-----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, TSQkFBxIm7Pc/QLy367gwtIG1uFjKV4HBhpM2+L3JAMAVEPhzq3afHWwiwg+p2KE Bf+9SbuAt6vggNMdiV7cIw== 0000893220-98-001585.txt : 19980930 0000893220-98-001585.hdr.sgml : 19980930 ACCESSION NUMBER: 0000893220-98-001585 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DECISIONONE CORP /DE CENTRAL INDEX KEY: 0001040354 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-28411 FILM NUMBER: 98716689 BUSINESS ADDRESS: STREET 1: 50 EAST SWEDESFORD RD CITY: FRAZER STATE: PA ZIP: 19355 BUSINESS PHONE: 6104083820 10-K 1 DECISIONONE CORPORATION FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1998 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 SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: TITLE OF EACH CLASS DECISIONONE HOLDINGS CORP.: 11-1/2% Senior Discount Debentures due 2008 148,400 Warrants to Purchase Common Stock Common Stock, $.01 par value DECISIONONE CORPORATION: 9-3/4% Senior Subordinated Notes due 2007 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 [X] 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 [X] No [ ] 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, 1998, as reported by the Nasdaq National Market System, was approximately $20,673,940. 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, 1998, 12,584,219 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. [ ] DecisionOne Corporation meets the conditions set forth in General Instruction I(1) (a) and (b) 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 1998 Annual Meeting of Stockholders (Part III). 2 PART I ITEM 1. BUSINESS Item 1. is presented with respect to both registrants submitting this filing, DecisionOne Holdings Corp. and DecisionOne Corporation. GENERAL DecisionOne Holdings Corp., through its wholly owned operating subsidiary, DecisionOne Corporation, and its subsidiaries (collectively, the "Company") is the largest independent provider of multivendor computer maintenance and technology support services in the United States, based on Dataquest Incorporated ("Dataquest") estimates for calendar year 1997. The Company offers its customers a single source solution for virtually all of their computer maintenance and technology support requirements, including hardware maintenance services, software support, end-user/help desk services, network support and other technology support services. The Company believes it is the most comprehensive independent (i.e., not affiliated with an original equipment manufacturer, or "OEM") provider of these services across a broad range of computing environments, including mainframes, midrange and distributed systems, work groups, PCs and related peripherals. The Company provides support for over 15,000 hardware products manufactured by more than 1,000 OEMs. The Company also supports most major operating systems and over 150 off-the-shelf software applications. The Company delivers its services through an extensive field service organization of approximately 4,000 field personnel in over 150 service locations throughout the United States and Canada and strategic alliances in selected international markets. The Company services over 51,000 customers at over 182,000 sites across the United States and Canada. The Company's customers include a diverse group of national and multinational corporations, including SABRE Group, Inc. (an affiliate of American Airlines, Inc.), Sun Microsystems, Inc. ("Sun"), NationsBank, DuPont Company ("DuPont"), Sequent Computer Corporation ("Sequent"), Southwestern Bell Corporation, and Netscape Communications Corporation ("Netscape"). COMPANY HISTORY The Company's roots extend back to 1969 when it was first known as Decision Data, then a provider of keypunch machines. During the 1980's, its operations expanded to include the sale of midrange computer hardware products and related maintenance services. In 1992, the Company sold off its computer hardware products business and focused primarily on providing computer maintenance and technology support services. Proceeds from the sale of the hardware business allowed the Company to embark upon a strategy of selective acquisitions aimed at bolstering its infrastructure and capabilities. The Company also acquired key "books of business" designed to help it leverage its infrastructure by increasing the geographic density of its customer base. Through this strategy, the Company established a major presence in the servicing of midrange computer systems by successfully acquiring and integrating nearly 30 companies in just over three years. The first significant acquisition was the 1994 purchase of IDEA Servcom, Inc., which raised the Company's customer base to 27,000 and, in following months, increased the revenues to where they had been before the sale of the hardware unit. In October of 1995, the Company completed its largest acquisition -- that of Bell Atlantic Business Systems Services, Inc. ("BABSS"), with approximately 4,400 employees and more than $500 million in sales. BABSS possessed a breadth of services, market presence, blue-chip customer base and over 30 years of experience in the computer service business that complemented and strengthened the Company. Upon the acquisition, the Company changed its name to DecisionOne. In 1996, the Company purchased the assets of the U.S. service business of Memorex Telex Corporation, a hardware manufacturer and computer service company, with annual revenues of more than $100 million. In 1997, acquisitions included certain assets of Xerox Technology Services (Canada) and the maintenance business on several types of tape-drive storage machines from EMC(2) Corporation ("EMC"). In October 1997, the Company acquired the network service and support business of Gandalf Technologies, a provider of ISDN and frame relay remote access equipment. As a result, the Company acquired key network technical expertise to support its growing network service portfolio. Additionally, in fiscal 1998, the Company acquired the assets of General Diagnostics Incorporated, a hardware depot repair firm. This transaction added eight additional depot repair centers spread across the United States to the Company's network of repair centers. MERGER AND RESTRUCTURING On August 7, 1997, the Company consummated a merger (the "Merger") with an affiliate of DLJ Merchant Banking Partners II, L.P. ("DLJ"). Pursuant to the Merger, DLJ, certain funds affiliated with DLJ (collectively, with DLJ, the "DLJ Funds"), and third-party investors who have entered into an agreement (the "Investors' Agreement") with DLJ in respect of the voting and disposition of shares acquired by them (collectively, the "DLJ Group"), acquired approximately 10.9 million shares, or 87.4%, of the Company's outstanding common stock in exchange for approximately $225 million. Such equity proceeds, 1 3 along with $145.5 million of net proceeds from the sale of 9 3/4% Senior Subordinated Notes due 2007 (the "9 3/4% Notes"), $81.6 million of net proceeds from the sale of 148,400 units consisting of 11 1/2% Senior Discount Debentures due 2008 and Warrants to purchase 281,960 shares of Company common stock exercisable at $23 per share (the "Units"), and borrowings of $470.0 million under a $575 million senior secured loan facility were used to repurchase approximately 26.5 million shares for approximately $609.7 million, cash out existing options and warrants, repay the Company's then-existing revolving credit facility, and pay fees and expenses incurred in connection with the Merger. See "Merger and Recapitalization" included in Item 7 herein. INDUSTRY BACKGROUND According to Dataquest projections, the U.S. hardware maintenance and technology support services market was approximately $43.3 billion in 1997 and is projected to grow at a compound annual rate of 10.9% to $65.3 billion by the year 2001. Within the market surveyed by Dataquest, Dataquest estimates that the independent, multivendor segment was approximately $9.3 billion in 1997 and projects the segment to grow at an 11% compound annual rate to $14.1 billion by the year 2001. According to Dataquest, independent, multivendor service providers such as the Company are taking market share from the OEM service providers faster than OEMs are contracting new business. The Company believes that this is occurring because: (i) customers are looking for single source providers who support multiple computer hardware and software platforms, (ii) independent service providers are viewed as being unbiased toward computer purchase decisions and (iii) OEMs are increasingly outsourcing customer maintenance service (including warranty and post warranty services) and technical customer support such as help desk services to independents in order to focus on their core design, technology and marketing competencies. According to Dataquest, within the independent, multivendor segment, hardware maintenance was the dominant service, accounting for approximately 73% of 1997 revenues, with technology support services, including software support, network support and end-user training, comprising the remaining 27% of 1997 revenues. The Company believes that the independent, multivendor segment is also fragmented and consolidating. Participants in the independent multivendor segment include: (i) several large independent service providers, (ii) the multivendor segments of OEM service organizations and (iii) hundreds of smaller independent companies servicing either product niches or limited geographical areas of the United States. The significant market position of OEMs is due largely to their traditional role of servicing their own installed base of equipment and their customers' former reliance on centralized, single vendor solutions (i.e., mainframe systems). COMPANY SERVICES The Company has built a service portfolio and infrastructure that is designed to offer its customers a single-source solution for virtually all of their computer maintenance and technology support requirements. The Company's portfolio includes services such as hardware support, software support, network support, and planning and consulting services for customers with mainframe, midrange, and distributed computing environments. The Company also provides multivendor parts repair and refurbishment and inventory management services as part of its logistics services portfolio, targeted at OEMs, resellers and other third-party service providers. While many of its services -- and its heritage -- are rooted in providing equipment maintenance and technical support, the Company has expanded its portfolio to optimize its customers' investments in information technology. Companies today are struggling to cope with increasingly complex computing environments that feature an abundance of networked computer equipment from a multitude of manufacturers. This equipment is often used to perform the companies' mission-critical operations, and can severely impact their businesses when a failure occurs. The Company believes that it can leverage its infrastructure and breadth of services to help customers reduce the cost of supporting their computer equipment while increasing their systems' availability. The Company's marketing strategy is focused on services in three different market segments: Enterprise customers (including Federal government customers), which have complex computing environments including data centers and tens of thousands of end users; Middle Market customers, which have included large, medium and small businesses, primarily with desktop computing systems; and Strategic Alliance customers, which include hardware and software original equipment manufacturers who utilize the Company for a wide variety of services, including depot repair, field service and support, and telephone technical support services. The Company's integrated portfolio of services is designed to appeal to each of these customer segments, by helping to increase computer system availability, enhance end user productivity and reduce the cost of running and managing information technology systems. The Company has tailored service portfolios to meet the unique needs of a number of computer environments, including Desktop computing, Data Center computing, Midrange computing and Logistics. Integrated Services for the Distributed Computing Desktop Environment: One To 1 The Company's One To 1 offering for the workgroup environment is an integrated package of life cycle services designed to reduce the cost of workgroup computing, and increase system availability and end-user productivity. One To 1 is aimed at providing desktop support that reduces a company's total cost of ownership. The Company believes One To 1's 2 4 strength lies in its ability to provide customers with a single-source solution for effectively supporting large, complex desktop environments. By utilizing all of the services in One To 1, customers leverage the Company's national and international infrastructure, and its ability to compile valuable service data to provide support at the desktop level. By purchasing all of these services from one supplier, One To 1 customers can provide greater support to their end users and organization while still reducing the total cost of owning desktop assets. One To 1 includes: Network Services: NetworkOne services help customers manage the total life cycle of their complex network environments, from designing systems to maintaining network hardware and wide area and local area networks. The Company utilizes its network systems management engine, ControlOne, located at the Company's headquarters facility, to assess and fix network problems. ControlOne features state-of-the-art network management tools and is manned by a staff of highly experienced network engineers and technicians. The Company also maintains a backup network management facility in Dallas, Texas. Consulting Services: ExpertOne services provide access to desktop support experts who can analyze a desktop environment, recommend solutions, manage their implementation, and audit the results. Technical Support Services: CallOne services provide help desk support on more than 150 shrink wrapped desktop software packages and a wide range of operating systems. The Company's Customer Support Centers ("CSCs") handle more than 130,000 calls per month for help desk and software support. Support ranges from basic and network support for corporate end-users, to advanced operating system support for systems administrators, to complete support for vertical markets and software developers. CallOne services are available on a 24 hour, 7 day a week basis. Hardware Services: The Company provides hardware maintenance, installations, moves, adds and changes to thousands of different desktop hardware devices, from hundreds of different manufacturers. Services are provided at the customer's location through one of the largest service infrastructures in the industry, or through the Company's network of depot repair centers. Asset Management Services: Through AssetOne, the Company can track customers' information technology asset data, such as PC location and number of software licenses, and provide information that leads to better asset management practices. Services for the Mainframe Environment: MainOne The Company has an extensive history in providing services to the data center. As part of its effort to standardize its offerings, and in response to the changing life cycle needs of the data center marketplace, the Company announced in May 1997 a complete suite of support services for the data center, called MainOne. MainOne Services extend beyond critical hardware support to services that meet the strategic needs of data center management, from planning and consulting through operating systems and management support. The Company offers a single source for maintaining the many brands and types of mission-critical equipment found in the data center, through a full suite of services that includes: remedial and preventative maintenance on the mainframe and associated peripheral devices; equipment moves, adds and changes, including data center relocations; migration assistance for customers changing processors and/or software operating systems; assistance to customers in managing and consolidating vendor relationships; environmental, financial and disaster recovery services; and consulting expertise to assist customers in reducing data center costs, improving equipment performance, and increasing processor capacity. Services for the Midrange Environment: MidrangeOne The Company's MidrangeOne Services are designed to meet the support requirements of complex midrange computing environments. For many customers, midrange devices play the same mission-critical role as mainframe computers, as well as drive the distributed computing environment. The Company offers an integrated suite of services, MidrangeOne, that addresses all the elements of today's more complex midrange environment, including: remedial and preventative maintenance on midrange equipment from IBM, Digital Equipment Corporation ("Digital"), Sun Microsystems, Hewlett-Packard, and Memorex Telex, among others, as well as on a full range of peripheral devices from hundreds of different manufacturers; problem resolution and migration support for midrange operating systems; services to support remote systems operations and backups; partnerships with industry leaders for specialized services such as disaster recovery, environmental auditing, and equipment financing; and advice from midrange experts to assist with increasing system capacity, improving performance, and lowering cost of ownership. Logistics Services: LogisticsOne The Company's LogisticsOne Services provide information technology companies such as OEMs, VARs, and other third-party maintainers with cost-effective alternatives to internal parts repair and inventory pipeline management. The company provides three distinct services under LogisticsOne: 3 5 Hardware services: The Company repairs and refurbishes computer parts and assemblies at its network of fifteen depot repair center across the United States. In addition to supporting its own business, these services are provided primarily for OEMs, distributors and other third party maintenance companies. Systems Configuration Management Services: The Company assists customers with technology transitions, from evaluating the current disposition of equipment through configuring machines for a new technology roll-out. The Company's services are backed by years of experience in installing and servicing a multivendor, multi-platform technology base. Inventory Life Cycle Management Services: These services, in support of OEMs, support both in-production or end-of-life parts, and provide materials management support for the entire life cycle of a product. These services help companies acquire inventory and maintain optimal stocking levels, allowing them to redirect funds normally spent on overstocking or replenishing the inventory. SUPPORT PARTNER PROGRAMS Customers are increasingly demanding truly turnkey services from vendors who can meet the total lifecycle requirements of their systems. The Company is a services-only company, meaning that it does not provide those aspects of the systems lifecycle that are not service and support related. To meet the needs of its customers, the Company maintains strategic alliances with companies who have expertise in key areas of the industry. Together with these support partners, the Company can offer customers the total lifecycle of support, including such areas as equipment financing and leasing, disaster recovery services, environmental analysis, wiring and cabling, system design, and equipment procurement. SALES AND MARKETING The Company's core service capabilities are bundled to match the support requirements of customers. Service portfolios exist for data center, midrange and desktop environments. In addition, a product portfolio exists for OEMs who seek support for parts sourcing and repair, inventory management, and related logistics services. The Company sells its services through a sales force of approximately 300 sales professionals aligned under several sales organizations: the Corporate Accounts group focuses on enterprise customers, including large and multinational corporate customers; Territory Managers and Telesales focus on middle market customers; a Federal group, responsible for sales to government units; and a Strategic Alliance Sales team that develops relationships with hardware manufacturers such as Compaq Computer Corporation, Sun Microsystems, Sequent and EMC - and software developers - like Netscape, Microsoft, Novell - who utilize the Company to deliver service and support to their customers. INTERNATIONAL BUSINESS PARTNERS In order to provide international service to its multinational customers, the Company supplements its broad North American infrastructure with strategic alliances in selected international markets. The Company maintains relationships with International Computers Limited ("ICL") and FBA Computer Technology Services ("FBA"). The Company licenses many of its proprietary multivendor support tools to FBA and to ICL Systems Service, which is ICL's multivendor services group in Western Europe. As a result, the Company is able to offer its multinational customers service in Western Europe, Asia and Australia. ICL is a leading information technology company that has approximately 23,000 employees operating in about 80 countries around the world. In Western Europe, ICL Systems Service companies provide multivendor services in 17 countries with approximately 250 service locations and about 6,000 employees. Several of the Company's major customers, including SABRE Group, Inc. and DuPont, benefit from the agreement between the Company and ICL, whereby ICL agrees to provide services at the European locations of the Company's multinational customers. Through ICL, the Company utilizes the service branches of both ICL and ICL's parent company, Fujitsu Ltd., to provide worldwide multivendor support throughout Asia, the Pacific Rim, the Middle East and Africa. FBA, an affiliate of Fujitsu Ltd., provides multivendor services in Australia and New Zealand from more than 20 locations with 600 employees. In addition to providing technical support to FBA, the Company has supplied various management and sales support personnel to FBA. FBA also provides services to certain of the Company's multinational customers, including Sun. SERVICE INFRASTRUCTURE Centralized Dispatch When a customer places a call for remedial maintenance, the Company uses its Dispatch Data Gathering system ("DDG") to manage the process. When a customer is identified, the DDG system displays the customer's service level requirements and covered equipment. Specific information on the symptoms of the problem and the products that are malfunctioning are entered into the system to begin tracking the service event. The Company's Customer Support 4 6 Representative ("CSR") selects, based upon the requirements of the service event, the appropriate Customer Service Engineer ("CSE") from a list of pre-assigned primary and back-up personnel and passes this information to the selected CSE. The Company maintains three CSCs in Malvern, Pennsylvania; Minneapolis, Minnesota; and Tulsa, Oklahoma. Customers can reach the CSCs by calling one toll free telephone number. The CSCs currently are staffed with over 600 CSRs and 29 staff/operations managers. There is a duty manager on call in each center at all times. CSCs are available on a 24 hour, 7 day per week basis. Redundancy for disaster recovery purposes is designed into the CSC system through the three locations' use of automatic telecommunications switching. Two of the Company's CSCs are used for centralized dispatch: Minneapolis and Tulsa. The CSEs in those facilities answer nearly 50,000 service calls per month. The third CSC in Malvern is dedicated to help desk and software support. Parts Logistics To meet the service needs of its customers, the Company stocks more than 2.3 million units of repairable and consumable parts representing more than 100,000 different parts for more than 15,000 types of equipment. The Company maintains more than 2,500 parts stocking locations to provide its technicians with rapid access to needed parts to support customer requirements, including locations at airports and overnight express hub locations to meet the needs of mission-critical support. In order to meet customer computer repair requirements, the Company maintains a tiered approach to management of its consumable and repairable spare parts. Parts or assemblies with low failure rates are stocked in either the Company's central distribution center located in Malvern, Pennsylvania or in its critical parts center in Dallas, Texas. The Company also maintains six regional distribution centers in Atlanta, Georgia; Newark, New Jersey; Los Angeles, California; San Francisco, California; Chicago, Illinois; and Wilmington, Ohio for critical parts needed more frequently throughout the United States. In order to service customers whose response time requirements are two to four hours, higher usage parts are maintained at the Company's branch offices or local attended stocking locations. Customer site parts storage is arranged when customer response time requirements are two hours or less. The Company's Field Inventory System ("FIS") is a real time system which tracks the consumable and repairable parts assigned to its field workforce and located at distribution centers, field offices or at customer sites. Parts information processed through FIS is integrated with the Company's other key systems, including DDG and International Support Information System ("ISIS"). Parts Repair The Company repairs and refurbishes computer parts and assemblies at 15 depot repair centers in the United States. The Company's repair facilities are located in : Phoenix (Arizona); Compton and San Francisco (California); Plantation (Florida); Elk Grove and Elmhurst (Illinois); Boston (Massachusetts); Nashua (New Hampshire); Grove City, Hilliard and Wilmington (Ohio); Tulsa (Oklahoma); Malvern (Pennsylvania); Richardson (Texas); and Milwaukee (Wisconsin). Many of these centers are certified to ISO-9002 quality processes and standards. In addition to supporting the Company's own business, these services are provided primarily for OEMs, distributors, and other third party maintenance companies. Subassemblies repaired include systems logic boards, hard drive assemblies, peripherals, power supplies, and related equipment. Continued investment in repair technology enhances the Company's ability to service today's latest technology, such as flat-panel displays on laptop computers, and to perform component-level repair on complex multi-level circuit boards and subassemblies. Field Service The Company delivers support through one of the most extensive field service infrastructures in the industry. Approximately, 3000 field service technicians deliver service to more than 51,000 customers at over 182,000 customer sites. These field technicians are based out of more than 150 service offices located across the United States and Canada. Based on customer requirements, some Company personnel are based at customer sites. Technical Support The Company delivers help desk and software support at all three of its CSCs. More than 130,000 calls for technical support are processed by these centers each month, utilizing over 600 customer support representatives. Support is provided for popular operating systems like Windows(R), MS DOS(R) and Sun Microsystems Solaris(R), as well as support on network operating systems such as Novell Netware(R) and Windows NT(R). Groupware products like Lotus Notes and Internet browsers - including the Netscape Navigator(R) - are fully supported. A wide variety of business productivity software products are also supported. The Company is a Microsoft Authorized Support Center, providing help desk support for a full range of Microsoft business software applications and operating systems. Technical support is delivered through the CSCs and ranges from 5 7 basic end-user software support to second level professional support, and work in conjunction with Microsoft desktop applications and operating systems, like Microsoft Windows 95(R) and Windows NT(R). Service Technology The Company has developed several proprietary technologies for use in service planning, support and delivery. These service tools include proprietary databases, remote diagnostic and system monitoring software, and instructional documentation. These technical support tools not only provide remote and on-site predictive and remedial service support, but also enable the Company to collect extensive, objective systems performance measurement information (on the customer's environment as well as benchmarking against the Company's database) which its customers can use to identify potential efficiencies, evaluate competing products and technologies, and determine whether their requirements are being met. The Company's proprietary service technologies include ISIS, SERVICE EDGE and MAXwatch(R). The Company licenses certain of these technologies and provides other technical support to certain foreign multivendor service providers, including ICL in Europe and FBA in Australia and New Zealand. International Support Information System: ISIS is a database accessible by the Company's CSEs which is comprised of diagnostic and symptom fix data for thousands of products; service updates; service planning information, such as machine performance and parts usage information; and remote support capabilities for large IBM systems, including automatic "call home" to the Company. The Company believes that ISIS is the most comprehensive service-related database of any independent computer service organization. SERVICE EDGE. SERVICE EDGE is a PC-based system installed at the customer's site which monitors error messages and collects and reports service data to help customers predict potential system failures and provide customers with system performance information. MAXwatch(R). MAXwatch(R) is an on-site program for products of Digital which monitors system integrity, proactively detects and corrects certain system errors, and automatically "calls home" for remote technical support when pre-defined error thresholds are exceeded. A similar product, MAX400, is available for IBM AS/400 systems. DecisionOne(R), ISIS, Service Edge, MAXwatch(R), One to 1, NetworkOne, ExpertOne,CallOne, AssetOne, MainOne, MidrangeOne, and LogisticsOne are service marks or trademarks owned by the Company. All other brand names, service marks or trademarks appearing herein are the property of their respective owners. Training The Company maintains the technical expertise of its CSEs through training programs designed to teach the various techniques for determining the status of a customer's total computer operations. The Company's training offers support professionals a broad exposure to various computer system technologies. The Company's training facilities include 22 classrooms, 23,000 square feet of hands-on lab space, 17 full-time instructors and video specialists and a curriculum of over 80 courses. The Company has six training centers and labs located in Frazer, Pennsylvania; Malvern, Pennsylvania; Minneapolis, Minnesota; Milwaukee, Wisconsin; Tulsa, Oklahoma and Phoenix, Arizona. Six months following course work, the Company surveys the CSEs to gauge the effectiveness and applicability of its training curriculum. CUSTOMERS The Company services over 51,000 customers at over 182,000 sites across the United States and Canada. The Company sells services primarily to five types of customers: large businesses that have complex computing support needs and typically maintain a data center, distributed computing and work group environments; medium-sized businesses that rely primarily on distributed systems for their computing needs; small businesses that principally use LANs and WANs for computing; individuals who use stand-alone computing systems; and OEMs and software developers that contract with the Company for warranty services, logistic support services or help desk support. A significant portion of the Company's revenues are attributable to large businesses with complex computing support needs. COMPETITION Competition among computer support service providers, both OEM and independent service organizations, is intense. The Company believes that approximately 80% of that portion of the hardware maintenance services market that is related to mainframes and stand alone midrange systems is currently serviced by OEM service organizations. In addition, the Company believes that OEM service organizations provide a smaller, but still significant, portion of the computer maintenance services related to distributed systems, work groups and PCs. The remainder of the technology support services market is serviced by a small number of larger, independent companies, such as the Company, offering a broader range of service capabilities, as well as numerous small companies focusing on narrower areas of expertise. 