Swing Line Loan Commitment Amount, as the case may be, to an aggregate amount not in excess of the Revolving Loan Commitment Amount, as so reduced, without any further action on the part of the Issuer or the Swing Line Lender. SECTION 2.3. Borrowing Procedures and Funding Maintenance. Loans (other than Swing Line Loans) shall be made by the Lenders in accordance with Section 2.3.1, and Swing Line Loans shall be made by the Swing Line Lender in accordance with Section 2.3.2. SECTION 2.3.1. Term Loans and Revolving Loans. By delivering a Borrowing Request to the Administrative Agent on or before 12:00 noon, New York time, on a Business Day, the Borrower may from time to time irrevocably request, on not less than one Business Day's notice 41 49 (in the case of Base Rate Loans) or three Business Days' notice (in the case of LIBO Rate Loans) nor more than five Business Days' notice (in the case of any Loans), that a Borrowing be made in an aggregate amount of $500,000 or any larger integral multiple of $100,000, or in the unused amount of the applicable Commitment. No Borrowing Request shall be required, and the minimum aggregate amounts specified under this Section 2.3.1 shall not apply, in the case of Revolving Loans made under clause (b) of Section 2.3.2 to refund Refunded Swing Line Loans or deemed made under Section 2.6.2 in respect of unreimbursed Disbursements. On the terms and subject to the conditions of this Agreement, each Borrowing shall be comprised of the type of Loans, and shall be made on the Business Day, specified in such Borrowing Request. On or before 11:00 a.m., New York time, on such Business Day each Lender shall deposit with the Administrative Agent same day funds in an amount equal to such Lender's Percentage of the requested Borrowing. Such deposit will be made to an account which the Administrative Agent shall specify from time to time by notice to the Lenders. To the extent funds are received from the Lenders, the Administrative Agent shall make such funds available to the Borrower by wire transfer to the accounts the Borrower shall have specified in its Borrowing Request. No Lender's obligation to make any Loan shall be affected by any other Lender's failure to make any Loan. SECTION 2.3.2. Swing Line Loans. (a) By telephonic notice, promptly followed (within one Business Day) by the delivery of a confirming Borrowing Request, to the Swing Line Lender on or before 1:00 p.m., New York City time, on the Business Day the proposed Swing Line Loan is to be made, the Borrower may from time to time irrevocably request that a Swing Line Loan be made by the Swing Line Lender in a minimum principal amount of $50,000 or any larger integral multiple of $10,000. All Swing Line Loans shall be made as Base Rate Loans and shall not be entitled to be converted into LIBO Rate Loans. The proceeds of each Swing Line Loan shall be made available by the Swing Line Lender, by 2:00 p.m., New York City time, on the Business Day telephonic notice is received by it as provided in this clause (a), to the Borrower by wire transfer to the account the Borrower shall have specified in its notice therefor. (b) If (i) any Swing Line Loan shall be outstanding for more than four Business Days or (ii) any Default shall occur and be continuing, each Lender with a Revolving Loan Commitment (other than the Swing Line Lender) irrevocably agrees that it will, at the request of the Swing Line Lender and upon notice from the Administrative Agent, unless such Swing Line Loan shall have been earlier repaid in full, make a Revolving Loan (which shall initially be funded as a Base Rate Loan) in an amount equal to such Lender's Percentage of the aggregate principal amount of all such Swing Line Loans then outstanding (such outstanding Swing Line Loans hereinafter referred to as the "Refunded Swing Line Loans"); provided, that the Swing Line Lender shall not request, and no Lender with a Revolving Loan Commitment shall make, any Refunded Swing Line Loan if, after giving effect to the making of such Refunded Swing Line Loan, the sum of all Swing Line Loans and Revolving Loans made by such Lender, plus such Lender's Percentage of the aggregate amount of all Letter of Credit Outstandings, would exceed such Lender's Percentage of the then existing Revolving Loan Commitment Amount. On or before 12:00 noon (New York time) on the first Business Day following receipt by each Lender 42 50 of a request to make Revolving Loans as provided in the preceding sentence, each such Lender with a Revolving Loan Commitment shall deposit in an account specified by the Swing Line Lender the amount so requested in same day funds and such funds shall be applied by the Swing Line Lender to repay the Refunded Swing Line Loans. At the time the aforementioned Lenders make the above referenced Revolving Loans, the Swing Line Lender shall be deemed to have made, in consideration of the making of the Refunded Swing Line Loans, a Revolving Loan in an amount equal to the Swing Line Lender's Percentage of the aggregate principal amount of the Refunded Swing Line Loans. Upon the making (or deemed making, in the case of the Swing Line Lender) of any Revolving Loans pursuant to this clause (b), the amount so funded shall become outstanding under such Lender's Revolving Note and shall no longer be owed under the Swing Line Note. All interest payable with respect to any Revolving Loans made (or deemed made, in the case of the Swing Line Lender) pursuant to this clause (b) shall be appropriately adjusted to reflect the period of time during which the Swing Line Lender had outstanding Swing Line Loans in respect of which such Revolving Loans were made. Each Lender's obligation (in the case of Lenders with a Revolving Loan Commitment) to make the Revolving Loans referred to in this clause (b) shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, (i) any set-off, counterclaim, recoupment, defense or other right which such Lender may have against the Swing Line Lender, the Borrower or any other Person for any reason whatsoever; (ii) the occurrence or continuance of any Default; (iii) any adverse change in the condition (financial or otherwise) of the Borrower; (iv) the acceleration or maturity of any Loans or the termination of any Commitment after the making of any Swing Line Loan; (v) any breach of this Agreement or any other Loan Document by the Borrower or any Lender; or (vi) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. SECTION 2.4. Continuation and Conversion Elections. By delivering a Continuation/Conversion Notice to the Administrative Agent on or before 12:00 noon, New York time, on a Business Day, the Borrower may from time to time irrevocably elect, on not less than one Business Day's notice (in the case of a conversion of LIBO Rate Loans to Base Rate Loans) or three Business Days' notice (in the case of a continuation of LIBO Rate Loans or a conversion of Base Rate Loans into LIBO Rate Loans) nor more than five Business Days' notice (in the case of any Loans) that all, or any portion in a minimum amount of $500,000 or any larger integral multiple of $100,000, be, in the case of Base Rate Loans, converted into LIBO Rate Loans or, in the case of LIBO Rate Loans, converted into Base Rate Loans or continued as LIBO Rate Loans (in the absence of delivery of a Continuation/Conversion Notice with respect to any LIBO Rate Loan at least three Business Days before the last day of the then current Interest Period with respect thereto, such LIBO Rate Loan shall, on such last day, automatically convert to a Base Rate Loan); provided, however, that (x) each such conversion or continuation shall be pro rated among the applicable outstanding Loans of the relevant Lenders, and (y) no portion of the outstanding principal amount of any Loans may be continued as, or be converted into, LIBO Rate Loans when any Default has occurred and is continuing. SECTION 2.5. Funding. Each Lender may, if it so elects, fulfill its obligation to make, continue or convert LIBO Rate Loans hereunder by causing one of its foreign branches or 43 51 Affiliates (or an international banking facility created by such Lender) to make or maintain such LIBO Rate Loan, so long as such action does not result in increased costs to the Borrower; provided, however, that such LIBO Rate Loan shall nonetheless be deemed to have been made and to be held by such Lender, and the obligation of the Borrower to repay such LIBO Rate Loan shall nevertheless be to such Lender for the account of such foreign branch, Affiliate or international banking facility; and provided, further, however, that, except for purposes of determining whether any such increased costs are payable by the Borrower, such Lender shall cause such foreign branch, Affiliate or international banking facility to comply with the applicable provisions of clause (b) of Section 4.6 with respect to such LIBO Rate Loan. In addition, the Borrower hereby consents and agrees that, for purposes of any determination to be made for purposes of Section 4.1, 4.2, 4.3 or 4.4, it shall be conclusively assumed that each Lender elected to fund all LIBO Rate Loans by purchasing Dollar deposits in its LIBOR Office's interbank Eurodollar market. SECTION 2.6. Issuance Procedures. By delivering to the Administrative Agent an Issuance Request on or before 12:00 noon, New York time, on a Business Day, the Borrower may, from time to time irrevocably request, on not less than three nor more than ten Business Days' notice (or such shorter or longer notice as may be acceptable to the Issuer), in the case of an initial issuance of a Letter of Credit, and not less than three nor more than ten Business Days' notice (unless a shorter or longer notice period is acceptable to the Issuer) prior to the then existing Stated Expiry Date of a Letter of Credit, in the case of a request for the extension of the Stated Expiry Date of a Letter of Credit, that the Issuer issue, or extend the Stated Expiry Date of, as the case may be, an irrevocable Letter of Credit on behalf of the Borrower (whether issued for the account of or on behalf of the Borrower or any of its Subsidiaries) in such form as may be requested by the Borrower and approved by the Issuer, for the purposes described in Section 7.1.9. Notwithstanding anything to the contrary contained herein or in any separate application for any Letter of Credit, the Borrower hereby acknowledges and agrees that it shall be obligated to reimburse the Issuer upon each Disbursement paid under a Letter of Credit, and it shall be deemed to be the obligor for purposes of each such Letter of Credit issued hereunder (whether the account party on such Letter of Credit is the Borrower or a Subsidiary of the Borrower). Upon receipt of an Issuance Request, the Administrative Agent shall promptly notify the Issuer and each Lender thereof. Each Letter of Credit shall by its terms be stated to expire on a date (its "Stated Expiry Date") no later than the earlier to occur of (i) the sixth anniversary of the Closing Date or (ii) one year from the date of its issuance; provided that, notwithstanding the terms of clause (ii) above, a Letter of Credit may, if required by the beneficiary thereof, contain "evergreen" provisions pursuant to which the Stated Expiry Date shall be automatically extended, unless notice to the contrary shall have been given to the beneficiary by the Issuer or the account party more than a specified period prior to the then existing Stated Expiry Date. The Issuer will make available to the beneficiary thereof the original of each Letter of Credit which it issues hereunder. SECTION 2.6.1. Other Lenders' Participation. Upon the issuance of each Letter of Credit issued by the Issuer pursuant hereto, and without further action, each Lender (other than the Issuer) that has a Revolving Loan Commitment shall be deemed to have irrevocably 44 52 purchased from the Issuer, to the extent of its Percentage in respect of Revolving Loans, and the Issuer shall be deemed to have irrevocably granted and sold to such Lender a participation interest in such Letter of Credit (including the Contingent Liability and any Reimbursement Obligation and all rights with respect thereto), and such Lender shall, to the extent of its Percentage in respect of Revolving Loans, be responsible for reimbursing promptly (and in any event within one Business Day) the Issuer for Reimbursement Obligations which have not been reimbursed by the Borrower in accordance with Section 2.6.3. In addition, such Lender shall, to the extent of its Percentage in respect of Revolving Loans, be entitled to receive a ratable portion of the Letter of Credit fees payable pursuant to Section 3.3.3 with respect to each Letter of Credit and of interest payable pursuant to Section 3.2 with respect to any Reimbursement Obligation. To the extent that any Lender has reimbursed the Issuer for a Disbursement as required by this Section, such Lender shall be entitled to receive its ratable portion of any amounts subsequently received (from the Borrower or otherwise) in respect of such Disbursement. SECTION 2.6.2. Disbursements; Conversion to Revolving Loans. The Issuer will notify the Borrower and the Administrative Agent promptly of the presentment for payment of any drawing under any Letter of Credit issued by the Issuer, together with notice of the date (the "Disbursement Date") such payment shall be made (each such payment, a "Disbursement"). Subject to the terms and provisions of such Letter of Credit and this Agreement, the Issuer shall make such payment to the beneficiary (or its designee) of such Letter of Credit. Prior to 12:30 p.m., New York time, on the first Business Day following the Disbursement Date (the "Disbursement Due Date"), the Borrower will reimburse the Administrative Agent, for the account of the Issuer, for all amounts which the Issuer has disbursed under such Letter of Credit, together with interest thereon at the rate per annum otherwise applicable to Revolving Loans (made as Base Rate Loans) from and including the Disbursement Date to but excluding the Disbursement Due Date and, thereafter (unless such Disbursement is converted into a Base Rate Loan on the Disbursement Due Date), at a rate per annum equal to the rate per annum then in effect with respect to overdue Revolving Loans (made as Base Rate Loans) pursuant to Section 3.2.2 for the period from the Disbursement Due Date through the date of such reimbursement; provided, however, that, if no Default shall have then occurred and be continuing, unless the Borrower has notified the Administrative Agent no later than one Business Day prior to the Disbursement Due Date that it will reimburse the Issuer for the applicable Disbursement, then the amount of the Disbursement shall be deemed to be a Borrowing of Revolving Loans constituting Base Rate Loans and following the giving of notice thereof by the Administrative Agent to the Lenders, each Lender with a Revolving Loan Commitment (other than the Issuer) will deliver to the Issuer on the Disbursement Due Date immediately available funds in an amount equal to such Lender's Percentage of such Borrowing. Each conversion of Disbursement amounts into Revolving Loans shall constitute a representation and warranty by the Borrower that on the date of the making of such Revolving Loans all of the statements set forth in Section 5.2.1 are true and correct. SECTION 2.6.3. Reimbursement. The obligation (a "Reimbursement Obligation") of the Borrower under Section 2.6.2 to reimburse the Issuer with respect to each Disbursement (including interest thereon) not converted into a Base Rate Loan pursuant to Section 2.6.2, and, 45 53 upon the Borrower failing or electing not to reimburse the Issuer and the giving of notice thereof by the Administrative Agent to the Lenders, each Lender's (to the extent it has a Revolving Loan Commitment) obligation under Section 2.6.1 to reimburse the Issuer or fund its Percentage of any Disbursement converted into a Base Rate Loan, shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower or such Lender, as the case may be, may have or have had against the Issuer or any such Lender, including any defense based upon the failure of any Disbursement to conform to the terms of the applicable Letter of Credit (if, in the Issuer's good faith opinion, such Disbursement is determined to be appropriate) or any non-application or misapplication by the beneficiary of the proceeds of such Letter of Credit; provided, however, that after paying in full its Reimbursement Obligation hereunder, nothing herein shall adversely affect the right of the Borrower or such Lender, as the case may be, to commence any proceeding against the Issuer for any wrongful Disbursement made by the Issuer under a Letter of Credit as a result of acts or omissions constituting gross negligence or willful misconduct on the part of the Issuer. SECTION 2.6.4. Deemed Disbursements. Upon the occurrence and during the continuation of any Event of Default of the type described in clauses (b) through (d) of Section 8.1.9 with respect to any Obligor (other than immaterial Subsidiaries) or, with notice from the Administrative Agent acting at the direction of the Required Lenders, upon the occurrence and during the continuation of any other Event of Default, (a) an amount equal to that portion of all Letter of Credit Outstandings attributable to the then aggregate amount which is undrawn and available under all Letters of Credit issued and outstanding shall, without demand upon or notice to the Borrower or any other Person, be deemed to have been paid or disbursed by the Issuer under such Letters of Credit (notwithstanding that such amount may not in fact have been so paid or disbursed); and (b) upon notification by the Administrative Agent to the Borrower of its obligations under this Section, the Borrower shall be immediately obligated to reimburse the Issuer for the amount deemed to have been so paid or disbursed by the Issuer. Any amounts so payable by the Borrower pursuant to this Section shall be deposited in cash with the Administrative Agent and held as collateral security for the Obligations in connection with the Letters of Credit issued by the Issuer. At such time as the Events of Default giving rise to the deemed disbursements hereunder shall have been cured or waived, the Administrative Agent shall return to the Borrower all amounts then on deposit with the Administrative Agent pursuant to this Section, together with accrued interest at the Federal Funds Rate, which have not been applied to the satisfaction of such Obligations. SECTION 2.6.5. Nature of Reimbursement Obligations. The Borrower and, to the extent set forth in Section 2.6.1, each Lender with a Revolving Loan Commitment, shall assume all risks of the acts, omissions or misuse of any Letter of Credit by the beneficiary thereof. The 46 54 Issuer (except to the extent of its own gross negligence or willful misconduct) shall not be responsible for: (a) the form, validity, sufficiency, accuracy, genuineness or legal effect of any Letter of Credit or any document submitted by any party in connection with the application for and issuance of a Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (b) the form, validity, sufficiency, accuracy, genuineness or legal effect of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or the proceeds thereof in whole or in part, which may prove to be invalid or ineffective for any reason; (c) failure of the beneficiary to comply fully with conditions required in order to demand payment under a Letter of Credit; (d) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise; or (e) any loss or delay in the transmission or otherwise of any document or draft required in order to make a Disbursement under a Letter of Credit. None of the foregoing shall affect, impair or prevent the vesting of any of the rights or powers granted to the Issuer or any Lender with a Revolving Loan Commitment hereunder. In furtherance and extension and not in limitation or derogation of any of the foregoing, any action taken or omitted to be taken by the Issuer in good faith (and not constituting gross negligence or willful misconduct) shall be binding upon the Borrower, each Obligor and each such Lender, and shall not put the Issuer under any resulting liability to the Borrower, any Obligor or any such Lender, as the case may be. SECTION 2.7. Register; Notes. (a) Each Lender may maintain in accordance with its usual practice an account or accounts evidencing the Indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. In the case of a Lender that does not request, pursuant to clause (b)(ii) below, execution and delivery of a Note evidencing the Loans made by such Lender to the Borrower, such account or accounts shall, to the extent not inconsistent with the notations made by the Administrative Agent in the Register, be conclusive and binding on the Borrower absent manifest error; provided, however, that the failure of any Lender to maintain such account or accounts shall not limit or otherwise affect any Obligations of the Borrower or any other Obligor. 47 55 (b)(i) The Borrower hereby designates the Administrative Agent to serve as the Borrower's agent, solely for the purpose of this clause (b), to maintain a register (the "Register") on which the Administrative Agent will record each Administrative Lender's Commitment, the Loans made by each Lender and each repayment in respect of the principal amount of the Loans of each Lender and annexed to which the Administrative Agent shall retain a copy of each Lender Assignment Agreement delivered to the Administrative Agent pursuant to Section 10.11.1. Failure to make any recordation, or any error in such recordation, shall not affect the Borrower's obligation in respect of such Loans. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Administrative Agent and the Lenders shall treat each Person in whose name a Loan (and as provided in clause (ii) the Note evidencing such Loan, if any) is registered as the owner thereof for all purposes of this Agreement, notwithstanding notice or any provision herein to the contrary. A Lender's Commitment and the Loans made pursuant thereto may be assigned or otherwise transferred in whole or in part only by registration of such assignment or transfer in the Register. Any assignment or transfer of a Lender's Commitment or the Loans made pursuant thereto shall be registered in the Register only upon delivery to the Administrative Agent of a Lender Assignment Agreement duly executed by the assignor thereof. No assignment or transfer of a Lender's Commitment or the Loans made pursuant thereto shall be effective unless such assignment or transfer shall have been recorded in the Register by the Administrative Agent as provided in this Section. (ii) The Borrower agrees that, upon the request to the Administrative Agent by any Lender, the Borrower will execute and deliver to such Lender, as applicable, a Revolving Note, a Term-A Note and a Term-B Note and a Swing Line Note evidencing the Loans made by such Lender. The Borrower hereby irrevocably authorizes each Lender to make (or cause to be made) appropriate notations on the grid attached to such Lender's Notes (or on any continuation of such grid), which notations, if made, shall evidence, inter alia, the date of, the outstanding principal amount of, and the interest rate and Interest Period applicable to the Loans evidenced thereby. Such notations shall, to the extent not inconsistent with the notations made by the Administrative Agent in the Register, be conclusive and binding on the Borrower absent manifest error; provided, however, that the failure of any Lender to make any such notations shall not limit or otherwise affect any Obligations of the Borrower or any other Obligor. The Loans evidenced by any such Note and interest thereon shall at all times (including after assignment pursuant to Section 10.11.1) be represented by one or more Notes payable to the order of the payee named therein and its registered assigns. A Note and the obligation evidenced thereby may be assigned or otherwise transferred in whole or in part only by registration of such assignment or transfer of such Note and the obligation evidenced thereby in the Register (and each Note shall expressly so provide). Any assignment or transfer of all or part of an obligation evidenced by a Note shall be registered in the Register only upon surrender for registration of assignment or transfer of the Note evidencing such obligation, accompanied by a Lender Assignment Agreement duly executed by the assignor thereof, and thereupon, 48 56 if requested by the assignee, one or more new Notes shall be issued to the designated assignee and the old Note shall be returned by the Administrative Agent to the Borrower marked "exchanged". No assignment of a Note and the obligation evidenced thereby shall be effective unless it shall have been recorded in the Register by the Administrative Agent as provided in this Section. ARTICLE III REPAYMENTS, PREPAYMENTS, INTEREST AND FEES SECTION 3.1. Repayments and Prepayments; Application. SECTION 3.1.1. Repayments and Prepayments. The Borrower shall repay in full the unpaid principal amount of each Loan upon the Stated Maturity Date therefor. Prior thereto, the Borrower (a) may, from time to time on any Business Day, make a voluntary prepayment, in whole or in part, of the outstanding principal amount of any (i) Loans (other than Swing Line Loans); provided, however, that (A) any such prepayment of the Term-A Loans or Term-B Loans shall be made pro rata among Term-A Loans and Term-B Loans, as applicable, of the same type and, if applicable, having the same Interest Period of all Lenders