-----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, NEYNyDx5yw5E9S/USLWZ0580eA6COjdzHWjK6jRYA2uW30Zk/uPKn1NQmojkZTUF D+F6de8udMbzOurMweWX4g== 0000893220-97-001645.txt : 19971010 0000893220-97-001645.hdr.sgml : 19971010 ACCESSION NUMBER: 0000893220-97-001645 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19971008 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/A SEC ACT: SEC FILE NUMBER: 333-28411 FILM NUMBER: 97692646 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/A 1 FORM 10-K/A DECISIONONE CORPORATION 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A1 [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 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This amendment to the Registrant's Form 10-K for the fiscal year ended June 30, 1997 (the "1997 Form 10-K") amends and modifies the financial statements and supplementary data for DecisionOne Holdings Corp. and DecisionOne Corporation listed in Item 14 which are attached hereto and made a part hereof. 3 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 October 8, 1997. DECISIONONE CORPORATION By: /s/ THOMAS J. FITZPATRICK ------------------------------------ Thomas J. Fitzpatrick Vice President and Chief Financial Officer 4 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 5 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 6 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 7 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 8 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 9 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 10 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 11 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 12 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 13 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 14 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 EXCEPT PER SHARE AMOUNTS) 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 15 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 16 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 17 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 18 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 of 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 19 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 20 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 21 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 22 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 23 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 24 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) ------------------------ -------------------- --------------- Grants issued in 1996... 5.85%-6.85% 26.9% 10 Grants issued in 1997... 6.47% 26.5% 10
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 25 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 26 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 27 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 28 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 29 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 30 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 SHAREHOLDER'S 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 31 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 32 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 33 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 34 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, 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 35 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 36 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 37 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 38 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 39 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 40 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 41 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 of 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 42 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 43 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 44 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 45 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 46 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 47 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 48 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 49 SCHEDULE I DECISIONONE HOLDINGS CORP. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET (PARENT COMPANY ONLY) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, JUNE 30, 1997 1996 -------- -------- ASSETS Investment in equity of subsidiaries................................. $214,888 $180,793 -------- -------- Total assets........................................................... $214,888 $180,793 ======== ======== SHAREHOLDERS' EQUITY Preferred stock, $1.00 par value; authorized 5,000,000 shares; none outstanding Common stock, $.01 par value -- authorized, 100,000,000 shares; issued and outstanding 27,817,832 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) Foreign currency translation adjustment.............................. 584 622 Pension liability adjustment......................................... (1,873) (1,848) -------- -------- Total shareholders' equity............................................. $214,888 $180,793 ======== ========
See note to condensed financial information. S-1 50 SCHEDULE I DECISIONONE HOLDINGS CORP. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENT OF OPERATIONS (PARENT COMPANY ONLY) (IN THOUSANDS)
YEARS ENDED JUNE 30, ---------------------------------- 1997 1996 1995 -------- -------- -------- Equity in net income of subsidiaries....................... $ 31,084 $ 18,862 $ 42,528 -------- -------- -------- Net income................................................. $ 31,084 $ 18,862 $ 42,528 ======== ======== ========
See note to condensed financial information. S-2 51 SCHEDULE I DECISIONONE HOLDINGS CORP. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENT OF CASH FLOWS (PARENT COMPANY ONLY) (IN THOUSANDS)
YEARS ENDED JUNE 30 -------------------------------- 1997 1996 1995 -------- --------- ------- Operating Activities: Net income.................................................. $ 31,084 $ 18,862 $42,528 Adjustment to reconcile net income to net cash provided by operating activities..................................... (31,084) (17,416) (42,528) -------- --------- -------- Net cash provided by operating activities.............. -- 1,446 -- -------- --------- -------- Investing Activities -- contribution to capital of subsidiaries................................................ (439) (142,090) -- -------- --------- -------- Financing Activities: Proceeds from issuance of preferred stock 31,392 Proceeds from issuance of common stock and warrants......... 439 110,698 Dividends paid on preferred stock........................... (1,446) -------- --------- -------- Net cash provided by financing activities.............. 439 140,644 -- -------- --------- -------- Net Change in Cash.......................................... $ -- $ $ -- ======== ========= ========
See note to condensed financial information. S-3 52 SCHEDULE 1 DECISIONONE HOLDINGS CORP. NOTE TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) 1. BASIS OF PRESENTATION The accompanying condensed financial statements include the accounts of DecisionOne Holdings Corp. (the Parent) and on an equity basis its subsidiaries and should be read in conjunction with the consolidated financial statements of DecisionOne Holdings Corp. and Subsidiaries (the "Company") and the notes thereto. S-4 53 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 54 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE - ------- ----------------------------------------------------------------------------- ---- 23 Consent of Deloitte & Touche LLP
EX-23 2 CONSENT OF INDEPENDENT AUDITORS 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/A1 of DecisionOne Holdings Corp. and DecisionOne Corporation for the year ended June 30, 1997. Deloitte & Touche LLP Philadelphia, Pennsylvania October 8, 1997 -----END PRIVACY-ENHANCED MESSAGE-----