6 8 The Company considers its principal competitors to include: IBM and its affiliate Technology Service Solutions, Compaq/Digital, Unisys Corporation and Wang Laboratories, Inc., the multivendor service divisions of certain other OEMs, other national independent service organizations providing service that are not affiliated with OEMs such as Vanstar Corporation, Entex Corporation, and various regional service providers. The Company believes that the primary competitive factors in the computer services industry are the quality of a company's services, the ability to service a wide range of products supplied by a variety of vendors, the geographic coverage of a company's services and the cost to the customer of those services. The Company believes that customers are increasingly looking for service providers capable of providing a single source solution for their increasingly complex multivendor systems. See "Risk Factors -- Competition and the Competitive Advantages of OEMs." EMPLOYEES As of June 30, 1998, the Company had approximately 6,400 full-time and 100 part-time employees. None of the Company's employees is currently covered by collective bargaining agreements. Management considers employee relations to be good. 7 9 Cautionary Statement Concerning Forward-Looking Statements The information herein contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve a number of risks and uncertainties. A number of factors could cause actual results, performance, achievements of the Company, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. These factors include, but are not limited to, the competitive environment in the computer maintenance and technology support services industry in general and in the Company's specific market areas; changes in prevailing interest rates and the availability of and terms of financing to fund the anticipated growth of the Company's business; inflation; changes in costs of goods and services; economic conditions in general and in the Company's specific market areas; demographic changes; changes in or failure to comply with federal, state and/or local government regulations; liability and other claims asserted against the Company; changes in operating strategy or development plans; the ability to attract and retain qualified personnel; the significant indebtedness of the Company; labor disturbances; changes in the Company's acquisition and capital expenditure plans; and other factors referenced herein. In addition, such forward looking statements are necessarily dependent upon assumptions, estimates and dates that may be incorrect or imprecise and involve known and unknown risks uncertainties and other factors. Accordingly, any forward looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. Forward looking statements can be identified by, among other things, the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "pro forma," "anticipates," or "intends" or the negative of any thereof, or other variations thereon or comparable terminology, or by discussions of strategy or intentions. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward looking statements. The Company disclaims any obligations to update any such factors or to publicly announce the results of any revisions to any of the forward looking statements contained herein to reflect future events or developments. RISK FACTORS LOSS OF CONTRACT-BASED REVENUE As is customary in the computer services industry, the Company experiences reductions in its contract based revenue, which accounted for approximately 89% of the Company's revenues during fiscal 1998, as customers may eliminate certain equipment or services from coverage under the contracts, typically upon 30 days' notice, or either cancel or elect not to renew their contracts upon 30, 60 or 90 days' notice. The Company believes the principal reasons for the loss of contract based revenue are the replacement of the equipment being serviced with new equipment covered under a manufacturer's warranty, the discontinuance of the use of equipment being serviced for a customer due to obsolescence or a customer's determination to utilize a competitor's services or to move technical support services in house. There can be no assurance that the Company will be able to offset the reduction of contract based revenue and maintain revenue growth through acquisitions and new contracts in the future. Any failure to consummate acquisitions, enter into new contracts or add additional services and equipment to existing contracts could have a material adverse effect on the Company's profitability. FAILURE TO PRICE FIXED FEE CONTRACTS Under many of the Company's contracts, the customer pays a fixed fee for customized bundled services that are priced by the Company based on its best estimates of various factors, including estimated future equipment failure rates, cost of spare parts and labor expenses. There can be no assurance that the Company will be able to estimate these factors accurately enough to be able to price these fixed fee contracts on terms favorable to the Company. The failure of the Company to price its fixed fee contracts accurately could have a material adverse effect on the Company's profitability. VARIABILITY OF PER INCIDENT REVENUES Per incident revenues will increase or decrease from one month to the next due to the nature of per incident revenue transactions. It is difficult for management to estimate the impact or amount of future per incident revenues. The Company may not be able to generate significant amounts of per incident revenue in the future. RESTRICTIONS RELATED TO, AND INABILITY TO SERVICE, MERGER FINANCING In connection with the Merger, the Company entered into financings (the "Merger Financing") including a new revolving credit facility (the "New Credit Facility"), the terms of which include significant operating and financial restrictions, such as limits on the Company's ability to incur indebtedness, create liens, sell assets, engage in mergers or consolidations, make investments and pay dividends. In addition, the New Credit Facility requires the Company to meet certain minimum financial performance measurements. These measurements include (1) Adjusted EBITDA, (2) Leverage Ratio, (3) Interest Coverage Ratio, and (4) Fixed Charge Ratio. During fiscal 1998, the Company sought and obtained amendments to the New Credit Facility. See "Note 9 to the Company's Consolidated Financial Statements." The level of the Company's indebtedness could have important consequences to the Company, including: (i) limiting cash flow available for general corporate purposes, including acquisitions, because a substantial portion of the Company's cash 8 10 flow from operations must be dedicated to debt service; (ii) limiting the Company's ability to obtain additional debt financing in the future for working capital, repairable parts purchases, capital expenditures or acquisitions; (iii) limiting the Company's flexibility in reacting to competitive and other changes in the industry and economic conditions generally; and (iv) exposing the Company to risks inherent in interest rate fluctuations because certain of the Company's borrowings are at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates. See "Item 7A Quantitative and Qualitative Disclosures about Market Risk." The Company's ability to make scheduled payments of principal of, to pay interest on or to refinance its indebtedness and to satisfy its other debt obligations will depend upon its future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond its control. The Company currently anticipates that its operating cash flow, together with borrowings under the New Credit Facility, will be sufficient to meet its anticipated future operating expenses and capital expenditures and to service its debt requirements as they become due. However, if the Company's future operating cash flows are less than currently anticipated it may be forced, in order to meet its debt service obligations, to reduce or delay acquisitions, purchases of repairable parts or capital expenditures, sell assets or reduce operating expenses, including, but not limited to, investment spending such as selling and marketing expenses, expenditures on management information systems and expenditures on new products. If the Company were unable to meet its debt service obligations, it could attempt to restructure or refinance its indebtedness or to seek additional equity capital. There can be no assurance that the Company will be able to effect any of the foregoing on satisfactory terms, if at all. In addition, subject to the restrictions and limitations contained in the agreements relating to the Merger Financing, the Company may incur significant additional indebtedness to finance future acquisitions, which could further adversely affect the Company's operating cash flows and its ability to service its indebtedness. See "Management's Discussion and Analysis of Financial Condition and Results of Operations: Liquidity and Capital Resources." DEPENDENCE ON COMPUTER INDUSTRY TRENDS The Company's future success is dependent upon the continuation of a number of trends in the computer industry, including the migration by information technology end-users to multivendor and multisystem computing environments, the overall increase in the sophistication and interdependency of computing technology, and a focus by information technology managers on cost efficient management. The Company believes these trends have resulted in a movement by both end-users and OEMs towards outsourcing and an increased demand for support service providers that have the ability to provide a broad range of multivendor support services. There can be no assurance these trends will continue into the future. RAPID TECHNOLOGICAL CHANGE Rapid technological change and compressed product life cycles are prevalent in the computer industry, which may lead to the development of improved or lower cost technologies, higher quality hardware with significantly reduced failure rates and maintenance needs, or customer decisions to replace rather than continue to maintain aging hardware, and which could result in a reduced need for the Company's services in the future. Moreover, such rapid technological changes could adversely affect the Company's ability to predict equipment failure rates, and, therefore, to establish prices that provide adequate profitability. Similarly, new computer systems could be built based upon proprietary, as opposed to open, systems that could not be serviced by the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations: Loss on Asset Sales and Disposals." DEPENDENCE ON KEY PERSONNEL The Company's continued success depends, to a large extent, upon the efforts and abilities of key managerial employees, particularly the Company's executive officers. Competition for qualified management personnel in the industry is intense. The loss of the services of certain of these key employees or the failure to retain qualified employees when needed could have a material adverse effect on the Company's business. The Company does not currently maintain key man insurance. FAILURE TO MANAGE FUTURE GROWTH AND TO ADAPT TO CHANGES The Company may not be able to manage its expanding domestic operations and international affiliations and to adapt its operational and financial systems to respond to changes in its business environment, while maintaining a competitive cost structure. The acquisition strategy of the Company and the expansion of the Company's service offerings have placed and will continue to place significant demands on the Company and its management to improve the Company's operational, financial and management information systems, to develop further the management skills of the Company's managers and supervisors, and to continue to retain, train, motivate and effectively manage the Company's employees. For example, the Company's acquisition and integration of BABSS resulted in the loss of certain members of its finance and accounting organization which resulted in a difficulty in the timely performance of certain internal reconciliations and account analyses. As the Company grows internally or acquires new businesses, the Company may experience similar difficulties in the future. The failure of the Company to manage its prior or any future growth and to adapt its operational and financial systems to respond to changes in its business environment effectively could have a material adverse effect on the Company. 9 11 INABILITY TO FUND FUTURE GROWTH The Company may not be able to maintain and increase its revenue base and to respond to shifts in customer demand and changes in industry trends if it is not able to generate sufficient cash flow or obtain sufficient capital for the purpose of, among other things, financing acquisitions, satisfying customer contractual requirements and financing infrastructure growth, including a significant investment in repairable parts, which are classified as non current assets. There can be no assurance the Company will be able to generate sufficient cash flow or that financing will be available on acceptable terms (or permitted to be incurred under the terms of the Merger Financing and any future indebtedness) to fund the Company's future growth. FAILURE OF ACQUISITION GROWTH STRATEGY The Company may not be able to continue its aggressive acquisition strategy, which it has historically pursued by acquiring certain contracts and assets in 40 transactions from the beginning of fiscal 1993 through June 30, 1998. Future acquisitions and/or internal revenue growth will be necessary to offset expected declines in contract based revenues. As a result, the Company expects to continue to evaluate acquisitions that can provide meaningful benefits by expanding the Company's existing and future hardware maintenance and technology support capabilities and leveraging its existing and future infrastructure. However, risks associated with pursuing an acquisition strategy of this nature include problems inherent in integrating new businesses, including potential loss of customers and key personnel and potential disruption of operations. There can be no assurance that the contracts acquired by the Company will generate significant revenues and customers covered by such acquired contracts may terminate such contracts at a rate that may be higher than the rates at which the Company's contracts have historically been terminated. There also can be no assurance that suitable acquisition candidates will be available, that acquisitions can be completed on reasonable terms, that the Company will successfully integrate the operations of any acquired entities or that the Company will have access to adequate funds to effect any desired acquisitions. Future acquisitions may be limited by restrictions in the Company's indebtedness. COMPETITION AND THE COMPETITIVE ADVANTAGES OF OEMS Competition among computer support service providers, both OEM and independent service organizations, is intense. The Company believes approximately 80% of that portion of industry hardware maintenance services related to mainframes and stand alone midrange systems is currently serviced by OEM service organizations. In addition, the Company believes that OEM service organizations provide a smaller, but still significant, portion of the computer maintenance services related to distributed systems, work groups and PCs. The remainder of the technology support services market is serviced by a small number of larger, independent companies, such as the Company, offering a broader range of service capabilities, as well as numerous small companies focusing on narrower areas of expertise or serving limited geographic areas. In many instances, OEM service organizations have greater resources than the Company, and, because of their access to the OEM's engineering data, may be able to respond more quickly to servicing equipment that incorporates new or emerging technologies. Moreover, some OEMs, especially in the mainframe environment, do not make available to end-users or independent service organizations the technical information, repairable parts, diagnostics, engineering changes and other support items required to service their products, and design and sell their products in a manner so as to make it virtually impossible for a third party to perform maintenance services without potentially infringing upon certain proprietary rights of the OEM. In addition, OEMs are sometimes able to develop proprietary remote diagnostic or monitoring systems which the Company may not be able to offer. Therefore, OEM service organizations sometimes have a cost and timing advantage over the Company because the Company must first develop or acquire from another party the required support items before the Company can provide services for that equipment. An OEM's cost advantage, the unavailability of required support items or various proprietary rights of the OEM may preclude the Company from servicing certain products. Furthermore, OEMs usually provide warranty coverage for new equipment for specified periods, during which it is not economically feasible for the Company to compete for the provision of maintenance services. To the extent OEMs choose, for marketing reasons or otherwise, to expand their warranty periods or terms, the Company's business may be adversely affected. POTENTIAL LITIGATION RELATED TO OEM SOFTWARE COPYRIGHTS In connection with the Company's performance of most hardware maintenance, the computer system which is being serviced must be turned on for the purpose of service or repair. When the computer is turned on, the resident operating system software and, in some cases diagnostic software, is transferred from a peripheral storage device or a hard disk drive into the computer's random access memory. Within the past several years, several OEMs have been involved in litigation with independent service organizations, including the Company, in which they have claimed such transfer constitutes the making of an unauthorized "copy" of such software by the independent service organization which infringes on the software copyrights held by the OEMs. The Company is aware of three cases in this area which have been decided in favor of the OEM. Although the Company was not a party in any of these cases, three similar claims have been asserted against the Company, each of which has been resolved by settlement. Litigation of this nature can be time consuming and expensive, and there can be no assurance the Company will not be a party to similar litigation in the future, or that such litigation would be resolved on terms that do not have a material adverse effect on the Company. TERMINATION OF THE IBM CONSENT DECREE In June 1994, International Business Machines Corporation ("IBM") filed in the United States District Court for the Southern District of New York (the "Court") a motion to terminate a 1956 consent decree (the "IBM Consent Decree") that, among other things, requires IBM to provide repairable parts, documentation and other support items for IBM electronic data processing systems to third parties on reasonable terms and places other restrictions on IBM's conduct. On January 18, 1996, the Court entered an order approving a modification of the IBM Consent Decree that, among other things, terminated the IBM Consent Decree except insofar as it applies to the System 360/370/390 (mainframes) and AS/400 (midrange) families of IBM products. In July 1996, IBM and the U.S. Department of Justice ("DOJ") reached an agreement in tentative settlement of the remainder of IBM's motion and jointly moved to terminate, on a phased basis, the remaining provisions of the IBM Consent Decree (the "Joint Motion"). On May 1, 1997 the Court granted the Joint Motion. Portions of the order granting the Joint Motion have been appealed. Consequently, certain of the remaining provisions of the IBM Consent Decree (primarily relating to sales and marketing restrictions on IBM) terminate either immediately upon, or within six months of, entry of the Court order; all of the other remaining provisions (including those requiring IBM to provide parts and other support items to third parties) terminate on July 2, 2000 with respect to AS/400 systems and on July 2, 2001 with respect to System 360/370/390 mainframes. 10 12 The impact, if any, upon the Company of the termination of such sales and marketing restrictions is impossible to predict because it depends upon what changes, if any, IBM will make in its sales and marketing policies and practices. As a result of the termination of the IBM Consent Decree, the Company's ability to service midrange and mainframe products may be adversely affected. Furthermore, as the Company's business is highly dependent upon its ability to service a wide variety of equipment in a multivendor environment, the inability to compete effectively for the service of IBM mainframes and midrange products could cause the loss of a substantial portion of the Company's customer base to IBM or an IBM affiliate, which would have a material adverse effect on the Company's business. DIFFICULTIES IN MANAGING INVENTORIES OF CONSUMABLE AND REPAIRABLE PARTS In order to service its customers, the Company is required to maintain a high level of consumable and repairable parts for extended periods of time. Any decrease in the demand for the Company's maintenance services could result in a substantial portion of the Company's consumable and repairable parts becoming excess, obsolete or otherwise unusable. In addition, rapid changes in technology could render significant portions of the Company's consumable and repairable parts obsolete, thereby giving rise to write-offs and a reduction in profitability. The inability of the Company to manage its consumable and repairable parts or the need to write them off in the future could have a material adverse effect on the Company's business, financial results and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations: Loss on Asset Sales and Disposals." SINGLE SUPPLIERS FOR CONSUMABLE AND REPAIRABLE PARTS Consumable and repairable parts purchases are made from OEMs and other vendors. The Company from time to time will have only a single supplier for a particular part which, in some cases, may be the Company's OEM customer. Should a supplier be unwilling or unable to supply any part or component in a timely manner, the Company's business could be adversely affected. In addition, the Company is dependent upon IBM for obtaining certain parts that are critical to the maintenance of certain IBM mainframe and midrange systems that IBM is currently required to make available to third parties pursuant to the IBM Consent Decree. There can no assurance that IBM will continue to make parts available for AS/400 Systems after July 2, 2000 and for System 360/370/390 mainframes after July 2, 2001. Even if such parts or components are available, a shortage of supply could result in an increase in procurement costs which, if not passed on to the customer, may adversely affect the Company's profitability. CONTROL BY DLJ Approximately 87.4% of the outstanding shares of the Company's common stock are currently held by the DLJ Group. As a result of its stock ownership and the Investors' Agreement (which includes members of management to the extent their shares are acquired through the Company's Direct Investment Program), the DLJ Funds control the Company and have the power to elect a majority of the Company's directors, appoint new management and approve any action requiring the approval of the holders of the Company's common stock, including adoption of certain amendments to the Company's certificate of incorporation and approving mergers or sales of all or substantially all of the Company's assets. The directors elected by the DLJ Funds have the authority to effect decisions affecting the capital structure of the Company, including the issuance of additional capital stock, the implementation of stock repurchase programs and the declaration of dividends. Following the Merger, there has been a limited market for the Company's common stock because of the significant ownership of the DLJ Group. As a result, stockholders may experience difficulty selling shares or obtaining prices that reflect the value thereof. DILUTION On August 7, 1997, the Company granted 1,179,000 options to purchase shares of Company Common Stock to members of the Company's management, and granted an additional 725,828 options during the remainder of fiscal 1998. The aggregate number of shares of Company Common Stock reserved for issuance pursuant to the Company's Management Incentive Plan was 1,698,280 as of June 30, 1998, which includes approximately 256,000 shares to accommodate options rolled over from the Company's previous stock option plan. In July 1998, subject to stockholder approval, the Company's Board of Directors increased the aggregate number of shares of Company Common Stock reserved for issuance to the Management Incentive Plan by 250,000 shares for a total of 1,948,280 shares. The exercise price of any options granted pursuant to the Management Incentive Plan may be less than the fair market value of the shares of Company Common Stock. Any such grant or exercise of any stock option, will dilute the equity ownership percentage of Company stockholders may result in a decrease of the book value of the Company Common Stock per share. In addition, pursuant to the Company's Direct Investment Program, certain members of management purchased approximately 97,520 shares of Company Common Stock at the time of the Merger. The aggregate number of shares reserved for issuance pursuant to the Direct Investment Plan is 238,095. These purchases, and any future purchases under the plan, would also dilute the equity ownership percentage of Company stockholders. 11 13 ITEM 2. PROPERTIES Item 2 is presented with respect to both registrants submitting this filing, DecisionOne Holdings Corp. and DecisionOne Corporation. FACILITIES The Company leases certain office and warehouse facilities under operating leases and subleases that expire at various dates through May 31, 2006. The Company's executive offices are located at the Frazer, Pennsylvania facilities listed below. The principal facilities currently leased or subleased by the Company are as follows: SQUARE LEASE FOOTAGE EXPIRATION ------- ---------- Frazer, Pennsylvania (Office) 109,800 December 2005 Frazer, Pennsylvania (Office) 35,968 June 2003 Malvern, Pennsylvania (Depot/Call Center) 200,000 February 2006 Richfield, Minnesota (Call Center) 83,360 May 2006 Hayward, California (Depot) 112,904 September 1999 Northborough, Massachusetts (Depot) 52,778 July 2001 Grove City, Ohio (Depot) 116,573 July 2002 Phoenix, Arizona (Depot) 60,000 April 2001 In addition, the Company owns a facility located in Tulsa, Oklahoma (multipurpose) and a facility located in the suburbs of Milwaukee, Wisconsin (logistics services). The Company's management believes that its current facilities will be adequate to meet its projected growth for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS Item 3 is presented with respect to both registrants submitting this filing, DecisionOne Holdings Corp. and DecisionOne Corporation. The Company is a party, from time to time, to lawsuits arising in the ordinary course of business. The Company believes it is not currently a party to any material legal proceedings. However, within the past several years, several OEMs have been involved in litigation with independent service organizations, including the Company, in which such OEMs have claimed infringement of software copyrights held by the OEMs. The Company currently is not involved in any such litigation. See "Risk Factors -- Potential Litigation Related to OEM Software Copyrights." The Company, or certain businesses as to which it is alleged that the Company is a successor, have been identified as potentially responsible parties in respect of four waste disposal sites that have been identified by the United States Environmental Protection Agency as Superfund Sites: (i) PAS Irwin Dump Site, Oswego, New York (and six satellite sites, including the Fulton Terminals Site, Fulton, New York); (ii) North Penn Area 6 Site, Lansdale, Pennsylvania; (iii) Revere Chemical Site, Nockamixon, Pennsylvania; and (iv) Malvern TCE site, Malvern, Pennsylvania. In addition, the Company received a notice several years ago that it may be a potentially responsible party with respect to the Boarhead Farms Site, Bridgeton, Pennsylvania, at a site related to the Revere Chemical site, but has not received any additional communication with respect to that site. Under applicable law, all parties responsible for disposal of hazardous substances at those sites are jointly and severally liable for clean up costs. The Company has estimated that its share of the costs of the clean up of one of the sites will be approximately $500,000, which has been accrued for in the accompanying consolidated balance sheets as of June 30, 1998 and 1997. 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 alleged predecessor at the sites, it is management's opinion that the Company's potential additional liability, if any, for the cost of clean up of these sites will not be material to the consolidated financial position, results of operations or liquidity of the Company. See Note 16 to the Company's Consolidated Financial Statements. 12 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1998. 13 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE OF THE COMMON STOCK The Common Stock of DecisionOne Holdings Corp. is quoted on the Nasdaq National Market System under the symbol "DOCI". As of September 9, 1998, there were 80 stockholders of record. The following table shows, for the periods indicated, the high and low sale prices of a share of the Company Common Stock as reported by the Nasdaq National Market System. HIGH LOW ---- --- 1996 Second Quarter* 29 3/8 20 Third Quarter 26 1/4 13 Fourth Quarter 16 3/4 13 1/4 1997 First Quarter 19 14 3/4 Second Quarter 22 3/4 14 3/4 Third Quarter 30 22 3/8 Fourth Quarter 34 5/8 24 1/2 1998 First Quarter 27 3/8 17 1/2 Second Quarter 23 1/2 17 1/2 Third Quarter** 20 1/8 14 * The Common Stock has been quoted and traded on the Nasdaq National Market System since April 4, 1996. ** Through September 9, 1998. Since its initial public offering in 1996, the Company has not paid any cash dividends on its Common Stock and it does not have any present intention to commence payment of any cash dividends. The Company intends to retain earnings to provide funds for the operation and expansion of the Company's business and to repay outstanding indebtedness. The Company's debt agreements and other agreements to which it is a party contain certain covenants restricting the payment of dividends on, or repurchases of, Company Common Stock. ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data sets forth, for the periods and the dates indicated, selected consolidated financial data of the Company, derived from the historical consolidated financial statements of the Company. The consolidated financial data of the Company for the years ended June 30, 1998, 1997 and 1996 and as of June 30, 1998 and 1997 are derived from the Company's audited consolidated financial statements included elsewhere herein. The information set forth below is qualified by reference to and should be read in conjunction with the Company's and DecisionOne Corporation and Subsidiaries' Consolidated Financial Statements and Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations". 14 16
YEARS ENDED JUNE 30, -------------------------------------------------------------- THE COMPANY 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PRO FORMA LOSS PER COMMON SHARE) STATEMENT OF OPERATIONS DATA: (1)(4) Revenues $ 805,717 $ 785,950 $ 540,191 $ 163,020 $ 108,416 Income (loss) before discontinued operations and extraordinary item (183,130) 31,084 20,789 41,415 10,112 Net Income (loss) (2) (183,130) 31,084 18,862 42,528 10,112 Pro forma net loss (unaudited) (3) (124,266) Pro forma loss per common share (unaudited) (3) (9.91) BALANCE SHEET DATA: (1)(4) Consumable parts $ 23,097 $ 29,052 $ 29,770 $ 3,455 $ 3,584 Repairable parts 142,446 205,366 154,970 27,360 9,473 Total assets 541,987 623,105 514,510 135,553 35,469 Debt, less current portion 731,012 232,721 188,582 6,157 2,366 Redeemable preferred stock -- -- -- 6,811 6,436 Total shareholders' equity (deficit) (361,606) 214,888 180,793 14,677 (27,627)
(1) The Selected Financial Data presented includes the results of operations and balance sheet data of the Company, including the following acquisitions: Servcom from September 1, 1994, BABSS from October 20, 1995 and certain assets of the U.S. computer service business of Memorex Telex from November 15, 1996. (2) The year ended June 30, 1994 includes income taxes based on an effective tax rate substantially less than the 40% effective tax rate for the year ended June 30, 1996 and the 41% effective tax rate for the year ended June 30, 1997. The years ended June 30, 1998 and 1995 includes a $15.8 million and $23.1 million, respectively net benefit arising from the recognition of future tax benefits of tax loss carryforwards and temporary timing differences. See Note 10 to the Company's Consolidated Financial Statements for additional information. (3) Pro forma net loss and loss per common share information for the fiscal year ended June 30, 1998 is presented to reflect the Merger and related transactions as if these had occurred on July 1, 1997. Historical per share data is not presented as this would not be meaningful. See Note 3 to the Company's Consolidated Financial Statements for additional information. (4) Certain reclassifications have been made to prior years' data in order to conform to the 1998 presentation.