that have made such Term-A Loans or Term-B Loans, and any such prepayment of Revolving Loans shall be made pro rata among the Revolving Loans of the same type and, if applicable, having the same Interest Period of all Lenders that have made such Revolving Loans; (B) the Borrower shall comply with Section 4.4 in the event that any LIBO Rate Loan is prepaid on any day other than the last day of the Interest Period for such Loan; (C) all such voluntary prepayments shall require at least one Business Day's notice in the case of Base Rate Loans, three Business Days' notice in the case of LIBO Rate Loans, but no more than five Business Days' notice in the case of any Loans, in each case in writing to the Administrative Agent; and (D) all such voluntary partial prepayments shall be in an aggregate amount of $500,000 or any larger integral multiple of $100,000 or in the 49 57 aggregate principal amount of all Loans of the applicable Tranche and type then outstanding; or (ii) Swing Line Loans, provided that (A) all such voluntary prepayments shall require prior telephonic notice to the Swing Line Lender on or before 1:00 p.m., New York City time, on the day of such prepayment (such notice to be confirmed in writing by the Borrower within 24 hours thereafter); and (B) all such voluntary partial prepayments shall be in an aggregate amount of $50,000 and an integral multiple of $10,000 or in the aggregate principal amount of all Swing Line Loans then outstanding; (b) shall, on each date when any reduction in the then applicable Borrowing Base Amount shall become effective, make a mandatory prepayment of Revolving Loans or all Swing Line Loans (or both) and (if necessary) deposit with the Administrative Agent cash collateral for Letter of Credit Outstandings, in an aggregate amount equal to the excess, if any, of the sum of (i) the aggregate outstanding principal amount of all Revolving Loans and Swing Line Loans and (ii) the aggregate amount of all Letter of Credit Outstandings over the then applicable Borrowing Base Amount; (c) shall, no later than five Business Days following the delivery by the Borrower of its annual audited financial reports required pursuant to clause (b) of Section 7.1.1 (beginning with the financial reports delivered in respect of the 1998 Fiscal Year), deliver to the Administrative Agent a calculation of the Excess Cash Flow for the Fiscal Year (or, in the case of the 1998 Fiscal Year, the period from August 31, 1997 through June 30, 1998) last ended and, no later than five Business Days following the delivery of such calculation, make a mandatory prepayment of the Term Loans in an amount equal to (i) 50% of the Excess Cash Flow (if any) for such Fiscal Year (or period) less (ii) the aggregate amount of all voluntary prepayments of the principal of the Term Loans actually made in such Fiscal Year pursuant to clause (a) of Section 3.1.1, to be applied as set forth in Section 3.1.2; provided, however, that no such prepayment shall be required to be made to the extent that the amount of Debt as reduced by giving effect to such prepayment would result in a Leverage Ratio of 3.50:1 or less as of the end of the immediately preceding Fiscal Quarter; (d) shall, not later than one Business Day following the receipt of any Net Disposition Proceeds or Net Debt Proceeds by the Borrower or any of its Restricted Subsidiaries, deliver to the Administrative Agent a calculation of the amount of such Net Disposition Proceeds or Net Debt Proceeds, as the case may be, and, to the extent the amount of such Net Disposition Proceeds or Net Debt Proceeds, as the case may be, with respect to any single transaction or series of related transactions, exceeds $2,500,000, make a mandatory prepayment of the Term Loans in an amount equal to 100% of such 50 58 Net Disposition Proceeds or Net Debt Proceeds, as the case may be, to be applied as set forth in Section 3.1.2; provided, that no mandatory prepayment on account of such Net Disposition Proceeds shall be required under this clause if the Borrower informs the Agents no later than 30 days following the receipt of any Net Disposition Proceeds of its or its Restricted Subsidiary's good faith intention to apply such Net Disposition Proceeds to the acquisition of other assets or property consistent with the DecisionOne Business (including by way of merger or investment) within 365 days following the receipt of such Net Disposition Proceeds, with the amount of such Net Disposition Proceeds unused after such 365 day period being applied to the Loans as set forth in Section 3.1.2; (e) shall, concurrently with the receipt of any Net Equity Proceeds by the Borrower or any of its Restricted Subsidiaries, deliver to the Administrative Agent a calculation of the amount of such Net Equity Proceeds, and no later than five Business Days following the delivery of such calculation, and, to the extent that the amount of such Net Equity Proceeds with respect to any single transaction or series of related transactions exceeds $2,500,000, make a mandatory prepayment of the Term Loans in an amount equal to 50% of such Net Equity Proceeds to be applied as set forth in Section 3.1.2; (f) shall, concurrently with the receipt by the Borrower or any of its Restricted Subsidiaries of any Casualty Proceeds in excess of $2,500,000 (individually or in the aggregate over the course of a Fiscal Year), deposit such Casualty Proceeds in an account maintained with the Administrative Agent and within 60 days following the receipt by the Borrower or any of its Restricted Subsidiaries of such Casualty Proceeds, direct the Administrative Agent to apply such Casualty Proceeds to prepay the Term Loans in an amount equal to 100% of such Casualty Proceeds, to be applied as set forth in Section 3.1.2; provided, that no mandatory prepayment on account of Casualty Proceeds shall be required under this clause if the Borrower informs the Agents no later than 60 days following the occurrence of the Casualty Event resulting in such Casualty Proceeds of its or its Restricted Subsidiary's good faith intention to apply such Casualty Proceeds to the rebuilding or replacement of the damaged, destroyed or condemned assets or property and in fact uses such Casualty Proceeds to rebuild or replace the damaged, destroyed or condemned assets or property within 365 days following the receipt of such Casualty Proceeds, with the amount of such Casualty Proceeds unused after such 365 day period being applied to the Loans pursuant to Section 3.1.2; (g) shall, on each date when any reduction in the Revolving Loan Commitment Amount shall become effective, including pursuant to Section 3.1.2, make a mandatory prepayment of Revolving Loans and Swing Line Loans and (if necessary) deposit with the Administrative Agent cash collateral for Letter of Credit Outstandings in an aggregate amount equal to the excess, if any, of the sum of (i) the aggregate outstanding principal amount of all Revolving Loans and Swing Line Loans and (ii) the aggregate amount of all Letter of Credit Outstandings over the Revolving Loan Commitment Amount as so reduced; 51 59 (h) shall, on the Stated Maturity Date and on each Quarterly Payment Date occurring during any period set forth below, make a scheduled repayment of the outstanding principal amount, if any, of Term-A Loans in an aggregate amount equal to the amount set forth below opposite such Stated Maturity Date or period, as applicable (as such amounts may have otherwise been reduced pursuant to this Agreement):
SCHEDULED PRINCIPAL PERIOD REPAYMENT -------------------------------------------- 7/1/98 to 9/30/99 $ 1,950,000 -------------------------------------------- 10/1/99 to 9/30/00 $ 4,875,000 -------------------------------------------- 10/1/00 to 9/30/01 $ 9,750,000 -------------------------------------------- 10/1/01 to 9/30/02 $12,187,500 -------------------------------------------- 10/1/02 to the Sixth $19,500,000 Anniversary of the Closing Date --------------------------------------------
(i) shall, on the Stated Maturity Date and on each Quarterly Payment Date occurring during any period set forth below, make a scheduled repayment of the outstanding principal amount, if any, of Term-B Loans in an aggregate amount equal to the amount set forth below opposite such Stated Maturity Date or period, as applicable (as such amounts may have otherwise been reduced pursuant to this Agreement):
SCHEDULED PRINCIPAL PERIOD REPAYMENT -------------------------------------------- 10/1/97 to 9/30/03 $ 687,500 -------------------------------------------- 10/1/03 to 9/30/04 $35,562,500 -------------------------------------------- 10/1/04 to the Eighth $29,062,500 Anniversary of the Closing Date --------------------------------------------
(j) shall, immediately upon any acceleration of the Stated Maturity Date of any Loans or Obligations pursuant to Section 8.2 or Section 8.3, repay all outstanding Loans and other Obligations, unless, pursuant to Section 8.3, only a portion of all Loans and other Obligations are so accelerated (in which case the portion so accelerated shall be so prepaid). 52 60 Each prepayment of any Loans made pursuant to this Section shall be without premium or penalty, except as may be required by Section 4.4. No prepayment of principal of any Revolving Loans or Swing Line Loans pursuant to clause (a), (b) or (j) of this Section 3.1.1 shall cause a reduction in the Revolving Loan Commitment Amount or the Swing Line Loan Commitment Amount, as the case may be. SECTION 3.1.2. Application. (a) Subject to clause (b) below, each prepayment or repayment of principal of the Loans of any Tranche shall be applied, to the extent of such prepayment or repayment, first, to the principal amount thereof being maintained as Base Rate Loans, and second, to the principal amount thereof being maintained as LIBO Rate Loans. (b) Each prepayment of Term Loans made pursuant to clauses (a), (c), (d), (e), and (f) of Section 3.1.1 shall be applied, (i) on a pro rata basis, to the outstanding principal amount of all remaining Term-A Loans and Term-B Loans and (ii) in respect of each Tranche of Term Loans, in direct order of maturity of the remaining scheduled quarterly amortization payments in respect thereof, until all such Term-A Loans and Term-B Loans have been paid in full; provided, however, that if the Borrower at any time elects in writing, in its sole discretion, to permit any Lender that has Term-B Loans to decline to have such Loans prepaid, then any Lender having Term-B Loans outstanding may, by delivering a notice to the Agents at least one Business Day prior to the date that such prepayment is to be made, decline to have such Loans prepaid with the amounts set forth above, in which case 50% of the amounts that would have been applied to a prepayment of such Lender's Term-B Loans shall instead be applied to a prepayment of the Term-A Loans (until paid in full), with the balance being retained by the Borrower. SECTION 3.2. Interest Provisions. Interest on the outstanding principal amount of the Loans shall accrue and be payable in accordance with this Section 3.2. SECTION 3.2.1. Rates. (a) Each Base Rate Loan shall accrue interest on the unpaid principal amount thereof for each day from and including the day upon which such Loan was made or converted to a Base Rate Loan to but excluding the date such Loan is repaid or converted to a LIBO Rate Loan at a rate per annum equal to the sum of the Alternate Base Rate for such day plus the Applicable Margin for such Loan on such day. (b) Each LIBO Rate Loan shall accrue interest on the unpaid principal amount thereof for each day during each Interest Period applicable thereto at a rate per annum equal to the sum of the LIBO Rate (Reserve Adjusted) for such Interest Period plus the Applicable Margin for such Loan on such day. All LIBO Rate Loans shall bear interest from and including the first day of the applicable Interest Period to (but not including) the last day of such Interest Period at the interest rate determined as applicable to such LIBO Rate Loan. 53 61 SECTION 3.2.2. Post-Maturity Rates. After the date any principal amount of any Loan shall have become due and payable (whether on the applicable Stated Maturity Date, upon acceleration or otherwise), or any other monetary Obligation (other than overdue Reimbursement Obligations which shall bear interest as provided in Section 2.6.2) of the Borrower shall have become due and payable, the Borrower shall pay, but only to the extent permitted by law, interest (after as well as before judgment) on such amounts at a rate per annum equal to (a) in the case of any overdue principal of Loans, overdue interest thereon, overdue commitment fees or other overdue amounts in respect of Loans or other obligations (or the related Commitments) under a particular Tranche, the rate that would otherwise be applicable to Base Rate Loans under such Tranche pursuant to Section 3.2.1 plus 2% and (b) in the case of other overdue monetary Obligations, the rate that would otherwise be applicable to Revolving Loans that were Base Rate Loans plus 2%. SECTION 3.2.3. Payment Dates. Interest accrued on each Loan shall be payable, without duplication: (a) on the Stated Maturity Date therefor; (b) in the case of a LIBO Rate Loan, on the date of any payment or prepayment, in whole or in part, of principal outstanding on such Loan, to the extent of the unpaid interest accrued through such date on the principal so paid or prepaid; (c) with respect to Base Rate Loans, on each Quarterly Payment Date occurring after the date of the initial Borrowing hereunder; (d) with respect to LIBO Rate Loans, on the last day of each applicable Interest Period (and, if such Interest Period shall exceed three months, at intervals of three months after the first day of such Interest Period); (e) with respect to the principal amount of any Base Rate Loans converted into LIBO Rate Loans on a day when interest would not otherwise have been payable pursuant to clause (c), on the date of such conversion; and (f) on that portion of any Loans the Stated Maturity Date of which is accelerated pursuant to Section 8.2 or Section 8.3, immediately upon such acceleration. Interest accrued on Loans, Reimbursement Obligations or other monetary Obligations arising under this Agreement or any other Loan Document after the date such amount is due and payable (whether on the Stated Maturity Date, upon acceleration or otherwise) shall be payable upon demand. SECTION 3.3. Fees. The Borrower agrees to pay the fees set forth in this Section 3.3. All such fees shall be non-refundable. 54 62 SECTION 3.3.1. Commitment Fee. The Borrower agrees to pay to the Administrative Agent for the account of each Lender that has a Revolving Loan Commitment, for each day during the period (including any portion thereof when any of the Lenders' Revolving Loan Commitments are suspended by reason of the Borrower's inability to satisfy any condition of Article V) commencing on the Closing Date and continuing to but excluding the Revolving Loan Commitment Termination Date, a commitment fee on such Lender's Percentage of the unused portion, whether or not then available, of the Revolving Loan Commitment Amount (net of Letter of Credit Outstandings) for such day at a rate per annum equal to the Applicable Commitment Fee for such day. Such commitment fee shall be payable by the Borrower in arrears on each Quarterly Payment Date, commencing with the first such day following the Closing Date, and on the Revolving Loan Commitment Termination Date. The making of Swing Line Loans shall not constitute usage of the Revolving Loan Commitment with respect to the calculation of commitment fees to be paid by the Borrower to the Lenders. Any term or provision hereof to the contrary notwithstanding, commitment fees payable for any period prior to the Closing Date shall be payable in accordance with the Fee Letter. Payments by the Borrower to the Swing Line Lender in respect of accrued interest on Swing Line Loans shall be net of the commitment fee payable in respect of the Swing Line Lender's Revolving Loan Commitment. SECTION 3.3.2. Administrative Agent Fee. The Borrower agrees to pay an annual administration fee to the Administrative Agent, for its own account, in the amount set forth in the Administrative Agent's Fee Letter, payable in advance on the Closing Date and quarterly thereafter. SECTION 3.3.3. Letter of Credit Fee. The Borrower agrees to pay to the Administrative Agent, for the pro rata account of the Issuer and each other Lender that has a Revolving Loan Commitment, a Letter of Credit fee for each day on which there shall be any Letters of Credit outstanding in an amount equal to (i) with respect to each standby Letter of Credit, a rate per annum equal to the then Applicable Margin for Revolving Loans maintained as LIBO Rate Loans, minus 1/8 of 1% per annum, multiplied by the Stated Amount of each such Letter of Credit; and (ii) with respect to each documentary Letter of Credit, 1.25% per annum multiplied by the Stated Amount of each such Letter of Credit, such fees being payable quarterly in arrears on each Quarterly Payment Date. The Borrower further agrees to pay to the Issuer quarterly in arrears on each Quarterly Payment Date, an issuance fee as specified in the Administrative Agent's Fee Letter. ARTICLE IV CERTAIN LIBO RATE AND OTHER PROVISIONS SECTION 4.1. LIBO Rate Lending Unlawful. If any Lender shall determine (which determination shall, upon notice thereof to the Borrower and the Lenders, be conclusive and binding on the Borrower) that the introduction of or any change in or in the interpretation of any 55 63 law, in each case after the date upon which such Lender shall have become a Lender hereunder, makes it unlawful, or any central bank or other governmental authority asserts, after such date, that it is unlawful, for such Lender to make, continue or maintain any Loan as, or to convert any Loan into, a LIBO Rate Loan, the obligations of such Lender to make, continue, maintain or convert any Loans as or to LIBO Rate Loans shall, upon such determination, forthwith be suspended until such Lender shall notify the Administrative Agent that the circumstances causing such suspension no longer exist (with the date of such notice being the "Reinstatement Date"), and (i) all LIBO Rate Loans previously made by such Lender shall automatically convert into Base Rate Loans at the end of the then current Interest Periods with respect thereto or sooner, if required by such law or assertion and (ii) all Loans thereafter made by such Lender and outstanding prior to the Reinstatement Date shall be made as Base Rate Loans, with interest thereon being payable on the same date that interest is payable with respect to the corresponding Borrowing of LIBO Rate Loans made by Lenders not so affected. SECTION 4.2. Deposits Unavailable. If the Administrative Agent shall have determined that (i) Dollar deposits in the relevant amount and for the relevant Interest Period are not available to the Administrative Agent in its relevant market, or (ii) by reason of circumstances affecting the Administrative Agent's relevant market, adequate means do not exist for ascertaining the interest rate applicable hereunder to LIBO Rate Loans, then, upon notice from the Administrative Agent to the Borrower and the Lenders, the obligations of all Lenders under Section 2.3 and Section 2.4 to make or continue any Loans as, or to convert any Loans into, LIBO Rate Loans shall forthwith be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. SECTION 4.3. Increased LIBO Rate Loan Costs, etc. The Borrower agrees to reimburse each Lender for any increase in the cost to such Lender of, or any reduction in the amount of any sum receivable by such Lender in respect of, making, continuing or maintaining (or of its obligation to make, continue or maintain) any Loans as, or of converting (or of its obligation to convert) any Loans into, LIBO Rate Loans (excluding any amounts, whether or not constituting Taxes, referred to in Section 4.6) arising as a result of any change in, or the introduction, adoption, effectiveness, interpretation, reinterpretation or phase-in of, any law or regulation, directive, guideline, decision or request (whether or not having the force of law) of any court, central bank, regulator or other governmental authority that occurs after the date upon which such Lender became a Lender hereunder. Such Lender shall promptly notify the Administrative Agent and the Borrower in writing of the occurrence of any such event, such notice to state, in reasonable detail, the reasons therefor and the additional amount required fully to compensate such Lender for such increased cost or reduced amount. Such additional amounts shall be payable by the Borrower directly to such Lender within five days of its receipt of such notice, and such notice shall, in the absence of manifest error, be conclusive and binding on the Borrower. SECTION 4.4. Funding Losses. In the event any Lender shall incur any loss or expense (including any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to make, continue or maintain any portion of the 56 64 principal amount of any Loan as, or to convert any portion of the principal amount of any Loan into, a LIBO Rate Loan, but excluding any loss of margin after the date of any such conversion, repayment, prepayment or failure to borrow, continue or convert) as a result of (i) any conversion or repayment or prepayment of the principal amount of any LIBO Rate Loans on a date other than the scheduled last day of the Interest Period applicable thereto, whether pursuant to Section 3.1 or otherwise, (ii) any Loans not being borrowed as LIBO Rate Loans in accordance with the Borrowing Request therefor, or (iii) any Loans not being continued as, or converted into, LIBO Rate Loans in accordance with the Continuation/ Conversion Notice therefor, then, upon the written notice of such Lender to the Borrower (with a copy to the Administrative Agent), the Borrower shall, within five days of its receipt thereof, pay directly to such Lender such amount as will (in the reasonable determination of such Lender) reimburse such Lender for such loss or expense. Such written notice (which shall include calculations in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on the Borrower. SECTION 4.5. Increased Capital Costs. If any change in, or the introduction, adoption, effectiveness, interpretation, reinterpretation or phase-in of, any law or regulation, directive, guideline, decision or request (whether or not having the force of law) of any court, central bank, regulator or other governmental authority, in each case occurring after the applicable Lender becomes a Lender hereunder, affects or would affect the amount of capital required or expected to be maintained by any Lender or any Person controlling such Lender, and such Lender determines (in its sole and absolute discretion) that the rate of return on its or such controlling Person's capital as a consequence of its Commitments, participation in Letters of Credit or the Loans made by such Lender is reduced to a level below that which such Lender or such controlling Person could have achieved but for the occurrence of any such circumstance, then, in any such case upon notice from time to time by such Lender to the Borrower, the Borrower shall immediately pay directly to such Lender additional amounts sufficient to compensate such Lender or such controlling Person for such reduction in rate of return. A statement of such Lender as to any such additional amount or amounts (including calculations thereof in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on the Borrower. In determining such amount, such Lender may use any method of averaging and attribution that it (in its sole and absolute discretion) shall deem applicable; provided, that such Lender may not impose materially greater costs on the Borrower than on other similarly situated borrowers by virtue of any such averaging or attribution method. SECTION 4.6. Taxes. (a) All payments by the Borrower of principal of, and interest on, the Loans and all other amounts payable hereunder (including Reimbursement Obligations, fees and expenses) shall be made free and clear of and without deduction for any present or future income, excise, stamp or franchise taxes and other taxes, fees, duties, withholdings or other charges of any nature whatsoever imposed by any taxing authority, but excluding (i) any income, excise, stamp or franchise taxes and other similar taxes, fees, duties, withholdings or other charges imposed on either of the Agents as a result of a present or former connection between the applicable lending office (or office through which it performs any of its actions as Agent) of such Agent, and any income, excise, stamp or franchise taxes and other similar taxes, fees, 57 65 duties, withholdings or other charges imposed on any Lender as a result of a present or former connection between the applicable lending office of such Lender, in each case, and the jurisdiction of the governmental authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from such Agent or such Lender having executed, delivered or performed its obligations or received a payment under, or taken any action to enforce, this Agreement and any Note) or (ii) any income, excise, stamp or franchise taxes and other similar taxes, fees, duties, withholdings or other charges to the extent that they are in effect and would apply as of the date any Person becomes a Lender or Assignee Lender, or as of the date that any Lender changes its applicable lending office, to the extent such taxes become applicable as a result of such change (other than a change in an applicable lending office made pursuant to Section 4.10 below) (such non-excluded items being called "Taxes"). In the event that any withholding or deduction from any payment to be made by the Borrower hereunder is required in respect of any Taxes pursuant to any applicable law, rule or regulation, then the Borrower will (i) pay directly to the relevant taxing authority the full amount required to be so withheld or deducted, (ii) promptly forward to the Administrative Agent an official receipt or other documentation available to the Borrower reasonably satisfactory to the Administrative Agent evidencing such payment to such authority, and (iii) pay to the Administrative Agent for the account of the Lenders such additional amount or amounts as is necessary to ensure that the net amount actually received by each Lender will equal the full amount such Lender would have received had no such withholding or deduction been required, provided, however, that the Borrower shall not be required to pay any such additional amounts in respect of amounts payable to any Lender that is not organized under the laws of the United States or a state thereof if such Lender fails to comply with the requirements of clause (b) of Section 4.6. Moreover, if any Taxes are directly asserted against either of the Agents or any Lender with respect to any payment received by such Agents or such Lender hereunder, such Agents or such Lender may pay such Taxes and the Borrower will promptly pay to such Person such additional amount (including any penalties, interest or expenses) as is necessary in order that the net amount received by such Person (including any Taxes on such additional amount) shall equal the amount of such Taxes paid by such Person; provided, however, that the Borrower shall not be obligated to make payment to the Lenders or the Agents (as the case may be) pursuant to this sentence in respect of penalties or interest attributable to any Taxes, if written demand therefor has not been made by such Lenders or the Agents within 60 days from the date on which such Lenders or the Agents knew of the imposition of Taxes by the relevant taxing authority or for any additional imposition which may arise from the failure of the Lenders or the Agents to apply payments in accordance with the tax law after the Borrower has made the payments required hereunder; provided, further, that the Borrower shall not be required to pay any such additional amounts in respect of any amounts payable to any Lender or the Agent (as the case may be) that is not organized under the laws of the United States or a state thereof to the extent the related Tax is imposed as a result of such Lender failing to comply with the requirements of clause (b) of Section 4.6. After the Lenders or the Agents (as the case may be) learn of the imposition of Taxes, such Lenders and the Agents will act in good faith to notify the Borrower of its obligations hereunder as soon as reasonably possible. 