YEARS ENDED JUNE 30, -------------------------------------------------------------- DECISIONONE CORPORATION 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: (1)(4) Revenues $ 805,717 $ 785,950 $ 540,191 $ 163,020 $ 108,416 Income (loss) before discontinued operations and extraordinary item (171,641) 31,084 20,789 41,415 10,112 Net Income (loss) (2) (171,641) 31,084 18,862 42,528 10,112 Pro forma net loss (unaudited) (3) (111,357) BALANCE SHEET DATA: (1)(4) Consumable parts $ 23,097 $ 29,052 $ 29,770 $ 3,455 $ 3,584 Repairable parts 142,446 205,366 154,970 27,360 9,473 Total assets 606,439 623,105 514,510 135,553 35,469 Debt, less current portion 638,766 232,721 188,582 6,157 2,366 Redeemable preferred stock -- -- -- 6,811 6,436 Total shareholder's equity (deficit) (204,468) 214,888 180,793 14,677 (27,627)
(1) The Selected Financial Data presented includes the results of operations and balance sheet data of DecisionOne Corporation, including the following acquisitions: Servcom from September 1, 1994, BABSS from October 20, 1995 and certain assets of the U.S. computer service business of Memorex Telex from November 15, 1996. (2) The year ended June 30, 1994 includes income taxes based on an effective tax rate substantially less than the 40% effective tax rate for the year ended June 30, 1996 and the 41% effective tax rate for the year ended June 30, 1997. The years ended June 30, 1998 and 1995 includes a $14.8 million and $23.1 million, respectively net benefit arising from the recognition of future tax benefits of tax loss carryforwards and temporary timing differences. See Note 10 to DecisionOne Corporation's Consolidated Financial Statements for additional information. 15 17 (3) Pro forma net loss for the fiscal year ended June 30, 1998 is presented to reflect the Merger and related transactions as if these had occurred on July 1, 1997. See Note 3 to DecisionOne Corporation's Consolidated Financial Statements for additional information. (4) Certain reclassifications have been made to prior years' data in order to conform to the 1998 presentation. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with the Company's Consolidated Financial Statements, DecisionOne Corporation and Subsidiaries' Consolidated Financial Statements and the respective Notes thereto, as included in Item 8 herein. Item 7 and 7A are presented with respect to both registrants submitting this filing, DecisionOne Holdings Corp. and DecisionOne Corporation. (As used in this Item 7, the term "Company" refers to DecisionOne Holdings Corp. and its wholly-owned subsidiaries, including DecisionOne Corporation and the term "Holdings" refers to DecisionOne Holdings Corp.) This discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors" in Item 1. COMPANY HISTORY Founded in 1969, the Company began operations as a provider of key punch machines under the tradename "Decision Data". During the 1980s, its operations expanded to include the sale of midrange computer hardware and related maintenance services. During fiscal 1993, the Company decided to focus on providing computer maintenance and support services and sold its computer hardware products business. Since the beginning of fiscal 1993, the Company established a major presence in the computer maintenance and technology support services industry through the acquisition and integration of assets and contracts of 40 complementary businesses. Significant acquisitions included IDEA Servcom, Inc., certain assets and liabilities of which were acquired in August 1994 for cash consideration of approximately $29.5 million and BABSS, which was acquired in October 1995 for cash consideration of approximately $250.0 million. In addition, certain assets of the U.S. computer service business of Memorex Telex were acquired in November 1996 for cash consideration of approximately $24.4 million after certain purchase price adjustments. These acquisitions were accounted for as purchase transactions. At the time of its acquisition by the Company, BABSS was among the largest independent, multivendor service organizations servicing end-user organizations and OEMs. Prior to the acquisition of BABSS, the Company had higher gross margins than BABSS principally because approximately 30% of the Company's revenues in fiscal 1995 were attributable to higher margin contracts involving systems that can be serviced by a limited number of service providers ("proprietary systems"), whereas BABSS had limited revenues from proprietary systems. The Company's primary source of revenues is contracted services for multivendor computer maintenance and technology support services, including hardware support, end-user and software support, network support and other support services. Approximately 89% of the Company's revenues during fiscal 1998 were derived from maintenance contracts covering a broad spectrum of computer hardware. These contracts typically have a stipulated monthly fee over a fixed initial term (typically one year) and continue thereafter unless canceled by either party. Such contracts generally provide that customers may eliminate certain equipment and services from the contract upon notice to the Company. In addition, the Company enters into per-incident arrangements with its customers. Per incident contracts can cover a range of bundled services for computer maintenance or support services or for a specific service, such as network support or equipment relocation services. Another form of per incident service revenues includes time and material billings for services as needed, principally maintenance and repair, provided by the Company. Furthermore, the Company derives additional revenues from the repair of hardware and components at the Company's logistics services and depot repair facilities. Pricing of the Company's services is based on various factors including equipment failure rates, cost of repairable parts and labor expenses. The Company customizes its contracts to the individual customer based generally on the nature of the customer's requirements, the term of the contract and the services that are provided. The Company experiences reductions in revenue when customers replace equipment being serviced with new equipment covered under a manufacturer's warranty, discontinue the use of equipment being serviced due to obsolescence, choose to use a competitor's services or move technical support services in-house. The Company must more than offset this revenue "reduction" to grow its revenues and seeks revenue growth from two principal sources: internally generated sales from its direct and indirect sales force and the acquisition of contracts and assets of other service providers. While the Company historically has been able to offset the erosion of contract-based revenue and maintain revenue growth through acquisitions and new contracts, notwithstanding the reduction in contract based revenue, there can be no assurance it will continue to do so in the future, and any failure to consummate acquisitions, enter into new contracts or add additional services and equipment to existing contracts could have a material adverse effect on the Company's profitability. 16 18 Cost of revenues is comprised principally of personnel-related costs (including fringe benefits), consumable parts cost recognition, amortization and repair costs for repairable parts, and facilities costs and related expenses. The acquisition of contracts and assets has generally provided the Company with an opportunity to realize economies of scale because the Company generally does not increase its costs related to facilities, personnel and consumable and repairable parts in the same proportion as increases in acquired revenues. MERGER AND RECAPITALIZATION On August 7, 1997, the Company consummated the Merger with Quaker Holding Co. ("Quaker"), an affiliate of DLJ Merchant Banking Partners II. The Merger, which has been recorded as a recapitalization as of the consummation date for accounting purposes, occurred pursuant to an Agreement and Plan of Merger among the Company and Quaker dated May 4, 1997, as amended (the "Merger Agreement"). In accordance with the terms of the Merger Agreement, which was approved by the Company's shareholders on August 7, 1997, Quaker merged with and into the Company, and the holders of approximately 94.7% of shares of DecisionOne Holdings Corp. common stock outstanding immediately prior to the Merger received $23 in cash in exchange for these shares. Holders of approximately 5.3% of shares of DecisionOne Holdings Corp. common stock outstanding immediately prior to the Merger retained such shares in the merged Company, as determined based upon shareholder elections and stock proration factors specified in the Merger Agreement. The aggregate value of the Merger was approximately $940 million, including refinancing of DecisionOne Corporation's revolving credit facility (See Note 3 and Note 9 to the Company's Consolidated Financial Statements). As a result of the Merger, the Company incurred various expenses, aggregating approximately $69.0 million on a pretax basis (approximately $63.5 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 reported this one-time charge during the first quarter of fiscal 1998. In addition to these expenses, the Company also incurred approximately $22.3 million of capitalized debt issuance costs associated with the Merger Financing. These costs will be charged to expense over the terms of the related debt instruments (see "Liquidity and Capital Resources" and Note 9 to the Company's Consolidated Financial Statements.) RESULTS OF OPERATIONS The following discussion of results of operations is presented for the fiscal years ended June 30, 1998, 1997 and 1996. The results of operations of the Company include the operations of Memorex Telex from November 15, 1996, and BABSS from October 20, 1995. The following tables set forth, for the periods indicated, certain operating data expressed in dollar amounts and as a percentage of revenues:
FISCAL YEAR ENDED JUNE 30, ------------------------------------- 1998 1997 1996 --------- --------- --------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues $ 805,717 $ 785,950 $ 540,191 Cost of Revenues 613,806 584,755 402,316 --------- --------- --------- Gross Profit 191,911 201,195 137,875 Selling, general and administrative expenses 142,462 105,675 69,137 Amortization of intangibles 27,169 23,470 15,673 Merger expenses 69,046 -- -- Loss on asset sales and disposals 87,458 -- -- Employee severance and unutilized lease losses -- 4,300 3,692 --------- --------- --------- Total operating expenses 326,135 133,445 88,502 --------- --------- --------- Operating income (loss) (134,224) 67,750 49,373 Interest expense, net of interest income 64,683 14,698 14,714 Provision (benefit) for income taxes (15,777) 21,968 13,870 Extraordinary item - loss on early extinguishment of debt -- -- (1,927) --------- --------- --------- Net income (loss) $(183,130) $ 31,084 $ 18,862 ========= ========= ========= OTHER DATA: EBITDA (1) $ 166,834 $ 172,939 $ 114,816 Less: Amortization of repairable parts (81,597) (63,870) (37,869) --------- --------- --------- Adjusted EBITDA (1) 85,237 109,069 76,947 ========= ========= ========= Net cash provided by operating activities 13,337 88,974 51,894 Net cash (used in) investing activities (98,629) (129,244) (346,354) Net cash provided by financing activities 80,830 42,926 300,022
17 19 (1) "EBITDA" represents income (loss) from continuing operations before interest expense, interest income, income taxes (benefit), depreciation, amortization of intangibles, amortization of repairable parts, amortization of discounts and capitalized expenditures related to indebtedness, non-recurring charges for employee severance costs and unutilized leases (approximately $4.3 million for the fiscal year ended June 30, 1997), merger expenses (approximately $69.0 million for the year ended June 30, 1998), loss on asset sales and disposals (approximately $87.5 million for the year ended June 30, 1998), a special charge to the provision for uncollectible receivables (approximately $12.3 million for the year ended June 30, 1998), and incremental charges related to the Company's ongoing service delivery re-engineering program (approximately $7.7 million during the fiscal year ended June 30, 1998). "Adjusted EBITDA" represents EBITDA reduced by the amortization of repairable parts. Adjusted EBITDA is presented because it is relevant to certain covenants contained in debt agreements entered by the Company in connection with the merger, and because the Company believes that Adjusted EBITDA is a more-consistent indicator of the Company's ability to meet its debt service, capital expenditure and working capital requirements.
FISCAL YEAR ENDED JUNE 30, -------------------------- 1998 1997 1996 ----- ----- ----- STATEMENT OF OPERATIONS DATA: Revenues 100.0% 100.0% 100.0% Cost of Revenues 76.2% 74.4% 74.5% ----- ----- ----- Gross Profit 23.8% 25.6% 25.5% Selling, general & administrative expenses 17.7% 13.4% 12.8% Amortization of intangibles 3.4% 3.0% 2.9% Merger expenses 8.6% -- -- Loss on asset sales and disposals 10.9% Employee severance and unutilized lease losses 0.0% 0.5% 0.7% Total operating expenses 40.5% 17.0% 16.4% Operating income (loss) (16.7)% 8.6% 9.1% Interest expense, net of interest income 8.0% 1.9% 2.7% Provision (benefit) for income taxes (2.0)% 2.8% 2.6% Extraordinary item - loss on early extinguishment of debt -- -- (0.4)% ===== ===== ===== Net income (loss) (22.7)% 4.0% 3.5% ===== ===== =====
Overview The Company reported net income (loss) of $(183.1) million, $31.1 million, and $18.9 million in fiscal 1998, 1997 and 1996, respectively. Operating income (loss) for the respective periods was ($134.2) million, $67.8 million, and $49.4 million. Operating loss for the fiscal year ended June 30, 1998 includes merger expenses totaling $69.0 million, a non-recurring loss on asset sales and disposals of $87.5 million, a special charge to the provision for uncollectible receivables of $12.3 million and $7.7 million for incremental charges related to the Company's ongoing service delivery re-engineering program. Operating income for the fiscal period ended June 30, 1997 and 1996 included special charges for employee severance and unutilized lease losses of $4.3 and $3.7 million respectively. Excluding the respective charges in the 1998, 1997 and 1996 periods, operating income was $42.3 million for fiscal 1998 compared to $72.1 million for fiscal 1997 and $53.1 million for fiscal 1996. The Company's fiscal year ended 1998 EBITDA -- as defined in footnote (1) above -- was $166.8 million, as compared to EBITDA of $172.9 million for the fiscal year ended June 30, 1997 and EBITDA of $114.8 million for the fiscal year ended June 30, 1996. Adjusted EBITDA was $85.2 million, $109.1 million, and $76.9 million in fiscal 1998, 1997 and 1996, respectively. A more detailed discussion of items affecting the comparison of operating results is provided below. Fiscal 1998 Compared to Fiscal 1997 Revenues: Revenues increased by $19.7 million, or 2.5%, to $805.7 million for the fiscal year ended June 30, 1998 from $786.0 million for the fiscal year ended June 30, 1997. This increase is attributable primarily to the inclusion of revenues for service contracts acquired from Memorex Telex on November 15, 1996 for an additional 4.5 months during fiscal 1998. Excluding the Memorex Telex related increase, revenues declined during the fiscal year ended June 30, 1998 principally due to lower monthly maintenance contract-based revenues as a result of equipment cancellations exceeding sales of new contracts. 18 20 The Company has taken actions to update its sales approach to the market including the recent employment of important executive and other sales management. While the Company expects these actions and the future acquisition of service contracts from other business to result in revenue growth from current levels, the timing of such revenue growth, if any, is uncertain. Cost of Revenues: Cost of revenues increased by $29.0 million, or 5.0%, to $613.8 million for the fiscal year ended June 30, 1998 from $584.8 million for the fiscal year ended June 30, 1997. This increase is due principally to a $17.7 million increase in the amortization of repairable parts from $63.9 million for the year ended June 30, 1997 to $81.6 million for the year ended June 30, 1998. The parts amortization increase resulted primarily from higher average levels of repairable parts on hand in fiscal 1998 in comparison to fiscal 1997 and the use of shorter lives for personal computer parts purchased in fiscal 1998. The inclusion of the costs of servicing contracts acquired from Memorex Telex on November 15, 1996 for an additional 4.5 months during fiscal 1998 compared to fiscal 1997 also contributed to the increase in cost of revenues. Gross Profit Percentage: As a percentage of revenues, gross profit decreased from 25.6% for the fiscal year ended June 30, 1997 to 23.8% for the fiscal year ended June 30, 1998. The decline in gross profit percentage is primarily attributable to the aforementioned increase in the amortization of repairable parts. Future margin performance is difficult to predict as it will be driven by the results of the aforementioned actions taken by the Company to generate revenue growth. Selling, General and Administrative Expenses: Selling, general and administrative expenses increased by $36.8 million, or 34.8%, to $142.5 million for the fiscal year ended June 30, 1998 from $105.7 million for the fiscal year ended June 30, 1997. This increase is primarily attributable to (1) a special charge to the provision for uncollectible receivables of $12.3 million as a result of changes in management's estimates used to assess the adequacy of the uncollectible receivable allowance, (2) incremental consulting fees of approximately $7.7 million incurred in connection with the Company's re-engineering efforts, (3) the inclusion of an additional 4.5 months of costs related to the acquisition of Memorex Telex service contracts, (4) the development of new information systems for the Company's central dispatch and service contract administration processes and (5) increases in sales employment costs. Amortization of Intangibles: Amortization of intangible assets increased by $3.7 million, or 15.7%, from $23.5 million for the fiscal year ended June 30, 1997 to $27.2 million for the fiscal year ended June 30, 1998. This increase was attributable principally to the amortization of intangibles resulting from the Memorex Telex acquisition and the acquisition of service contracts of several other complementary businesses. Loss on Asset Sales and Disposals: Management determined that over 1.2 million of its computer parts were obsolete during its annual fourth quarter physical inventory. These parts were retired and subsequently sold to salvage dealers for nominal scrap value. The parts obsolescence was principally due to the convergence of significant changes in the Company's business operations and the computer service industry, which the Company expects will continue. The significant changes include: (1) accelerated technology migration trends as customers modify their computing environments to remediate year 2000 ("Y2K") problems, (2) increasing shifts in demand from data center and midrange systems to desktop computing environments, and (3) declining life cycles of the products under current and anticipated service contracts due to increasingly rapid changes in technology. The abnormal nature of this retirement and subsequent sale required immediate loss recognition of $75 million. As a result of the abnormal retirement of computer parts and related life studies, the Company will revise the useful lives of repairable parts and increase the obsolescence provision for consumable parts prospectively. Effective July 1, 1998, the Company will amortize its existing composite group of repairable parts and future repairable parts purchases over an estimated average remaining life of three years. Management expects the reduction in future amortization expense that will result from the abnormal retirement will be substantially offset by the increased amortization and obsolescence charges on its remaining group of parts and future parts purchases. In connection with the aforementioned acquisition of BABSS, the Company acquired contractual profit participation rights pursuant to an existing agreement between BABSS and ICL Sorbus Limited ("ICL"). On June 29, 1998, the Company sold all of its contractual profit participation rights back to ICL at a pretax loss of approximately $12.5 million. Operating income reflects $0.5 million, $1.7 million, and $0.0 million in 1998, 1997, and 1996, respectively, for amounts earned pursuant to these rights. Interest Expense: The Company's interest expense, net of interest income, increased by $50.0 million from $14.7 million for the fiscal year ended June 30, 1997 to $64.7 million for the fiscal year ended June 30, 1998. 19 21 DecisionOne Corporation interest expense, net of interest income, increased by $37.5 million from $14.7 million for the fiscal year ended June 30, 1997 to $52.2 million for the fiscal year ended June 30, 1998. The respective increases are primarily attributable to the Company's increased debt levels as a result of the Merger (see "Liquidity and Capital Resources"). The interest expense, net of interest income, is higher for the Company than DecisionOne Corporation as a result of interest expense on $85 million of 11-1/2% Senior Discount Debentures issued by Holdings in connection with the Merger and interest income on a $59.1 million parent company loan receivable held by DecisionOne Corporation. Income Taxes: The Company's income tax provision for the fiscal year ended June 30, 1998 reflects an estimated effective income tax benefit of approximately 8%, while the effective income tax expense for the fiscal year ended June 30, 1997 was approximately 41%. The change in the Company's anticipated effective income tax rate was due primarily to the recording of a valuation allowance for financial reporting purposes to reduce the tax benefit recognized on operating loss carryforwards generated during fiscal 1998. Fiscal 1997 Compared to Fiscal 1996 Revenues: Revenues increased by $245.8 million, or 45.5%, to $786.0 million for the fiscal year ended June 30, 1997 from $540.2 million for the fiscal year ended June 30, 1996. This increase is attributable primarily to the full period effect of the BABSS acquisition, which occurred on October 20, 1995. To a lesser degree, this increase is attributable to the acquisition of the service contracts of several complementary businesses, principally Memorex Telex on November 15, 1996. Cost of Revenues: Cost of revenues increased by $182.5 million, or 45.4%, to $584.8 million for the fiscal year ended June 30, 1997 from $402.3 million for the fiscal year ended June 30, 1996. This increase is attributable primarily to the full period effect of the BABSS acquisition, which occurred on October 20, 1995. To a lesser degree, this increase is attributable to the acquisition of the service contracts of several complementary businesses, principally Memorex Telex on November 15, 1996. Gross Profit Percentage: As a percentage of revenues, gross profit increased slightly from 25.5% for the fiscal year ended June 30, 1996 to 25.6% for the fiscal year ended June 30, 1997. Selling, General and Administrative Expenses: Selling, general and administrative expenses increased by $36.6 million, or 53.0%, to $105.7 million for the fiscal year ended June 30, 1997 from $69.1 million for the fiscal year ended June 30, 1996. This increase is primarily attributable to the full period effect in fiscal 1997 of the BABSS acquisition, and to a lesser degree, to the acquisition of Memorex Telex in fiscal 1996. As a percentage of revenues, selling, general and administrative expenses increased to 13.4% for the fiscal year ended June 30, 1997 from 12.8% for the fiscal year ended June 30, 1996. Amortization of Intangibles: Amortization of intangible assets increased by $7.8 million, or 49.7%, from $15.7 million for the fiscal year ended June 30, 1996 to $23.5 million for the fiscal year ended June 30, 1997. This increase was attributable principally to the amortization of intangibles resulting from the BABSS and Memorex Telex acquisitions. Employee severance and unutilized lease costs: During the fiscal year ended June 30, 1997, the Company recorded $4.3 million in employee severance and unutilized lease/contract costs, in connection with specific acquisitions. During fiscal 1996, the Company recorded $3.7 million in employee severance and unutilized lease costs. These costs were related principally to future rent obligations and related costs for facilities of the Company that the Company determined were no longer required as a result of the acquisition of BABSS. (See Note 16 to the Company's Consolidated Financial Statements for additional information). Interest Expense: Interest expense, net of interest income, equaled approximately $14.7 million for each of the fiscal years ended June 30, 1997 and 1996. This was the result of two offsetting factors, as the Company's reduced average borrowing rate on long-term indebtedness, (approximately 6.4% for the fiscal year ended June 30, 1997 as compared to 9.0% for the fiscal year ended June 30, 1996) substantially offset the increase in average borrowings during the fiscal year ended June 30, 1997. The reduced average borrowing rate resulted from the refinancing of the Company's revolving credit facility in April, 1996. The increased average borrowings during fiscal 1997 were attributable primarily to the funding requirements of several acquisitions, principally Memorex Telex. Income Taxes: The Company's income tax provision for the fiscal year ended June 30, 1997 reflects an estimated effective income tax rate of approximately 41%, while the effective income tax rate for the fiscal year ended June 30, 1996 was approximately 40%. This increase in the Company's anticipated effective income tax rate was due primarily to the prior-year impact of certain non-recurring foreign income tax benefits relating to net operating loss carryforwards. LIMITATION ON USE OF NET OPERATING LOSS CARRYFORWARDS AND OTHER TAX CREDITS As of June 30, 1998, the Company had tax loss carryforwards of approximately $130.4 million, $109.9 million and $4.0 million for Federal, state and foreign income tax purposes, respectively, which are scheduled to expire between 1999 and 2013. The Company also had minimum tax credits of approximately $2.8 million as of June 30, 1998, with no applicable expiration period. These carryforwards and credits may be utilized, as applicable, to reduce future taxable income. 20 22 As a result of the Company's merger with Quaker on August 7, 1997 an "ownership change" occurred pursuant to Section 382 of the Internal Revenue Code. Accordingly, for U.S. Federal income tax purposes, net operating loss and tax credit carryforwards of approximately $27.9 million arising prior to the ownership change are limited during any future period to the Section 382 "limitation amount" of approximately $9.0 million per annum. For financial reporting purposes, the tax benefit recognized for these carryforwards has been reduced by a valuation allowance (See Note 10 to the Company's Consolidated Financial Statements.) LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity are cash flow from operations and borrowings under its new $105 million revolving credit facility ("New Credit Facility",) which was entered into in connection with the Merger. The New Credit Facility is scheduled to expire on August 7, 2003. The interest rate applicable to the Facility varies, at the Company's option, LIBOR (plus applicable margins not to exceed 3.0%, as amended) or the Prime Rate (plus applicable margin not to exceed 1.75%). (See Note 9 to the Company's Consolidated Financial Statements.) The Company's principal uses of cash are debt service requirements, capital expenditures, purchases of repairable parts, acquisitions, and working capital. The Company expects that ongoing requirements for debt service, capital expenditures, repairable parts and working capital will be funded from operating cash flow and borrowings under the New Revolving Credit Facility. To finance future acquisitions, the Company may require additional funding which may be provided in the form of additional debt, equity financing or a combination thereof. The Company incurred substantial indebtedness in connection with the Merger on August 7, 1997. As of June 30, 1998, the Company had outstanding approximately $744.3 million of debt, as compared to approximately $237.5 million as of June 30, 1997. (See Note 9 to the Company's Consolidated Financial Statements.) The Company's significant debt service obligations could, under certain circumstances, have material consequences to security holders of the Company. See "Risk Factors", included herein under Item 1. In connection with the Merger, Holdings received proceeds of $85 million from the issuance of 11-1/2% Senior Discount Debentures due 2008 (the "11-1/2% Notes") and DecisionOne Corporation issued $150 million of 9-3/4% Senior Subordinated Notes due 2007 (the "9-3/4% Notes"). DecisionOne Corporation also entered into a new syndicated credit facility providing for term loans of $470 million and revolving loans of up to $105 million. The proceeds of the 11-1/2% Notes (which were issued with attached warrants), 9-3/4% Notes, the initial borrowings under the new credit facility and the purchase of approximately $225 million of Holdings common stock by the DLJ Group have been used to finance the payments of cash to cash-electing shareholders, to pay the holders of stock options and stock warrants canceled or converted, as applicable, in connection with the merger, to repay DecisionOne Corporation's existing revolving credit facility and to pay expenses incurred in connection with the merger. See Note 3 and Note 9 to the Company's and DecisionOne Corporation's Consolidated Financial Statements for additional information. The New Credit Facility contains various terms and covenants which, among other things, place certain restrictions on the Company's ability to pay dividends and incur additional indebtedness, and which require the Company to meet certain minimum financial performance measurements. During the three months ended March 31, 1998, the Company sought and obtained amendments to the New Credit Facility to revise certain financial performance measurements. The Company is in compliance with its covenants under the amended New Credit Facility as of June 30, 1998. (See Note 9 to the Company's Consolidated Financial Statements.) The Company incurred approximately $4.7 million in incremental expenditures for information systems and related re-engineering initiatives in fiscal 1998 and has budgeted to incur an additional $16.0 million in fiscal 1999. The initiatives that are being funded include the following: (i) enhancements to the Company's service entitlement process which will further ensure that customers are billed for all work performed; (ii) improvements to the Company's dispatch system and field engineer data collection, technical support tools and service delivery processes, all of which are designed to increase productivity; (iii) enhancements to the Company's help desk and central dispatch systems to provide an integrated support solution to the customer base, and (iv) improvements to the Company's field inventory tracking system which will facilitate increased transfer of consumable and repairable parts among field locations and reduce purchases of repairable parts. There can be no assurance that the 1999 budgeted amounts will be so expended by the Company, nor when these amounts will be so expended. The Company currently anticipates that its operating cash flow, together with borrowings under the New Credit Facility, will be sufficient to meet its anticipated future operating expenses and capital expenditures and to service its debt requirements as they become due. However, the Company's ability to make scheduled payments of principal of, to pay interest on or to refinance its indebtedness and to satisfy its other debt obligations will depend upon its future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond its control. See "Risk Factors", included herein under Item 1. 21 23 Financial Condition: Cash flow from operating activities, exclusive of non-recurring Merger expenses which were funded entirely through the proceeds of the merger financing, for the fiscal year ended June 30, 1998 was approximately $13.3 million. These funds, together with borrowings under the New Credit Facility, provided the required capital to fund repairable part purchases and capital expenditures of approximately $88.5 million as well as the acquisition of contracts and assets of complementary businesses for approximately $10.2 million. In fiscal years 1997 and 1996, the Company generated net cash flow from operating activities of $89.0 million and $51.9 million, respectively. Cash required to fund the purchase of repairable parts and for capital expenditures totaled $97.0 million and $70.8 million, during fiscal years 1997 and 1996, respectively. Cash required to fund the acquisition of contracts and assets of complimentary businesses were approximately $32.3 million and $275.6 million during fiscal years 1997 and 1996, respectively. The most significant of the Company's acquisitions during the fiscal year ended June 30, 1997 was the Memorex Telex acquisition on November 15, 1996. The adjusted purchase price was $52.7 million, comprised of the Company's assumption of $28.3 million of liabilities under acquired customer maintenance contracts, and $24.4 million in cash, excluding transactions and closing costs, after taking into account certain purchase price adjustments. The Company, or certain businesses as to which it is alleged that the Company is a successor, have been identified as potentially responsible parties in respect of four waste disposal sites that have been identified by the U.S. Environmental Protection Agency as Superfund sites. In addition, the Company received a notice several years ago that it may be a potentially responsible party in respect of a fifth site, but has not received any other communication in respect of that site. The Company has estimated that its share of the costs of the cleanup of one of the sites will be approximately $500,000, which has been accrued for in the accompanying consolidated balance sheets as of June 30,1998 and 1997. Complete information as to the scope of required cleanup at these sites is not yet available and, therefore, management's evaluation may be affected as further information becomes available. However, in light of information currently available to management, including information regarding assessments of the sites to date and the nature of involvement of the Company's alleged predecessor at the sites, it is management's opinion that the Company's potential additional liability, if any, for the cost of cleanup of these sites will not be material to the consolidated financial position, results of operations or liquidity of the Company. See Note 17 to the Company's Consolidated Financial Statements. EFFECT OF INFLATION; SEASONALITY Inflation has not been a material factor affecting the Company's business. In recent years, the cost of electronic components has remained relatively stable due to competitive pressures within the industry, which has enabled the Company to contain its service costs. The Company's general operating expenses, such as salaries, employee benefits, and facilities costs, are subject to normal inflationary pressures. The operations of the Company are generally not subject to seasonal fluctuations. YEAR 2000 COMPLIANCE As in the case with most other businesses, the Company is in the process of evaluating and addressing Year 2000 compliance of both its information technology systems and its non-information technology systems (collectively referred to as "Systems"). Such Year 2000 compliance efforts are designed to identify, address and resolve issues that may be created by computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. If this situation occurs, the potential exists for System failure or miscalculations by computer programs, which could cause disruption of operations. The Company has completed an assessment of both its information technology systems and its non-information technology systems. The Company has four mission critical information technology systems, two of which have been remediated and are Year 2000 compliant and are currently being placed into service. Remediation has begun on the other two mission critical information technology systems and is expected to be complete by April 1999. The Company has identified approximately 70 non-mission critical information technology systems, which the Company plans to remediate using in-house personnel or will obtain certifications and or upgrades from its vendors. Subsequently, all of the systems will be compliance tested by in-house personnel. The Company believes it is approximately 40% complete with the above remediation processes and will be 100% complete by June 1999. The Company expects that remediation of its non-information technology systems will commence in the fall of 1998 and be complete by June 1999. 22 24 The Company has initiated communications with all of its significant business partners via a Vendor Readiness Survey to determine their plans to comply with Year 2000. All responses are evaluated as received to determine if additional action is required to ensure compliance of the business partner. The Company continues to use both internal and external resources to comply with Year 2000. The Company has recently engaged a consultant to assess the Company's processes in place to achieve Year 2000 compliance. The Company has in place a Year 2000 Steering Committee, which meets regularly and periodically reports the progress of Year 2000 compliance to the Company's executive management and the Board of Directors. Currently, the Company does not have any contingency plans. However, it recognizes the need to develop contingency plans and expects to have these plans secured by September 1999. As of June 30, 1998 the Company has incurred costs of approximately $2.1 million and expects to incur approximately $3.2 million thereafter to remediate all of the Company's Systems. This represents approximately 7.5% of the Company's information technology budget. No significant information technology projects have been deferred due to the Company's Year 2000 efforts. The future remediation costs to be incurred are based on management's best estimates, which were derived using assumptions of future events including the continued availability of resources and the reliability of third party modification plans. There can be no assurance that this estimate will be achieved and actual results may be materially different. Specific factors that might cause such material differences include, but not limited to, the availability and cost of personnel with appropriate skills and the ability to locate and correct all non-compliant Systems. The Company is aware of the potential for claims against it and other companies for damages for products and services that were not Year 2000 compliant. Since the Company is neither a hardware manufacturer nor a software developer, the Company believes that it does not have significant exposure to liability for such claims. While the Company does not believe that the Year 2000 matters discussed above will have a material impact on its business, financial condition or results of operations, it is uncertain whether or to what extent the Company may be affected by such matters. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company uses its revolving credit facility, term loans, senior discount debentures, and senior subordinated notes to finance a significant portion of its operations. These on-balance sheet financial instruments, to the extent they provide for variable rates of interest, expose the Company to interest rate risk resulting from changes in LIBOR or the prime rate. The Company uses off-balance sheet interest rate swap and collar agreements to partially hedge interest rate exposure associated with on-balance sheet financial instruments. All of the Company's derivative financial instrument transactions are entered into for non-trading purposes. The terms and characteristics are matched with the underlying on-balance instruments, subject to the terms of the New Credit Facility. To the extent that the Company's financial instruments expose the Company to interest rate risk and market risk, they are presented in the table below. The table presents principal cash flows and related interest rates by year of maturity for the Company's revolving credit facility, term loans, senior discount debentures, and senior subordinated notes in effect at June 30, 1998 and, in the case of the senior discount notes, exclude the potential exercise of the redemption feature. For interest rate swaps and collars, the table presents notional amounts and the related reference interest rates by year of maturity. Fair values included herein have been determined based on (1) quoted market prices for the term loans, senior discount debentures, and senior subordinated notes; (2) the carrying value for the revolving credit facility as interest rates are reset periodically; and (3) estimates obtained from dealers to settle interest rate swap and collar agreements. Note 9 to the consolidated financial statements contain descriptions of the Company's new revolving credit facility, term loans, senior discount debentures, senior subordinated notes and interest rate risk management agreements and should be read in conjunction with the table below (amounts in thousands).
Year of Maturity ---------------- Total Due Fair Value Interest Rate Sensitivity 1999 2000 2001 2002 2003 Thereafter At Maturity at June 30, 1998 ------ ------ ------ ------ ------ ------- ------- ------- Debt: Fixed Rate -- -- -- -- -- 298,400 298,400 233,790 Average Interest Rate -- -- -- -- -- 10.6% -- -- Variable Rate 10,550 19,325 36,875 49,062 73,438 309,388 498,638 490,148 Average Interest Rate 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% -- -- Interest Rate Instruments: Variable to Fixed Swaps -- 50,000 60,000 -- -- -- 110,000 (687) Average Pay Rate -- 6.0% 6.0% -- -- -- -- -- Average Receive Rate -- 5.7% 5.7% -- -- -- -- -- Collars: -- -- 125,000 -- -- -- 125,000 (538) Average Cap Rate -- -- 6.7% -- -- -- -- -- Average Floor Rate -- -- 5.7% -- -- -- -- --
23 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Attached hereto and a part of this report are the consolidated financial statements and supplementary data for DecisionOne Holdings Corp. and DecisionOne Corporation listed in Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 24 26 PART III ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF REGISTRANT The information required by this item is incorporated by reference to the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed by the Company with the Securities and Exchange Commission on or before October 28, 1998. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed by the Company with the Securities and Exchange Commission on or before October 28, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed by the Company with the Securities and Exchange Commission on or before October 28, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed by the Company with the Securities and Exchange Commission on or before October 28, 1998. 25 27 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) Financial Statements See Index to Financial Statements appearing on Page F-1. (2) Financial Statement Schedules Schedule I--Condensed Financial Information of Registrant (DecisionOne Holdings Corp. only) Schedule II--Valuation and Qualifying Accounts (3) Exhibits DECISIONONE HOLDINGS CORP. EXHIBIT NO. DESCRIPTION --- ----------- 2.1 Agreement and Plan of Merger, dated May 4, 1997 between the Company and Quaker Holding Co.(5) (appears as Annex A) 2.2 Amendment No. 1 to the Agreement and Plan of Merger, dated as of July 15, 1997(5) (appears as Annex A-1) 3.1 Amended and Restated Certificate of Incorporation (Exhibit 3.1)(1) 3.2 Amended and Restated Bylaws (Exhibit 3.2)(1) 4.1 Specimen of DecisionOne Corporation's 9 3/4% Senior Subordinated Notes due 2007 (included in Exhibit 4.2)(6) 4.2 9 3/4% Senior Subordinated Note Indenture dated as of August 7, 1997 between DecisionOne Corporation and State Street Bank and Trust Company as Trustee(6) 4.3 Specimen of the Company's 11 1/2% Senior Discount Debenture due 2008 (included in Exhibit 4.4) (6) 4.4 11 1/2% Senior Discount Debenture Indenture dated as of August 7, 1997 by and between Quaker Holding Co. and State Street Bank and Trust as Trustee (6) 4.5 Form of Warrant (included in Exhibit 4.6) (6) 4.6 Warrant Agreement dated as of August 7, 1997 between Quaker Holding Co. and State Street Bank and Trust as Warrant Agent (6) 4.7 Debenture Agreement dated as of August 7, 1997 between the Company and State Street Bank and Trust as Trustee (included in Exhibit 4.4) (6) 4.8 Warrant Assumption dated as of August 7, 1997 between the Company and State Street Bank and Trust as Warrant Agent (included in Exhibit 4.6) (6) 10.1+ Management Incentive Plan (6) 26 28 EXHIBIT NO. DESCRIPTION --- ----------- 10.2+ Direct Investment Program (6) 10.3 Investors' Agreement dated August 7, 1997 (6) 10.4 U.S. $575,000,000 Credit Agreement ("Credit Agreement") dated as of August 7, 1997 by and among DecisionOne Corporation, various financial institutions, DLJ Capital Funding Inc. (as Syndication Agent), Nations Bank of Texas, N.A. (as Administrative Agent) and BankBoston, N.A. (as Documentation Agent)(6) 10.5 Amendment No. 2, dated January 12, 1998 to the Credit Agreement (7) 10.6 Amendment No. 3, dated March 18, 1998 to the Credit Agreement (8) 10.7+ Employment Agreement with Kenneth Draeger (Exhibit 10.7)(1) 10.8+ Employment Letter with Stephen J. Felice (Exhibit 10.8)(1) 10.9 Amended and Restated Registration Rights Agreement (Exhibit 10.11)(1) 10.10 First Amendment to Amended and Restated Registration Rights Agreement (Exhibit 10.12)(1) 10.11 Lease for Frazer, Pennsylvania executive offices (East)(Exhibit 10.14)(1) 10.12 Lease for Frazer, Pennsylvania executive offices (West)(Exhibit 10.15)(1) 10.13 Lease for Malvern, Pennsylvania depot and call center (Exhibit 10.16)(1) 10.14+ Employment Letter with Joseph S. Giordano (Exhibit 10.17)(2) 10.15 Lease for Hayward, California depot (Exhibit 10.19)(2) 10.16 Lease for Northborough, Massachusetts depot (Exhibit 10.20)(2) 10.17+ Employment Letter with Thomas J. Fitzpatrick (Exhibit 10.22)(3) 10.18+ Employment Letter with Thomas M. Molchan(4) 10.19+ Employment Letter with Dwight T. Wilson(4) 10.20 Intercompany Note made by the Company in favor of DecisionOne Corporation dated as of August 7, 1997(6) 10.21 Form of Purchase Agreement dated as of August 7, 1997(6) 10.22 Form of Option Agreement dated as of August 7, 1997(6) 10.23 Lease for Richfield, Minnesota call center (7) 10.24 Lease for Grove City, Ohio depot 10.25 Lease for Phoenix, Arizona depot 10.26+ Employment Letter for James S. Burkhardt 10.27+ Employment Letter for Dennis M. Callagy 10.28 Form of Tax Sharing Agreement(9) 27 29 12 Computation of Ratios of Earnings to Fixed Charges(5) 21 Subsidiaries of the Registrant (Exhibit 21)(1) 23 Consent of Deloitte & Touche LLP 24 Power of Attorney 27 Financial Data Schedule + Compensation plans and arrangements for executives and others. (1) Filed as an Exhibit to Registration Statement No. 333-1256 on Form S-1 filed with the Securities and Exchange Commission on February 9, 1996. (2) Filed as an Exhibit to Pre-Effective Amendment No. 1 to Registration Statement No. 333-1256 on Form S-1 filed with the Securities and Exchange Commission on March 14, 1996. (3) Filed as an Exhibit to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 30, 1996. (4) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 1997. (5) Filed as an Exhibit to Registration Statement No. 333-28265 on Form S-4 filed with the Securities and Exchange Commission on June 2, 1997. (6) Filed as an Exhibit to the Annual Report on Form 10-K for DecisionOne Holdings Corp. filed with the Securities and Exchange Commission on September 29, 1997. (7) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on February 12, 1998. (8) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 1998. (9) Filed as an Exhibit to Registration Statement No. 333-28411 on Form S-1 filed with the Securities and Exchange Commission on June 3, 1997. 28 30 DECISIONONE CORPORATION EXHIBIT NO. DESCRIPTION --- ----------- 3.1 Amended and Restated Certificate of Incorporation of the Company, as amended.(1) 3.2 Amended and Restated Bylaws of the Company.(1) 4.1 Specimen of the Company's 9 3/4 Senior Subordinated Notes due 2007 (included in Exhibit 4.2).(4) 4.2 9 3/4% Senior Subordinated Note Indenture dated as of August 7, 1997 between the Company and State Street Bank and Trust as Trustee.(4) 10.1+ Employment Agreement with Kenneth Draeger.(2) 10.2+ Employment Letter with Stephen J. Felice.(2) 10.3 Lease for Frazer, Pennsylvania executive offices (East).(2) 10.4 Lease for Frazer, Pennsylvania executive offices (West).(2) 10.5 Lease for Malvern, Pennsylvania depot and call center.(2) 10.6 Lease for Hayward, California depot.(3) 10.7 Lease for Northborough, Massachusetts depot.(3) 10.8 Form of Tax Sharing Agreement.(1) 10.9 U.S. $575,000,000 Credit Agreement dated as of August 7, 1997 by and among the Company, various finance institutions, DLJ Capital Funding Inc. (as Syndication Agent), NationsBank of Texas, N.A. (as Administrative Agent) and BankBoston, N.A. (as Documentation Agent).(4) 10.10 Intercompany Note made by DecisionOne Holdings Corp. in favor of the Company dated as of August 7, 1997.(4) 12.1 Statement Regarding Computation of Ratios.(1) 23 Consent of Deloitte & Touche LLP 24.1 Power of Attorney 27 Financial Data Schedule. + Compensation plans and arrangements for executives and others. (1) Filed as an Exhibit to Registration Statement No. 333-28411 on Form S-1 filed with the Securities and Exchange Commission on June 3, 1997. (2) Filed as an Exhibit to Registration Statement No. 333-1256 on Form S-1 filed with the Securities and Exchange Commission on February 9, 1996. (3) Filed as an Exhibit to Pre-Effective Amendment No. 1 to Registration Statement No. 333-1256 on Form S-1 filed with the Securities and Exchange Commission on March 14, 1996. (4) Filed as an Exhibit to the Annual Report on Form 10-K filed by DecisionOne Corporation with the Securities and Exchange Commission on September 29, 1997. 29 31 (b) Current Reports on Form 8-K filed during the quarter ended June 30, 1998: None 30 32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in Frazer, Pennsylvania on September 28, 1998. DECISIONONE HOLDINGS CORP. By: /s/ STEPHEN J. FELICE ------------------------------------- Stephen J. Felice Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the indicated persons and by Stephen J. Felice as attorney-in-fact for the specific persons in the capacities with Registrant on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ STEPHEN J. FELICE Chief Executive Officer and President September 28, 1998 - ------------------------------ Stephen J. Felice (Principal Executive Officer) /s/ THOMAS J. FITZPATRICK Executive Vice President and Chief Financial Officer September 28, 1998 - ------------------------------ Thomas J. Fitzpatrick (Principal Financial and Accounting Officer) /s/ * Director and Chairman of the Board September 28, 1998 - ------------------------------ Peter T. Grauer /s/ * Director September 28, 1998 - ------------------------------ Lawrence M.v.D. Schloss /s/ * Director September 28, 1998 - ------------------------------ Kirk B. Wortman *By: /s/ STEPHEN J. FELICE -------------------------- Stephen J. Felice Attorney-in-Fact
31 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in Frazer, Pennsylvania on September 28, 1998. DECISIONONE CORPORATION By: /s/ STEPHEN J. FELICE ------------------------------------- Stephen J. Felice Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the indicated persons and by Stephen J. Felice as attorney-in-fact for the specific persons in the capacities with Registrant on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ STEPHEN J. FELICE Chief Executive Officer and President September 28, 1998 - ------------------------------ Stephen J. Felice (Principal Executive Officer) /s/ THOMAS J. FITZPATRICK Executive Vice President and Chief Financial Officer September 28, 1998 - ------------------------------ Thomas J. Fitzpatrick (Principal Financial and Accounting Officer) /s/ * Director September 28, 1998 - ------------------------------ Peter T. Grauer /s/ * Director September 28, 1998 - ------------------------------ Giles D. Harlow /s/ * Director September 28, 1998 - ------------------------------ Kirk B. Wortman /s/ * Director September 28, 1998 - ------------------------------ Richard C. Yancey *By: /s/ STEPHEN J. FELICE ------------------------- Stephen J. Felice Attorney-in-Fact
32 34 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS OF DECISIONONE HOLDINGS CORP.: Independent Auditors' Report F-2 Consolidated Balance Sheets as of June 30, 1998 and 1997 F-3 Consolidated Statements of Operations for the Years Ended June 30, 1998, 1997 and 1996 F-4 Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended June 30, 1998, 1997 and 1996 F-5 Consolidated Statements of Cash Flows for the Years Ended June 30, 1998, 1997 and 1996 F-6 Notes to Consolidated Financial Statements F-7 CONSOLIDATED FINANCIAL STATEMENTS OF DECISIONONE CORPORATION: Independent Auditors' Report F-23 Consolidated Balance Sheets as of June 30, 1998 and 1997 F-24 Consolidated Statements of Operations for the Years Ended June 30, 1998, 1997 and 1996 F-25 Consolidated Statements of Shareholder's Equity (Deficit) for the Years Ended June 30, 1998, 1997 and 1996 F-26 Consolidated Statements of Cash Flows for the Years Ended June 30, 1998, 1997 and 1996 F-27 Notes to Consolidated Financial Statements F-28 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 35 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, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the three years in the period ended June 30, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998 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 September 4, 1998 F-2 36 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1998 AND 1997 (IN THOUSANDS, EXCEPT NUMBER OF SHARES)
1998 1997 --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 6,415 $ 10,877 Accounts receivable, net of allowances of $ 22,572 and $14,869 114,082 127,462 Consumable parts, net of allowances of $ 9,271 and $15,976 23,097 29,052 Prepaid expenses and other assets 28,106 4,542 --------- --------- Total current assets 171,700 171,933 REPAIRABLE PARTS, Net of accumulated amortization of $135,277 and $156,468 142,446 205,366 PROPERTY AND EQUIPMENT 29,095 34,227 INTANGIBLES 154,029 191,366 DEFERRED TAX ASSET 25,360 18,064 OTHER ASSETS 19,357 2,149 --------- --------- TOTAL ASSETS $ 541,987 $ 623,105 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current portion of debt $ 13,311 $ 4,788 Accounts payable and accrued expenses 101,851 96,516 Deferred revenues 40,758 56,600 Income taxes and other liabilities 10,925 11,513 --------- --------- Total current liabilities 166,845 169,417 DEBT 731,012 232,721 OTHER LIABILITIES 5,736 6,079 SHAREHOLDERS' EQUITY (DEFICIT): Preferred stock, no par value; authorized 5,000,000 shares; none outstanding Common stock, $.01 par value; authorized 100,000,000 shares; issued and outstanding 12,584,219 shares in 1998 and 27,817,832 shares in 1997 126 278 Additional paid-in capital 242,181 258,331 Accumulated deficit (601,195) (42,432) Other (2,718) (1,289) --------- --------- Total shareholders' equity (deficit) (361,606) 214,888 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 541,987 $ 623,105 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-3 37 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1998, 1997 AND 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1997 1996 --------- --------- --------- REVENUES $ 805,717 $ 785,950 $ 540,191 COST OF REVENUES 613,806 584,755 402,316 --------- --------- --------- GROSS PROFIT 191,911 201,195 137,875 OPERATING EXPENSES: Selling, general and administrative expenses 142,462 109,975 72,829 Amortization of intangibles 27,169 23,470 15,673 Merger expenses 69,046 Loss on asset sales and disposals 87,458 --------- --------- --------- OPERATING INCOME (LOSS) (134,224) 67,750 49,373 INTEREST EXPENSE, Net of interest income of $1,417 in 1998, $197 in 1997 and $239 in 1996 64,683 14,698 14,714 --------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (BENEFIT) AND EXTRAORDINARY ITEM (198,907) 53,052 34,659 PROVISION (BENEFIT) FOR INCOME TAXES (15,777) 21,968 13,870 --------- --------- --------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (183,130) 31,084 20,789 EXTRAORDINARY ITEM, NET OF TAX BENEFIT OF $1,284 -- -- 1,927 --------- --------- --------- NET INCOME (LOSS) $(183,130) $ 31,084 $ 18,862 ========= ========= ========= PRO FORMA INFORMATION (UNAUDITED) - See Note 3: Pro forma net loss $(124,266) Pro forma net loss per share $ (9.91) Pro forma weighted average number of common shares outstanding 12,545
The accompanying notes are an integral part of these consolidated financial statements. F-4 38 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) YEARS ENDED JUNE 30, 1998, 1997 AND 1996 (IN THOUSANDS, EXCEPT NUMBER OF SHARES OF COMMON STOCK)
FOREIGN COMMON STOCK ADDITIONAL CURRENCY NUMBER OF PAID-IN ACCUMULATED TRANSLATION SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT ------------ --------- --------- --------- --------- BALANCE, JUNE 30, 1995 8,935,348 $ 89 $ 107,991 $ (92,378) $ 680 Net income 18,862 Adjustment to pension liability Common stock issued: Exercise of preemptive rights 384,502 4 1,526 Public offering 6,300,000 63 106,250 Exercise of stock options 329,850 3 300 Exercise of warrants 118,664 1 598 Conversion of redeemable preferred stock 11,271,924 113 37,529 Stock issuance costs (1,573) Issuance of warrants 126 Issuance of warrants attached to subordinated debentures 3,400 Foreign currency translation adjustment (58) Accrued dividends on redeemable preferred stock (885) ------------ --------- --------- --------- --------- BALANCE, JUNE 30, 1996 27,340,288 273 255,262 (73,516) 622 Net income 31,084 Adjustment to pension liability Tax benefit--disqualifying stock disposition 2,635 Foreign currency translation adjustment (38) Exercise of stock options 477,544 5 434 ------------ --------- --------- --------- --------- BALANCE, JUNE 30, 1997 27,817,832 278 258,331 (42,432) 584 Net loss (183,130) Adjustment to pension liability Foreign currency translation adjustment (912) Repurchase of common stock and warrants in connection with recapitalization (26,506,705) (265) (244,639) (375,633) Issuance of common stock in connection with recapitalization 11,108,354 111 226,472 Purchase and retirement of common stock (23,026) (85) Issuance of warrants 1,880 Exercise of stock options 187,764 2 222 ------------ --------- --------- --------- --------- BALANCE, JUNE 30, 1998 $ 12,584,219 $ 126 $ 242,181 $(601,195) $ (328) ============ ========= ========= ========= ========= TOTAL SHARE- PENSION HOLDERS' LIABILITY (DEFICIT) ADJUSTMENT EQUITY ------- --------- BALANCE, JUNE 30, 1995 $(1,705) $ 14,677 Net income 18,862 Adjustment to pension liability (143) (143) Common stock issued: Exercise of preemptive rights 1,530 Public offering 106,313 Exercise of stock options 303 Exercise of warrants 599 Conversion of redeemable preferred stock 37,642 Stock issuance costs (1,573) Issuance of warrants 126 Issuance of warrants attached to subordinated debentures 3,400 Foreign currency translation adjustment (58) Accrued dividends on redeemable preferred stock (885) ------- --------- BALANCE, JUNE 30, 1996 (1,848) 180,793 Net income 31,084 Adjustment to pension liability (25) (25) Tax benefit--disqualifying stock disposition 2,635 Foreign currency translation adjustment (38) Exercise of stock options 439 ------- --------- BALANCE, JUNE 30, 1997 (1,873) 214,888 Net loss (183,130) Adjustment to pension liability (517) (517) Foreign currency translation adjustment (912) Repurchase of common stock and warrants in connection with recapitalization (620,537) Issuance of common stock in connection with recapitalization 226,583 Purchase and retirement of common stock (85) Issuance of warrants 1,880 Exercise of stock options 224 ------- --------- BALANCE, JUNE 30, 1998 $(2,390) $(361,606) ======= =========
The accompanying notes are an integral part of these consolidated financial statements. F-5 39 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1998, 1997 AND 1996 (IN THOUSANDS)
1998 1997 1996 --------- --------- --------- OPERATING ACTIVITIES: Net income (loss) $(183,130) $ 31,084 $ 18,862 Adjustments to reconcile net income to net cash provided by operating activities: Loss on asset sales and disposals 87,458 Depreciation 15,729 13,549 8,309 Amortization of repairable parts 81,597 63,870 37,869 Amortization of intangibles 27,169 23,470 15,673 Provision for uncollectible receivables 15,515 7,849 3,434 Provision for consumable parts obsolescence 1,852 2,554 1,171 Extraordinary item 1,927 Changes in operating assets and liabilities, net of effects from companies acquired, which provided (used) cash: Accounts receivable (802) (38,365) (1,900) Consumable parts (1,889) (6,038) (1,248) Accounts payable and accrued expenses 4,581 3,885 256 Deferred revenues (20,311) (25,427) (33,928) Net changes in other assets and liabilities (14,432) 12,543 1,469 --------- --------- --------- Net cash provided by operating activities 13,337 88,974 51,894 --------- --------- --------- INVESTING ACTIVITIES: Capital expenditures (10,222) (10,540) (7,278) Repairable spare parts purchases, net (78,239) (86,446) (63,514) Acquisitions of companies and contracts (10,168) (32,258) (275,562) --------- --------- --------- Net cash used in investing activities (98,629) (129,244) (346,354) --------- --------- --------- FINANCING ACTIVITIES: Proceeds from issuance of preferred stock 31,392 Proceeds from issuance of subordinated debentures 30,000 Proceeds from issuance of common stock in connection with recapitalization 226,583 439 106,313 Payment of subordinated debentures (30,000) Redemption of common stock in connection with recapitalization (609,654) Redemption of common stock warrants in connection with recapitalization (12,149) Issuance of warrants 1,880 Net proceeds from borrowings 476,918 43,625 165,711 Principal payments under capital leases (480) (1,075) (3,423) Other (2,268) (63) 29 --------- --------- --------- Net cash provided by financing activities 80,830 42,926 300,022 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,462) 2,656 5,562 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,877 8,221 2,659 --------- --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 6,415 $ 10,877 $ 8,221 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Net cash paid during the year for: Interest $ 41,644 $ 15,640 $ 14,838 Income taxes 4,031 8,381 5,344 Noncash investing/financing activities: Issuance of seller notes in connection with acquisitions 2,224 587 Issuance of seller notes in exchange for repairable parts 1,855 Repairable parts received in lieu of cash for accounts receivable 1,124 Repairable parts received in exchange for the assumption of liabilities 2,100 Accretion of accrued dividends 885
The accompanying notes are an integral part of these consolidated financial statements. F-6 40 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1998, 1997 AND 1996 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 personnel in over 150 service locations throughout North America and through strategic alliances in selected international markets. Historically, 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 5). 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, 1997. Historical earnings per share data for the fiscal years ended June 30, 1998, 1997 and 1996 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 expended during the repair process, are stated principally at weighted average cost, less an allowance for obsolescence and shrinkage. Consumable parts are reflected in the cost of revenues during the period utilized. Repairable (rotable) parts, which can be refurbished and reused, are stated at original weighted average cost less accumulated amortization. Monthly amortization of repairable parts is reflected in cost of revenues. The costs of refurbishing parts are also included in the cost of revenues as incurred. Amortization of repairable costs is based principally on the composite group method, using straight-line whole life and remaining life composite rates. Repairable parts generally have an economic life that corresponds to the estimated normal life cycle of the related products. As consumable and repairable parts are retired, the weighted average gross amounts at which such parts have been carried are removed from the respective asset 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 estimated product life cycles, usage levels, and technology changes. Changes in these estimates are reflected on a prospective basis unless such changes result from an abnormal retirement (including sales, disposals and shrinkage) which requires immediate loss recognition. In addition, 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. F-7 41 The Company has amortized the majority of its composite group of repairable parts over an estimated average useful life of five years based principally on historic product life cycle studies. As a result of the recent abnormal retirement of computer parts (see Note 4) and related life studies, the Company will revise the useful lives of repairable parts and increase the obsolescence provision for consumable parts prospectively. Effective July 1, 1998 the Company will amortize its existing composite group of repairable parts and future repairable part purchases over an estimated average remaining life of three years. Property and Equipment--Property and equipment are stated at cost. Depreciation is provided for principally using the straight-line composite group method over the estimated useful lives of the depreciable asset group. 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 respective asset accounts, and charged to accumulated depreciation and amortization accounts as applicable. 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 7). 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 7). 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 future undiscounted 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. 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 (deficit). Gains and losses resulting from foreign currency transactions are included in operations, except for intercompany foreign currency transactions which are of a long-term nature and are accumulated as a separate component of shareholders' equity (deficit). 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. F-8 42 Debt--As more fully described in Note 9, the fair values of debt such as the New Credit Facility, the senior discount debentures and the senior subordinated notes and the fair values of interest rate swaps and collars are based on quoted market prices. 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. 