58 66 If the Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent, for the account of the respective Lenders, the required receipts or other required documentary evidence, the Borrower shall indemnify the Lenders for any incremental Taxes, interest or penalties that may become payable by any Lender as a result of any such failure. (b) Each Non-U.S. Lender shall, (i) on or prior to the date of the execution and delivery of this Agreement, in the case of each Lender listed on the signature pages hereof, or, in the case of an Assignee Lender, on or prior to the date it becomes a Lender, execute and deliver to the Borrower and the Administrative Agent, two or more (as the Borrower or the Agents may reasonably request) United States Internal Revenue Service Forms 4224 or Forms 1001 or, solely if such Lender is claiming exemption from United States withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of "portfolio interest", United States Internal Revenue Service Forms W-8 and a certificate signed by a duly authorized officer of such Lender representing that such Lender is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code, or such other forms or documents (or successor forms or documents), appropriately completed, establishing that payments to such Lender are exempt from withholding or deduction of Taxes; and (ii) deliver to the Borrower and the Administrative Agent two further copies of any such form or documents on or before the date that any such form or document expires or becomes obsolete and after the occurrence of any event requiring a change in the most recent such form or document previously delivered by it to the Borrower. (c) If the Borrower determines in good faith that a reasonable basis exists for contesting the imposition of a Tax with respect to a Lender or either of the Agents, the relevant Lender or Agent, as the case may be, shall cooperate with the Borrower in challenging such Tax at the Borrower's expense if requested by the Borrower; provided, however, that nothing in this Section 4.6 shall require any Lender to submit to the Borrower or any other Person any tax returns or any part thereof, or to prepare or file any tax returns other than as such Lender in its sole discretion shall determine. (d) If a Lender or an Agent shall receive a refund (including any offset or credits from a taxing authority (as a result of any error in the imposition of Taxes by such taxing authority)) of any Taxes paid by the Borrower pursuant to subsection 4.6(a) above, such Lender or the Agent (as the case may be) shall promptly pay the Borrower the amount so received, with interest from the taxing authority with respect to such refund. (e) Each Lender and each Agent agrees, to the extent reasonable and without material cost to it, to cooperate with the Borrower to minimize any amounts payable by the Borrower under this Section 4.6. SECTION 4.7. Payments, Computations, etc. Unless otherwise expressly provided, all payments by or on behalf of the Borrower pursuant to this Agreement, the Notes or any other Loan Document shall be made by the Borrower to the Administrative Agent for the pro rata account of the Lenders, Agents or Arranger, as applicable, entitled to receive such payment. All 59 67 such payments required to be made to the Administrative Agent shall be made, without setoff, deduction or counterclaim, not later than 1:00 p.m., New York time, on the date due, in same day or immediately available funds, to such account as the Administrative Agent shall specify from time to time by notice to the Borrower. Funds received after that time shall be deemed to have been received by the Administrative Agent on the next succeeding Business Day. The Administrative Agent shall promptly remit in same day funds to each Lender, Agent or Arranger, as the case may be, its share, if any, of such payments received by the Administrative Agent for the account of such Lender, Agent or Arranger, as the case may be. All interest and fees shall be computed on the basis of the actual number of days (including the first day but excluding the last day) occurring during the period for which such interest or fee is payable over a year comprised of 360 days (or, in the case of interest on a Base Rate Loan, 365 days or, if appropriate, 366 days). Whenever any payment to be made shall otherwise be due on a day which is not a Business Day, such payment shall (except as otherwise required by clause (i) of the definition of the term "Interest Period") be made on the next succeeding Business Day and such extension of time shall be included in computing interest and fees, if any, in connection with such payment. SECTION 4.8. Sharing of Payments. If any Lender shall obtain any payment or other recovery (whether voluntary, involuntary, by application of setoff or otherwise) on account of any Loan or Reimbursement Obligations (other than pursuant to the terms of Sections 4.3, 4.4 and 4.5) in excess of its pro rata share of payments then or therewith obtained by all Lenders entitled thereto, such Lender shall purchase from the other Lenders such participation in the Credit Extensions made by them as shall be necessary to cause such purchasing Lender to share the excess payment or other recovery ratably with each of them; provided, however, that if all or any portion of the excess payment or other recovery is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and each Lender which has sold a participation to the purchasing Lender shall repay to the purchasing Lender the purchase price to the ratable extent of such recovery together with an amount equal to such selling Lender's ratable share (according to the proportion of (i) the amount of such selling Lender's required repayment to the purchasing Lender in respect of such recovery, to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section may, to the fullest extent permitted by law, exercise all its rights of payment (including pursuant to Section 4.9) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. If under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a setoff to which this Section applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this Section to share in the benefits of any recovery on such secured claim. SECTION 4.9. Setoff. Each Lender shall, upon the occurrence of any Event of Default described in clauses (b) through (d) of Section 8.1.9 with respect to any Obligor (other than immaterial Subsidiaries) or, with the consent of the Required Lenders, upon the occurrence of any other Event of Default, to the fullest extent permitted by law, have the right to appropriate 60 68 and apply to the payment of the Obligations then due to it, and (as security for such Obligations) the Borrower hereby grants to each Lender a continuing security interest in, any and all balances, credits, deposits, accounts or moneys of the Borrower then or thereafter maintained with or otherwise held by such Lender; provided, however, that any such appropriation and application shall be subject to the provisions of Section 4.8. Each Lender agrees promptly to notify the Borrower and the Administrative Agent after any such setoff and application made by such Lender; provided, however, that the failure to give such notice shall not affect the validity of such setoff and application. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff under applicable law or otherwise) which such Lender may have. SECTION 4.10. Mitigation. Each Lender agrees that if it makes any demand for payment under Sections 4.3, 4.4, 4.5, or 4.6, or if any adoption or change of the type described in Section 4.1 shall occur with respect to it, it will use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions and so long as such efforts would not be disadvantageous to it, as determined in its sole discretion) to designate a different lending office if the making of such a designation would reduce or obviate the need for the Borrower to make payments under Section 4.3, 4.4, 4.5, or 4.6, or would eliminate or reduce the effect of any adoption or change described in Section 4.1. SECTION 4.11. Replacement of Lenders. Each Lender hereby severally agrees as set forth in this Section. If any Lender (a "Subject Lender") makes demand upon the Borrower for (or if the Borrower is otherwise required to pay) amounts pursuant to Section 4.3, 4.5 or 4.6, or gives notice pursuant to Section 4.1 requiring a conversion of such Subject Lender's LIBO Rate Loans to Base Rate Loans or suspending such Lender's obligation to make Loans as, or to convert Loans into, LIBO Rate Loans, the Borrower may, within 90 days of receipt by the Borrower of such demand or notice (or the occurrence of such other event causing the Borrower to be required to pay such compensation), as the case may be, give notice (a "Replacement Notice") in writing to the Agents and such Subject Lender of its intention to replace such Subject Lender with a financial institution (a "Replacement Lender") designated in such Replacement Notice. If the Agents shall, in the exercise of their reasonable discretion and within 30 days of their receipt of such Replacement Notice, notify the Borrower and such Subject Lender in writing that the designated financial institution is satisfactory to the Agents (such consent not being required where the Replacement Lender is already a Lender), then such Subject Lender shall, subject to the payment of any amounts due pursuant to Section 4.4, assign, in accordance with Section 10.11.1, all of its Commitments, Loans, Notes and other rights and obligations under this Agreement and all other Loan Documents (including, without limitation, Reimbursement Obligations) to such designated financial institution; provided, however, that (i) such assignment shall be without recourse, representation or warranty and shall be on terms and conditions reasonably satisfactory to such Subject Lender and such designated financial institution and (ii) the purchase price paid by such designated financial institution shall be in the amount of such Subject Lender's Loans and its Percentage of outstanding Reimbursement Obligations, together with all accrued and unpaid interest and fees in respect thereof, plus all other amounts (including the amounts demanded and unreimbursed under Sections 4.3, 4.5 and 61 69 4.6), owing to such Subject Lender hereunder. Upon the effective date of an assignment described above, the Borrower shall issue a replacement Note or Notes, as the case may be, to such designated financial institution or Replacement Lender, as applicable, and such institution shall become a "Lender" for all purposes under this Agreement and the other Loan Documents. ARTICLE V CONDITIONS TO CREDIT EXTENSIONS SECTION 5.1. Initial Credit Extension. The obligations of the Lenders and, if applicable, the Issuer to fund the initial Credit Extension shall be subject to the prior or concurrent satisfaction of each of the conditions precedent set forth in this Section 5.1. SECTION 5.1.1. Resolutions, etc. The Agents shall have received from each Obligor a certificate, dated the date of the initial Credit Extension, of its Secretary or Assistant Secretary as to (i) resolutions of its Board of Directors then in full force and effect authorizing the execution, delivery and performance of each Loan Document to be executed by it, and (ii) the incumbency and signatures of those of its officers authorized to act with respect to each Loan Document executed by it, upon which certificate each Agent and each Lender may conclusively rely until it shall have received a further certificate of the Secretary or Assistant Secretary of such Obligor canceling or amending such prior certificate. SECTION 5.1.2. Transaction Documents. The Agents shall have received (with copies for each Lender that shall have expressly requested copies thereof) copies of fully executed versions of the Transaction Documents, certified to be true and complete copies thereof by an Authorized Officer of the Borrower. The Merger Agreement shall be in full force and effect and shall not have been modified or waived in any material respect, nor shall there have been any forbearance to exercise any material rights with respect to any of the terms or provisions relating to the conditions to the consummation of the Merger set forth in the Merger Agreement unless otherwise agreed to by the Required Lenders. SECTION 5.1.3. Consummation of Merger. The Agents shall have received evidence satisfactory to each of them that all actions necessary to consummate the Merger (including the filing of the Certificate of Merger with the Secretary of State of the State of Delaware) shall have been taken in accordance with Section 251 of the Delaware General Corporation Law. SECTION 5.1.4. Closing Date Certificate. Each of the Agents shall have received, with counterparts for each Lender, the Closing Date Certificate, substantially in the form of Exhibit D hereto, dated the date of the initial Credit Extension and duly executed and delivered by the chief executive, financial or accounting (or equivalent) Authorized Officer of the Borrower, in which certificate the Borrower shall agree and acknowledge that the statements made therein shall be deemed to be true and correct representations and warranties of the Borrower made as of such 62 70 date under this Agreement, and, at the time such certificate is delivered, such statements shall in fact be true and correct. SECTION 5.1.5. Delivery of Notes. The Agents shall have received, for the account of each Lender that shall have requested a Note not less than two Business Days prior to the Closing Date, a Note of each applicable Tranche duly executed and delivered by the Borrower. SECTION 5.1.6. [Intentionally Omitted]. SECTION 5.1.7. Pledge Agreements. The Agents shall have received executed counterparts of (a) the Holdings Guaranty and Pledge Agreement, dated as of the date hereof, duly executed by an Authorized Officer of Holdings, together with the certificates evidencing all of the issued and outstanding shares of Capital Stock of the Borrower which shall be pledged pursuant to the Holdings Guaranty and Pledge Agreement, which certificates shall in each case be accompanied by undated stock powers duly executed in blank; and (b) the Borrower Pledge Agreement, dated as of the date hereof, duly executed by the Borrower together with (i) the certificates evidencing all of the issued and outstanding shares of Capital Stock of each Material Subsidiary, if any, of the Borrower which shall be pledged pursuant to the Borrower Pledge Agreement, which certificates shall in each case be accompanied by undated stock powers duly executed in blank and (ii) the Intercompany Note duly indorsed to the order of the Administrative Agent; provided, however, that neither the Borrower nor any of its Subsidiaries shall be required to pledge in excess of 65% of the outstanding voting stock of any Non-U.S. Subsidiary. If any securities pledged pursuant to a Pledge Agreement are uncertificated securities or are held through a financial intermediary, the Administrative Agent shall have received confirmation and evidence satisfactory to it that appropriate book entries have been made in the relevant books or records of a financial intermediary or the issuer of such securities, as the case may be, or other appropriate steps have been taken under applicable law resulting in the perfection of the security interest granted in favor of the Administrative Agent in such securities pursuant to the terms of the applicable Pledge Agreement. SECTION 5.1.8. Security Agreement. The Agents shall have received executed counterparts of the Borrower Security Agreement, dated as of the date hereof, duly executed by the Borrower, together with (a) executed Uniform Commercial Code financing statements (Form UCC-1) naming the Borrower as the debtor and the Administrative Agent as the secured party, or other similar instruments or documents, to be filed under the Uniform Commercial Code of all jurisdictions as may be necessary or, in the opinion of the Administrative Agent, 63 71 desirable to perfect the security interest of the Administrative Agent pursuant to the Security Agreements (provided that perfection of security interests in (i) motor vehicles shall not be required and (ii) certain intellectual property collateral owned as of the Closing Date by the Borrower shall be completed in accordance with Section 7.1.11); and (b) certified copies of Uniform Commercial Code Requests for Information or Copies (Form UCC-11), or a similar search report certified by a party acceptable to the Agents, dated a date reasonably near to the date of the initial Credit Extension, listing all effective financing statements which name the Borrower (under its present name and any previous names) as the debtor and which are filed in the jurisdictions in which filings were made pursuant to clause (a) above, together with copies of such financing statements. SECTION 5.1.9. Financial Information, etc. The Agents shall have received, with counterparts for each Lender, (a) the (i) audited consolidated balance sheets of DOH and its Subsidiaries as at June 30, 1995 and June 30, 1996 and the audited consolidated statements of operations, cash flows and stockholders' equity for the fiscal years ended June 30, 1994, June 30, 1995 and June 30, 1996 and (ii) unaudited consolidated balance sheet of DOH and its Subsidiaries as at March 31, 1997 and unaudited consolidated statements of operations, cash flows and stockholders' equity for the nine months then ended (collectively, the "Base Financial Statements") ; (b) a pro forma consolidated balance sheet of the Borrower and its Subsidiaries, as of March 31, 1997 (the "Pro Forma Balance Sheet"), certified by the chief financial or accounting Authorized Officer of the Borrower, giving effect to the consummation of the Transaction and the contribution by Holdings of certain of its Subsidiaries to the Borrower on May 29, 1997 and reflecting the proposed legal and capital structure of the Borrower, which legal and capital structure shall be satisfactory in all respects to the Arranger and the Syndication Agent; and (c) a Borrowing Base Certificate, dated the date of the initial Credit Extension and calculated as of June 30, 1997, duly executed (with all schedules thereto completed) and delivered by an Authorized Officer of the Borrower. SECTION 5.1.10. Solvency, etc. The Agents shall have received a solvency certificate from the chief financial Authorized Officer of the Borrower, dated the date of the initial Borrowing, in form and substance satisfactory to the Agents. SECTION 5.1.11. Equity Issuance, Discount Debenture Issuance, Subordinated Debt Issuance, Closing Date Dividend and Intercompany Loan. The Agents shall have received evidence satisfactory to each of them that (i) the Equity Issuance shall have been effected as described in clause (a) of the fourth recital, (ii) MergerSub received not less than $85,000,000 in 64 72 gross cash proceeds from the Discount Debenture Issuance, (iii) the Borrower received not less than $150,000,000 in gross cash proceeds from the Subordinated Debt Issuance, (iv) the Borrower made Closing Date Dividend and/or the Intercompany Loan to Holdings and (v) Holdings shall have applied the proceeds of the Equity Issuance, the Discount Debenture Issuance and the Closing Date Dividend and/or the Intercompany Loan to pay the cash portion of the consideration payable to existing shareholders of DOH in connection with the Merger and related fees and expenses or, in each case, that arrangements satisfactory to the Agents for the making and receipt of such payments shall have been made. SECTION 5.1.12. Litigation. There shall exist no pending or threatened material litigation, proceedings or investigations which (x) contests the consummation of the Transaction or (y) could reasonably be expected to have a material adverse effect on the financial condition, operations, assets, businesses, properties or prospects of Holdings, the Borrower, or any of their respective Subsidiaries, taken as a whole. SECTION 5.1.13. Material Adverse Change. There shall have occurred no material adverse change in the financial condition, operations, assets, business, properties or prospects of Holdings and its Subsidiaries, taken as a whole, since June 30, 1996. SECTION 5.1.14. Reliance Letters. The Agents shall, unless otherwise agreed, have received reliance letters, dated the date of the making of the initial Credit Extension and addressed to each Lender and each Agent, in respect of each of the legal opinions (other than "disclosure" and other similar opinions) delivered in connection with the Transaction. SECTION 5.1.15. Opinions of Counsel. The Agents shall have received opinions, dated the date of the initial Credit Extension and addressed to the Agents and all Lenders from (a) Davis Polk & Wardwell, special New York counsel to each of the Obligors, in substantially the form of Exhibit K-1 hereto; (b) Morgan, Lewis & Bokius LLP, special Pennsylvania counsel, in substantially the form of Exhibit K-2 hereto; and (c) Vincent Dadamo, Esq., Associate General Counsel of the Borrower, in substantially the form of Exhibit K-3 hereto. SECTION 5.1.16. Insurance. The Agents shall have received satisfactory evidence of the existence of insurance in compliance with Section 7.1.4 (including all endorsements included therein), and the Administrative Agent shall be named additional insured or loss payee, on behalf of the Lenders, pursuant to documentation reasonably satisfactory to the Agents and the Borrower. 