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 12). Derivative Financial Instruments--Derivative financial instruments, which constitute interest rate swap and collar agreements (see Note 9), 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 and collar agreements are recognized as interest expense or interest income during the period in which these accrue. Gains or losses realized, if any, on the early termination of interest rate swap or collar contracts are deferred, to be recognized upon the termination of the related asset or liability or expiration of the original term of the swap or collar contract, whichever is earlier. The Company does not hold any derivative financial instruments for trading purposes. Recent Accounting Pronouncements--In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, Earnings Per Share. Effective for the fiscal quarter ended December 31, 1997, the Company adopted the provisions of SFAS No. 128. 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 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. In accordance with SFAS No. 128, diluted earnings per share is not presented because the effect of the potential exercise of outstanding common stock equivalents is antidilutive as a result of the net loss incurred for the fiscal year ended June 30, 1998. Had the presentation of diluted earnings per share been dilutive, the total weighted average common stock equivalents that would have been used to determine diluted earnings per share as of June 30, 1998 were as follows: common stock options of 1,568,020 and common stock warrants of 313,047. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which are both effective for fiscal years beginning after December 15, 1997. The Company intends to adopt the pronouncements in fiscal 1999. Both will require additional disclosure but will not have a material effect on the Company's financial position or results of operations. SFAS No. 130 will first be reflected in the Company's first quarter of fiscal 1999 interim financial statements. Components of comprehensive income for the Company include such items as net income and foreign currency translation. SFAS No. 131 requires segments to be determined based on how management measures performance and makes decisions about allocating resources. The Company is evaluating whether the adoption of SFAS No. 131 will result in any changes to its presentation of financial data for interim and financial periods in fiscal 1999. In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The Company has recently committed to acquire and develop new Customer Information and Dispatch Data Gathering Systems in connection with its contract administration and call dispatch. The Company believes a significant portion of the costs to be incurred in fiscal 1999 and fiscal 2000 will be capitalizable in accordance with SOP 98-1. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those statements at fair value. This statement is effective for fiscal years beginning after June 15, 1999, although early adoption is encouraged. The Company is evaluating the effect that the adoption of SFAS No. 133 will have on its consolidated financial position or results of operations. F-9 43 Reclassifications--Certain reclassifications have been made to prior year data in order to conform with the 1998 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 was recorded as a recapitalization for accounting purposes as of the consummation date, occurred pursuant to an Agreement and Plan of Merger (the "Merger Agreement") between the Company and Quaker dated May 4, 1997. In accordance with the terms of the Merger Agreement, which was formally approved by the Company's shareholders on August 7, 1997, Quaker merged with and into the Company, and the holders of approximately 94.7% of shares of Company common stock outstanding immediately prior to the merger received $23 in cash in exchange for each of 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 9). In connection with the merger, the Company raised $85 million through the public issuance of senior discount debentures, in addition to publicly issued senior subordinated notes for approximately $150 million. The Company also entered into a new syndicated credit facility providing for term loans of $470 million and revolving loans of up to $105 million. The proceeds of the senior discount notes, senior subordinated notes, the initial borrowings under the new credit facility and the purchase of approximately $225 million of Company common stock by Quaker 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 $69.0 million on a pretax basis (approximately $63.5 million after related tax benefit) 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 reported 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 for the year ended June 30, 1998 assumes that the merger had occurred on July 1, 1997. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the merger occurred as of July 1, 1997 or which may result in the future.
UNAUDITED (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) YEAR ENDED JUNE 30, 1998 ---- PRO FORMA LOSS STATEMENT INFORMATION: Revenues $ 805,717 Operating loss (65,178) Loss from continuing operations before income tax benefit (134,971) Net loss (124,266) Loss per common share (9.91) Weighted average common shares outstanding 12,545
The pro forma net loss reflects (1) a net increase in interest expense of approximately $5.1 million attributable to additional financing incurred in connection with the merger, net of the repayment of the Company's existing revolving credit facility; (2) the elimination of the non-recurring merger expenses of approximately $69.0 million and (3) the elimination of the tax benefit related to these adjustments of approximately $5.1 million, including the effect of valuation allowances against certain deferred tax assets (see Note 10). Pro forma weighted average common shares outstanding includes 12,499,978 shares outstanding immediately subsequent to the merger on August 7, 1997 in addition to shares subsequently issued and outstanding. F-10 44 4. LOSS ON ASSET SALES AND DISPOSALS Management determined that over 1.2 million of its computer parts were obsolete during its annual fourth quarter physical inventory. These parts were retired and subsequently sold to salvage dealers for nominal scrap value. The parts obsolescence was principally due to the convergence of significant changes in the Company's business operations and the computer service industry, which the Company expects will continue. The significant changes include: (1) accelerated technology migration trends as customers modify their computing environments to remediate year 2000 ("Y2K") problems, (2) increasing shifts in demand from data center and midrange systems to desktop computing environments, and (3) declining life cycles of the products under current and anticipated service contracts due to increasingly rapid changes in technology. The abnormal nature of this retirement and subsequent sale required immediate loss recognition of $75 million. In connection with the acquisition of BABSS, the Company acquired contractual profit participation rights pursuant to an existing agreement between BABSS and ICL Sorbus, Ltd. (ICL) (See Note 5). On June 29, 1998, the Company sold its contractual profit participation rights back to ICL at a pretax loss of approximately $12.5 million. 5. BUSINESS AND CONTRACT ACQUISITIONS During the years ended June 30, 1998, 1997 and 1996, the Company acquired certain net assets of other service companies as follows (in thousands):
EXCESS PURCHASE CONSIDERATION PRICE ------------- OVER FAIR TOTAL VALUE OF NUMBER OF PURCHASE OTHER NET ASSETS YEARS ENDED ACQUISITIONS CASH NOTES PRICE INTANGIBLES ACQUIRED - ----------- ------------ ---- ----- ----- ----------- -------- Significant business acquisitions: June 30, 1996 1 $250,549 $250,549 $72,581 $60,533 Nonsignificant business or maintenance contract acquisitions: 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 June 30, 1998 4 10,168 4,538 14,706 4,600 7,385
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 9 and 14). 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. As part of the acquisition, the Company purchased from BAC contractual profit participation rights whereby the Company would 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 was $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. F-11 45 The estimated fair market values of certain assets acquired during fiscal 1998, as well as liabilities assumed, are subject to further adjustment as additional information becomes available to 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 year ended June 30, 1996 assumes that the acquisition occurred as of July 1, 1995. 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.
(IN THOUSANDS) (UNAUDITED) YEAR ENDED JUNE 30, 1996 ------------------------ Revenues $697,676 Income from continuing operations before extraordinary item 31,080 Net income 29,153
6. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
JUNE 30, -------------------- 1998 1997 ---- ---- (IN THOUSANDS) Land and buildings $ 6,312 $ 6,318 Equipment 15,335 13,234 Computer hardware and software 32,459 37,611 Furniture and fixtures 9,628 8,465 Leasehold improvements 5,190 4,629 -------- -------- 68,924 70,257 Accumulated depreciation and amortization (39,829) (36,030) -------- -------- $ 29,095 $ 34,227 ======== ========
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 $15,729,000, $13,549,000, and $8,309,000 for the fiscal years ended 1998, 1997 and 1996, respectively. 7. INTANGIBLES Intangibles consisted of the following:
JUNE 30, -------- 1998 1997 ---- ---- (IN THOUSANDS) Excess purchase price over fair value of net assets acquired $ 137,241 $ 130,548 Customer lists 60,370 64,688 Contractual profit participation rights -- 25,000 Noncomplete agreements 9,231 4,631 Other intangibles 8,014 9,131 --------- --------- 214,856 233,998 Accumulated amortization (60,827) (42,632) --------- --------- $ 154,029 $ 191,366 ========= =========
F-12 46 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 $27,169,000, $23,470,000, and $15,673,00, for the fiscal years ended 1998, 1997 and 1996, respectively. 8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consisted of the following:
JUNE 30, -------- 1998 1997 ---- ---- (IN THOUSANDS) Accounts payable $56,040 $55,723 Compensation and benefits 20,928 22,706 Interest 11,485 563 Unused leases 175 878 Pension accrual 1,515 1,371 Accrued accounting and legal fees 568 1,435 Non-income taxes and other 11,140 13,840 -------- ------- $101,851 $96,516 ======== =======
Accrued interest expense increased due to additional borrowings outstanding at June 30, 1998 as a result of the merger and recapitalization (See Notes 3 and 9). 9. DEBT Debt consists of the following:
JUNE 30, -------- 1998 1997 ---- ---- (IN THOUSANDS) Revolving credit loans $ 30,700 $231,671 Term loans 467,938 -- Senior discount debentures, 11-1/2%, due 2008 92,246 -- Senior subordinated notes, 9-3/4%, due 2007 150,000 -- Seller noninterest-bearing notes payable 2,179 2,922 Seller note payable - purchase of spare parts 508 1,608 Capitalized lease obligations, payable in varying installments at interest rates ranging from 7.71% to 15.00% at June 30, 1998 752 1,308 -------- -------- 744,323 237,509 Less current portion 13,311 4,788 -------- -------- $731,012 $232,721 ======== ========
In connection with the Company's merger with Quaker (see Note 3), the revolving credit loans outstanding immediately prior to the merger were repaid in full, including all interest due thereon. This refinancing was accomplished, in part, through the issuance of certain new debt instruments, consisting of a New Credit Facility, senior discount notes, and senior subordinated notes which, in the aggregate, provided financing of approximately $810 million, subject to certain conditions. The Company had average borrowings of approximately $699,873,000 during 1998 at an average interest rate of 9.0%. Maximum borrowings during 1998 were approximately $751,016,000. 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. The Company's Canadian subsidiary has available a $5.0 million (Canadian) revolving line of credit agreement with a local financial institution. At June 30, 1998 and 1997, approximately $0 and $471,000, respectively (in U.S. dollars) was outstanding under this agreement. Annual maturities on long-term debt outstanding at June 30, 1998, are as follows (in thousands): 1999, $13,311; 2000, $19,953; 2001, $36,899; 2002, $49,081; 2003, $73,445; 2004 and beyond, $607,788. F-13 47 NEW CREDIT FACILITY The New Credit Facility provides for term loans of $470,000,000 (term loan A - $195,000,000 and term loan B - $275,000,000) and revolving loans of up to $105,000,000. Term loan A expires in August 2003 with uneven quarterly principal payments commencing in September 1998. Term loan B expires in August 2005 with uneven quarterly principal payments commencing in December 1997. The revolving loans expire in August 2003. The Company pays a quarterly commitment fee on the unused amount of the revolving loans. The unused amount of the revolving loans was $74,300,000 as of June 30, 1998. The Company incurred debt issuance costs of approximately $14,375,000 in connection with the New Credit Facility. These costs have been deferred and are being amortized to interest expense over the term of the facility. The interest rate applicable to the New Credit Facility varies, at the Company's option, based upon LIBOR plus applicable margins (2.75% for term loan A and the revolving loans and 3.0% for term loan B) or based upon Prime Rate plus applicable margins (1.5% for term loan A and the revolving loans and 1.75% for term loan B). The applicable weighted average interest rates at June 30, 1998 were 8.47%, 8.71% and 8.96% for term loan A, term loan B, and the revolving loans, respectively. The New Credit Facility contains various terms and covenants which, among other things, place certain restrictions on the Company's ability to pay dividends and incur additional indebtedness, and which require the Company to meet certain minimum financial performance measurements. These measurements include (1) Adjusted EBITA, (2) Leverage Ratio, (3) Interest Coverage Ratio, and (4) Fixed Charge Ratio. During the third quarter of fiscal 1998, the Company sought and obtained amendments to the New Credit Facility. The amendments revised certain financial performance measurements and increased the borrowing rate by 0.25%. The Company incurred fees of approximately $1,400,000 in connection with the amendments. These costs have been deferred and are being amortized to interest expense over the remaining term of the related debt instruments. The Company is in compliance with its covenants under the amended New Credit Facility as of June 30, 1998. The estimated fair value of the funded portion of the New Credit Facility was approximately $490.1 million and is based on quoted market prices as of June 30, 1998. SENIOR DISCOUNT DEBENTURES The Company received proceeds of $85,003,520 from the sale of $148,400,000 principal amount at maturity of its 11 1/2% senior discount debentures due 2008. The debentures accrete at a rate of 11 1/2% per annum, compounded semi-annually, to an aggregate principal amount at maturity of $148,400,000 by August 1, 2002. Commencing on February 1, 2003, cash interest on the debentures will be payable, semi-annually in arrears on each February 1 and August 1. The Company incurred debt issuance costs of $3,400,141 in connection with the senior discount debentures. These costs have been deferred and are being amortized to interest expense over the life of the debentures. Each unit ($1,000 principal amount) was issued with a warrant which allows the holder, subject to certain conditions, to purchase 1.9 shares of common stock, for a total of 281,960 shares, at an exercise price of $23.00 per share, subject to adjustment under certain circumstances. The warrants expire on August 1, 2007. The Company is required to be in compliance with certain non-financial covenants in connection with the senior discount debentures. The Company is in compliance with those covenants as of June 30, 1998. The estimated fair value of the senior discount debentures and the related warrants as of June 30, 1998 was approximately $89.0 million and is based on quoted market prices for that publicly traded debt. SENIOR SUBORDINATED NOTES The 9-3/4% senior subordinated notes mature on August 1, 2007. Interest on the notes is payable semi-annually on February 1 and August 1 of each year, commencing on February 1, 1998. The Company incurred debt issuance costs of $4,500,000 in connection with the senior subordinated notes. These costs have been deferred and are being amortized to interest expense over the life of the notes. The estimated fair value of the senior subordinated notes as of June 30, 1998 was approximately $144.8 million and is based on quoted market prices. SELLER NOTES PAYABLE In connection with certain acquisitions (see Note 5), 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 F-14 48 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. REVOLVING CREDIT LOANS - 1997 AND PRIOR On October 20, 1995, in connection with the BABSS acquisition (see Note 5) 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 14). 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 was 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%. 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 was deferred to the first quarter of fiscal 1998, when the related debt instruments were terminated. INTEREST RATE RISK MANAGEMENT The use of interest rate risk management instruments, such as Swaps and Collars, is required under the terms of the New Credit Facility. The Company manages interest costs using a mix of fixed and variable rate debt. Using Swaps, the Company agrees to exchange, at specified intervals, the difference between fixed and variable interest rate amounts calculated by reference to an agreed-upon notional principal amount. Collars limit the Company's exposure to and benefits from interest rate fluctuations on variable rate debt to within a certain range of rates. The following table summarizes the terms of the Company's existing Swaps and Collars as of June 30, 1998:
Notional Amount Maturities Average Interest Rate Estimated Fair Value --------------- ---------- --------------------- -------------------- Variable to Fixed Swaps $ 110,000,000 2000 - 2001 6.0% $ (686,605) Collars $ 125,000,000 2000 5.7% - 6.7% $ (537,737)
The notional amounts of interest rate instruments, as presented in the above table, are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The estimated fair value approximates the proceeds (costs) to settle the outstanding contracts. While Swaps and Collars represent an integral part of the Company's interest rate risk management, their incremental effect on interest expense for the year ended June 30, 1998 was not significant. 10. INCOME TAXES The provision (benefit) for income taxes consists of the following:
YEARS ENDED JUNE 30, -------------------- 1998 1997 1996 ---- ---- ---- (IN THOUSANDS) Current: Federal $ (8,209) $ 10,909 $ 2,892 State 100 3,616 1,595 Foreign (372) 1,080 548 Deferred: Federal (6,991) 6,460 8,945 State (917) 16 641 Foreign 612 (113) (751) -------- -------- -------- Provision (benefit) for income taxes $(15,777) $ 21,968 $ 13,870 ======== ======== ========
F-15 49 The tax effects of temporary differences consisted of the following:
JUNE 30, 1998 1997 ---- ---- (IN THOUSANDS) Gross deferred tax assets: Accounts receivable $ 7,869 $ 4,771 Inventory 2,819 2,195 Accrued expenses 6,348 7,000 Unused leases (277) 390 Fixed assets 1,714 -- Intangibles 17,049 6,196 Debt issuance costs 3,743 -- Other 1,298 -- Operating loss carryforwards 53,554 4,868 Tax credit carryforwards 2,969 1,670 -------- -------- Gross deferred tax assets 97,086 27,090 Valuation allowance (57,833) -- -------- -------- Gross deferred tax assets less valuation allowance 39,253 27,090 Gross deferred tax liabilities: Repairable spare parts (13,893) (8,918) Fixed assets -- (108) -------- -------- Gross deferred tax liabilities (13,893) (9,026) -------- -------- Net deferred tax asset $ 25,360 $ 18,064 ======== ========
Net operating loss and minimum tax credit carryforwards available at June 30, 1998 expire in the following years:
YEAR OF AMOUNT EXPIRATION ------ ---------- (IN THOUSANDS) Federal operating losses $130,388 2006-2013 State operating losses 109,910 1999-2013 Foreign operating losses 4,008 1999-2005 Investment tax credit 134 2004 Minimum tax credit 2,835 INDEFINITE
A reconciliation between the provision (benefit) for income taxes, computed by applying the statutory federal income tax rate of 35% for 1998, 1997 and 1996 to income before income taxes, and the actual provision (benefit) for income taxes follows:
1998 1997 1996 ---- ---- ---- Federal income tax provision at statutory tax rate (35.0%) 35.0% 35.0% State income taxes, net of federal income tax provision (3.9) 5.0 4.6 Foreign income taxes (0.4) 0.4 Benefit of operating loss carryforward (0.8) Change in valuation allowance 29.1 (1.4) Other 2.3 1.0 2.6 ---- ---- ---- Actual income tax provision (benefit) effective tax rate (7.9%) 41.4% 40.0% ==== ==== ====
F-16 50 As a result of the Company's merger with Quaker on August 7, 1997 (see Note 3), 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 of approximately $27.9 million arising prior to the ownership change are limited during any future period to the Section 382 "limitation amount" of approximately $9.0 million per annum. The federal, state and foreign net operating loss carryforwards expire in varying amounts between 1999 and 2013. The Company recorded a valuation allowance of $57,833,000 during the year ended June 30, 1998. The valuation allowance reduces the gross deferred tax assets to the level where management believes that it is more likely than not that the tax benefit will be realized. The ultimate realization of deferred tax benefits is dependant upon the generation of future taxable income during the periods in which the temporary differences become deductible. 11. OTHER LIABILITIES Other (noncurrent) liabilities consisted of the following:
JUNE 30, ----------------- 1998 1997 ---- ---- (IN THOUSANDS) Accrued severance $2,973 $2,756 Other noncurrent liabilities 2,763 3,323 ------ ------ $5,736 $6,079 ====== ======
Accrued severance reflects the actuarial determined liability for the separation of employees who are entitled to severance benefits under pre-existing separation pay plans. 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 and unutilized lease losses. 12. STOCK-BASED COMPENSATION PLANS 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 Stock Option and Restricted Stock Purchase 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 elected to convert 255,828 options under the Stock Option and Restricted Stock Purchase Plan into options to purchase common stock of the merged Company, in lieu of cash payments. The converted options were fully vested. MANAGEMENT INCENTIVE PLAN The 1997 Management Incentive Plan (Incentive Plan), a stock option plan, was created concurrently with the Quaker Merger. Under the Incentive Plan, officers, directors and key employees may be granted options to purchase the Company's common stock at an exercise price determined by the Compensation Committee at the time of the grant. On August 7, 1997, the Company granted 1,179,000 options and granted an additional 725,828 options during the remainder of fiscal 1998. The aggregate number of shares of Company common stock permitted for issuance pursuant to the Incentive Plan was 1,698,280 as of June 30, 1998. In July 1998, subject to stockholder approval, the Company's Board of Directors increased the aggregate number of shares of Company Common Stock reserved for issuance to the Management Incentive Plan by 250,000 shares for a total of 1,948,280 shares. Options generally vest and become exercisable either in installments of 25% per year on each of the first through fourth anniversaries of the grant date or as defined corporate performance goals are met. All options become fully vested in seven years. Options generally expire upon the earlier of termination of employment (with a defined period to exercise vested options) or ten years from date of grant. A summary of the Incentive Plan activity is as follows:
OPTIONS WEIGHTED AVERAGE ------- EXERCISE PRICE -------------- Balance, June 30, 1997 0 $ 0.00 Options granted 1,904,828 $ 19.09 Options exercised (107,264) $ 0.96 Options cancelled (212,790) $ 22.58 --------- Balance, June 30, 1998 1,584,774 $ 19.86 =========
The following tables summarize information about options outstanding at June 30, 1998: F-17 51
OUTSTANDING OPTIONS ------------------- RANGE OF EXERCISE WEIGHTED AVERAGE WEIGHTED AVERAGE PRICES NUMBER OF SHARES CONTRACTUAL LIFE EXERCISE PRICE ------ ---------------- ---------------- -------------- $0.45 - $7.17 46,178 7.4 $7.17 $12.54 - $15.01 94,596 8.3 $14.16 $20.61 - $21.83 1,439,000 9.3 $20.61 $26.75 - $28.29 5,000 9.0 $26.75 --------- Total 1,584,774 9.2 $19.86 =========
EXERCISABLE OPTIONS ------------------- RANGE OF EXERCISE WEIGHTED AVERAGE PRICES NUMBER OF OPTIONS EXERCISE PRICE ------ ----------------- -------------- $0.45 - $7.17 46,178 $7.17 $12.54 - $15.01 94,596 $14.16 $20.61 - $21.83 55,979 $20.61 $26.75 - $28.29 5,000 $26.75 ----- Total 201,753 $14.66 =======
All stock option grants to date have been issued with an exercise price equal to or in excess of the market price of the underlying stock at the date of the grant. As a result, and in accordance with APB Opinion 25, no compensation expense is recognized in the Company's financial statements. Had compensation expense for the Incentive Plan been determined based on the fair value at the grant dates under the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's pro forma net loss and pro forma loss per share (see Note 3) would have been increased to the following adjusted pro forma amounts (dollars in thousands, except per share amounts):
1998 ---- Pro forma net loss--as reported $ (124,266) Pro forma net loss--as adjusted $ (126,743) Pro forma basic loss per share--as reported $ (9.91) Pro forma basic loss per share--as adjusted $ (10.10)