65 73 SECTION 5.1.17. Perfection Certificate. The Administrative Agent shall have received the Perfection Certificate, dated as of the date of the initial Credit Extension, duly executed and delivered by an Authorized Officer of the Borrower. SECTION 5.1.18. Closing Fees, Expenses, etc. The Agents and the Arranger shall have received, each for its own respective account, or, in the case of the Administrative Agent, for the account of each Lender, as the case may be, all fees, costs and expenses due and payable pursuant to Sections 3.3 and 10.3, if then invoiced. SECTION 5.1.19. Satisfactory Legal Form. All documents executed or submitted pursuant hereto by or on behalf of the Borrower or any of its Subsidiaries or any other Obligors shall be reasonably satisfactory in form and substance to the Agents and their counsel; the Agents and their counsel shall have received all information, approvals, opinions, documents or instruments as the Agents or their counsel may reasonably request. SECTION 5.2. All Credit Extensions. The obligation of each Lender and, if applicable, the Issuer, to make any Credit Extension (including its initial Credit Extension) shall be subject to the satisfaction of each of the conditions precedent set forth in this Section 5.2. SECTION 5.2.1. Compliance with Warranties, No Default, etc. Both before and after giving effect to any Credit Extension the following statements shall be true and correct: (a) the representations and warranties set forth in Article VI and in each other Loan Document shall, in each case, be true and correct in all material respects with the same effect as if then made (unless stated to relate solely to an earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date); (b) the sum of (i) the aggregate outstanding principal amount of all Revolving Loans and Swing Line Loans, plus (ii) the aggregate amount of all Letter of Credit Outstandings, does not exceed the lesser of (x) the then existing Revolving Loan Commitment Amount and (y) the then applicable Borrowing Base Amount; and (c) no Default shall have then occurred and be continuing. SECTION 5.2.2. Credit Extension Request. Except with respect to the deemed issuance of the Existing Letters of Credit on the Closing Date, the Agents shall have received a Borrowing Request if Loans are being requested, or an Issuance Request if a Letter of Credit is being requested or extended. Each of the delivery of a Borrowing Request or Issuance Request and the acceptance by the Borrower of proceeds of any Credit Extension shall constitute a representation and warranty by the Borrower that on the date of such Credit Extension (both immediately before and after giving effect thereto and the application of the proceeds thereof) the statements made in Section 5.2.1 are true and correct. 66 74 ARTICLE VI REPRESENTATIONS AND WARRANTIES In order to induce the Lenders, the Issuer and the Agents to enter into this Agreement and to make Credit Extensions hereunder, the Borrower represents and warrants unto the Agents, the Issuer and each Lender as set forth in this Article VI. SECTION 6.1. Organization, etc. The Borrower and each of its Restricted Subsidiaries (a) is a corporation validly organized and existing and in good standing to the extent required under the laws of the jurisdiction of its incorporation, is duly qualified to do business and is in good standing as a foreign corporation to the extent required under the laws of each jurisdiction where the nature of its business requires such qualification, except to the extent that the failure to qualify would not reasonably be expected to result in a Material Adverse Effect, and (b) has full power and authority and holds all requisite governmental licenses, permits and other approvals to (i) enter into and perform its Obligations in connection with the Transaction and under this Agreement, the Notes and each other Loan Document to which it is a party and (ii) own and hold under lease its property and to conduct its business substantially as currently conducted by it except, in the case of this clause (b)(ii), where the failure to do so could not reasonably be expected to result in a Material Adverse Effect. SECTION 6.2. Due Authorization, Non-Contravention, etc. The execution, delivery and performance by the Borrower of this Agreement, the Notes and each other Loan Document executed or to be executed by it, and the execution, delivery and performance by each other Obligor of each Loan Document executed or to be executed by it and the Borrower's and, where applicable, each such other Obligor's participation in the consummation of the Transaction, are within the Borrower's and each such Obligor's corporate powers, have been duly authorized by all necessary corporate action, and do not (i) contravene the Borrower's or any such Obligor's Charter Documents, (ii) contravene any contractual restriction, law or governmental regulation or court decree or order binding on or affecting the Borrower or any such Obligor, where such contravention, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, or (iii) result in, or require the creation or imposition of, any Lien on any of the Borrower's or any other Obligor's properties, except pursuant to the terms of a Loan Document. SECTION 6.3. Government Approval, Regulation, etc. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or other Person, is required for the due execution, delivery or performance by the Borrower or any other Obligor of this Agreement, the Notes or any other Loan Document to which it is a party, or for the Borrower's and each such other Obligor's participation in the consummation of the Transaction, except as have been duly obtained or made and are in full force and effect or those which the failure to obtain or make could not reasonably be expected to have a Material Adverse Effect. None of the Borrower or any other Obligor, or any of the Borrower's Subsidiaries is an "investment company" within the meaning of the Investment Company Act of 1940, as 67 75 amended, or a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. SECTION 6.4. Validity, etc. This Agreement constitutes, and the Notes and each other Loan Document executed by the Borrower will, on the due execution and delivery thereof, constitute, the legal, valid and binding obligations of the Borrower enforceable in accordance with their respective terms; and each Loan Document executed pursuant hereto by each other Obligor will, on the due execution and delivery thereof by such Obligor, be the legal, valid and binding obligation of such Obligor enforceable in accordance with its terms, in each case with respect to this Section 6.4 subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. SECTION 6.5. Financial Information. The Borrower has delivered to the Agents and each Lender copies of each of (i) the Base Financial Statements, and (ii) a Pro Forma Balance Sheet. Each of the financial statements described above has been prepared, in the case of clause (i), in accordance with GAAP consistently applied and, in the case of clause (ii), on a basis substantially consistent with the basis used to prepare the financial statements referred to in clause (i), and (in the case of clause (i)) present fairly the consolidated financial condition of the corporations covered thereby as at the date thereof and the results of their operations for the periods then ended and (in the case of clause (ii)) include appropriate pro forma adjustments to give pro forma effect to the Transaction. SECTION 6.6. No Material Adverse Change. Since June 30, 1996, there has been no material adverse change in the financial condition, operations, assets, business, properties or prospects of the Borrower and its Restricted Subsidiaries, taken as a whole. SECTION 6.7. Litigation, Labor Controversies, etc. There is no pending or, to the knowledge of the Borrower, threatened litigation, action, proceeding, labor controversy, arbitration or governmental investigation affecting any Obligor, or any of their respective properties, businesses, assets or revenues, which could reasonably be expected to result in a Material Adverse Effect except as disclosed in Item 6.7 ("Litigation") of the Disclosure Schedule. No material adverse development has occurred in any litigation, action, labor controversy, arbitration or governmental investigation or other proceeding disclosed in Item 6.7 ("Litigation") of the Disclosure Schedule. SECTION 6.8. Subsidiaries. The Borrower has only those Subsidiaries (i) which are identified in Item 6.8 ("Existing Subsidiaries") of the Disclosure Schedule, or (ii) which are permitted to have been acquired in accordance with Section 7.2.5 or 7.2.8. SECTION 6.9. Ownership of Properties. Except to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect, the Borrower and each 68 76 of its Subsidiaries owns good title to, or leasehold interests in, all of its properties and assets (other than insignificant properties and assets), real and personal, tangible and intangible, of any nature whatsoever (including patents, trademarks, trade names, service marks and copyrights), free and clear of all Liens or material claims (including material infringement claims with respect to patents, trademarks, copyrights and the like), except as permitted pursuant to Section 7.2.3. SECTION 6.10. Taxes. Each of Holdings, the Borrower and each of the Borrower's Restricted Subsidiaries has filed all Federal, State and other material tax returns required by law to have been filed by it and has paid all taxes and governmental charges thereby shown to be owing, except any such taxes or charges which are being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. SECTION 6.11. Pension and Welfare Plans. During the twelve-consecutive-month period prior to the date of the execution and delivery of this Agreement, no steps have been taken to terminate any Pension Plan, and no contribution failure has occurred with respect to any Pension Plan sufficient to give rise to a Lien under section 302(f) of ERISA, which, in either case, is reasonably expected to lead to a liability to such Pension Plan in excess of $10,000,000. No condition exists or event or transaction has occurred with respect to any Pension Plan which could reasonably be expected to result in the incurrence by the Borrower or any member of the Controlled Group of any material liability, fine or penalty other than such condition, event or transaction which would not reasonably be expected to have a Material Adverse Effect. Except as disclosed in Item 6.11 ("Employee Benefit Plans") of the Disclosure Schedule or otherwise approved by the Agents (such approval not to be unreasonably withheld or delayed), since the date of the last financial statement the Borrower has not increased any contingent liability with respect to any post-retirement benefit under a Welfare Plan, other than liability for continuation coverage described in Part 6 of Subtitle B of Title I of ERISA, except as would not have Material Adverse Effect. SECTION 6.12. Environmental Matters. Except as set forth in Item 6.12 ("Environmental Matters") of the Disclosure Schedule or as, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect: (a) all facilities and property (including underlying groundwater) owned or leased by the Borrower or any of its Subsidiaries are, and continue to be, owned or leased by the Borrower and its Subsidiaries in compliance with all Environmental Laws; (b) there have been no past, and there are no pending or threatened (i) written claims, complaints, notices or requests for information received by the Borrower or any of its Subsidiaries with respect to any alleged violation of any Environmental Law, or (ii) written complaints, notices or inquiries to the Borrower or any of its Subsidiaries regarding potential liability under any Environmental Law; 69 77 (c) to the best knowledge of the Borrower, there have been no Releases of Hazardous Materials at, on or under any property now or previously owned or leased by the Borrower or any of its Subsidiaries; (d) the Borrower and its Subsidiaries have been issued and are in compliance with all permits, certificates, approvals, licenses and other authorizations relating to environmental matters and necessary or desirable for their businesses; (e) no property now or, to the best knowledge of the Borrower, previously owned or leased by the Borrower or any of its Subsidiaries is listed or, to the knowledge of the Borrower or any of its Subsidiaries, proposed for listing (with respect to owned property only) on the National Priorities List pursuant to CERCLA, on the CERCLIS or on any similar state list of sites requiring investigation or clean-up; (f) to the best knowledge of the Borrower, there are no underground storage tanks, active or abandoned, including petroleum storage tanks, on or under any property now or previously owned or leased by the Borrower or any of its Subsidiaries; (g) to the best knowledge of the Borrower, the Borrower and its Subsidiaries have not directly transported or directly arranged for the transportation of any Hazardous Material to any location which is listed or to the knowledge of the Borrower or any of its Subsidiaries, proposed for listing on the National Priorities List pursuant to CERCLA, on the CERCLIS or on any similar state list; (h) to the best knowledge of the Borrower, there are no polychlorinated biphenyls or friable asbestos present in a manner or condition at any property now or previously owned or leased by the Borrower or any Subsidiary of the Borrower; and (i) to the best knowledge of the Borrower, no conditions exist at, on or under any property now or previously owned or leased by the Borrower or any of its Subsidiaries which, with the passage of time, or the giving of notice or both, would give rise to liability to the Borrower or any of its Subsidiaries under any Environmental Law. SECTION 6.13. Regulations G, U and X. Neither the Borrower nor Holdings is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock, and no proceeds of any Credit Extension will be used in violation of F.R.S. Board Regulation G, U or X. Terms for which meanings are provided in F.R.S. Board Regulation G, U or X or any regulations substituted therefor, as from time to time in effect, are used in this Section with such meanings. SECTION 6.14. Accuracy of Information. All material factual information concerning the financial condition, operations or prospects of Holdings, the Borrower, and the Borrower's Restricted Subsidiaries heretofore or contemporaneously furnished by or on behalf of the Borrower in writing to the Agents, the Arranger, the Issuer or any Lender for purposes of or in 70 78 connection with this Agreement or any transaction contemplated hereby or with respect to the Transaction is, and all other such factual information hereafter furnished by or on behalf of the Borrower, or any of its Restricted Subsidiaries to the Agents, the Arranger, the Issuer or any Lender will be, taken as a whole, true and accurate in every material respect on the date as of which such information is dated or certified and such information is not, or shall not be, taken as a whole, as the case may be, incomplete by omitting to state any material fact necessary to make such information not misleading. Any term or provision of this Section to the contrary notwithstanding, insofar as any of the factual information described above includes assumptions, estimates, projections or opinions, no representation or warranty is made herein with respect thereto; provided, however, that to the extent any such assumptions, estimates, projections or opinions are based on factual matters, the Borrower has reviewed such factual matters and nothing has come to its attention in the context of such review which would lead it to believe that such factual matters were not or are not true and correct in all material respects or that such factual matters omit to state any material fact necessary to make such assumptions, estimates, projections or opinions not misleading in any material respect. SECTION 6.15. Solvency. The Transaction (including, among other things, the incurrence of the initial Credit Extension hereunder, the incurrence by the Borrower of the Indebtedness represented by the Notes and the Subordinated Notes, the execution and delivery by the Subsidiary Guarantors, if any, of a Subsidiary Guaranty, the consummation of the Discount Debenture Issuance and the application of the proceeds of the Credit Extensions), will not involve or result in any fraudulent transfer or fraudulent conveyance under the provisions of Section 548 of the Bankruptcy Code (11 U.S.C. Section 101 et seq., as from time to time hereafter amended, and any successor or similar statute) or any applicable state law respecting fraudulent transfers or fraudulent conveyances. On the Closing Date, after giving effect to the Transaction, the Borrower is Solvent. ARTICLE VII COVENANTS SECTION 7.1. Affirmative Covenants. The Borrower agrees with the Agents, the Issuer and each Lender that, until all Commitments have terminated and all Obligations have been paid and performed in full, the Borrower will perform the obligations set forth in this Section 7.1. SECTION 7.1.1. Financial Information, Reports, Notices, etc. The Borrower will furnish, or will cause to be furnished, to each Lender and each Agent copies of the following financial statements, reports, notices and information: (a) as soon as available and in any event within 60 days after the end of each of the first three Fiscal Quarters of each Fiscal Year of the Borrower (or, if the Borrower is 71 79 required to file such information on a Form 10-Q with the Securities and Exchange Commission, promptly following such filing), a consolidated balance sheet of the Borrower and its Subsidiaries as of the end of such Fiscal Quarter, together with the related consolidated statements of operations and cash flows for such Fiscal Quarter and for the period commencing at the end of the previous Fiscal Year and ending with the end of such Fiscal Quarter (it being understood that the foregoing requirement may be satisfied by delivery of the Borrower's report to the Securities and Exchange Commission on Form 10-Q, if any), certified by the president, chief executive officer, treasurer, assistant treasurer, controller or chief financial Authorized Officer of the Borrower; (b) as soon as available and in any event within 105 days after the end of each Fiscal Year of the Borrower (or, if the Borrower is required to file such information on a Form 10-K with the Securities and Exchange Commission, promptly following such filing), a copy of the annual audit report for such Fiscal Year for the Borrower and its Subsidiaries, including therein a consolidated balance sheet for the Borrower and its Subsidiaries as of the end of such Fiscal Year, together with the related consolidated statements of operations and cash flows for such Fiscal Year (it being understood that the foregoing requirement may be satisfied by delivery of the Borrower's report to the Securities and Exchange Commission on Form 10-K, if any), in each case certified (without any Impermissible Qualification) by Deloitte & Touche LLP or another "Big Six" firm of independent public accountants, together with a certificate from such accountants as to whether, in making the examination necessary for the signing of such annual report by such accountants, they have not become aware of any Default that has occurred and is continuing or, if in the opinion of such accounting firm such a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof; (c) together with the delivery of the financial information required pursuant to clauses (a) and (b), a Compliance Certificate, in substantially the form of Exhibit E, executed by the president, chief executive officer, treasurer, assistant treasurer, controller or chief financial Authorized Officer of the Borrower, showing (in reasonable detail and with appropriate calculations and computations in all respects satisfactory to the Agents) compliance with the financial covenants set forth in Section 7.2.4; (d) as soon as possible and in any event within five Business Days after obtaining knowledge of the occurrence of any Default, if such Default is then continuing, a statement of the president, chief executive officer, treasurer, assistant treasurer, controller or chief financial Authorized Officer of the Borrower setting forth details of such Default and the action which the Borrower has taken or proposes to take with respect thereto; (e) as soon as possible and in any event within ten Business Days after (x) the occurrence of any material adverse development with respect to any litigation, action, proceeding or labor controversy described in Section 6.7 or (y) the commencement of any labor controversy, litigation, action, proceeding of the type described in Section 6.7, 72 80 notice thereof and of the action which the Borrower has taken or proposes to take with respect thereto; (f) promptly after the sending or filing thereof, copies of all reports and registration statements (other than exhibits thereto and any registration statement on Form S-8 or its equivalent) which the Borrower or any of its Subsidiaries files with the Securities and Exchange Commission or any national securities exchange; (g) as soon as practicable after the chief financial officer or the chief executive officer of the Borrower or a member of the Borrower's Controlled Group becomes aware of (i) formal steps in writing to terminate any Pension Plan or (ii) the occurrence of any event with respect to a Pension Plan which, in the case of (i) or (ii), could reasonably be expected to result in a contribution to such Pension Plan by (or a liability to) the Borrower or a member of the Borrower's Controlled Group in excess of $10,000,000, (iii) the failure to make a required contribution to any Pension Plan if such failure is sufficient to give rise to a Lien under section 302(f) of ERISA in an amount in excess of $10,000,000, (iv) the taking of any action with respect to a Pension Plan which could reasonably be expected to result in the requirement that the Borrower furnish a bond to the PBGC or such Pension Plan in an amount in excess of $10,000,000 or (v) any material increase in the contingent liability of the Borrower with respect to any post-retirement Welfare Plan benefit, notice thereof and copies of all documentation relating thereto; (h) within 25 days after the end of each calendar month, a Borrowing Base Certificate that is calculated as of the last day of such calendar month; and (i) such other information respecting the condition or operations, financial or otherwise, of the Borrower or any of its Subsidiaries as any Lender through the Administrative Agent may from time to time reasonably request. SECTION 7.1.2. Compliance with Laws, etc. The Borrower will, and will cause each of its Subsidiaries to, comply in all material respects with all applicable laws, rules, regulations and orders, such compliance to include (without limitation) (i) except as permitted under Section 7.2.8, the maintenance and preservation of its corporate existence and qualification as a foreign corporation, except where the failure to so qualify could not reasonably be expected to have a Material Adverse Effect, and (ii) the payment, before the same become delinquent, of all material taxes, assessments and governmental charges imposed upon it or upon its property except to the extent being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. SECTION 7.1.3. Maintenance of Properties. Except to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect, the Borrower will, and will cause each of its Subsidiaries to, maintain, preserve, protect and keep its properties (other than insignificant properties) in good repair, working order and condition (ordinary wear 73 81 and tear excepted), and make necessary and proper repairs, renewals and replacements so that its business carried on in connection therewith may be properly conducted at all times unless the Borrower determines in good faith that the continued maintenance of any of its properties is no longer economically desirable. SECTION 7.1.4. Insurance. The Borrower will, and will cause each of its Restricted Subsidiaries to, maintain or cause to be maintained with responsible insurance companies insurance with respect to its properties and business against such casualties and contingencies and of such types and in such amounts as is customary in the case of similar businesses and with such provisions and endorsements as the Agents may reasonably request and will, upon request of the Agents, furnish to the Agents and each Lender a certificate of an Authorized Officer of the Borrower setting forth the nature and extent of all insurance maintained by the Borrower and its Restricted Subsidiaries in accordance with this Section. SECTION 7.1.5. Books and Records. The Borrower will, and will cause each of its Restricted Subsidiaries to, keep books and records which accurately reflect in all material respects all of its business affairs and transactions and permit the Agents, the Issuer and each Lender or any of their respective representatives, at reasonable times and intervals, and upon reasonable notice, but, unless an Event of Default shall have occurred and be continuing, not more frequently than once in each Fiscal Year, to visit its corporate offices, to discuss its financial matters with its officers and, only in the presence of a representative of the Borrower (whose attendance at such discussion cannot be unreasonably refused), its independent public accountants (and the Borrower hereby authorizes such independent public accountants to discuss the Borrower's financial matters with the Issuer and each Lender or its representatives, so long as a representative of the Borrower is present) and to examine any of its books or other financial records. The cost and expense of each such visit shall be borne by the applicable Agent or Lender. SECTION 7.1.6. Environmental Covenant. The Borrower will and will cause each of its Subsidiaries to, (a) use and operate all of its facilities and properties in compliance with all Environmental Laws, keep all necessary permits, approvals, certificates, licenses and other authorizations relating to environmental matters in effect and remain in compliance therewith, and handle all Hazardous Materials in compliance with all applicable Environmental Laws, in each case except where the failure to comply with the terms of this clause could not reasonably be expected to have a Material Adverse Effect; (b) promptly notify the Agents and provide copies of all written claims, complaints, notices or inquiries relating to the condition of its facilities and properties or compliance with Environmental Laws which would have, or would reasonably be expected to have, a Material Adverse Effect, and promptly cure and have dismissed with prejudice any material actions and proceedings relating to compliance with Environmental Laws, except to the extent being diligently contested in good faith by 74 82 appropriate proceedings and for which adequate reserves in accordance with GAAP have been set aside on its books; and (c) provide such information and certifications which the Agents may reasonably request from time to time to evidence compliance with this Section 7.1.6. SECTION 7.1.7. Future Subsidiaries; Material Subsidiaries. The Borrower hereby covenants and agrees as follows: (a) Upon any Person (other than the Trademark Subsidiary and the IPO Subsidiary) becoming, after the Closing Date, a Material Subsidiary of the Borrower that is a U.S. Subsidiary, or (in the case of clause (a)(ii) below only) upon the Borrower or any Material Subsidiary of the Borrower that is a U.S. Subsidiary (other than the Trademark Subsidiary and the IPO Subsidiary) acquiring additional Capital Stock of any existing Material Subsidiary (other than an Unrestricted Subsidiary, the Trademark Subsidiary and the IPO Subsidiary), the Borrower shall notify the Agents of such acquisition, and (i) the Borrower shall promptly cause such Material Subsidiary to execute and deliver to the Administrative Agent, with counterparts for each Lender, a Subsidiary Security Agreement (or a supplement thereto) (and, if such Material Subsidiary owns any real property, to the extent required by clause (b) of Section 7.1.8, a Mortgage), together with Uniform Commercial Code financing statements (form UCC-1) executed and delivered by the Material Subsidiary naming the Material Subsidiary as the debtor and the Administrative Agent as the secured party, or other similar instruments or documents, in appropriate form for filing under the Uniform Commercial Code and any other applicable recording statutes, in the case of real property, of all jurisdictions as may be necessary or, in the opinion of the Administrative Agent, desirable to perfect the security interest of the Administrative Agent pursuant to the Subsidiary Security Agreement or a Mortgage, as the case may be (other than the perfection of security interests in motor vehicles); and (ii) the Borrower shall promptly deliver, or cause to be delivered, to the Administrative Agent under a Pledge Agreement (or a supplement thereto) certificates (if any) representing all of the issued and outstanding shares of Capital Stock of such Subsidiary (other than an Unrestricted Subsidiary, the Trademark Subsidiary and the IPO Subsidiary) owned by the Borrower or any Material Subsidiary of the Borrower that is a U.S. Subsidiary, as the case may be, along with undated stock powers for such certificates, executed in blank, or, if any securities subject thereto are uncertificated securities or are held through a financial intermediary, confirmation and evidence satisfactory to the Agents that appropriate book entries have been made in the relevant books or records of a financial intermediary or the issuer of such securities, as the case may be, or other 75 83 appropriate steps shall have been taken under applicable law resulting in the perfection of the security interest granted in favor of the Administrative Agent pursuant to the terms of a Pledge Agreement; together, in each case, with such opinions, in form and substance and from counsel satisfactory to the Agents, as the Agents may reasonably require; provided, however, that notwithstanding the foregoing, no Non-U.S. Subsidiary shall be required to execute and deliver a Mortgage or a Subsidiary Security Agreement (or a supplement thereto), nor will the Borrower or any Subsidiary of the Borrower be required to deliver in pledge pursuant to a Pledge Agreement in excess of 65% of the total combined voting power of all classes of Capital Stock of a Non-U.S. Subsidiary entitled to vote. (b) Upon any Person (other than the Trademark Subsidiary and the IPO Subsidiary) becoming, after the Closing Date, a Material Subsidiary of the Borrower that is a U.S. Subsidiary, the Borrower shall notify the Agents of such event, and the Borrower shall promptly cause such Material Subsidiary to execute and deliver to the Administrative Agent, with counterparts for each Lender, a Subsidiary Guaranty together with such opinions, in form and substance and from counsel satisfactory to the Agents, as the Agents may reasonably require. SECTION 7.1.8. Future Leased Property and Future Acquisitions of Real Property; Future Acquisition of Other Property. (a) Prior to entering into any new lease of real property or renewing any existing lease of real property following the Closing Date, the Borrower shall, and shall cause each of its U.S. Subsidiaries (other than the Trademark Subsidiary and the IPO Subsidiary) that is a Restricted Subsidiary to, use its (and their) best efforts (which shall not require the expenditure of cash or the making of any material concessions under the relevant lease) to deliver to the Administrative Agent a Waiver executed by the lessor of any real property that is to be leased by the Borrower or such U.S. Subsidiary for a term in excess of one year in any state which by statute grants such lessor a "landlord's" (or similar) Lien which is superior to the Administrative Agent's, to the extent the value of any personal property of the Borrower or its U.S. Subsidiaries to be held at such leased property exceeds (or it is anticipated that the value of such personal property will, at any point in time during the term of such leasehold term, exceed) $10,000,000. (b) In the event that the Borrower or any of its U.S. Subsidiaries that is a Restricted Subsidiary shall acquire any real property having a value as determined in good faith by the Administrative Agent in excess of $5,000,000 in the aggregate, the Borrower or the applicable U.S. Subsidiary shall, promptly after such acquisition, execute a Mortgage and provide the Administrative Agent with (i) evidence of the completion (or satisfactory arrangements for the completion) of all recordings and filings of such Mortgage as may be necessary or, in the reasonable opinion of the Administrative Agent, desirable effectively to create a valid, perfected, first priority Lien, subject to Liens permitted by Section 7.2.3, 76 84 against the properties purported to be covered thereby, (ii) mortgagee's title insurance policies in favor of the Agents and the Lenders in amounts and in form and substance and issued by insurers, reasonably satisfactory to the Agents, with respect to the property purported to be covered by such Mortgage, insuring that title to such property is marketable and that the interests created by the Mortgage constitute valid first Liens thereon free and clear of all defects and encumbrances other than as approved by the Agents, and such policies shall also include a revolving credit endorsement and such other endorsements as the Agents shall request and shall be accompanied by evidence of the payment in full of all premiums thereon, and (iii) such other approvals, opinions, or documents as the Agents may reasonably request. (c) In accordance with the terms and provisions of the Security Documents, the Borrower and each Material Subsidiary that is a U.S. Subsidiary (other than the Trademark Subsidiary and the IPO Subsidiary) shall provide the Agents with evidence of all recordings and filings as may be necessary or, in the reasonable opinion of the Administrative Agent, desirable to create a valid, perfected first priority Lien, subject to the Liens permitted by Section 7.2.3, against all property acquired after the Closing Date (excluding motor vehicles and (except to the extent required under clause (b) of Section 7.1.8) leases of and fee interests in real property). SECTION 7.1.9. Use of Proceeds, etc. The Borrower shall (a) apply the proceeds of the Loans (i) to pay, in part, through the Closing Date Dividend and/or the Intercompany Loan to Holdings, the cash portion of the obligations of Holdings in connection with the Transaction and to pay the transaction fees and expenses associated with the Transaction; provided, that not more than $10,000,000 of the proceeds from Revolving Loans may be used to finance the consummation of Transaction (including reasonably related transaction fees and expenses); and (ii) in the case of Revolving Loans and Swing Line Loans, for working capital and general corporate purposes of the Borrower and its Subsidiaries; and (b) use Letters of Credit only for purposes of supporting working capital and general corporate purposes of the Borrower and its Subsidiaries. SECTION 7.1.10. Hedging Obligations. Within six months following the Closing Date, the Administrative Agent shall have received evidence satisfactory to it that the Borrower has entered into interest rate swap, cap, collar or similar arrangements designed to protect the Borrower against fluctuations in interest rates with respect to at least 50% of the aggregate principal amount of the Term Loans for a period of at least three years from the date the initial interest rate protection arrangement was obtained, with terms reasonably satisfactory to the Borrower and the Agents. 77 85 SECTION 7.1.11. Undertaking. The Borrower will deliver to the Agents no later than 60 days after the Closing Date instruments or documents, in appropriate form for filing with the United States Patent and Trademark Office, sufficient to create and perfect a security interest in intellectual property owned as of the Closing Date by the Borrower. SECTION 7.2. Negative Covenants. The Borrower agrees with the Agents and each Lender that, until all Commitments have terminated, and all Obligations have been paid and performed in full, the Borrower will perform the obligations set forth in this Section 7.2. SECTION 7.2.1. Business Activities. The Borrower will not, and will not permit any of its Restricted Subsidiaries to, engage in any business activity, except the equipment maintenance and support services businesses and any businesses reasonably ancillary or related thereto (the "DecisionOne Business"); provided, however, that, any term or provision hereof (including this Section 7.2) to the contrary notwithstanding, (i) the Trademark Subsidiary shall conduct no business activity other than that directly connected with the ownership or licensing of trademarks, trade names, trade secrets, trade dress, service marks, patents, copyrights, mask works and other intellectual property associated with the DecisionOne Business and the licensing of such trademarks, trade names, trade secrets, trade dress, service marks, patents, copyrights, mask works and other intellectual property associated with the DecisionOne Business to Holdings and its Restricted Subsidiaries and the lending of the proceeds thereof to the Borrower and its Restricted Subsidiaries and (ii) the IPO Subsidiary shall conduct no business activity other than holding the promissory note issued by the Borrower to the IPO Subsidiary in the amount of $106,000,000, representing proceeds received from the April, 1996 Initial Public Offering, plus accrued interest thereon (including interest added to the principal thereof). SECTION 7.2.2. Indebtedness. The Borrower will not, and will not permit any of its Restricted Subsidiaries to, create, incur, assume or suffer to exist or otherwise become or be liable in respect of any Indebtedness, other than, without duplication, the following: (a) Indebtedness outstanding on the Closing Date and identified in Item 7.2.2(a) ("Ongoing Indebtedness") of the Disclosure Schedule, and refinancings and replacements thereof in a principal amount not exceeding the principal amount of the Indebtedness so refinanced or replaced and with an average life to maturity of not less than the then average life to maturity of the Indebtedness so refinanced or replaced; (b) Indebtedness in respect of the Credit Extensions and other Obligations; (c) Indebtedness incurred by the Borrower or any of its Restricted Subsidiaries that is represented by Capitalized Lease Liabilities, mortgage financings or purchase money obligations (but only to the extent otherwise permitted by Section 7.2.7); provided, that the maximum aggregate amount of all Indebtedness permitted under this clause (c) shall not at any time exceed $25,000,000; 78 86 (d) Hedging Obligations of the Borrower or any of its Restricted Subsidiaries in respect of the Credit Extensions; (e) intercompany Indebtedness of (x) any Restricted Subsidiary of the Borrower owing to the Borrower or any of its Restricted Subsidiaries or (y) the Borrower to any of its Restricted Subsidiaries, which Indebtedness (i) shall be evidenced by one or more promissory notes in form and substance satisfactory to the Agents which (except in the case of any such notes held by a Non-U.S. Subsidiary, a Subsidiary that is not a Material Subsidiary, the Trademark Subsidiary or the IPO Subsidiary) have been duly executed and delivered to (and indorsed to the order of) the Administrative Agent in pledge pursuant to a Pledge Agreement, and (ii) shall not be forgiven or otherwise discharged for any consideration other than payment (Dollar for Dollar) in cash unless the Agents otherwise consent; (f) Indebtedness evidenced by any Subordinated Note and guarantees thereof in an aggregate outstanding principal amount not to exceed $150,000,000; (g) Assumed Indebtedness of the Borrower and its Restricted Subsidiaries in an aggregate principal amount not to exceed $25,000,000 at any time outstanding; (h) unsecured Indebtedness of the Borrower and its Restricted Subsidiaries in an aggregate amount not to exceed $25,000,000 incurred in connection with any acquisition; (i) Indebtedness of Non-U.S. Subsidiaries of the Borrower in an aggregate principal amount not to exceed $5,000,000 at any time outstanding; and (j) other unsecured Indebtedness of the Borrower and its Restricted Subsidiaries in an aggregate amount at any time outstanding not to exceed $50,000,000 plus the unutilized and available amounts under clause (h) above plus the difference between the maximum amount of additional Revolving Loan Commitments that have been or could be provided under clause (c) of Section 2.1.2 and the then outstanding amount of additional Revolving Loans made pursuant to clause (c) of Section 2.1.2; provided, however, that (i) no Indebtedness otherwise permitted hereunder (other than Indebtedness permitted under clause (e)) may be incurred by the Trademark Subsidiary or the IPO Subsidiary, (ii) no Indebtedness otherwise permitted by clause (c), (e), (g), (h) or (j) may be incurred if, after giving effect to the incurrence thereof, any Default shall have occurred and be continuing, and (iii) that all such Indebtedness of the type described in clause (e)(y) above that is owed to Subsidiaries which are not party to a Subsidiary Guaranty shall be subordinated, in writing, to the Obligations upon terms satisfactory to the Agents. SECTION 7.2.3. Liens. The Borrower will not, and will not permit any of its Restricted Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any of its property, revenues or assets, whether now owned or hereafter acquired, except: 79 87 (a) Liens existing on the Closing Date and identified in Item 7.2.2(b) ("Ongoing Liens") of the Disclosure Schedule; (b) Liens securing payment of the Obligations or any obligation under any Rate Protection Agreement, granted pursuant to any Loan Document; (c) Liens granted to secure payment of Indebtedness of the type permitted and described in clause (c) of Section 7.2.2; (d) Liens for taxes, assessments or other governmental charges or levies, including Liens pursuant to Section 107(l) of CERCLA or other similar law, not at the time delinquent or thereafter payable without penalty or being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books; (e) Liens of carriers, warehousemen, mechanics, repairmen, materialmen, contractors, laborers and landlords or other like Liens incurred in the ordinary course of business for sums not overdue for a period of more than 30 days or being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books; (f) Liens incurred in the ordinary course of business in connection with workmen's compensation, unemployment insurance or other forms of governmental insurance or benefits, or to secure performance of tenders, bids, statutory or regulatory obligations, insurance obligations, leases and contracts (other than for borrowed money) entered into in the ordinary course of business or to secure obligations on surety or appeal bonds; (g) judgment Liens in existence less than 30 days after the entry thereof or with respect to which execution has been stayed or the payment of which is covered in full by a bond or (subject to a customary deductible) by insurance maintained with responsible insurance companies; (h) Liens with respect to minor imperfections of title and easements, rights-of-way, restrictions, reservations, permits, servitudes and other similar encumbrances on real property and fixtures which do not materially detract from the value or materially impair the use by the Borrower or any such Restricted Subsidiary in the ordinary course of their business of the property subject thereto; (i) leases or subleases granted by the Borrower or any of its Restricted Subsidiaries to any other Person in the ordinary course of business; (j) Liens in the nature of trustees' Liens granted pursuant to any indenture governing any Indebtedness permitted by Section 7.2.2, in each case in favor of the 80 88 trustee under such indenture and securing only obligations to pay compensation to such trustee, to reimburse its expenses and to indemnify it under the terms thereof; (k) Liens of sellers of goods to the Borrower and its Restricted Subsidiaries arising under Article 2 of the U.C.C. or similar provisions of applicable law in the ordinary course of business, covering only the goods sold and securing only the unpaid purchase price for such goods and related expenses; (l) Liens securing Assumed Indebtedness of the Borrower and its Subsidiaries permitted pursuant to clause (g) of Section 7.2.2; provided, however, that (i) any such Liens attach only to the property of the Subsidiary acquired, or the property acquired, in connection with such Assumed Indebtedness and shall not attach to any assets of the Borrower or any of its Restricted Subsidiaries theretofore existing or which arise after the date thereof and (ii) the Assumed Indebtedness and other secured Indebtedness of the Borrower and its Restricted Subsidiaries secured by any such Lien shall not exceed 100% of the fair market value of the assets being acquired in connection with such Assumed Indebtedness; (m) Liens on assets of Non-U.S. Subsidiaries of the Borrower securing Indebtedness permitted pursuant to clause (i) of Section 7.2.2; and (n) Liens on the Capital Stock of Unrestricted Subsidiaries; provided, however, that no Liens otherwise permitted by clause (c), (e), (f), (h), (i), (j), (k), (l) or (m) may be created, incurred, assumed or otherwise permitted to exist upon any property, revenues or assets of the Trademark Subsidiary or the IPO Subsidiary. SECTION 7.2.4. Financial Covenants. (a) Adjusted EBITDA. The Borrower will not permit Adjusted EBITDA for the period of four consecutive Fiscal Quarters ending on the last day of any Fiscal Quarter occurring during any period set forth below to be less than the amount set forth opposite such period:
Period Adjusted EBITDA ------ --------------- Closing Date to 6/30/98 $105,000,000 7/1/98 to 6/30/99 $110,000,000 7/1/99 to 6/30/00 $120,000,000 7/1/00 to 6/30/01 $135,000,000 7/1/01 to 6/30/02 $160,000,000 7/1/02 to 6/30/03 $180,000,000
81 89 7/1/03 and thereafter $200,000,000
(b) Leverage Ratio. The Borrower will not permit the Leverage Ratio as of the end of any Fiscal Quarter occurring during any period set forth below to be greater than the ratio set forth opposite such period:
Period Leverage Ratio ------ -------------- Closing Date to 6/30/98 6.00:1 7/1/98 to 6/30/99 5.50:1 7/1/99 to 6/30/00 5.00:1 7/1/00 to 6/30/01 4.50:1 7/1/01 to 6/30/02 3.50:1 7/1/02 and thereafter 3.00:1
(c) Interest Coverage Ratio. The Borrower will not permit the Interest Coverage Ratio as of the end of any Fiscal Quarter ending after the Closing Date and occurring during any period set forth below to be less than the ratio set forth opposite such period:
Interest Coverage Period Ratio ------ ----- Closing Date to 6/30/98 1.75:1 7/1/98 to 6/30/99 1.85:1 7/1/99 to 6/30/00 2.00:1 7/1/00 to 6/30/01 2.25:1 7/1/01 to 6/30/02 2.50:1 7/1/02 to 6/30/03 3.00:1 7/1/03 and thereafter 3.50:1
(d) Fixed Charge Coverage Ratio. The Borrower will not permit the Fixed Charge Coverage Ratio as of the end of any Fiscal Quarter ending after the Closing Date to be less than 1.10:1. SECTION 7.2.5. Investments. The Borrower will not, and will not permit any of its Restricted Subsidiaries to, make, incur, assume or suffer to exist any Investment in any other Person, except: (a) Investments existing on the Closing Date and identified in Item 7.2.5(a) ("Ongoing Investments") of the Disclosure Schedule; (b) Cash Equivalent Investments; 82 90 (c) without duplication, Investments permitted as Indebtedness pursuant to Section 7.2.2; (d) without duplication, Investments permitted as Capital Expenditures pursuant to Section 7.2.7; (e) Investments by the Borrower in any of its Restricted Subsidiaries, or by any such Restricted Subsidiary in any Restricted Subsidiary of the Borrower, by way of contributions to capital; (f) additional Investments by the Borrower or any of its Restricted Subsidiaries from capital contributions by Holdings to the Borrower, sales of Capital Stock by the Borrower to Holdings or repayments of the Intercompany Loan by Holdings to the Borrower, in each case after the Closing Date for the purpose of making an Investment identified in a notice to the Agents on or prior to the date such contribution, sale or repayment is made, which Investments shall result in the Borrower or such Restricted Subsidiary acquiring a majority controlling interest in the Person in which such Investment was made or increasing any such controlling interest already maintained by it; (g) Investments to the extent the consideration received pursuant to clause (c)(i) of Section 7.2.9 is not all cash; (h) Investments in the form of loans to officers, directors and employees of the Borrower and its Restricted Subsidiaries for the sole purpose of purchasing Holdings common stock (or purchases of such loans made by others) in an aggregate amount at any time outstanding not to exceed $5,000,000; (i) the Intercompany Loan; (j) Investments in Unrestricted Subsidiaries of the Borrower in an aggregate amount at any time outstanding not to exceed $15,000,000; or (k) other Investments (including Assumed Indebtedness) made by the Borrower or any of its Restricted Subsidiaries in an aggregate amount not to exceed $50,000,000 in any single transaction or series of related transactions or $150,000,000 in the aggregate, which Investments shall result in the Borrower or the relevant Subsidiary acquiring (subject to Section 7.2.1) a majority controlling interest in the Person in which such Investment was made or increasing any such controlling interest maintained by it in such Person; provided, however, that (l) any Investment which when made complies with the requirements of the definition of the term "Cash Equivalent Investment" may continue to be held 83 91 notwithstanding that such Investment if made thereafter would not comply with such requirements; (m) no Investment otherwise permitted (i) hereunder (other than Investments consisting of Indebtedness permitted under clause (e) of Section 7.2.2) shall be permitted to be made by the Trademark Subsidiary or the IPO Subsidiary or (ii) by clause (c) (except to the extent permitted under Section 7.2.2), (e), (f), (h), (j) or (k) of this Section 7.2.5 shall be permitted to be made if, immediately before or after giving effect thereto, any Default shall have occurred and be continuing. SECTION 7.2.6. Restricted Payments, etc. On and at all times after the date hereof: (a) the Borrower will not, and will not permit any of its Restricted Subsidiaries to, declare, pay or make any payment, dividend, distribution or exchange (in cash, property or obligations) on or in respect of any shares of any class of Capital Stock (now or hereafter outstanding) of the Borrower or on any warrants, options or other rights with respect to any shares of any class of Capital Stock (now or hereafter outstanding) of the Borrower (other than (i) dividends or distributions payable in its common stock or warrants to purchase its common stock and (ii) splits or reclassifications of its stock into additional or other shares of its common stock) or apply, or permit any of its Restricted Subsidiaries to apply, any of its funds, property or assets to the purchase, redemption, exchange, sinking fund or other retirement of, or agree or permit any of its Restricted Subsidiaries to purchase, redeem or exchange, any shares of any class of Capital Stock (now or hereafter outstanding) of the Borrower, warrants, options or other rights with respect to any shares of any class of Capital Stock (now or hereafter outstanding) of the Borrower; (b) the Borrower will not, and will not permit any of its Restricted Subsidiaries to, (i) make any payment or prepayment of principal of, or make any payment of interest on, any Subordinated Note or Discount Debenture on any day other than the stated, scheduled date for such payment or prepayment set forth in the documents and instruments memorializing such Subordinated