The weighted average fair value of options granted during fiscal 1998 is estimated as $10.88 on the date of the grant using the Black-Scholes option pricing model with the following assumptions: volatility of 46.0%, risk-free interest rate of 5.52%, dividend yield of 0.0% and an expected life of 5 years. STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN Under the plan, the Company, at the discretion of the Board of Directors, issued restricted stock, incentive stock options and non-qualified options for shares of the Company's common stock. Vesting of the restricted stock and stock options was at the discretion of the Board of Directors and generally occurred at a rate of 25% per year. No such options were granted at prices less then 100% of the fair value of common shares at the date of issuance. Options were to expire through February 2007. Presented below is the activity in the Plan for the years ended June 30, 1998, 1997 and 1996:
OPTIONS PRICE RANGE ------- ----------- 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 Options exercised (80,500) $0.50-$6.00 Options cancelled (2,774,847) $0.45-$26.75 ----------- Balance, June 30, 1998 0 $0.00 -----------
F-18 52 The fair value of the options granted were estimated using the Black-Scholes option pricing model. The fair values of the options granted during 1997 and 1996 were $9.61 and $11.56, respectively. The assumptions used to determine the fair values were as follows: risk-free interest rate of 6.58% in 1997 and 6.45% in 1996; expected volatility of 27.1% in 1997 and 27.0% in 1996; and an expected life of 10 years for 1997 and 1996. 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 pre-tax pro forma compensation expense in 1997 and 1996 would have been approximately $4.4 million and $1.7 million, respectively. 13. 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 2006. 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, 1998 and thereafter are as follows (in thousands):
1999 $18,688 2000 15,123 2001 11,525 2002 7,708 2003 5,712 Thereafter 6,771 ------- $65,527
Rental expense amounted to approximately $19,379,000, $17,367,000, and $13,149,000, for the fiscal years ended 1998, 1997 and 1996, respectively. 14. SHAREHOLDERS' EQUITY (DEFICIT) 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. 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. As a result, 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 related amortization of original issue discount. F-19 53 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, these warrants were converted into cash, with the holder receiving an amount equal to $23 less the exercise price. As a result, the Company recorded compensation expense of approximately $1.3 million during fiscal 1998 (see Note 3). 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 9). In connection with the merger, certain executive management employees were given the option to acquire common stock shares at current market prices. The Company provided non-recourse interest bearing loans to those key executives who elected to acquire common stock. Total loans outstanding at June 30, 1998 were $1,328,851. The Company has recorded the employee loans receivable as a reduction to shareholders' equity (deficit). 15. RETIREMENT PLANS The Company maintains a 401(k) plan for its employees. Under this plan, eligible employees may contribute amounts through payroll deductions supplemented by employer contributions for investment in various investments specified in the plan. The Company's contribution to this plan for fiscal 1998 was $1,012,563. A similar plan exists for former employees of an acquired company for which eligibility and additional contributions were frozen in September 1988. In addition, the Company assumed the liability of the defined benefit pension plan applicable to employees of a company acquired in 1986. The eligibility and benefits were frozen as of the date of the acquisition. Pension expense for the defined benefit pension plan was computed as follows:
YEARS ENDED JUNE 30, 1998 1997 1996 ---- ---- ---- (IN THOUSANDS) Interest cost $ 611 $ 521 $ 495 Actual return on plan assets (1,506) (409) (449) Net amortization and deferral 1,128 9 72 ------- ------- ------- Periodic pension costs $ 233 $ 121 $ 118 ======= ======= =======
The discount rate used in determining the actuarial present value of the projected benefit obligation was 7.0% for 1998 and 7.5% for 1997 and 1996. The expected long-term rate of return on assets was 8.5% for 1998, 1997 and 1996. The mortality table used for 1998 was the 1983 Group Annuity Mortality Table for Males and Females and the mortality table used for 1997 and 1996 was the UP-1984 Unisex Mortality Table. The following table sets forth the funded status of the frozen pension plan as of May 1, 1998 and 1997:
1998 1997 ---- ---- (IN THOUSANDS) Accumulated benefits (100% vested) $ 9,155 $ 7,290 Fair value of plan assets 7,857 6,128 ------- ------- Unfunded projected benefit obligation 1,298 1,162 Unrecognized net loss 2,390 1,873 Unrecognized net transition obligation 438 470 Adjustment to recognized minimum liability (2,828) (2,343) ------- ------- Accrued pension costs $ 1,298 $ 1,162 ======= =======
16. EMPLOYEE SEVERANCE AND UNUTILIZED LEASE COSTS F-20 54 During the second quarter of fiscal 1997, in connection with the Memorex Telex acquisition (see Note 5), 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 11 for further information regarding accrued severance and unutilized lease losses. 17. 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 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 accrued in the accompanying consolidated balance sheets as of June 30, 1998 and 1997. 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 alleged 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. 18. RELATED PARTY TRANSACTIONS In connection with the Quaker Merger (See Note 3), DecisionOne Corporation made a loan to DecisionOne Holdings Corp. for $59,100,000 which was used to finance the merger. The subordinated promissory note accrues interest at an annual interest rate of 8 -1/4%. Interest and principal are both due upon maturity in August 2010. Interest income recorded by DecisionOne Corporation and interest expense recorded by DecisionOne Holdings Corp. was approximately $4,381,000 in fiscal 1998. During the year ended June 30, 1998, the Company paid the DLJ Group approximately $500,000 for financial advisory services. Prior to 1994, the Company entered into an agreement to purchase printer products from Genicom Corporation (Genicom). The Company and Genicom were under common ownership prior to the August 7, 1997 Merger. Purchases from Genicom for the period July 1, 1997 through August 7, 1997 were approximately $121,000. Purchases from Genicom for the years ended June 30, 1997 and 1996 were approximately $472,000 and $1,512,000, respectively. Accounts payable to Genicom amounted to approximately $0 and $30,000 as of June 30, 1998 and 1997, 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 9 and 14). F-21 55 19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of the unaudited quarterly financial information for the fiscal years ended 1998 and 1997:
QUARTER ENDED ------------- SEPT. 30 (1), DEC. 31, MARCH 31, JUNE 30 (2), ------------- -------- --------- ------------ (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1998 Revenues $ 202,264 $ 200,075 $ 200,910 $ 202,468 Gross profit 44,819 46,769 47,747 52,576 Net loss (57,627) (10,718) (10,994) (103,791) Pro forma net income (loss) 1,237 (10,718) (10,994) (103,791) Pro forma earnings (loss) per share 0.09 (0.86) (0.87) (8.25)
QUARTER ENDED ------------- SEPT. 30, DEC. 31 (3), MARCH 31, JUNE 30, --------- ------------ --------- -------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1997 Revenues $176,426 $191,253 $205,070 $213,201 Gross profit 41,861 47,642 53,822 58,332 Net income 5,455 4,954 9,507 11,168
(1) Net loss for the first quarter of 1998 includes $69.0 million of pre-tax merger expenses (See Note 3). (2) Net loss for the fourth quarter of 1998 includes $87.5 million of pre-tax loss on asset sales and disposals and a $12.3 million pre-tax special charge to the provision for uncollectible receivables (See Note 4). (3) Net income for the second quarter of 1997 includes 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, primarily associated with duplicate facilities to be closed in connection with the Memorex Telex acquisition (see Note 16). F-22 56 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, 1998 and 1997, and the related consolidated statements of operations, shareholder's equity (deficit) and cash flows for each of the three years in the period ended June 30, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998 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. Deloitte & Touche LLP Philadelphia, Pennsylvania September 4, 1998 F-23 57 DECISIONONE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1998 AND 1997 (IN THOUSANDS)
1998 1997 ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 5,205 $ 10,877 Accounts receivable, net of allowances of $22,572 and $14,869 114,082 127,462 Consumable parts, net of allowances of $9,271 and $15,976 23,097 29,052 Prepaid expenses and other assets 27,797 4,542 --------- --------- Total current assets 170,181 171,933 REPAIRABLE PARTS, Net of accumulated amortization of $135,277 and $156,468 142,446 205,366 PROPERTY AND EQUIPMENT 29,095 34,227 INTANGIBLES 154,029 191,366 PARENT COMPANY LOAN RECEIVABLE 69,867 DEFERRED TAX ASSET 24,370 18,064 OTHER ASSETS 16,451 2,149 --------- --------- TOTAL ASSETS $ 606,439 $ 623,105 ========= ========= LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT) CURRENT LIABILITIES: Current portion of debt $ 13,311 $ 4,788 Accounts payable and accrued expenses 101,351 96,516 Deferred revenues 40,758 56,600 Income taxes and other liabilities 10,925 11,513 --------- --------- Total current liabilities 166,345 169,417 DEBT 638,766 232,721 OTHER LIABILITIES 5,796 6,079 SHAREHOLDER'S EQUITY(DEFICIT): Common stock, no par value; one share authorized, issued and outstanding in 1998 and 1997 -- -- Additional paid-in capital 12,323 258,609 Accumulated deficit (214,073) (42,432) Other (2,718) (1,289) --------- --------- Total shareholder's equity (deficit) (204,468) 214,888 --------- --------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT) $ 606,439 $ 623,105 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-24 58 DECISIONONE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1998, 1997 AND 1996 (IN THOUSANDS)
1998 1997 1996 ---- ---- ---- REVENUES $ 805,717 $ 785,950 $ 540,191 COST OF REVENUES 613,806 584,755 402,316 --------- --------- --------- GROSS PROFIT 191,911 201,195 137,875 OPERATING EXPENSES: Selling, general and administrative expenses 142,462 109,975 72,829 Amortization of intangibles 27,169 23,470 15,673 Merger expenses 69,046 Loss on asset sales and disposals 87,458 --------- --------- --------- OPERATING INCOME (LOSS) (134,224) 67,750 49,373 INTEREST EXPENSE, Net of interest income of $206 in 1998, $197 in 1997 and $239 in 1996 52,204 14,698 14,714 --------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (BENEFIT) AND EXTRAORDINARY ITEM (186,428) 53,052 34,659 PROVISION (BENEFIT) FOR INCOME TAXES (14,787) 21,968 13,870 --------- --------- --------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (171,641) 31,084 20,789 EXTRAORDINARY ITEM, NET OF TAX BENEFIT OF $1,284 -- -- 1,927 --------- --------- --------- NET INCOME (LOSS) $(171,641) $ 31,084 $ 18,862 ========= ========= ========= PRO FORMA INFORMATION (UNAUDITED) - See Note 3: Pro forma net loss $ (111,357)
The accompanying notes are an integral part of these consolidated financial statements. F-25 59 DECISIONONE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT) YEARS ENDED JUNE 30, 1998, 1997 AND 1996 (IN THOUSANDS, EXCEPT NUMBER OF SHARES OF COMMON STOCK)
TOTAL FOREIGN SHARE- ADDITIONAL CURRENCY PENSION HOLDERS' PAID-IN ACCUMULATED TRANSLATION LIABILITY (DEFICIT) CAPITAL DEFICIT ADJUSTMENT ADJUSTMENT EQUITY ------- ------- ---------- ---------- ------ 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) Tax benefit - disqualifying stock disposition 2,635 2,635 Contributed capital 439 439 -------- ------- --- -------- --------- BALANCE, JUNE 30, 1997 258,609 (42,432) 584 (1,873) 214,888 Net loss (171,641) (171,641) Adjustment to pension liability (517) (517) Foreign currency translation adjustment (912) (912) Dividends declared (244,000) (244,000) Contributed capital 349 349 Reversal of tax benefit - disqualifying stock disposition (2,635) (2,635) -------- --------- ---- -------- --------- BALANCE, JUNE 30, 1998 $12,323 $(214,073) $(328) $(2,390) $(204,468) ======== ========= ===== ======= =========
The accompanying notes are an integral part of these consolidated financial statements. F-26 60 DECISIONONE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1998, 1997 AND 1996 (IN THOUSANDS)
1998 1997 1996 ---- ---- ---- OPERATING ACTIVITIES: Net income (loss) $(171,641) $ 31,084 $ 18,862 Adjustments to reconcile net income to net cash provided by operating activities: Loss on asset sales and disposals 87,458 Depreciation 15,729 13,549 8,309 Amortization of repairable parts 81,597 63,870 37,869 Amortization of intangibles 27,169 23,470 15,673 Provision for uncollectible receivables 15,515 7,849 3,434 Provision for consumable parts obsolescence 1,852 2,554 1,171 Extraordinary item 1,927 Changes in operating assets and liabilities, net of effects from companies acquired, which provided (used) cash: Accounts receivable (802) (38,365) (1,900) Consumable parts (1,889) (6,038) (1,248) Accounts payable and accrued expenses 4,081 3,885 256 Deferred revenues (20,311) (25,427) (33,928) Net changes in other assets and liabilities (26,631) 12,543 1,469 --------- --------- --------- Net cash provided by operating activities 12,127 88,974 51,894 --------- --------- --------- INVESTING ACTIVITIES: Capital expenditures (10,222) (10,540) (7,278) Repairable spare parts purchases, net (78,239) (86,446) (63,514) Acquisitions of companies and contracts (10,168) (32,258) (275,562) --------- --------- --------- Net cash used in investing activities (98,629) (129,244) (346,354) --------- --------- --------- FINANCING ACTIVITIES: Capital contributions 349 439 142,090 Proceeds from issuance of subordinated debentures 30,000 Payment of dividends to Parent (244,000) Payment of dividends (1,446) Payment of subordinated debentures (30,000) Loans made to Parent (69,617) Net proceeds from borrowings 397,195 43,625 162,772 Principal payments under capital leases (480) (1,075) (3,423) Other (2,617) (63) 29 --------- --------- --------- Net cash provided by financing activities 80,830 42,926 300,022 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,672) 2,656 5,562 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,877 8,221 2,659 --------- --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,205 $ 10,877 $ 8,221 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Net cash paid during the year for: Interest $ 38,472 $ 15,640 $ 14,838 Income taxes 4,031 8,381 5,344 Noncash investing/financing activities: Issuance of seller notes in connection with acquisitions 2,224 587 Issuance of seller notes in exchange for repairable parts 1,855 Repairable parts received in lieu of cash for accounts receivable 1,124 Repairable parts received in exchange for the assumption of liabilities 2,100
The accompanying notes are an integral part of these consolidated financial statements. F-27 61 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1998, 1997 AND 1996 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 personnel in over 150 service locations throughout North America and through strategic alliances in selected international markets. Historically, 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 5). 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 the years ended June 30, 1997 and 1996. 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, 1997. 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 expended during the repair process, are stated principally at weighted average cost, less an allowance for obsolescence and shrinkage. Consumable parts are reflected in the cost of revenues during the period utilized. Repairable (rotable) parts, which can be refurbished and reused, are stated at original weighted average cost less accumulated amortization. Monthly amortization of repairable parts is reflected in cost of revenues. The costs of refurbishing parts are also included in the cost of revenues as incurred. Amortization of repairable costs is based principally on the composite group method, using straight-line whole life and remaining life composite rates. Repairable parts generally have an F-28 62 economic life that corresponds to the estimated normal life cycle of the related products. As consumable and repairable parts are retired, the weighted average gross amounts at which such parts have been carried are removed from the respective asset 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 estimated product life cycles, usage levels, and technology changes. Changes in these estimates are reflected on a prospective basis unless such changes result from an abnormal retirement (including sales, disposals and shrinkage) which requires immediate loss recognition. In addition, 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. The Company has amortized the majority of its composite group of repairable parts over an estimated average useful life of five years based principally on historic product life cycle studies. As a result of the recent abnormal retirement of computer parts (See Note 4) and related life studies the Company will revise the useful lives of repairable parts and increase obsolescence provision for consumable parts prospectively. Effective July 1, 1998, the Company will amortize its existing composite group of repairable parts and future repairable part purchases over an estimated average remaining life of three years. Property and Equipment--Property and equipment are stated at cost. Depreciation is provided for principally using the straight-line composite group method over the estimated useful lives of the depreciable asset group. 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 respective asset accounts, and charged to accumulated depreciation and amortization accounts as applicable. 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 7). 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 7). 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 future undiscounted 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. 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 (deficit). Gains and losses resulting from foreign currency transactions are included in operations, except for intercompany foreign currency transactions which are of a long-term nature and are accumulated as a separate component of shareholders' equity (deficit). F-29 63 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. Debt -- As more fully described in Note 9, fair values of debt such as the New Credit Facility, the senior discount debentures and the senior subordinated notes and the fair values of interest rate swaps and collars are based on quoted market prices. 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. Derivative Financial Instruments--Derivative financial instruments, which constitute interest rate swap and collar agreements (see Note 9), 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 and collar agreements are recognized as interest expense or interest income during the period in which these accrue. Gains or losses realized, if any, on the early termination of interest rate swap or collar contracts are deferred, to be recognized upon the termination of the related asset or liability or expiration of the original term of the swap or collar contract, whichever is earlier. The Company does not hold any derivative financial instruments for trading purposes. Recent Accounting Pronouncements -- In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which are both effective for fiscal years beginning after December 15, 1997. The Company intends to adopt the pronouncements in fiscal 1999. Both will require additional disclosure but will not have a material effect on the Company's financial position or results of operations. SFAS No. 130 will first be reflected in the Company's first quarter of 1999 interim financial statements. Components of comprehensive income for the Company include such items as net income and foreign currency translation. SFAS No. 131 requires segments to be determined based on how management measures performance and makes decisions about allocating resources. The Company is evaluating whether the adoption of SFAS No. 131 will result in any changes to its presentation of financial data for interim and financial periods in fiscal 1999. In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The Company has recently committed to acquire and develop new Customer Information and Dispatch Data Gathering Systems in connection with its contract administration and call dispatch. The Company believes a significant portion of the costs to be incurred in fiscal 1999 and fiscal 2000 will be capitalizable in accordance with SOP 98-1. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133".) This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those statements at fair value. This statement is effective for fiscal years beginning after June 15, 1999, although early adoption is encouraged. The Company is evaluating the effect that the adoption of SFAS No. 133 will have on its consolidated financial position or results of operations. Reclassifications--Certain reclassifications have been made to prior year data in order to conform with the 1998 presentation. 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 was recorded as a recapitalization for accounting purposes as of the consummation date, occurred pursuant to an Agreement and Plan of Merger (the "Merger Agreement") by and among the Company, Holdings and Quaker dated May 4, 1997. F-30 64 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 9). In connection with the merger, Holdings raised $85 million through the public issuance of senior discount debentures, and the Company issued publicly held senior 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 senior discount notes, senior 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 $69.0 million on a pretax basis (approximately $63.5 million after related tax benefit) 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 reported 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 for the year ended June 30, 1998 assumes that the merger had occurred on July 1, 1997. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the merger occurred as of July 1, 1997 or which may result in the future.
(UNAUDITED) (IN THOUSANDS) YEAR ENDED JUNE 30, 1998 ---- PRO FORMA LOSS STATEMENT INFORMATION: Revenues $ 805,717 Operating Loss (65,178) Loss from continuing operations before income taxes (120,972) Net Loss (111,357)
The pro forma net loss reflects (1) a net increase in interest expense of approximately $3.6 million attributable to additional financing incurred in connection with the merger, net of the repayment of the Company's existing revolving credit facility, (2) the elimination of the non-recurring merger expenses of approximately $69.0 million and (3) the elimination of the net tax benefit related to these adjustments of approximately $5.2 million, including the effect of valuation allowances against certain deferred tax assets (see Note 10). 4. LOSS ON ASSET SALES AND DISPOSALS Management determined that over 1.2 million of its computer parts were obsolete during its annual fourth quarter physical inventory. These parts were retired and subsequently sold to salvage dealers for nominal scrap value. The parts obsolescence was principally due to the convergence of significant changes in the Company's business operations and the computer service industry, which the Company expects will continue. The significant changes include: (1) accelerated technology migration trends as customers modify their computing environments to remediate year 2000 ("Y2K") problems, (2) increasing shifts in demand from data center and midrange systems to desktop computing environments, and (3) declining life cycles of the products under current and anticipated service contracts due to increasingly rapid changes in technology. The abnormal nature of this retirement and subsequent sale required immediate loss recognition of $75 million. In connection with the acquisition of BABSS, the Company acquired contractual profit participation rights pursuant to an existing agreement between BABSS and ICL Sorbus, Ltd. (ICL) (See Note 5). On June 29, 1998, the Company sold its contractual profit participation rights back to ICL at a pretax loss of approximately $12.5 million. F-31 65 5. BUSINESS AND CONTRACT ACQUISITIONS During the years ended June 30, 1998, 1997 and 1996, the Company acquired certain net assets of other service companies as follows (in thousands):
EXCESS PURCHASE CONSIDERATION PRICE ------------- OVER FAIR TOTAL VALUE OF NUMBER OF PURCHASE OTHER NET ASSETS YEARS ENDED ACQUISITIONS CASH NOTES PRICE INTIGIBLES ACQUIRED - ----------- ------------ ---- ----- ----- ---------- -------- Significant business acquisitions: June 30, 1996 1 $250,549 $250,549 $72,581 $60,533 Nonsignificant business or maintenance contract acquisitions: 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 June 30, 1998 4 10,168 4,538 14,706 4,600 7,385
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 Note 9). 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. 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 these contractual profit participation rights was $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. 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 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. The following summarized unaudited pro forma information for significant acquisitions that have a material effect on the Company's results of operations for the year ended June 30, 1996 assumes that the acquisition occurred as of July 1, 1995. 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.