Note or Discount Debenture, or which would violate the subordination provisions of such Subordinated Note or Discount Debenture, or (ii) redeem, purchase or defease any Subordinated Note or Discount Debenture (the foregoing prohibited acts referred to in clauses (a) and (b) above are herein collectively referred to as "Restricted Payments"); provided, however, that (c) notwithstanding the provisions of clause (a) above, the Borrower shall be permitted to make Restricted Payments to Holdings to the extent necessary to enable Holdings to 84 92 (i) pay its overhead expenses in an amount not to exceed $2,000,000 in the aggregate in any Fiscal Year (exclusive of advisory fees in an amount not to exceed $500,000 in the aggregate in any Fiscal Year); (ii) pay taxes in an amount not to exceed the amount provided in the Tax Sharing Agreement; provided, however, that in no event shall the amount permitted to be paid by the Borrower to Holdings pursuant to this clause (c)(ii) in respect of the Borrower's obligations under the Tax Sharing Agreement in any Fiscal Year exceed the amount of federal, state and local taxes that the Borrower and its Subsidiaries (on a consolidated basis) would be required to pay for such Fiscal Year if they did not file a consolidated income tax return with Holdings for such Fiscal Year; (iii) make payments in respect of statutory appraisal rights (and any settlement thereof) exercised by holders of outstanding Capital Stock of DOH in connection with the Merger; and (iv) so long as (A) no Default shall have occurred and be continuing on the date such Restricted Payment is declared or to be made, nor would a Default result from the making of such Restricted Payment, (B) after giving effect to the making of such Restricted Payment, the Borrower shall be in pro forma compliance with the covenants set forth in Section 7.2.4 for the most recent full Fiscal Quarter immediately preceding the date of the making of such Restricted Payment for which the relevant financial information has been delivered pursuant to clause (a) or clause (b) of Section 7.1.1, and (C) an Authorized Officer of the Borrower shall have delivered a certificate to the Administrative Agent in form and substance satisfactory to the Administrative Agent (including a calculation of the Borrower's compliance with the covenants set forth in Section 7.2.4 in reasonable detail) certifying as to the accuracy of clauses (c)(iv)(A) and (c)(iv)(B) above, (x) repurchase, redeem or otherwise acquire or retire for value any Capital Stock of Holdings, or any warrant, option or other right to acquire Capital Stock of Holdings, held by any member of the Borrower's or any of the Borrower's Restricted Subsidiaries' management pursuant to any management equity subscription agreement or stock option agreement; provided that (A) the aggregate price paid for all such repurchased, redeemed, acquired or retired Capital Stock, warrants, options and other rights shall not exceed (I) $5,000,000 in any calendar year (with unused amounts in any calendar year being carried forward to succeeding calendar years subject to a maximum (without giving effect to the following clause (II)) of $10,000,000 in any calendar year) plus (II) the aggregate cash proceeds received by the Borrower during such calendar year from any reissuance of Capital Stock of Holdings, and warrants, 85 93 options and other rights to acquire Capital Stock of Holdings, by Holdings or the Borrower to members of management of the Borrower and its Restricted Subsidiaries and (B) no Default or Event of Default shall have occurred and be continuing immediately after such transaction; or (y) pay for the repurchase, retirement or other acquisition or retirement for value of Capital Stock of Holdings or options, warrants or other rights to acquire Capital Stock of Holdings outstanding on the date of this Agreement and which are not held by the Equity Investors or any member of management of Holdings or any of its Subsidiaries on the date of this Agreement (including any Capital Stock, options, warrants or rights issued in respect of such Capital Stock, options, warrants or rights as a result of a stock split, recapitalization, merger, combination, consolidation or otherwise, but excluding any Capital Stock, options, warrants or rights issued pursuant to any management equity plan or stock option plan or similar agreement) in an aggregate amount not to exceed (I) $10,000,000 and (II) an incremental $20,000,000 so long as (A) after giving effect to the making of such Restricted Payment, the Leverage Ratio shall be less than 4.0:1.0 on a pro forma basis for the most recent full Fiscal Quarter immediately preceding the date of the making of such Restricted Payment for which the relevant financial information has been delivered pursuant to clause (a) or clause (b) of Section 7.1.1, (B) an Authorized Officer of the Borrower shall have delivered a certificate to the Administrative Agent substantially in the form of Exhibit L hereto (including a calculation of the Leverage Ratio in reasonable detail) certifying to the accuracy of clause (A) above and certifying that no Default shall have occurred and be continuing on the date such Restricted Payment is made, nor would a Default result from the making of such Restricted Payment, and (C) the amount of such Restricted Payment shall not exceed 25% of the Excess Cash Flow for the period from August 31, 1997 through the most recently ended Fiscal Quarter; (d) notwithstanding the provisions of clauses (a) and (b) above, the Borrower and its Restricted Subsidiaries shall be permitted to pay dividends to Holdings to enable Holdings to pay cash interest on Indebtedness of Holdings in accordance with the terms of such Indebtedness in an aggregate amount not to exceed 25% of Excess Cash Flow for the period from August 31, 1997 through the most recently ended Fiscal Quarter (net of amounts in respect of clause (c)(iv)(y) (II) above) so long as (A) after giving effect to the making of such Restricted Payment, (i) the Leverage Ratio shall be less than 4.0:1.0 on a pro forma basis and (ii) the Borrower shall be in pro forma compliance with the Fixed Charge Coverage Ratio covenant set forth in clause (d) of Section 7.2.4, in each case for the most recent full Fiscal Quarter immediately preceding the date of the making of such Restricted Payment for which the relevant financial information has been delivered pursuant to clause (a) or clause (b) of Section 7.1.1 and (B) an Authorized Officer of the 86 94 Borrower shall have delivered a certificate to the Administrative Agent substantially in the form of Exhibit L hereto (including a calculation of the Leverage Ratio and Fixed Charge Coverage Ratio in reasonable detail) certifying to the accuracy of clause (A) above and certifying that no Default shall have occurred and be continuing on the date such Restricted Payment is made, nor would a Default result from the making of such Restricted Payment; (e) notwithstanding the provisions of clauses (a) and (b) above, the Borrower and its Subsidiaries shall be permitted to make the Restricted Payments included in the Transaction; and (f) notwithstanding the provisions of clauses (a) and (b) above, the Borrower may pay a dividend to Holdings consisting solely of a transfer of all or a portion of the Intercompany Loan. SECTION 7.2.7. Capital Expenditures, etc. With respect to Capital Expenditures, the parties covenant and agree as follows: (a) The Borrower will not, and will not permit any of its Restricted Subsidiaries to, make or commit to make Capital Expenditures in any Fiscal Year, except Capital Expenditures of the Borrower and its Restricted Subsidiaries (other than the Trademark Subsidiary and the IPO Subsidiary) which do not aggregate in excess of (x) in the case of Fiscal Years ending on or prior to June 30, 2000, $20,000,000 in such Fiscal Year or (y) in the case of any Fiscal Year thereafter, $25,000,000 in such Fiscal Year; provided, however, that, to the extent the amount of Capital Expenditures permitted to be made in any Fiscal Year pursuant to this Section exceeds the aggregate amount of Capital Expenditures actually made during such Fiscal Year, such excess amount (up to an aggregate of 50% of the amount of Capital Expenditures permitted for such Fiscal Year, without giving effect to this proviso) may be carried forward to (but only to) the next succeeding Fiscal Year (any such amount to be certified by the Borrower to the Agents in the Compliance Certificate delivered for the last Fiscal Quarter of such Fiscal Year, and any such amount carried forward to a succeeding Fiscal Year shall be deemed to be used prior to the Borrower and its Subsidiaries using the amount of Capital Expenditures permitted by this Section in such succeeding Fiscal Year, without giving effect to such carry-forward). (b) The parties acknowledge and agree that the permitted Capital Expenditure level set forth in clause (a) above shall be exclusive of (i) the amount of Capital Expenditures actually made with cash capital contributions made, directly or indirectly, to the Borrower or any of its Restricted Subsidiaries by Holdings, the proceeds of equity issuances made by the Borrower or any of its Restricted Subsidiaries, directly or indirectly, to Holdings, and repayments by Holdings of the Intercompany Loan, in each case after the Closing Date and specifically identified in a certificate delivered by an Authorized Officer of the Borrower to the Agents on or about the time such capital 87 95 contribution or equity issuance is made and (ii) that portion of any acquisition that is permitted under Section 7.2.5 (other than pursuant to clause (d) thereof) that is accounted for as a Capital Expenditure. SECTION 7.2.8. Consolidation, Merger, etc. The Borrower will not, and will not permit any of its Restricted Subsidiaries to, liquidate or dissolve, consolidate with, or merge into or with, any other corporation, or purchase or otherwise acquire all or substantially all of the assets of any Person (or of any division thereof) except (a) any such Restricted Subsidiary may liquidate or dissolve voluntarily into, and may merge with and into, the Borrower (so long as the Borrower is the surviving corporation of such combination or merger) or any other Subsidiary, and the assets or stock of any Restricted Subsidiary may be purchased or otherwise acquired by the Borrower or any other Restricted Subsidiary; provided, that notwithstanding the above, a Restricted Subsidiary may only liquidate or dissolve into, or merge with and into, another Restricted Subsidiary of the Borrower if, after giving effect to such combination or merger, the Borrower continues to own (directly or indirectly), and the Administrative Agent continues to have pledged to it pursuant to a Pledge Agreement, a percentage of the issued and outstanding shares of Capital Stock (on a fully diluted basis) of the Restricted Subsidiary surviving such combination or merger that is equal to or in excess of the percentage of the issued and outstanding shares of Capital Stock (on a fully diluted basis) of the Restricted Subsidiary that does not survive such combination or merger that was (immediately prior to the combination or merger) owned by the Borrower or pledged to the Administrative Agent; (b) so long as no Default has occurred and is continuing or would occur after giving effect thereto, the Borrower or any of its Restricted Subsidiaries (other than the Trademark Subsidiary and the IPO Subsidiary) may purchase all or substantially all of the assets of any Person (or any division thereof) not then a Subsidiary, or acquire such Person by merger, if permitted (without duplication) pursuant to Section 7.2.7 or clause (f), (j) or (k) of Section 7.2.5; (c) the Borrower and its Restricted Subsidiaries may consummate the Transaction. SECTION 7.2.9. Asset Dispositions, etc. The Borrower will not, and will not permit any of its Restricted Subsidiaries to, sell, transfer, lease, contribute or otherwise convey, or grant options, warrants or other rights with respect to, all or any part of its assets, whether now owned or hereafter acquired (including accounts receivable and Capital Stock of Restricted Subsidiaries) to any Person, unless (with respect to the Borrower and each Restricted Subsidiary other than the Trademark Subsidiary, as to intellectual property acquired after the Closing Date, and the IPO Subsidiary): 88 96 (a) such sale, transfer, lease, contribution or conveyance of such assets is (i) in the ordinary course of its business (and does not constitute a sale, transfer, lease, contribution or other conveyance of all or a substantial part of the Borrower's and its Restricted Subsidiaries' assets, taken as a whole) or is of obsolete or worn out property, (ii) permitted by Section 7.2.8, or (iii) between the Borrower and one of its Subsidiaries or between Subsidiaries of the Borrower; (b) such sale, transfer, lease, contribution or conveyance constitutes (i) an Investment permitted under Section 7.2.5, (ii) a Lien permitted under Section 7.2.3, or (iii) a Restricted Payment permitted under Section 7.2.6; or (c) (i) such sale, transfer, lease, contribution or conveyance of such assets is for fair market value and the consideration consists of no less than 75% in cash, (ii) the Net Disposition Proceeds received from such assets, together with the Net Disposition Proceeds of all other assets sold, transferred, leased, contributed or conveyed pursuant to this clause (c) since the Closing Date, does not exceed (individually or in the aggregate) $75,000,000 over the term of this Agreement and (iii) an amount equal to the Net Disposition Proceeds generated from such sale, transfer, lease, contribution or conveyance is reinvested in the business of the Borrower and its Restricted Subsidiaries, or, to the extent required thereunder, is applied to prepay the Loans pursuant to the terms of Section 3.1.1 and Section 3.1.2. SECTION 7.2.10. Modification of Certain Agreements. Without the prior written consent of the Required Lenders, the Borrower will not, and will not permit any of its Restricted Subsidiaries to, consent to any amendment, supplement, amendment and restatement, waiver or other modification of any of the terms or provisions contained in, or applicable to, the Discount Debentures, any Subordinated Note (including any agreement or indenture related thereto or to the Subordinated Debt Issuance) or any Material Document or any schedules, exhibits or agreements related thereto, in each case which would materially adversely affect the rights or remedies of the Lenders, or the Borrower's or any other Obligor's ability to perform hereunder or under any Loan Document or which would increase the cash consideration payable in respect of the Merger or, in the case of the Merger Agreement, which would increase the Borrower's or any of its Restricted Subsidiaries' obligations or liabilities, contingent or otherwise (other than adjustments to the cash consideration payable in respect of the Merger made pursuant to the terms of the Merger Agreement). SECTION 7.2.11. Transactions with Affiliates. The Borrower will not, and will not permit any of its Restricted Subsidiaries to, enter into, or cause, suffer or permit to exist any arrangement or contract with any of its other Affiliates (other than any Obligor or any other Restricted Subsidiary of the Borrower) unless such arrangement or contract is fair and equitable to the Borrower or such Restricted Subsidiary and is an arrangement or contract of the kind which would be entered into by a prudent Person in the position of the Borrower or such Subsidiary with a Person which is not one of its Affiliates; provided, however that the Borrower and its Restricted Subsidiaries shall be permitted to (i) enter into and perform their obligations, 89 97 or take any other actions contemplated under the Transaction Documents, (ii) make any Restricted Payment permitted under Section 7.2.6 and (iii) enter into and perform their obligations under arrangements with DLJ and its Affiliates for underwriting, investment banking and advisory services on usual and customary terms. SECTION 7.2.12. Negative Pledges, Restrictive Agreements, etc. The Borrower will not, and will not permit any of its Restricted Subsidiaries to, enter into any agreement prohibiting (a) the (i) creation or assumption of any Lien upon its properties, revenues or assets, whether now owned or hereafter acquired (other than, in the case of any assets acquired with the proceeds of any Indebtedness permitted under Section 7.2.2(c), customary limitations and prohibitions contained in such Indebtedness and in the case of any Indebtedness permitted under clause (h) of Section 7.2.2, customary limitations in respect of the Non-U.S. Subsidiaries of the Borrower that shall have incurred such Indebtedness and their assets), or (ii) ability of the Borrower or any other Obligor to amend or otherwise modify this Agreement or any other Loan Document; or (b) any Restricted Subsidiary from making any payments, directly or indirectly, to the Borrower by way of dividends, advances, repayments of loans or advances, reimbursements of management and other intercompany charges, expenses and accruals or other returns on investments, or any other agreement or arrangement which restricts the ability of any such Restricted Subsidiary to make any payment, directly or indirectly, to the Borrower (other than any limitations or prohibitions existing in any Indebtedness permitted under clause (a) of Section 7.2.2 or any Lien permitted under clause (a) of Section 7.2.3 or customary limitations and prohibitions in any Indebtedness permitted under clause (h) of Section 7.2.2 that are applicable to the Non-U.S. Subsidiaries of the Borrower that have incurred such Indebtedness and their assets). SECTION 7.2.13. Stock of Subsidiaries. The Borrower will not permit any Restricted Subsidiary to issue any Capital Stock (whether for value or otherwise) to any Person other than the Borrower or another wholly-owned Subsidiary of the Borrower. SECTION 7.2.14. Sale and Leaseback. The Borrower will not, and will not permit any of its Restricted Subsidiaries to, enter into any agreement or arrangement with any other Person providing for the leasing by the Borrower or any of its Restricted Subsidiaries of real or personal property which has been or is to be sold or transferred by the Borrower or any of its Restricted Subsidiaries to such other Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of the Borrower or any of its Restricted Subsidiaries. 90 98 ARTICLE VIII EVENTS OF DEFAULT SECTION 8.1. Listing of Events of Default. Each of the following events or occurrences described in this Section 8.1 shall constitute an "Event of Default". SECTION 8.1.1. Non-Payment of Obligations. (a) The Borrower shall default in the payment or prepayment of any principal of any Loan when due or any Reimbursement Obligations or any deposit of cash for collateral purposes pursuant to Section 2.6.2 or Section 2.6.4, as the case may be, or (b) any Obligor (including the Borrower) shall default (and such default shall continue unremedied for a period of three Business Days) in the payment when due of any interest or commitment fee with respect to the Loans or Commitments or of any other monetary Obligation. SECTION 8.1.2. Breach of Warranty. Any representation or warranty of the Borrower or any other Obligor made or deemed to be made hereunder or in any other Loan Document executed by it or any other writing or certificate (including the Closing Date Certificate) furnished by or on behalf of the Borrower or any other Obligor to the Agents, the Issuer, the Arranger or any Lender for the purposes of or in connection with this Agreement or any such other Loan Document (including any certificates delivered pursuant to Article V) is or shall be incorrect when made in any material respect. SECTION 8.1.3. Non-Performance of Certain Covenants and Obligations. The Borrower shall default in the due performance and observance of any of its obligations under Sections 7.1.9, 7.1.10 or 7.2 (other than Section 7.2.1). SECTION 8.1.4. Non-Performance of Other Covenants and Obligations. Any Obligor shall default in the due performance and observance of any other agreement contained herein or in any other Loan Document executed by it, and such default shall continue unremedied for a period of 30 days after notice thereof shall have been given to the Borrower by the Administrative Agent at the direction of the Required Lenders. SECTION 8.1.5. Default on Other Indebtedness. A default shall occur (i) in the payment when due (subject to any applicable grace period), whether by acceleration or otherwise, of any Indebtedness, other than Indebtedness described in Section 8.1.1, of the Borrower or any of its Restricted Subsidiaries or Holdings having a principal amount, individually or in the aggregate, in excess of $10,000,000, or (ii) a default shall occur in the performance or observance of any obligation or condition with respect to such Indebtedness having a principal amount, individually or in the aggregate, in excess of $10,000,000 if the effect of such default is to accelerate the maturity of any such Indebtedness or such default shall continue unremedied for any applicable period of time sufficient to permit the holder or holders of such Indebtedness, or any trustee or agent for such holders, to cause such Indebtedness to become due and payable prior to its expressed maturity. 91 99 SECTION 8.1.6. Judgments. Any judgment or order for the payment of money in excess of $10,000,000 (not covered by insurance from a responsible insurance company that is not denying its liability with respect thereto) shall be rendered against the Borrower or any of its Restricted Subsidiaries or Holdings and remain unpaid and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order, or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect. SECTION 8.1.7. Pension Plans. Any of the following events shall occur with respect to any Pension Plan (i) the termination of any Pension Plan if, as a result of such termination, the Borrower would be required to make a contribution to such Pension Plan, or would reasonably expect to incur a liability or obligation to such Pension Plan, in excess of $10,000,000, or (ii) a contribution failure occurs with respect to any Pension Plan sufficient to give rise to a Lien under section 302(f) of ERISA in an amount in excess of $10,000,000. SECTION 8.1.8. Change in Control. Any Change in Control shall occur. SECTION 8.1.9. Bankruptcy, Insolvency, etc. The Borrower or any of its Restricted Subsidiaries (other than immaterial Subsidiaries) or any other Obligor shall (a) become insolvent or generally fail to pay, or admit in writing its inability or unwillingness to pay, its debts as they become due; (b) apply for, consent to, or acquiesce in, the appointment of a trustee, receiver, sequestrator or other custodian for the Borrower or any of such Restricted Subsidiaries or any other Obligor or any property of any thereof, or make a general assignment for the benefit of creditors; (c) in the absence of such application, consent, acquiescence or assignment, permit or suffer to exist the appointment of a trustee, receiver, sequestrator or other custodian for the Borrower or any of its Restricted Subsidiaries (other than immaterial Subsidiaries) or any other Obligor or for a substantial part of the property of any thereof, and such trustee, receiver, sequestrator or other custodian shall not be discharged within 60 days, provided that the Borrower, each such Restricted Subsidiary and each other Obligor hereby expressly authorizes the Agents, the Issuer and each Lender to appear in any court conducting any relevant proceeding during such 60-day period to preserve, protect and defend their rights under the Loan Documents; (d) permit or suffer to exist the commencement of any bankruptcy, reorganization, debt arrangement or other case or proceeding under any bankruptcy or insolvency law, or any dissolution, winding up or liquidation proceeding, in respect of the Borrower or any of its Restricted Subsidiaries (other than immaterial Subsidiaries) or any other Obligor, and, if any such case or proceeding is not commenced by the Borrower or such Restricted Subsidiary or such other Obligor, such case or proceeding 92 100 shall be consented to or acquiesced in by the Borrower or such Restricted Subsidiary or such other Obligor or shall result in the entry of an order for relief or shall remain for 60 days undismissed, provided that the Borrower, each such Restricted Subsidiary and each other Obligor hereby expressly authorizes the Agents, the Issuer and each Lender to appear in any court conducting any such case or proceeding during such 60-day period to preserve, protect and defend their rights under the Loan Documents; or (e) take any action (corporate or otherwise) authorizing, or in furtherance of, any of the foregoing. SECTION 8.1.10. Impairment of Security, etc. Any Loan Document, or any Lien granted thereunder, shall (except in accordance with its terms), in whole or in part, terminate, cease to be in full force and effect or cease to be the legally valid, binding and enforceable obligation of any Obligor party thereto; the Borrower or any other Obligor shall, directly or indirectly, contest in any manner the effectiveness, validity, binding nature or enforceability thereof; or any Lien securing any Obligation shall, in whole or in part, cease to be a perfected first priority Lien, subject only to those exceptions expressly permitted by the Loan Documents, except to the extent any event referred to above (a) relates to assets of the Borrower or any of its Subsidiaries which are immaterial, (b) results from the failure of the Administrative Agent to maintain possession of certificates representing securities pledged under any Pledge Agreement or to file continuation statements under the Uniform Commercial Code of any applicable jurisdiction or (c) is covered by a lender's title insurance policy and the relevant insurer promptly after the occurrence thereof shall have acknowledged in writing that the same is covered by such title insurance policy. SECTION 8.1.11. Subordinated Notes. The subordination provisions relating to the Subordinated Notes (the "Subordination Provisions") shall fail to be enforceable by the Lenders (which have not effectively waived the benefits thereof) in accordance with the terms thereof, or the principal or interest on any Loan, Reimbursement Obligation or other Obligations shall fail to constitute "Senior Debt" (as defined in any Subordinated Note) or "senior indebtedness" (or any other similar term)); or the Borrower or any of its Subsidiaries shall, directly or indirectly, disavow or contest in any manner (i) the effectiveness, validity or enforceability of any of the Subordination Provisions, or (ii) that any of such Subordination Provisions exist for the benefit of the Agents and the Lenders. SECTION 8.2. Action if Bankruptcy, etc. If any Event of Default described in clauses (b), (c) and (d) of Section 8.1.9 shall occur with respect to any Obligor (other than immaterial Subsidiaries) the Commitments (if not theretofore terminated) shall automatically terminate and the outstanding principal amount of all outstanding Loans and all other Obligations (including Reimbursement Obligations) shall automatically be and become immediately due and payable, without notice or demand and the Borrower shall automatically and immediately be obligated to deposit with the Administrative Agent cash collateral in an amount equal to all Letter of Credit Outstandings. 