(IN THOUSANDS) (UNAUDITED) YEAR ENDED JUNE 30, 1996 ------------------------ Revenues $697,676 Income from continuing operations before extraordinary item 31,080 Net income 29,153
F-32 66 6. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
JUNE 30, 1998 1997 ---- ---- (IN THOUSANDS) Land and buildings $ 6,312 $ 6,318 Equipment 15,335 13,234 Computer hardware and software 32,459 37,611 Furniture and fixtures 9,628 8,465 Leasehold improvements 5,190 4,629 ------- -------- 68,924 70,257 Accumulated depreciation and amortization (39,829) (36,030) -------- --------- $ 29,095 $ 34,227 ======== ========
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 $15,729,000, $13,549,000, and $8,309,000 for the fiscal years ended 1998, 1997 and 1996, respectively. 7. INTANGIBLES
Intangibles consisted of the following: JUNE 30, -------- 1998 1997 ---- ---- (IN THOUSANDS) Excess purchase price over fair value of net assets acquired $ 137,241 $ 130,548 Customer lists 60,370 64,688 Contractual profit participation rights -- 25,000 Noncompete agreements 9,231 4,631 Other intangibles 8,014 9,131 --------- --------- 214,856 233,998 --------- Accumulated amortization (60,827) (42,632) --------- --------- $ 154,029 $ 191,366 ========= =========
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 $27,169,00, $23,470,000, and $15,673,000, for the fiscal years ended 1998, 1997 and 1996, respectively. 8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consisted of the following:
JUNE 30, 1998 1997 ---- ---- (IN THOUSANDS) Accounts payable $ 56,040 $ 55,723 Compensation and benefits 20,928 22,706 Interest 11,485 563 Unused leases 175 878 Pension accrual 1,515 1,371 Accrued accounting and legal fees 568 1,435 Non-income taxes and other 10,640 13,840 -------- -------- $101,351 $ 96,516 ======== ========
F-33 67 Accrued interest expense increased due to additional borrowings outstanding at June 30, 1998 as a result of the merger and recapitalization (See Notes 3 and 9). 9. DEBT
Debt consists of the following: JUNE 30, -------- 1998 1997 ---- ---- (IN THOUSANDS) Revolving credit loans $ 30,700 $231,671 Term loans 467,938 -- Senior subordinated notes, 9-3/4%, due 2007 150,000 -- Seller noninterest-bearing notes payable 2,179 2,922 Seller note payable--purchase of spare parts 508 1,608 Capitalized lease obligations, payable in varying installments at interest rates ranging from 7.25% to 13.01% at June 30, 1998 752 1,308 -------- -------- 652,077 237,509 Less current portion 13,311 4,788 -------- -------- $638,766 $232,721 ======== ========
In connection with the Company's merger with Quaker (see Note 3), the revolving credit loans outstanding immediately prior to the merger were repaid in full, including all interest due thereon. This refinancing was accomplished, in part, through the issuance of certain new debt instruments, consisting of a New Credit Facility, senior discount notes, and senior subordinated notes which, in the aggregate, provide financing of approximately $810 million, subject to certain conditions. The Company had average borrowings of approximately $609,629,000 during 1998 at an average interest rate of 8.2%. Maximum borrowings during 1998 were approximately $659,732,000. 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. The Company's Canadian subsidiary has available a $5.0 million (Canadian) revolving line of credit agreement with a local financial institution. At June 30, 1998 and 1997, approximately $0 and $471,000, respectively (in U.S. dollars) was outstanding under this agreement. Annual maturities on long-term debt outstanding at June 30, 1998, are as follows:1999, $13,311; 2000, $19,953; 2001, $36,899; 2002, $49,081; 2003, $73,445; 2004 and beyond, $459.388. NEW CREDIT FACILITY The New Credit Facility provides for term loans of $470,000,000 (term loan A - $195,000,000 and term loan B - $275,000,000) and revolving loans of up to $105,000,000. Term loan A expires in August 2003 with uneven quarterly principal payments commencing in September 1998. Term loan B expires in August 2005 with uneven quarterly principal payments commencing in December 1997. The revolving loans expire in August 2003. The Company pays a quarterly commitment fee on the unused amount of the revolving loans. The unused amount of the revolving loans was $74,300,000 as of June 30, 1998. The Company incurred debt issuance costs of approximately $14,375,000 in connection with the New Credit Facility. These costs have been deferred and are being amortized to interest expense over the term of the facility. The interest rate applicable to the New Credit Facility varies, at the Company's option, based upon LIBOR plus applicable margins (2.75% for term loan A and the revolving loans and 3.0% for term loan B) or based upon Prime Rate plus applicable margins (1.5% for term loan A and the revolving loans and 1.75% for term loan B). The applicable weighted average interest rates at June 30, 1998 were 8.47%, 8.71% and 8.96% for term loan A, term loan B, and the revolving loans, respectively. The New Credit Facility contains various terms and covenants which, among other things, place certain restrictions on the Company's ability to pay dividends and incur additional indebtedness, and which require the Company to meet certain minimum financial performance measurements. These measurements include (1) Adjusted EBITA, (2) Leverage Ratio, (3) Interest Coverage Ratio, and (4) Fixed Charge Ratio. During the third quarter of fiscal 1998, the Company sought and obtained amendments to the New Credit Facility. The amendments revised certain financial performance measurements and increased the borrowing rate by 0.25%. The Company incurred fees of approximately $1,400,000 in connection with the amendments. F-34 68 These costs have been deferred and are being amortized to interest expense over the remaining term of the related debt instruments. The Company is in compliance with its covenants under the amended New Credit Facility as of June 30, 1998. The estimated fair value of the funded portion of the New Credit Facility was approximately $490.1 million and is based on quoted market prices, as of June 30, 1998. SENIOR SUBORDINATED NOTES The 9 -3/4% senior subordinated notes mature on August 1, 2007. Interest on the notes is payable semi-annually on February 1 and August 1 of each year, commencing on February 1, 1998. The Company incurred debt issuance costs of $4,500,000 in connection with the senior subordinated notes. These issuance costs have been deferred and are being amortized over the life of the notes. The estimated fair value of the senior subordinated notes as of June 30, 1998 was approximately $144.8 million and is based on quoted market prices. SELLER NOTES PAYABLE In connection with certain acquisitions (see Note 5), 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. REVOLVING CREDIT LOANS - 1997 AND PRIOR On October 20, 1995, in connection with the BABSS acquisition (see Note 5) 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. 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 was 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%. 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, when the debt instruments were terminated. INTEREST RATE RISK MANAGEMENT The use of interest rate risk management instruments, such as Swaps and Collars, is required under the terms of the New Credit Facility. The Company manages interest costs using a mix of fixed and variable rate debt. Using Swaps, the Company agrees to exchange, at specified intervals, the difference between fixed and variable interest rate amounts calculated by reference to an agreed-upon notional principal amount. Collars limit the Company's exposure to and benefits from interest rate fluctuations on variable rate debt to within a certain range of rates. F-35 69 The following table summarizes the terms of the Company's existing Swaps and Collars as of June 30, 1998:
Notional Amount Maturities Average Interest Rate Estimated Fair Value --------------- ---------- --------------------- -------------------- Variable to Fixed Swaps $ 110,000,000 2000 - 2001 6.0% $ (686,605) Collars $ 125,000,000 2000 5.7% - 6.7% $ (537,737)
The notional amounts of interest rate instruments, as presented in the above table, are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The estimated fair value approximates the proceeds (costs) to settle the outstanding contracts. While Swaps and Collars represent an integral part of the Company's interest rate risk management, their incremental effect on interest expense for the year ended June 30, 1998 was not significant. 10. INCOME TAXES The provision (benefit) for income taxes consists of the following:
YEARS ENDED JUNE 30, 1998 1997 1996 ---- ---- ---- (IN THOUSANDS) Current: Federal $ (8,209) $ 10,909 $ 2,892 State 100 3,616 1,595 Foreign (372) 1,080 548 Deferred: Federal (6,315) 6,460 8,945 State (603) 16 641 Foreign 612 (113) (751) -------- -------- -------- Provision (benefit) for income taxes $(14,787) $ 21,968 $ 13,870 ======== ======== ========
The tax effects of temporary differences consisted of the following:
JUNE 30, 1998 1997 ---- ---- (IN THOUSANDS) Gross deferred tax assets: Accounts receivable $ 7,869 $ 4,771 Inventory 2,819 2,195 Accrued expenses 6,348 7,000 Unused leases (277) 390 Fixed assets 1,714 -- Intangibles 17,049 6,196 Other 1,298 -- Operating loss carryforwards 52,278 4,868 Tax credit carryforwards 2,969 1,670 -------- -------- Gross deferred tax assets 92,067 27,090 Valuation allowance (53,804) -- -------- -------- Gross deferred tax assets less valuation allowance 38,263 27,090 Gross deferred tax liabilities: Repairable spare parts (13,893) (8,918) Fixed assets -- (108) -------- -------- Gross deferred tax liabilities (13,893) (9,026) -------- -------- Net deferred tax asset $ 24,370 $ 18,064 ======== ========
Net operating loss and minimum tax credit carryforwards available at June 30, 1998 expire in the following years: F-36 70
AMOUNT YEAR OF EXPIRATION (IN THOUSANDS) Federal operating losses $127,215 2006-2013 State operating losses 109,910 1999-2013 Foreign operating losses 4,008 1999-2005 Investment tax credit 134 2004 Minimum tax credit 2,835 INDEFINITE
A reconciliation between the provision (benefit) for income taxes, computed by applying the statutory federal income tax rate of 35% for 1998, 1997 and 1996 to income before income taxes, and the actual provision (benefit) for income taxes follows:
1998 1997 1996 ---- ---- ---- Federal income tax provision at statutory tax rate (35.0%) 35.0% 35.0% State income taxes, net of federal income tax provision (3.8) 5.0 4.6 Foreign income taxes (0.4) 0.4 Unused lease credit Benefit of operating loss carryforward (0.8) Change in valuation allowance 30.0 (1.4) Other 2.4 1.0 2.6 ---- --- ---- Actual income tax provision (benefit) effective tax rate (6.8%) 41.4% 40.0% ===== ===== =====
As a result of the Company's merger with Quaker on August 7, 1997 (see Note 3), 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 of approximately $27.6 million arising prior to the ownership change are limited during any future period to the Section 382 "limitation amount" of approximately $9.0 million per annum. The federal, state and foreign net operating loss carryforwards expire in varying amounts between 1999 and 2013. The Company recorded a valuation allowance of $53,804,000 during the year ended June 30, 1998. The valuation allowance reduces the gross deferred tax assets to the level where management believes that it is more likely than not that the tax benefit will be realized. The ultimate realization of deferred tax benefits is dependant upon the generation of future taxable income during the periods in which the temporary differences become deductable. DecisionOne Corporation is a wholly owned subsidiary of Holdings and is included in Holdings' consolidated tax returns. DecisionOne Corporation participates in a tax sharing agreement with Holdings, whereby consolidated income tax expense or benefit, is allocated to the Company. 11. OTHER LIABILITIES Other (noncurrent) liabilities consisted of the following:
JUNE 30, 1998 1997 ---- ---- (IN THOUSANDS) Accrued severance $2,973 $2,756 Other noncurrent liabilities 2,823 3,323 ------ ------ $5,796 $6,079 ====== ======
Accrued severance reflects the actuarial determined liability for the separation of employees who are entitled to severance benefits under pre-existing separation pay plans. 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 and unutilized lease losses. 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 F-37 71 minimum lease payments for operating leases having initial or remaining noncancelable terms in excess of one year for the five years succeeding June 30, 1998 and thereafter are as follows (in thousands):
1999 $18,688 2000 15,123 2001 11,525 2002 7,708 2003 5,712 Thereafter 6,771 ------- $65,527 =======
Rental expense amounted to approximately $19,379,000, $17,367,000, and $13,149,000,for the fiscal years ended 1997, 1996 and 1995, respectively. 13. RETIREMENT PLANS The Company maintains a 401(k) plan for its employees. Under this plan, eligible employees may contribute amounts through payroll deductions supplemented by employer contributions for investment in various investments specified in the plan. The Company's contribution to this plan for fiscal 1998 was $1,012,563. A similar plan exists for former employees of an acquired company for which eligibility and additional contributions were frozen in September 1988. In addition, the Company assumed the liability of the defined benefit pension plan applicable to employees of a company acquired in 1986. The eligibility and benefits were frozen as of the date of the acquisition. Pension expense for the defined benefit pension plan was computed as follows:
YEAR ENDED JUNE 30, --------------------------------- 1998 1997 1996 ---- ---- ---- (IN THOUSANDS) Interest cost $ 611 $ 521 $ 495 Actual return on plan assets (1,506) (409) (449) Net amortization and deferral 1,128 9 72 ------- ------- ------- Periodic pension costs $ 233 $ 121 $ 118 ======= ======= =======
The discount rate used in determining the actuarial present value of the projected benefit obligation was 7.0% for 1998 and 7.5% for 1997 and 1996. The expected long-term rate of return on assets was 8.5% for 1998, 1997 and 1996. The mortality table used for 1998 was the 1983 Group Annuity Mortality Table for Males and Females and the mortality table used for 1997 and 1996 was the UP-1984 Unisex Mortality Table. The following table sets forth the funded status of the frozen pension plan as of May 1, 1998 and 1997:
1998 1997 ---- ---- (IN THOUSANDS) Accumulated benefits (100% vested) $ 9,155 $ 7,290 Fair value of plan assets 7,857 6,128 ------- ------- Unfunded projected benefit obligation 1,298 1,162 Unrecognized net loss 2,390 1,873 Unrecognized net transition obligation 438 470 Adjustment to recognized minimum liability (2,828) (2,343) ------- ------- Accrued pension costs $ 1,298 $ 1,162 ======= =======
14. EMPLOYEE SEVERANCE AND UNUTILIZED LEASE COSTS During the second quarter of fiscal 1997, in connection with the Memorex Telex acquisition (see Note 5), 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. F-38 72 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 11 for further information regarding accrued severance and unutilized lease losses. 15. 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 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 accrued in the accompanying consolidated balance sheets as of June 30, 1998 and 1997. 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 alleged 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. During the year ended June 30, 1998, DecisionOne Corporation declared and paid dividends of $244,000,000 to DecisionOne Holdings Corp. 16. RELATED PARTY TRANSACTIONS In connection with the Quaker Merger (See Note 3), DecisionOne Corporation made a loan to DecisionOne Holdings Corp. for $59,100,000 which was used to finance the merger. The subordinated promissory note accrues interest at an annual interest rate of 8 -1/4%. Interest and principal are both due upon maturity in August 2010. Interest income recorded by DecisionOne Corporation and interest expense recorded by DecisionOne Holdings Corp. was approximately $4,381,000 in fiscal 1998. During the year ended June 30, 1998, DecisionOne Corporation declared and paid dividends of $244,000,000 to DecisionOne Holdings Corp. During the year ended June 30, 1998, the Company paid the DLJ Group approximately $500,000 for financial advisory services. Prior to 1994, the Company entered into an agreement to purchase printer products from Genicom Corporation (Genicom). The Company and Genicom were under common ownership prior to the August 7, 1997 Merger. Purchases from Genicom for the period July 1, 1997 through August 7, 1997 were approximately $121,000. Purchases from Genicom for the years ended June 30, 1997 and 1996 were approximately $472,000 and $1,512,000, respectively. Accounts payable to Genicom amounted to approximately $0 and $30,000 as of June 30, 1998 and 1997, 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. 17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of the unaudited quarterly financial information for the fiscal years ended 1998 and 1997: F-39 73
QUARTER ENDED ------------- SEPT. 30 (1), DEC. 31, MARCH 31, JUNE 30 (2), ------------- -------- --------- ------------ (DOLLARS IN THOUSANDS) 1998 Revenues $ 202,264 $ 200,075 $ 200,910 $ 202,468 Gross profit 44,819 46,769 47,747 52,576 Net loss (57,117) (6,625) (8,033) (99,866) Proforma net loss (824) (6,625) (8,033) (95,875)
QUARTER ENDED ------------- SEPT. 30, DEC. 31 (3), MARCH 31, JUNE 30 (2), --------- ------------ --------- ------------ (DOLLARS IN THOUSANDS) 1997 Revenues $176,426 $191,253 $205,070 $213,201 Gross profit 41,861 47,642 53,822 58,332 Net income 5,455 4,954 9,507 11,168
(1) Net loss for the first quarter of 1998 includes $69.0 million of pre-tax merger expenses (See Note 3). (2) Net loss for the fourth quarter of 1998 includes $87.5 million of pre-tax loss on asset sales and disposals and a $12.3 million pre-tax special charge to the provision for uncollectible receivables (See Note 4). (3) Net income for the second quarter of 1997 includes 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, primarily associated with duplicate facilities to be closed in connection with the Memorex Telex acquisition (see Note 16). F-40 74 SCHEDULE I DECISIONONE HOLDINGS CORP. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, 1998 JUNE 30, 1997 ------------- ------------- ASSETS Current assets $ 1,519 $ -- -- Other assets 3,896 -- -- Investments in equity of subsidiaries -- -- 214,888 --------- --------- Total assets $ 5,415 $ 214,888 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Investment in deficit of subsidiaries $ 204,468 $ -- -- Senior discount debentures 92,246 -- -- Intercompany loan and payables 69,867 -- -- Other liabilities 440 -- -- Preferred stock, no par value; authorized 5,000,000 shares; none outstanding Common stock, $.01 par value; authorized 100,000,000 shares; issued and outstanding 12,584,219 shares in 1998 and 27,817,832 shares in 1997 126 278 Additional paid-in capital 242,181 258,331 Accumulated deficit (601,195) (42,432) Other (2,718) (1,289) --------- --------- Total shareholders' equity (deficit) (361,606) 214,888 --------- --------- Total liabilities and shareholders' equity (deficit) $ 5,415 $ 214,888 ========= =========
See notes to condensed financial information. S-1 75 SCHEDULE I DECISIONONE HOLDINGS CORP. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF OPERATIONS (PARENT COMPANY ONLY) (IN THOUSANDS)
YEARS ENDED JUNE 30, -------------------- 1998 1997 1996 ---- ---- ---- Equity in net income (loss) of subsidiaries $(171,641) $ 31,084 $ 18,862 Interest expense, net of interest income of $1,210 in 1998 12,479 -- -- --------- --------- --------- Income (loss) before provision (benefit) for income taxes (184,120) 31,084 18,862 Provision (benefit) for income taxes (990) -- -- --------- --------- --------- Net income (loss) $(183,130) $ 31,084 $ 18,862 ========= ========= =========
See notes to condensed financial information. S-2 76 SCHEDULE I DECISIONONE HOLDINGS CORP. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY) (IN THOUSANDS)
YEARS ENDED JUNE 30, --------------------------------------------- 1998 1997 1996 ---- ---- ---- Operating Activities: Equity in net income (loss) of subsidiary $(171,641) $ 31,084 $ 18,862 Other adjustments, net 172,851 (31,084) (17,462) --------- --------- --------- Net cash provided by operating activities 1,210 -- 1,446 --------- --------- --------- Investing Activities - contribution to capital of subsidiaries -- (439) (142,090) --------- --------- --------- Financing Activities: Proceeds from issuance of common stock 226,583 -- -- Proceeds from issuance of senior discount debentures 79,723 -- -- Proceeds from related party loans 69,617 -- -- Issuance of warrants 1,880 439 110,698 Recapitalization (621,803) -- -- Dividends received from subsidiary 244,000 -- -- Issuance of preferred stock -- -- 31,392 Preferred stock dividends -- -- (1,446) --------- --------- --------- Net cash provided by financing activities -- 439 140,644 --------- --------- --------- Net change in cash 1,210 -- -- Cash, beginning of year -- -- -- --------- --------- --------- Cash, end of year $ 1,210 $ -- $ -- ========= ========= =========
See notes to condensed financial information. S-3 77 SCHEDULE I DECISIONONE HOLDINGS CORP. NOTES 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. 2. SENIOR DISCOUNT DEBENTURES The Company received net proceeds of $85,003,520 from the sale of $148,400,000 principal amount at maturity of its 11 1/2% senior discount debentures due 2008. The debentures accrete at a rate of 11 1/2% per annum, compounded semi-annually, to an aggregate principal amount at maturity of $148,400,000 by August 1, 2002. Commencing on February 1, 2003, cash interest on the debentures will be payable, semi-annually in arrears on each February 1 and August 1. The Company incurred debt issuance costs of $3,400,141 in connection with the senior discount debentures. These costs have been deferred and are being amortized to interest expense over the life of the debentures. 3. RELATED PARTY TRANSACTIONS In connection with the Quaker Merger (See Note 3), DecisionOne Corporation made a loan to DecisionOne Holdings Corp. for $59,100,000 which was used to finance the merger. The subordinated promissory note accrues interest at an annual interest rate of 8 1/4%. Interest and principal are both due upon maturity in August 2010. Interest income recorded by DecisionOne Corporation and interest expense recorded by DecisionOne Holdings Corp. was approximately $4,381,000 in fiscal 1998. During the year ended June 30, 1998, DecisionOne Corporation declared and paid dividends of $244,000,000 to DecisionOne Holdings Corp. 4. INCOME TAXES The Parent and its wholly owned subsidiaries file a consolidated tax return. The Parent participates in a tax sharing agreement with the consolidated group whereby consolidated income tax expense or benefit is allocated to the Parent. S-4 78 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, 1996: Accounts receivable Allowance for uncollectible 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 uncollectible 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) $(9,964) $15,976 Year Ended June 30, 1998: Accounts Receivable-- Allowance for uncollectible accounts $14,869 $3,170 $12,345 (c) $(7,812)(a) $22,572 Consumable parts-- Allowance for Obsolescence $15,976 $7,000 -- $(13,705) $9,271
(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. (c) Amount represents a special charge as a result of changes in management's estimates used to assess the adequacy of the receivable allowance. S-5 EX-10.24 2 LEASE AGREEMENT 1 Exhibit 10.24 DRAFT #3 4/1/97 SOUTH PARK BULK VII =============================================================================== LEASE AGREEMENT BETWEEN 3423 SOUTHPARK PLACE DEVELOPMENT COMPANY ("LANDLORD") AND DECISIONONE CORP. ("TENANT") =============================================================================== 2 LEASE SUMMARY ------------- A. DATE OF EXECUTION OF LEASE: March __, 1997 B. LANDLORD: 3423 SouthPark Place Development Company C. ADDRESS OF LANDLORD: c/o Pizzuti Management Inc. Suite 1900 250 East Broad Street Columbus, Ohio 43215 D. TENANT: DecisionOne Corp. E. ADDRESS OF TENANT: Attn: Director, Real Estate 50 East Swedesford Road Frazer, Pennsylvania 19355 F. LAND: The approximately 17.5 acre parcel of land located in SouthPark in Grove City, Ohio. G. BUILDING: The 393,969 square foot building located on the Land and known as the Bulk VII Building H. LEASED PREMISES: That portion of the Building outlined on Exhibit A. The Leased Premises will initially contain 58,597 square feet of rentable space ("INITIAL LEASED PREMISES") and will ultimately be expanded, per the term of "Special Terms", Exhibit F, by an additional 57,596 square feet of rentable space ("EXPANSION SPACE"). I. PERMITTED USE: Computer repair and general office and warehouse use. J. LEASE TERM: Five years commencing on the Commencement Date and terminating on the Termination Date. K. COMMENCEMENT DATE: Except as otherwise expressly provided in Section 9, the date of "substantial completion" of the improvements to be constructed to the Leased Premises (as the term "substantial completion" is defined in Section 9 of the Lease). L. TERMINATION DATE: Fifth anniversary of Commencement Date BASE RENT: As to Initial Leased Premises, $14,405 per month,$172,860 per year and $2.95 prsf. The Base Rent for the Expansion Space is specified in "Special Terms", Exhibit F. N. TENANT'S PROPORTIONATE SHARE OF OPERATING EXPENSES: 14.87% as to Initial Leased Premises only, increased to 29.49% on commencement date of Tenant's leasing of Expansion Space. O. INITIAL ESTIMATED OPERATING EXPENSE PAYMENT: As to Initial Leased Premises, $1,563 per month, $18,756 per year and $.32 prsf. The Estimated Operating Payment applicable to the Expansion Space will be determined on commencement date of Tenant's leasing of the Expansion Space, per Section 2 of the Lease Agreement. P. GUARANTOR: None Q. GUARANTOR'S ADDRESS: Not applicable. The following exhibits are attached to and made a part of the Lease: EXHIBIT A - Description of Leased Premises EXHIBIT B - Examples of Operating Expenses EXHIBIT C - SouthPark Rules and Regulations EXHIBIT D - Leasehold Improvements EXHIBIT E - Agency Disclosure Statement EXHIBIT F - Special Terms Exhibit G - Rider THE PROVISIONS OF THIS LEASE SUMMARY ARE INCORPORATED BY THIS REFERENCE INTO THE LEASE. 3 LEASE AGREEMENT --------------- Landlord hereby leases the Leased Premises to Tenant for the duration of the Lease Term. The leasing of the Leased Premises to Tenant will be upon the terms and conditions set forth in this Lease. SECTION 1. BASE RENT. For each month of the Lease Term, Tenant will pay Base Rent in an amount equal to the monthly installment set forth in the Lease Summary, which Lease Summary is attached hereto and incorporated herein by this reference. SECTION 2. OPERATING EXPENSE PAYMENT. Tenant will pay its Proportionate Share of all Operating Expenses incurred by Landlord during the Lease Term in connection with the operation, management, maintenance and repair of the Land and the Building. Illustrative examples of those expenses which are included within the definition of "Operating Expenses" are set forth in Exhibit B. Tenant's Proportionate Share of such Operating Expenses will be paid by Tenant in advance based upon Landlord's estimate of the actual Operating Expenses which will be incurred during each calendar year during the Lease Term. The Estimated Operating Expense Payment for the first such calendar year is set forth in the Lease Summary. The Estimated Operating Expense Payment for each calendar year thereafter will be adjusted based upon Landlord's estimate of its Operating Expenses for such calendar year. Landlord will use its best efforts to notify Tenant by December 1 of each year during the Lease Term of any adjustment in the monthly Estimated Operating Expense Payment for the upcoming calendar year. As soon as reasonably practicable after the end of each calendar year, Landlord will deliver to Tenant a written statement showing its actual Operating Expenses for such calendar year and Tenant's actual Proportionate Share thereof. If the sum of the Estimated Operating Expense Payments paid by Tenant during such calendar year exceeds Tenant's Proportionate Share of the actual Operating Expenses incurred during such year, then Landlord will apply the excess toward the next succeeding monthly Estimated Operating Expense Payment(s) due from Tenant. If the sum of the Estimated Operating Expense Payments paid by Tenant during such calendar year is less than Tenant's Proportionate Share of the actual Operating Expenses incurred during such year, then Tenant will pay the deficiency to Landlord within ten business days after Tenant's receipt of Landlord's written demand for the payment thereof. SECTION 3. MANNER AND TIMING OF RENT PAYMENTS. The first monthly installment of Base Rent and Estimated Operating Expense Payments will be paid by Tenant on or before the Commencement Date. Thereafter, monthly installments of Base Rent and Estimated Operating Expense Payments will be due and payable in advance on or before the first day of each calendar month during the Lease Term. Each such installment will be paid to Landlord at its address set forth in the Lease Summary (or such other address as Landlord may designate from time to time). If the Lease Term commences on a day other than the first day of the month or terminates on a day other than the last day of the month, then the installments of Base Rent and Estimated Operating Expense Payments for such month(s) will be adjusted accordingly. If any installment of Base Rent or any Estimated Operating Expense Payment is not received by Landlord within five days after its due date, then a late payment charge of 5% of such past due amount will be immediately due and payable from Tenant. All installments of Base Rent and Estimated Operating Expense Payments will be paid by Tenant without demand and without any rights of reduction, counterclaim or offset. Tenant hereby agrees to pay as additional rent any sales, use or other tax (other than income taxes) now or hereafter imposed by any governmental authority upon the rent and other sums payable by Tenant hereunder. SECTION 4. UTILITIES. Tenant will pay all costs associated with the provision of all utility services to the Leased Premises, including, without limitation, telephone, gas, electricity, water and sewer service. To the extent possible, all utility services will be separately metered to the Leased Premises and placed in Tenant's name. If it is not possible to place a utility service on a separate meter in Tenant's name, then all costs associated with the provision of such utility service to the Leased Premises will be billed directly by Landlord to Tenant and will be paid by Tenant within 15 days after its receipt of such billing. Landlord will not be liable to Tenant, nor will Tenant be relieved of any obligation hereunder if any utility service to the Leased Premises is interrupted for any reason beyond Landlord's control. SECTION 5. MAINTENANCE AND REPAIR. Tenant will at its sole expense maintain the Leased Premises in a first-class condition and order of repair. Tenant's maintenance obligation will extend to and include the repair and replacement, if necessary, of all structural and non-structural elements and mechanical systems located wholly within and solely serving the Leased Premises. Any repairs or replacements made to the Leased Premises by Tenant pursuant to this Section 5 will be made in a workmanlike manner with materials at least equal in quality and grade to those originally contained within the Leased Premises. Tenant will also contract for its own janitorial and trash removal services and will promptly pay all costs associated with such services. 