93 101 SECTION 8.3. Action if Other Event of Default. If any Event of Default (other than an Event of Default described in clauses (b), (c) and (d) of Section 8.1.9 with respect to any Obligor (other than immaterial Subsidiaries)) shall occur for any reason, whether voluntary or involuntary, and be continuing, the Administrative Agent, upon the direction of the Required Lenders, shall by notice to the Borrower declare all or any portion of the outstanding principal amount of the Loans and other Obligations (including Reimbursement Obligations) to be due and payable, require the Borrower to provide cash collateral to be deposited with the Administrative Agent in an amount equal to the undrawn amount of all Letters of Credit outstanding and/or declare the Commitments (if not theretofore terminated) to be terminated, whereupon the full unpaid amount of such Loans and other Obligations which shall be so declared due and payable shall be and become immediately due and payable, without further notice, demand or presentment, and/or, as the case may be, the Commitments shall terminate and the Borrower shall deposit with the Administrative Agent cash collateral in an amount equal to all Letters of Credit Outstandings. ARTICLE IX THE AGENTS SECTION 9.1. Actions. Each Lender hereby appoints DLJ as its Syndication Agent and NationsBank as its Administrative Agent under and for purposes of this Agreement, the Notes and each other Loan Document. Each Lender authorizes the Agents to act on behalf of such Lender under this Agreement, the Notes and each other Loan Document and, in the absence of other written instructions from the Required Lenders received from time to time by the Agents (with respect to which each of the Agents agrees that it will comply, except as otherwise provided in this Section or as otherwise advised by counsel), to exercise such powers hereunder and thereunder as are specifically delegated to or required of the Agents by the terms hereof and thereof, together with such powers as may be reasonably incidental thereto. Each Lender hereby indemnifies (which indemnity shall survive any termination of this Agreement) the Agents, ratably in accordance with their respective Term Loans outstanding and Commitments (or, if no Term Loans or Commitments are at the time outstanding and in effect, then ratably in accordance with the principal amount of Term Loans held by such Lender, and their respective Commitments as in effect in each case on the date of the termination of this Agreement), from and against any and all liabilities, obligations, losses, damages, claims, costs or expenses of any kind or nature whatsoever which may at any time be imposed on, incurred by, or asserted against, either of the Agents in any way relating to or arising out of this Agreement, the Notes and any other Loan Document, including reasonable attorneys' fees, and as to which any Agent is not reimbursed by the Borrower or any other Obligor (and without limiting the obligation of the Borrower or any other Obligor to do so); provided, however, that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, claims, costs or expenses which are determined by a court of competent jurisdiction in a final proceeding to have resulted solely from such Agent's gross negligence or willful misconduct. The Agents shall not be required to take any action hereunder, under the Notes or under any other Loan Document, or 94 102 to prosecute or defend any suit in respect of this Agreement, the Notes or any other Loan Document, unless it is indemnified hereunder to its satisfaction. If any indemnity in favor of either of the Agents shall be or become, in such Agent's determination, inadequate, the Agent may call for additional indemnification from the Lenders and cease to do the acts indemnified against hereunder until such additional indemnity is given. SECTION 9.2. Funding Reliance, etc. Unless the Administrative Agent shall have been notified by telephone, confirmed in writing, by any Lender by 5:00 p.m., New York time, on the day prior to a Borrowing or disbursement with respect to a Letter of Credit pursuant to Section 2.6.2 that such Lender will not make available the amount which would constitute its Percentage of such Borrowing on the date specified therefor, the Administrative Agent may assume that such Lender has made such amount available to the Administrative Agent and, in reliance upon such assumption, make available to the Borrower a corresponding amount. If and to the extent that such Lender shall not have made such amount available to the Administrative Agent, such Lender severally agrees and the Borrower agrees to repay the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date the Administrative Agent made such amount available to the Borrower to the date such amount is repaid to the Administrative Agent, at the interest rate applicable at the time to Loans comprising such Borrowing. SECTION 9.3. Exculpation. None of the Agents or the Arranger nor any of their respective directors, officers, employees or agents shall be liable to any Lender for any action taken or omitted to be taken by it under this Agreement or any other Loan Document, or in connection herewith or therewith, except for its own willful misconduct or gross negligence, nor responsible for any recitals or warranties herein or therein, nor for the effectiveness, enforceability, validity or due execution of this Agreement or any other Loan Document, nor for the creation, perfection or priority of any Liens purported to be created by any of the Loan Documents, or the validity, genuineness, enforceability, existence, value or sufficiency of any collateral security, nor to make any inquiry respecting the performance by the Borrower of its obligations hereunder or under any other Loan Document. Any such inquiry which may be made by any Agent or the Issuer shall not obligate it to make any further inquiry or to take any action. The Agents and the Issuer shall be entitled to rely upon advice of counsel concerning legal matters and upon any notice, consent, certificate, statement or writing which the Agents or the Issuer, as applicable, believe to be genuine and to have been presented by a proper Person. SECTION 9.4. Successor. The Syndication Agent may resign as such upon one Business Day's notice to the Borrower and the Administrative Agent. The Administrative Agent may resign as such at any time upon at least 30 days' prior notice to the Borrower and all Lenders. If the Administrative Agent at any time shall resign, the Required Lenders may, with the prior consent of the Borrower (which consent shall not be unreasonably withheld), appoint another Lender as a successor Administrative Agent which shall thereupon become the Administrative Agent hereunder. If no successor Administrative Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent's giving notice of resignation, then the retiring 95 103 Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, which shall be one of the Lenders or a commercial banking institution organized under the laws of the United States or a United States branch or agency of a commercial banking institution, and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall be entitled to receive from the retiring Administrative Agent such documents of transfer and assignment as such successor Administrative Agent may reasonably request, and shall thereupon succeed to and become vested with all rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Administrative Agent's resignation hereunder as the Administrative Agent, the provisions of (i) this Article IX shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Administrative Agent under this Agreement, and (ii) Section 10.3 and Section 10.4 shall continue to inure to its benefit. SECTION 9.5. Credit Extensions by each Agent. Each Agent and the Issuer shall have the same rights and powers with respect to (x) (i) in the case of the Agents, the Credit Extensions made by it or any of its Affiliates and (ii) in the case of the Issuer, the Loans made by it or any of its Affiliates, and (y) the Notes held by it or any of its Affiliates as any other Lender and may exercise the same as if it were not an Agent or the Issuer. Each Agent, the Issuer and each and each of their respective Affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or Affiliate of the Borrower as if such Agent or Issuer were not an Agent or Issuer hereunder. SECTION 9.6. Credit Decisions. Each Lender acknowledges that it has, independently of each Agent, the Documentation Agent, the Arranger, the Issuer and each other Lender, and based on such Lender's review of the financial information of the Borrower, this Agreement, the other Loan Documents (the terms and provisions of which being satisfactory to such Lender) and such other documents, information and investigations as such Lender has deemed appropriate, made its own credit decision to extend its Commitments. Each Lender also acknowledges that it will, independently of each Agent, the Documentation Agent, the Arranger, the Issuer and each other Lender, and based on such other documents, information and investigations as it shall deem appropriate at any time, continue to make its own credit decisions as to exercising or not exercising from time to time any rights and privileges available to it under this Agreement or any other Loan Document. SECTION 9.7. Copies, etc. The Administrative Agent shall give prompt notice to each Lender of each notice or request required or permitted to be given to the Administrative Agent by the Borrower pursuant to the terms of this Agreement (unless concurrently delivered to the Lenders by the Borrower). The Administrative Agent will distribute to each Lender each document or instrument received for such Lender's account and copies of all other communications received by the Administrative Agent from the Borrower for distribution to the Lenders by the Administrative Agent in accordance with the terms of this Agreement. 96 104 SECTION 9.8. The Syndication Agent, the Documentation Agent and the Administrative Agent. Notwithstanding anything else to the contrary contained in this Agreement or any other Loan Document, the Agents and the Documentation Agent, in their respective capacities as such, each in such capacity, shall have no duties or responsibilities under this Agreement or any other Loan Document nor any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise exist against either Agent or the Documentation Agent, as applicable, in such capacity except as are explicitly set forth herein or in the other Loan Documents. ARTICLE X MISCELLANEOUS PROVISIONS SECTION 10.1. Waivers, Amendments, etc. The provisions of this Agreement and of each other Loan Document may from time to time be amended, modified or waived, if such amendment, modification or waiver is in writing and consented to by the Borrower and each Obligor party thereto and by the Required Lenders; provided, however, that no such amendment, modification or waiver which would: (a) modify any requirement hereunder that any particular action be taken by all the Lenders or by the Required Lenders shall be effective unless consented to by each Lender; (b) modify this Section 10.1, or clause (i) of Section 10.10, change the definition of "Required Lenders", increase any Commitment Amount or the Percentage of any Lender (other than pursuant to clause (c) of Section 2.1.2), reduce any fees described in Section 3.3 (other than the administration fee referred to in Section 3.3.2), release any Subsidiary Guarantor from its obligations under the Subsidiary Guaranty, if any, release all or substantially all of the collateral security (except in each case as otherwise specifically provided in this Agreement, any such Subsidiary Guaranty, a Security Agreement or a Pledge Agreement) or extend any Commitment Termination Date, shall be made without the consent of each Lender adversely affected thereby; (c) extend the due date for, or reduce the amount of, any scheduled repayment of principal of or interest on or fees payable in respect of any Loan or reduce the principal amount of or rate of interest on or fees payable in respect of any Loan or any Reimbursement Obligations (which shall in each case include the conversion of all or any part of the Obligations into equity of any Obligor), shall be made without the consent of the holder of the Note evidencing such Loan or, in the case of a Reimbursement Obligation, the Issuer owed, and those Lenders participating in, such Reimbursement Obligation; 97 105 (d) affect adversely the interests, rights or obligations of any Agent, Issuer or Arranger (in its capacity as Agent, Issuer or Arranger), unless consented to by such Agent, Issuer or Arranger, as the case may be; (e) (i) change the definition of "Borrowing Base Amount", "Eligible Account", "Eligible Inventory" or "Net Asset Value" (in each case if the effect of such change would be to require a Lender to make or participate in a Credit Extension in an amount that is greater than such Lender would have had to make or participate in immediately prior to such change), (ii) amend, modify or waive Section 3.1.1(b) or (iii) have the effect (either immediately or at some later time) of enabling the Borrower to satisfy a condition precedent to the making of a Revolving Loan or the issuance of a Letter of Credit without the consent of Lenders holding at least 51% of the Revolving Loan Commitments; or (f) amend, modify or waive the provisions of clause (a)(i) of Section 3.1.1 or clause (b) of Section 3.1.2 or effect any amendment, modification or waiver that by its terms adversely affects the rights of Lenders participating in any Tranche differently from those of Lenders participating in other Tranches, without the consent of the holders of the Notes evidencing at least 51% of the aggregate amount of Loans outstanding under the Tranche or Tranches affected by such modification, or, in the case of a modification affecting the Revolving Loan Commitment Amount, the Lenders holding at least 51% of the Revolving Loan Commitments. No failure or delay on the part of any Agent, the Issuer, any Lender or the holder of any Note in exercising any power or right under this Agreement or any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No notice to or demand on the Borrower in any case shall entitle it to any notice or demand in similar or other circumstances. No waiver or approval by any Agent, the Issuer, any Lender or the holder of any Note under this Agreement or any other Loan Document shall, except as may be otherwise stated in such waiver or approval, be applicable to subsequent transactions. No waiver or approval hereunder shall require any similar or dissimilar waiver or approval thereafter to be granted hereunder. SECTION 10.2. Notices. All notices and other communications provided to any party hereto under this Agreement or any other Loan Document shall be in writing or by facsimile and addressed, delivered or transmitted to such party at its address or facsimile number set forth on Schedule II hereto or, in the case of a Lender that becomes a party hereto after the date hereof, as set forth in the Lender Assignment Agreement pursuant to which such Lender becomes a Lender hereunder or at such other address or facsimile number as may be designated by such party in a notice to the other parties. Any notice, if mailed and properly addressed with postage prepaid or if properly addressed and sent by pre-paid courier service, shall be deemed given when received; any notice, if transmitted by facsimile, shall be deemed given when transmitted (and telephonic confirmation of receipt thereof has been received). 98 106 SECTION 10.3. Payment of Costs and Expenses. The Borrower agrees to pay on demand all reasonable expenses of each of the Agents (including the reasonable fees and out-of-pocket expenses of a single counsel to the Agents and of local or foreign counsel, if any, who may be retained by counsel to the Agents) in connection with (a) the syndication by the Syndication Agent and the Arranger of the Loans, the negotiation, preparation, execution and delivery of this Agreement and of each other Loan Document, including schedules and exhibits, and any amendments, waivers, consents, supplements or other modifications to this Agreement or any other Loan Document as may from time to time hereafter be required, whether or not the transactions contemplated hereby are consummated; (b) the filing, recording, refiling or rerecording of each Mortgage, each Pledge Agreement and each Security Agreement and/or any Uniform Commercial Code financing statements relating thereto and all amendments, supplements and modifications to any thereof and any and all other documents or instruments of further assurance required to be filed or recorded or refiled or rerecorded by the terms hereof or of such Mortgage, Pledge Agreement or Security Agreement; and (c) the preparation and review of the form of any document or instrument relevant to this Agreement or any other Loan Document. The Borrower further agrees to pay, and to save the Agents, the Issuer and the Lenders harmless from all liability for, any stamp or other similar taxes which may be payable in connection with the execution or delivery of this Agreement, the Credit Extensions made hereunder or the issuance of the Notes or Letters of Credit or any other Loan Documents. The Borrower also agrees to reimburse each Agent, the Issuer and each Lender upon demand for all reasonable out-of-pocket expenses (including reasonable attorneys' fees and legal expenses) incurred by such Agent, the Issuer or such Lender in connection with (x) the negotiation of any restructuring or "work-out", whether or not consummated, of any Obligations and (y) the enforcement of any Obligations. SECTION 10.4. Indemnification. In consideration of the execution and delivery of this Agreement by each Lender and the extension of the Commitments, the Borrower hereby, to the fullest extent permitted under applicable law, indemnifies, exonerates and holds each Agent, the Documentation Agent, the Issuer, the Arranger and each Lender and each of their respective Affiliates, and each of their respective partners, officers, directors, employees and agents, and each other Person controlling any of the foregoing within the meaning of either Section 15 of the Securities Act of 1933, as amended, or Section 20 of the Securities Exchange Act of 1934, as amended (collectively, the "Indemnified Parties"), free and harmless from and against any and all actions, causes of action, suits, losses, costs, liabilities and damages, and expenses actually incurred in connection therewith (irrespective of whether any such Indemnified Party is a party to the action for which indemnification hereunder is sought), including reasonable attorneys' 99 107 fees and disbursements (collectively, the "Indemnified Liabilities"), incurred by the Indemnified Parties or any of them as a result of, or arising out of, or relating to (a) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of any Credit Extension; (b) the entering into and performance of this Agreement and any other Loan Document by any of the Indemnified Parties (excluding any successful action brought by or on behalf of the Borrower as the result of any failure by any Lender to make any Credit Extension hereunder); (c) any investigation, litigation or proceeding related to any acquisition or proposed acquisition by the Borrower or any of its Subsidiaries of all or any portion of the stock or assets of any Person, whether or not such Agent, such Documentation Agent, such Issuer, such Arranger or such Lender is party thereto; (d) any investigation, litigation or proceeding related to any environmental cleanup, audit, compliance or other matter relating to the Borrower's or any of its Subsidiaries' compliance with or liability under Environmental Law or the Release by the Borrower or any of its Subsidiaries of any Hazardous Material; or (e) the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission or release from, any real property owned or operated by the Borrower or any Subsidiary thereof of any Hazardous Material present on or under such property in a manner giving rise to liability at or prior to the time the Borrower or such Subsidiary owned or operated such property (including any losses, liabilities, damages, injuries, costs, expenses or claims asserted or arising under any Environmental Law), regardless of whether caused by, or within the control of, the Borrower or such Subsidiary, except for any such Indemnified Liabilities arising for the account of a particular Indemnified Party by reason of the relevant Indemnified Party's gross negligence or willful misconduct or any Hazardous Materials that are first manufactured, emitted, generated, treated, released, stored or disposed of on any real property of the Borrower or any of its Subsidiaries or any violation of Environmental Law that first occurs on or with respect to any real property of the Borrower or any of its Subsidiaries after such real property is transferred to any Indemnified Person or its successor by foreclosure sale, deed in lieu of foreclosure, or similar transfer, except to the extent such manufacture, emission, release, generation, treatment, storage or disposal or violation is actually caused by Holdings, the Borrower or any of the Borrower's Subsidiaries. The Borrower and its permitted successors and assigns hereby waive, release and agree not to make any claim, or bring any cost recovery action against, any Agent, the Issuer, the Documentation Agent, the Arranger or any Lender under CERCLA or any state equivalent, or any similar law now existing or hereafter enacted, except to the extent arising out of the gross negligence or willful misconduct of any Indemnified Party. It is expressly understood and agreed that to the extent that any of such Persons is strictly liable under any Environmental Laws, the Borrower's 100 108 obligation to such Person under this indemnity shall likewise be without regard to fault on the part of the Borrower, to the extent permitted under applicable law, with respect to the violation or condition which results in liability of such Person. Notwithstanding anything to the contrary herein, each Agent, the Documentation Agent, the Issuer, the Arranger and each Lender shall be responsible with respect to any Hazardous Materials that are first manufactured, emitted, generated, treated, released, stored or disposed of on any real property of the Borrower or any of its Subsidiaries or any violation of Environmental Law that first occurs on or with respect to any such real property after such real property is transferred to any Agent, Documentation Agent, Issuer, Arranger or Lender to its successor by foreclosure sale, deed in lieu of foreclosure, or similar transfer, except to the extent such manufacture, emission, release, generation, treatment, storage or disposal or violation is actually caused by Holdings, the Borrower or any of the Borrower's Subsidiaries. If and to the extent that the foregoing undertaking may be unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. SECTION 10.5. Survival. The obligations of the Borrower under Sections 4.3, 4.4, 4.5, 4.6, 10.3 and 10.4, and the obligations of the Lenders under Sections 4.8 and 9.1, shall in each case survive any termination of this Agreement, the payment in full of all Obligations and the termination of all Commitments. The representations and warranties made by the Borrower and each other Obligor in this Agreement and in each other Loan Document shall survive the execution and delivery of this Agreement and each such other Loan Document. SECTION 10.6. Severability. Any provision of this Agreement or any other Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or such Loan Document or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 10.7. Headings. The various headings of this Agreement and of each other Loan Document are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or such other Loan Document or any provisions hereof or thereof. SECTION 10.8. Execution in Counterparts, Effectiveness, etc. This Agreement may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. SECTION 10.9. Governing Law; Entire Agreement. THIS AGREEMENT, THE NOTES AND, EXCEPT TO THE EXTENT OTHERWISE EXPRESSLY PROVIDED THEREIN, EACH OTHER LOAN DOCUMENT SHALL EACH BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK. This Agreement, the Notes and the other Loan Documents constitute the entire understanding among the parties hereto with respect to the subject matter 101 109 hereof and supersede any prior agreements, written or oral, with respect thereto. Upon the execution and delivery of this Agreement by the parties hereto, all obligations and liabilities of DLJ Merchant Banking II, Inc. under or relating or with respect to the Commitment Letter shall be terminated and of no further force or effect. SECTION 10.10. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that (i) the Borrower may not assign or transfer its rights or obligations hereunder without the prior written consent of each of the Agents and all Lenders, and (ii) the rights of sale, assignment and transfer of the Lenders are subject to Section 10.11. SECTION 10.11. Sale and Transfer of Loans and Notes; Participations in Loans and Notes. Each Lender may assign, or sell participations in, its Loans and Commitments to one or more other Persons, on a non pro rata basis (except as provided below), in accordance with this Section 10.11. SECTION 10.11.1. Assignments. Any Lender (the "Assignor Lender"), (a) with the written consents of the Borrower, the Agents and (in the case of any assignment of participations in Letters of Credit or Revolving Loan Commitments) the Issuer (which consents shall not be unreasonably delayed or withheld and which consents of the Agents and the Issuer shall not be required in the case of assignments made by DLJ or any of its Affiliates), may at any time assign and delegate to one or more commercial banks or other financial institutions or funds which are regularly engaged in making, purchasing or investing in loans or securities, and (b) with notice to the Borrower, the Agents, and (in the case of any assignment of participations in Letters of Credit or Revolving Loan Commitments) the Issuer, but without the consent of the Borrower, the Agents or the Issuer, may assign and delegate to any of its Affiliates or to any other Lender (each Person described in either of the foregoing clauses as being the Person to whom such assignment and delegation is to be made, being hereinafter referred to as an "Assignee Lender"), all or any fraction of such Lender's total Loans, participations in Letters of Credit and Letter of Credit Outstandings with respect thereto and Commitments (which assignment and delegation shall be, as among Revolving Loan Commitments, Revolving Loans and participations in Letters of Credit, of a constant, and not a varying, percentage) in a minimum aggregate amount of (i) $5,000,000 or (ii) the then remaining amount of such Lender's Loans and Commitments; provided, however, that any such Assignee Lender will comply, if applicable, with the provisions contained in Section 4.6 and the Borrower, each other Obligor and the Agents shall be entitled to continue to deal solely and directly with such Lender in connection with the interests so assigned and delegated to an Assignee Lender until 102 110 (c) written notice of such assignment and delegation, together with payment instructions, addresses and related information with respect to such Assignee Lender, shall have been given to the Borrower and the Agents by such Lender and such Assignee Lender; (d) such Assignee Lender shall have executed and delivered to the Borrower and the Agents a Lender Assignment Agreement, accepted by the Agents; (e) the processing fees described below shall have been paid; and (f) the Agent shall have registered such assignment and delegation in the Register pursuant to clause (b) of Section 2.7. From and after the date that the Agents accept such Lender Assignment Agreement and such assignment and delegation is registered in the Register pursuant to clause (b) of Section 2.7, (x) the Assignee Lender thereunder shall be deemed automatically to have become a party hereto and to the extent that rights and obligations hereunder have been assigned and delegated to such Assignee Lender in connection with such Lender Assignment Agreement, shall have the rights and obligations of a Lender hereunder and under the other Loan Documents, and (y) the Assignor Lender, to the extent that rights and obligations hereunder have been assigned and delegated by it in connection with such Lender Assignment Agreement, shall be released from its obligations hereunder and under the other Loan Documents. Within ten Business Days after its receipt of notice that the Administrative Agent has received an executed Lender Assignment Agreement, the Borrower shall execute and deliver to the Administrative Agent (for delivery to the relevant Assignee Lender) new Notes evidencing such Assignee Lender's assigned Loans and Commitments and, if the Assignor Lender has retained Loans and Commitments hereunder, replacement Notes in the principal amount of the Loans and Commitments retained by the Assignor Lender hereunder (such Notes to be in exchange for, but not in payment of, those Notes then held by such Assignor Lender). Each such Note shall be dated the date of the predecessor Notes. The Assignor Lender shall mark the predecessor Notes "exchanged" and deliver them to the Borrower. Accrued interest on that part of the predecessor Notes evidenced by the new Notes, and accrued fees, shall be paid as provided in the Lender Assignment Agreement. Accrued interest on that part of the predecessor Notes evidenced by the replacement Notes shall be paid to the Assignor Lender. Accrued interest and accrued fees shall be paid at the same time or times provided in the predecessor Notes and in this Agreement. Such Assignor Lender or such Assignee Lender (unless the Assignor Lender or the Assignee Lender is DLJ or one of its Affiliates) must also pay a processing fee to the Administrative Agent upon delivery of any Lender Assignment Agreement in the amount of $3,000, unless such assignment and delegation is by a Lender to its Affiliate or if such assignment and delegation is by a Lender to a Federal Reserve Bank, as provided below or is otherwise consented to by the Administrative Agent. Any attempted assignment and delegation not made in accordance with this Section 10.11.1 shall be null and void. Nothing contained in this Section 10.11.1 shall prevent or prohibit any Lender from pledging its rights (but not its obligations to make Loans or participate in Letters of Credit of Letter of Credit Outstandings) under this Agreement and/or its Loans and/or its Notes 103 111 hereunder to a Federal Reserve Bank in support of borrowings made by such Lender from such Federal Reserve Bank. In the event that S&P, Moody's or Thompson's BankWatch (or InsuranceWatch Ratings Service, in the case of Lenders that are insurance companies (or Best's Insurance Reports, if such insurance company is not rated by Insurance Watch Ratings Service)) shall, after the date that any Lender with a Commitment to make Revolving Loans or participate in Letters of Credit becomes a Lender, downgrade the long-term certificate of deposit rating or long-term senior unsecured debt rating of such Lender, and the resulting rating shall be below BBB-, Baa3 or C (or BB, in the case of Lender that is an insurance company (or B, in the case of an insurance company not rated by InsuranceWatch Ratings Service)) respectively, then the Issuer or the Borrower (with the consent of the Agents and the Issuer) shall have the right, but not the obligation, upon notice to such Lender and the Agents, to replace such Lender with an Assignee Lender in accordance with and subject to the restrictions contained in this Section, and such Lender hereby agrees to transfer and assign without recourse (in accordance with and subject to the restrictions contained in this Section) all its interests, rights and obligations in respect of its Revolving Loan Commitment under this Agreement to such Assignee Lender; provided, however, that (i) no such assignment shall conflict with any law, rule, regulation or order of any governmental authority and (ii) such Assignee Lender shall pay to such Lender in immediately available funds on the date of such assignment the principal of and interest and fees (if any) accrued to the date of payment on the Loans made, and Letters of Credit participated in, by such Lender hereunder and all other amounts accrued for such Lender's account or owed to it hereunder. SECTION 10.11.2. Participations. Any Lender may at any time sell to one or more commercial banks or other Persons (each such commercial bank and other Person being herein called a "Participant") participating interests in any of the Loans, Commitments, participations in Letters of Credit and Letters of Credit Outstandings or other interests of such Lender hereunder; provided, however, that (a) no participation contemplated in this Section shall relieve such Lender from its Commitments or its other obligations hereunder or under any other Loan Document; (b) such Lender shall remain solely responsible for the performance of its Commitments and such other obligations; (c) the Borrower and each other Obligor and the Agents shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and each of the other Loan Documents; (d) no Participant, unless such Participant is an Affiliate of such Lender, or is itself a Lender, shall be entitled to require such Lender to take or refrain from taking any action hereunder or under any other Loan Document, except that such Lender may agree with any Participant that such Lender will not, without such Participant's consent, agree to (i) any reduction in the interest rate or amount of fees that such Participant is otherwise entitled to, (ii) a decrease in the principal amount, or an extension of the final Stated 104 112 Maturity Date, of any Loan in which such Participant has purchased a participating interest or (iii) a release of all or substantially all of the collateral security under the Loan Documents or any Subsidiary Guarantor under any Subsidiary Guaranty, if any, in each case except as otherwise specifically provided in a Loan Document; and (e) the Borrower shall not be required to pay any amount under Sections 4.3, 4.4, 4.5, 4.6, 10.3 and 10.4 that is greater than the amount which it would have been required to pay had no participating interest been sold. The Borrower acknowledges and agrees, subject to clause (e) above, that, to the fullest extent permitted under applicable law, each Participant, for purposes of Sections 4.3, 4.4, 4.5, 4.6, 4.8, 4.9, 10.3 and 10.4, shall be considered a Lender. SECTION 10.12. Other Transactions. Nothing contained herein shall preclude any Agent or any other Lender from engaging in any transaction, in addition to those contemplated by this Agreement or any other Loan Document, with the Borrower or any of its Affiliates in which the Borrower or such Affiliate is not restricted hereby from engaging with any other Person. SECTION 10.13. Forum Selection and Consent to Jurisdiction. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE AGENTS, THE LENDERS, THE ISSUER OR THE BORROWER RELATING THERETO SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY (TO THE EXTENT PERMITTED UNDER APPLICABLE LAW) IN THE COURTS OF THE STATE OF NEW YORK, NEW YORK COUNTY, OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE ADMINISTRATIVE AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, NEW YORK COUNTY, AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. THE BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH 105 113 LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OF FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, THE BORROWER HEREBY IRREVOCABLY WAIVES (TO THE EXTENT PERMITTED UNDER APPLICABLE LAW) SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. SECTION 10.14. Waiver of Jury Trial. THE AGENTS, THE ISSUER, THE LENDERS AND THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE AGENTS, THE LENDERS OR THE BORROWER RELATING THERETO. THE BORROWER ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENTS AND THE LENDERS ENTERING INTO THIS AGREEMENT AND EACH SUCH OTHER LOAN DOCUMENT. SECTION 10.15. Confidentiality. The Agents, the Issuer, the Arranger and the Lenders shall hold all non-public information obtained pursuant to or in connection with this Agreement or obtained by them based on a review of the books and records of the Borrower or any of its Subsidiaries in accordance with their customary procedures for handling confidential information of this nature, but may make disclosure to any of their examiners, regulators (including, without limitation, the National Association of Insurance Commissioners), Affiliates, outside auditors, counsel and other professional advisors in connection with this Agreement or as reasonably required by any potential bona fide transferee, participant or assignee, or in connection with the exercise of remedies under a Loan Document, or as requested by any governmental agency or representative thereof or pursuant to legal process; provided, however, that (a) unless specifically prohibited by applicable law or court order, each Agent, the Arranger and each Lender shall promptly notify the Borrower of any request by any governmental agency or representative thereof (other than any such request in connection with an examination of the financial condition of such Agent, the Issuer, Arranger and 106 114 Lender by such governmental agency) for disclosure of any such non-public information and, where practicable, prior to disclosure of such information; (b) prior to any such disclosure pursuant to this Section 10.15, each Agent, the Issuer, the Arranger and each Lender shall require any such bona fide transferee, participant and assignee receiving a disclosure of non-public information to agree in writing (i) to be bound by this Section 10.15; and (ii) to require such Person to require any other Person to whom such Person discloses such non-public information to be similarly bound by this Section 10.15; (c) disclosure may, with the consent of the Agents and the Borrower, be made by any Lender to any direct or indirect contractual counterparties of such Lender in swap agreements or such contractual counterparties' professional advisors; provided that such contractual counterparty or professional advisor agrees in writing to keep such information confidential to the same extent required of the Lenders hereunder; and (d) except as may be required by an order of a court of competent jurisdiction and to the extent set forth therein, no Lender shall be obligated or required to return any materials furnished by the Borrower or any Subsidiary. 115 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the day and year first above written. DECISIONONE CORPORATION By:________________________________ Title: DLJ CAPITAL FUNDING, INC., as the Syndication Agent and as Lender By:________________________________ Title: NATIONSBANK OF TEXAS, N.A., as the Administrative Agent and as Lender By:________________________________ Title: BANKBOSTON, N.A., as the Documentation Agent and as Lender By:___________________________ Title: 116 LENDERS: ALLSTATE INSURANCE COMPANY By: _________________________________ Name: Title: By: _________________________________ Name: Title: 109 117 BANKBOSTON, N.A. By: _________________________________ Name: Title: 110 118 BANK OF MONTREAL By: _________________________________ Name: Title: 111 119 THE BANK OF NOVA SCOTIA By: _________________________________ Name: Title: 112 120 BANK OF TOKYO-MITSUBISHI TRUST COMPANY By: _________________________________ Name: Title: 113 121 BANQUE FRANCAISE DU COMMERCE EXTERIEUR By: _________________________________ Name: Title: 114 122 BDC FINANCE L.L.C. By: _________________________________ Name: Title: 115 123 CITIBANK, N.A. By: _________________________________ Name: Title: 116 124 CORESTATES BANK, N.A. By: _________________________________ Name: Title: 117 125 CREDIT LYONNAIS NEW YORK BRANCH By: _________________________________ Name: Title: 118 126 CYPRESSTREE INVESTMENT MANAGEMENT COMPANY By: _________________________________ Name: Title: 119 127 DEBT STRATEGIES FUND, INC. By: _________________________________ Name: Title: 120 128 DEEPROCK & COMPANY By: Eaton Vance Management, as Investment Advisor By: _________________________________ Name: Title: 121 129 THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES By: _________________________________ Name: Title: 122 130 THE FIRST NATIONAL BANK OF CHICAGO By: _________________________________ Name: Title: 123 131 FLEET NATIONAL BANK By: _________________________________ Name: Title: 124 132 FLOATING RATE PORTFOLIO By: Chancellor LGT Senior Secured Management, Inc., as Attorney-in-Fact By: _________________________________ Name: Title: 125 133 THE FUJI BANK, LIMITED NEW YORK BRANCH By: _________________________________ Name: Title: 126 134 HARCH CAPITAL MANAGEMENT, INC., as Agent for HCN Offshore Trust By: _________________________________ Name: Title: 127 135 IMPERIAL BANK, A CALIFORNIA BANKING CORPORATION By: _________________________________ Name: Title: 128 136 INDOSUEZ CAPITAL FUNDING III, LIMITED By: Indosuez Capital Luxembourg, as Collateral Manager By: _________________________________ Name: Title: 129 137 THE ING CAPITAL SENIOR SECURED HIGH INCOME FUND, L.P. By: _________________________________ Name: Title: 130 138 KZH HOLDING CORPORATION III By:_________________________________ Name: Title: 131 139 KZH-SOLEIL CORPORATION By: _________________________________ Name: Title: 132 140 THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED, NEW YORK BRANCH By: _________________________________ Name: Title: 133 141 MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By: _________________________________ Name: Title: 134 142 MERITA BANK LTD. - NEW YORK BRANCH By: _________________________________ Name: Title: 135 143 MELLON BANK, N.A. By: _________________________________ Name: Title: 136 144 MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. By: _________________________________ Name: Title: 137 145 THE MITSUBISHI TRUST AND BANKING CORPORATION By: _________________________________ Name: Title: 138 146 NEW YORK LIFE INSURANCE COMPANY By: _________________________________ Name: Title: 139 147 OCTAGON CREDIT INVESTORS LOAN PORTFOLIO (a Unit of The Chase Manhattan Bank) By: _________________________________ Name: Title: 140 148 PNC BANK, NATIONAL ASSOCIATION By: _________________________________ Name: Title: 141 149 BY: PPM AMERICA, INC., as attorney in fact, on behalf of Jackson National Life Insurance Company By: _________________________________ Name: Title: 142 150 PRIME INCOME TRUST By: _________________________________ Name: Title: 143 151 ROYAL BANK OF CANADA By: _________________________________ Name: Title: 144 152 ROYALTON COMPANY By: Pacific Investment Management Company, as its Investment Advisor By: _________________________________ Name: Title: 145 153 THE SAKURA BANK, LTD. By: _________________________________ Name: Title: 146 154 SHENKMAN CAPITAL MANAGEMENT, INC. By: _________________________________ Name: Title: 147 155 THE SUMITOMO BANK, LIMITED, NEW YORK BRANCH By: _________________________________ Name: Title: 148 156 THOROUGHBRED LIMITED PARTNERSHIP I By: Appaloosa Management L.P. Its General Partner By: Appaloosa Partners Inc. Its General Partner By: _________________________________ Name: Title: 149 157 KZH - CRESCENT CORPORATION By: _________________________________ Name: Title: 150 158 VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST By: _________________________________ Name: Title: 151 159 WELLS FARGO BANK, N.A. By: _________________________________ Name: Title: 152 160 KZH - ING-1 CORPORATION By:_____________________________________ Name: Title: 153 161 NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION By: NEW YORK LIFE INSURANCE COMPANY By: _____________________________ Name: Title: 154 162 CANADIAN IMPERIAL BANK OF COMMERCE By:_____________________________________ Name: Title: 163 CRESCENT/MACH I PARTNERS, L.P. By: TCW Asset Management Company Its Investment Manager By:_____________________________________ Name: Title: 164 CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (E) By: TCW Asset Management Company as Attorney-in-Fact By:_____________________________________ Name: Mark L. Gold Title: Managing Director By:_____________________________________ Name: Justin L. Driscoll Title: Senior Vice President 165 SCHEDULE I DISCLOSURE SCHEDULE ITEM 6.7 Litigation. 1. On April 30, 1997, the United States District Court for the Southern District of New York granted the joint motion of the U.S. Department of Justice and IBM, approving the proposed settlement of the IBM Consent Decree litigation. As summary of the terms of the settlement, and the possible effects on the Borrower's business, is set forth on pages 8-9 of the Holdings' 10-K filed with the Securities and Exchange Commission for the Fiscal Year ended June 30, 1996. 2. In Data Study, Inc. v. DecisionOne, the plaintiff filed suit against the Borrower for unpaid invoices in the amount of approximately $450,000 relating to a software development contract; the Borrower counterclaimed, alleging failure of performance by Data Study. ITEM 6.8 Existing Subsidiaries. IC Properties Corporation (Delaware) Properties Development Corporation (Delaware) Properties Holding Corporation (Delaware) Decision Data Investment Corporation (Delaware) DecisionOne Supplies, Inc. (Delaware) Decision Data International Corporation (Delaware) Decision Data Computer International S.A. (Switzerland) DecisionOne Corporation (Canada) ITEM 6.11 Employee Benefit Plans. Underfunded Pension Plan In 1988 the Borrower assumed the liability of a defined benefit pension plan applicable to employees of a company acquired in 1988. The eligibility and benefits were frozen in 1988. The Plan is underfunded as the projected benefit obligations exceed the fair value of the Plan assets by approximately $1.3 million as of June 30, 1996. For a further discussion, see footnote 16 to the Notes to the Consolidated Financial Statements 166 of the Borrower appearing in the Holdings' 10-K filed with the Securities and Exchange and Exchange Commission for the Fiscal Year ended June 30, 1996. ITEM 6.12 Environmental Matters. The Borrower, or certain businesses as to which it is alleged that the Borrower is a successor, have been identified as potentially responsible parties in respect of four waste disposal sites that have been identified by the United States Environmental Protection Agency as Superfund sites. In addition, the Borrower received a notice several years ago that it may be a potentially responsible party with respect to a fifth related site, but has not received any other communication with respect to that site. Under applicable law, all parties responsible for disposal of hazardous substances at those sites are jointly and severally liable for clean up costs. The Borrower originally estimated that its share of the costs of the clean-up of one of these sites would be approximately $500,000 which is provided for in liabilities related to the discontinued products division in the Holdings consolidated balance sheets as of June 30, 1995 and 1996. Complete information as to the scope of required clean-up at these sites is not yet available and, therefore, the Borrower's evaluation may be affected as further information becomes available. ITEM 7.2.2(a) Ongoing Indebtedness. TYPE OF INDEBTEDNESS AMOUNT Acquisition Related Non-Interest = $4,517,302 Bearing Obligations Capitalized Lease Obligations = $1,308,071 Outstanding Letters of Credit = $3,254,803 Obligations ITEM 7.2.2 (b) Ongoing Liens. NONE ITEM 7.2.5(a) Ongoing Investments. NONE I-2 167 SCHEDULE II to Credit Agreement PERCENTAGES || REVOLVING LOAN Term-A Loan Term-B Loan COMMITMENT Commitment Commitment % % % [LENDER] % % % || ADMINISTRATIVE INFORMATION Notice Information Lenders' Domestic and LIBOR Offices DLJ Capital Funding, Inc. 525 Washington Blvd. Jersey City, New Jersey 07310 Contact: ____________ Fax: 201-610-1965 168 SCHEDULE III EXISTING LETTERS OF CREDIT III-2 EX-23.2 4 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-03267, 333-19095, 333-33043, 333-33045 on Form S-8 and 333-33057, 333-33061 on Form S-3 of DecisionOne Holdings Corp. of our reports dated August 15, 1997 appearing in this Annual Report on Form 10-K of DecisionOne Holdings Corp. and DecisionOne Corporation for the year ended June 30, 1997. Deloitte & Touche LLP Philadelphia, Pennsylvania September 29, 1997 EX-27 5 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF DECISIONONE CORPORATION AND SUBSIDIARIES AS OF JUNE 30, 1997 AND THE YEAR THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000000000 0 1,000 U.S. DOLLARS YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 1 10,877 0 142,331 14,869 34,518 182,635 70,532 36,305 623,105 161,568 0 0 0 0 214,888 623,105 785,950 785,950 581,860 581,860 128,491 7,849 14,698 53,052 21,698 31,084 0 0 0 31,084 0 0
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