1 4 Landlord will maintain, repair and, if necessary, replace, the roof, roof membrane and exterior walls of the Building (including exterior glass), all structural and mechanical systems located within the Building (including plumbing, heating, HVAC and electrical systems) unless the maintenance and repair of the same are Tenant's responsibility under the immediately preceding paragraph, and all common areas serving the Building (including, without limitation, the parking lot, driveways and loading dock areas) in a first-class condition and order of repair. Except as otherwise expressly provided in this Section 5 and Section 9, Landlord will not at any time during the Lease Term be required to make any improvements, repairs, replacements or alterations to the Leased Premises. SECTION 6. USE OF PREMISES. Tenant will use the Leased Premises solely for the Permitted Use. Tenant will not cause or permit any waste or damage to the Leased Premises, the Building or the Land and will not occupy or use the Leased Premises for any business or purpose which is unlawful, hazardous, unsanitary, noxious or offensive or which unreasonably interferes with the business operations of other tenants in the Building. If the nature of Tenant's use or occupancy of the Leased Premises (other than the Permitted Use defined in the Lease Summary) causes any increase in Landlord's insurance premiums over and above those chargeable for the least hazardous type of occupancy legally permitted in the Leased Premises, then Tenant will pay the resulting increase within ten days after its receipt of a statement from Landlord setting forth the amount thereof. Tenant will comply with the Rules and Regulations for the SouthPark which are set forth in Exhibit C (and any reasonable modifications thereto which are consistent with the provisions of this Lease). SECTION 7. GOVERNMENTAL REQUIREMENTS. Tenant will at its sole expense comply with all laws and other governmental requirements which are now or hereafter in force pertaining to the Leased Premises and Tenant's occupancy and use thereof, including, without limitation, the Americans with Disabilities Act, the Comprehensive Environmental Response, Compensation and Liability Act the Clean Air Act, the Hazardous Materials Transportation Act, the Resource Conservation and Recovery Act and the Water Pollution Control Act. Landlord hereby represents and warrants that the Building will, as of the date on which Tenant first occupies any portion of the Building, be in full compliance with all applicable laws and other governmental requirements, including, without limitation, the laws referred to in the immediately preceding sentence. SECTION 8. SIGNS. Tenant will not place any sign or other advertising material on the exterior or interior of the Leased Premises or the Building, without the prior written consent of Landlord. SECTION 9. LEASEHOLD IMPROVEMENTS. Attached to this Lease as Exhibit D are either: (a) the preliminary specifications for the improvements to be made to the Initial Leased Premises ("Improvements"); or (b) a tenant improvement allowance for such Improvements. To the extent Exhibit D simply sets forth a tenant improvement allowance for such Improvements, Landlord and Tenant agree that, promptly following the parties' execution of this Lease, they will meet to develop approved preliminary specifications for the Improvements. Once Landlord and Tenant have approved preliminary specifications (either by the initial attachment of the same hereto as Exhibit D or as a product of their meeting promptly following the execution of this Lease), Landlord will proceed with the preparation of the final architectural and engineering drawings, plans and specifications for the Improvements. Once those drawings, plans and specifications are completed, Landlord will deliver a full set thereof to Tenant for its review and approval. The approved final drawings, plans and specifications ("Final Plans") are incorporated herein by this reference. If Exhibit D simply sets forth a tenant improvement allowance number and if the cost of constructing the Improvements in accordance with the approved Final Plans (as determined by Landlord's general contractor) exceeds the amount of such tenant improvement allowance, and if, following Tenant's receipt of written notice from Landlord of the amount of such excess costs and Tenant nonetheless authorizes Landlord to proceed to incur such excess costs, then, in such event, Tenant will pay any such excess costs upon completion of said improvements and within ten days after Landlord's written demand for the payment thereof. If, following the approval of the Final Plans, Tenant expresses a desire to make any revisions thereto, Tenant will so notify Landlord and Landlord will then ask its general contractor to prepare a cost estimate for the making of such changes. Landlord will promptly notify Tenant of any increased costs or savings resulting from such changes and Tenant will have the right to require Landlord to cause such a change to be made to the Final Plans; provided, however, that such changes will not unreasonably affect the structural integrity or value of the Building. If the aggregate of all such changes results in a net increase in the cost of the construction of the Improvements, (net of any savings), then Tenant will pay such net increase to Landlord within 10 business days after Landlord's written demand for the payment thereof. Landlord will cause the Improvements to be constructed in accordance with the Final Plans. Landlord will use its best efforts to substantially complete construction of the Improvements on or before the targeted Commencement Date set forth in the Lease Summary, subject to delays caused by the occurrence of events beyond its reasonable control, including, without limitation, labor troubles, inability to procure materials, restrictive governmental laws and pronouncements, acts of God, unseasonable weather, Tenant's failure to timely respond to any matter submitted for its review and Tenant's requested change orders ("Delay Events"). The establishment of the substantial completion date referred in the immediately preceding sentence is predicated upon the various Milestone Dates referred to in Exhibit D 2 5 being met in a timely manner with respect to the preparation, submission and approval of all preliminary specifications and Final Plans. Tenant agrees that it will review and either approve or specify its objections to any documents or drawings submitted to it for its review and approval hereunder within five business days after its receipt of the same. If Landlord's inability to substantially complete the Improvements on or before the targeted Commencement Date set forth in the Lease Summary is attributable to any Delay Event (other than those tenant-caused delays referred to in the immediately succeeding sentence), then the Commencement Date will be deferred by the number of days of the delay in substantially completing the Improvements which is caused by the occurrence of any such Delay Events. If Landlord is unable to substantially complete construction of improvements on or before the date which is 120 days after both parties' execution of the Lease, for any reason other than the occurrence of a Delay Event, then Tenant will thereafter have the right for 30 days after the expiration of such 120 day period to terminate this Lease by delivery of written notice to such effect to Landlord. Notwithstanding anything to the contrary contained herein, if Landlord's inability to substantially complete the improvements on or before the targeted Commencement Date set forth in the Lease Summary is attributable to Tenant-caused delays (including, without limitation, Tenant's failure to timely respond to any manner submitted for its review, delays caused by Tenant's requested change orders, as verified by Landlord's general contractor, or Tenant's failure to meet the Milestone Dates referred to in the Lease Summary), then the Commencement Date will remain as set forth in Exhibit F, notwithstanding the fact that the Improvements are not yet substantially completed, and Tenant will, from and after the Commencement Date, have an obligation to pay Base Rent, Estimated Operating Expense Payments and perform all of its other obligations and duties hereunder. For the purposes of this Lease, the Improvements will be deemed substantially completed on the earlier of the date on which Tenant occupies the Leased Premises or the date on which a temporary or permanent certificate of occupancy for the Improvements is issued by the appropriate governmental authority. Landlord will be responsible for securing a certificate of occupancy for the improvements from the appropriate governmental authority. SECTION 10. ALTERATIONS. Except for "Minor Alterations" (as that term is hereafter defined). Tenant may not at any time prior to or during the Lease Term make any alterations, additions or improvements to the Leased Premises without the prior written consent of Landlord. For the purposes of this Section 10, "Minor Alterations" will mean any alteration, addition or improvement to the Leased Premises which costs less than $10,000, and which does not alter the exterior aesthetics pr structural integrity of the Building. All improvements, alterations and additions made at one time in connection with any one job will be aggregated for the purposes of determining whether the $10,000 limit has been exceeded. Any alterations, addition or improvement made to the Leased Premises in accordance with this Section 10 will at all times remain the property of Landlord. If Landlord consents to any proposed alteration, addition or improvement, the same shall be made at Tenant's sole expense. SECTION 11. MECHANICS LIENS. Tenant will indemnify and hold Landlord harmless from any liability or expense associated with its construction of any alteration, addition or improvement to the Leased Premises, unless Landlord is itself constructing any such alteration, addition or improvement. Tenant will immediately discharge any mechanics lien filed against the Leased Premises, the Building or the Land in connection with any work performed by or at the request of Tenant. SECTION 12. ASSIGNMENT AND SUBLETTING. Tenant will not assign this Lease or sublet all or any part of the Leased Premises without the prior written consent of Landlord. Unless otherwise agreed to by Landlord, Landlord's consent to any such assignment or sublease will not relieve Tenant from its obligations under this Lease. Notwithstanding anything to the contrary contained herein, Tenant may, without having to obtain the prior written consent of Landlord, assign this Lease or sublet all or any part of the Leased Premises to any parent, affiliate or subsidiary of Tenant, so long as Tenant remains fully liable for the performance of all of its obligations hereunder notwithstanding such assignment or sublease. If Landlord consents to any sublease by Tenant, then Tenant will be permitted to retain all rent payable in connection with such sublease. SECTION 13. SUBORDINATION. Tenant's rights and interests under this Lease will be subordinate to all mortgages and other encumbrances now or hereafter affecting any portion of the Building or the Land. In the event of the foreclosure of any mortgage or other encumbrance, Tenant will, upon request of any person succeeding to the interest of Landlord, attorn to and automatically become the tenant of such successor-in-interest without change in the terms or conditions of this Lease; provided, however, that such successor-in-interest will not be liable for any act or omission of any prior landlord or subject to any offsets or defenses which Tenant may have against any such prior landlord. The obligations of Tenant under this Section 13 will be expressly conditioned upon its receipt of an acceptable subordination, non-disturbance and attornment agreement from any mortgagee of Landlord, which subordination, non-disturbance and attornment agreement will expressly provide that Tenant will be entitled to the undisturbed possession of the Leased Premises, so long as it is in full compliance with all of its obligations under this Lease. Within ten business days after its receipt of Landlord's request therefor, Tenant will execute and deliver to Landlord a certificate prepared by Landlord confirming such subordination and attornment and setting forth the current status and facts related to this Lease and Tenant's occupancy of the Leased Premises. 3 6 SECTION 14. LIMITATION OF LANDLORD'S PERSONAL LIABILITY. Tenant will look solely to Landlord's interest in the Leased Premises, the Building and the Land for the recovery of any judgment against Landlord; it being the express intent of the parties hereto that neither Landlord, nor any of its shareholders, directors, officers or employees will ever be personally liable for any such judgment. SECTION 15. INDEMNIFICATION AND INSURANCE. Landlord will not be liable for and Tenant will indemnify and hold Landlord harmless from any liability or expense associated with any damage or injury to any person or property (including any person or property of Tenant or any one claiming under Tenant) which arises directly or indirectly in connection with the Tenant's use or occupancy of the Leased Premises; provided, however, that Tenant will not be obligated to indemnify Landlord as to any liability or expense occasioned by the fault or negligence of Landlord. All property stored or placed by Tenant in or about the Leased Premises will be so stored or placed at the sole risk of Tenant. Tenant will at its sole expense maintain in full force and effect at all times during the Lease Term: (a) comprehensive public liability insurance for personal injury and property damage with liability limits of not less than $5,000,000 for injury to one person, $10,000,000 for injury from one occurrence and $2,000,000 for property damage; and (b) extended coverage insurance on all property stored or placed by Tenant in or about the Leased Premises in an amount equal to the full replacement value thereof. Each insurance policy required to be maintained by Tenant hereunder will name Landlord and Landlord's mortgagee, if any, as additional insureds and will specifically provide that such insurance policy cannot be terminated without giving at least 30 days prior written notice to Landlord and Landlord's mortgagee, if any. SECTION 16. HAZARDOUS SUBSTANCES. Tenant will not use, store or dispose of any Hazardous Substance (as that term is hereafter defined on or about the Leased Premises, except for immaterial amounts that are exempt from or do not give rise to any violation of applicable law. Tenant agrees to indemnify and hold Landlord harmless from any liability or expense (Including, without limitation, the fees of Landlord's attorneys and consultants and the cost of any required remediation or clean-up) incurred by or claimed against Landlord as a result of Tenant's breach of the covenant contained in this paragraph. The foregoing covenant will survive the termination of this Lease for 12 months after such termination. For the purposes of this Section 17, the term "Hazardous Substance" means any "hazardous substance", "toxic substance" (as those terms are defined in the Comprehensive Environmental Response, Compensation and Liability Act), "hazardous waste" (as that term is defined in the Resource Conservation Recovery Act), polychlorinated biphenyls, asbestos, radioactive material or any other pollutant, contaminant or hazardous, dangerous or toxic material or substance which is regulated by any federal, state or local law, regulation, ordinance or requirement. Landlord represents and warrants that, as of the Commencement Date, there will not be any Hazardous Substances in or about the Building or the Leased Premises, except for immaterial amounts that are exempt from or do not give rise to any violation of applicable law. Landlord agrees to indemnify and hold Tenant harmless from any liability or expense (including, without limitation, fees of Tenant's attorneys and consultants and the cost of any required remediation or clean-up) incurred by or claimed against Tenant as a result of Landlord's breach of the representation and warranty contained in this paragraph. SECTION 17. SURRENDER OF PREMISES. Upon the termination of Tenant's right of possession under this Lease, Tenant will immediately surrender possession of the Leased Premises to Landlord in good repair and "broom clean" condition, reasonable wear and tear and fire and casualty excepted. Tenant will at the same time remove all of its movable trade fixtures from the Leased Premises. Tenant will promptly repair any damage caused to the Leased Premises by the removal of any of such movable trade fixtures. SECTION 18. CASUALTY. If the Leased Premises are damaged by fire or other casualty, Landlord shall promptly give written notice to Tenant whether the Leased Premises can reasonably be repaired within 180 days after the date of the occurrence of such fire or other casualty. If Landlord notifies Tenant that it does not believe that the Leased Premises can reasonably be repaired within such 180-day period, then both Landlord and Tenant will have the option of terminating this Lease by giving written notice thereof to the other at any time within 30 days after the date of Tenant's receipt of the aforementioned notice from Landlord. If Landlord determines that the Leased Premises can reasonably be repaired within such 180-day period or if neither party elects to terminate this Lease despite the fact that Landlord has determined that the Leased Premises cannot be reasonably repaired within such 180-day period, then Landlord will proceed to repair the Leased Premises at its sole expense; provided, however, that Landlord will in no event be required to repair any improvements previously made to or any fixtures previously installed in the Leased Premises by Tenant (other than the improvements initially constructed to the Leased Premises by Landlord pursuant to Section 9 and Exhibit D). If the Leased Premises are rendered untenantable in whole or in part as a result of a fire or other casualty, then all rent accruing after the occurrence of any such fire or other casualty and prior to the completion of the repair of the Leased Premises will be equitably and proportionately abated to reflect the untenantable portion of the Leased Premises. Landlord will not be liable to Tenant for any inconvenience or interruption to Tenant's business occasioned by such fire or other casualty or the concomitant repair of the Leased Premises. 4 7 SECTION 19. CONDEMNATION. If all or any substantial portion of the Leased Premises or the Building is taken by or under threat of condemnation so as to render the Leased Premises wholly untenantable, then this Lease will automatically terminate as of the date of the vesting of title to such property in the condemning authority. If such taking does not render the Leased Premises wholly untenantable, then this Lease will not terminate but will continue in full force and effect in accordance with its terms, except that the Base Rent and Tenant's Proportionate Share will be adjusted to fairly reflect the portion of the Leased Premises or the Building which was so taken. Landlord will not be liable to Tenant for any inconvenience or interruption to Tenant's business occasioned by any such taking. Landlord will be entitled to receive the entire award made by the condemning authority for any such taking. SECTION 20. HOLDING OVER. Tenant will not hold over in its occupancy of the Leased Premises after the expiration of the Lease Term, without the prior written consent of Landlord. If Tenant holds over without the prior written consent of Landlord, then Tenant will pay 125% of the Base Rent and Estimated Operating Expense Payment then in effect for each month during the entire holdover term. Any holding over with the consent of Landlord will constitute this Lease as a lease from month-to-month. SECTION 21. DEFAULT. If Tenant fails to pay any installment of Base Rent, any Estimated Operating Expense Payment or any other sum payable by it hereunder on or before the date when due, or if Tenant defaults in the performance of any of its other obligations under this Lease and such default continues for 30 days after written notice thereof is given to Tenant (or if such default is not capable of being cured within 30 days, then only if Tenant fails to commence a cure of such default within such 30 day period and at all times thereafter proceed with due diligence to cure the same), then, in addition to any other legal rights and remedies available to Landlord at law or in equity, Landlord may: (a) terminate this Lease and declare all Base Rent, Estimated Operating Expense Payments and other sums payable over the remainder of the Lease Term to be immediately due and payable; or (b) re-enter and attempt to relet the Leased Premises without terminating this Lease, in which event Tenant will remain obligated to pay to Landlord any deficiency between all sums payable by Tenant pursuant to this Lease and any sums collected by Landlord from any reletting of the Leased Premises (net of any sums paid by Landlord in connection with such reletting, including, without limitation, leasing commissions, attorneys' fees and costs of improvements to the Leased Premises). Notwithstanding anything to the contrary contained in this Section , Landlord will not have the right to pursue any of the aforementioned legal rights and remedies in the event of a monetary default by Tenant hereunder unless, on not more than two occasions in any 12 month period, Landlord has first delivered written notice of non-payment of any monetary sum to Tenant and Tenant has failed to cure such non-payment within ten days after its receipt of such written notice. SECTION 22. PREVAILING PARTY'S FEES. If any legal action is commenced by either Landlord or Tenant, to enforce its rights hereunder, then all attorneys' fees and other expenses incurred by the prevailing party in such action shall be promptly paid by the non-prevailing party. SECTION 23. SUCCESSORS AND ASSIGNS. This Lease shall be binding upon and inure to the benefit of the successors and assigns of Landlord and the successors and permitted assigns of Tenant. SECTION 24. NO WAIVER. No waiver of any covenant or condition of this Lease by either party will be deemed to constitute a future waiver of the same or any other covenant or condition of this Lease. In order to be effective, any such waiver must be in writing and must be delivered to the other party to this Lease. SECTION 25. BROKERAGE COMMISSIONS. Each of Landlord and Tenant hereby represents and warrants that it has not dealt or consulted with any real estate broker or agent in connection with this Lease other than those real estate brokers and agents specifically identified in the Agency Disclosure Statement attached hereto as Exhibit E. Each of Landlord and Tenant agrees to indemnify and hold the other harmless from and against any liability or expense occasioned by a breach of the foregoing representation. SECTION 26. REASONABLENESS OF CONSENT. Landlord will not unreasonably withhold any consent or approval which is required to be given by it pursuant to the terms of this Lease. SECTION 27. AMENDMENT. This Lease may not be amended except by a written instrument signed by both Landlord and Tenant. SECTION 28. GOVERNING LAW. This Lease will be governed by and construed in accordance with the laws of the State of Ohio. SECTION 29. NOTICES. All notices required or permitted under this Lease must be in writing and must be delivered to Landlord and Tenant at their addresses set forth in the Lease Summary (or such other address as may hereafter be 5 8 designated by such party). Any such notice must be personally delivered or sent by either registered or certified mail or overnight courier. SECTION 30. SPECIAL TERMS. Exhibit F sets forth those special provisions, if any, which supplement the provisions of this Lease. [SIGNATURES AND ACKNOWLEDGMENTS APPEAR ON NEXT PAGE] 6 9 SIGNATURES AND ACKNOWLEDGMENTS Landlord and Tenant have executed this Lease as of the date specified in the Lease Summary. Signed and acknowledge in the presence of: LANDLORD: 3423 SOUTHPARK PLACE DEVELOPMENT COMPANY By: Pizzuti Management Inc. By /s/ RICHARD C. DALEY - ----------------------------------- ----------------------------------- Richard C. Daley Vice President - ----------------------------------- TENANT: DECISIONONE CORP. - ----------------------------------- By /s/ Thomas J. Fitzpatrick - ----------------------------------- ----------------------------------- Thomas J. Fitzpatrick Vice President and CFO STATE OF OHIO COUNTY OF FRANKLIN: SS Before me, a notary public in and for said state and county, personally appeared Richard C. Daley, the Vice President of Pizzuti Management Inc., the duly authorized representative of the Landlord in the foregoing Lease, who acknowledged the signing of the Lease to be his free act and deed on behalf of the Landlord. Date: 4/10/97 NOVA S. WITTE ---------------- ------------------------------- Notary Public NOVA S. WITTE STATE OF PENNSYLVANIA NOTARY PUBLIC, STATE OF OHIO COUNTY OF CHESTER: SS MY COMMISSION EXPIRES DEC. 5, 1999 Before me, a notary public in and for said state and county, personally appeared ______________, the Decision One Director of Deal State the Tenant in the foregoing Lease, who acknowledged the signing of the Lease to be his free act and deed on behalf of Tenant. Date: April 9, 1997 ----------------------------------- ---------------- Notarial Seal Phillis I. Marshall, Notary Public East Whiteland Twp., Chester County My Commission Expires June 12, 2000 ----------------------------------- 7 10 [EXHIBITS A-F INTENTIONALLY OMITTED] 11 EXHIBIT G RIDER TO LEASE BETWEEN DECISION ONE CORPORATION AND 3423 SOUTHPARK PLACE DEVELOPMENT COMPANY DATED APRIL ___, 1997 For the Demised Premises located at 3423 SouthPark Place, Grove City, Ohio. The provisions of this Rider are incorporated into, and in the event of any contradictions shall supersede, the terms of the Lease referenced in the title of this Rider and any other amendments or modifications thereof. 1. LANDLORD'S OBLIGATIONS. Landlord at its sole expense shall be responsible for all costs and expenses associated with the maintenance, repair and replacement of the roof, foundations, exterior walls, all structural parts of the Building, and all mechanical, electrical and structural systems of the Building, including HVAC and telecommunications and sprinkler systems, the source of which lie outside the Leased Premises or which do not serve solely the Leased Premises. 2. INSURANCE: WAIVER OF SUBROGATION. Landlord shall maintain fire and full extended coverage insurance, including vandalism and malicious mischief, for full replacement cost of Landlord's property; with reputable insurance companies. Each party hereby waive subrogation against the other, its officers and employees for any damage covered by insurance required pursuant to the Lease and this Rider regardless of which party caused such damage in whole or in part. Both parties shall cause their respective carriers to issue endorsements to their insurance policies to the effect that the carrier agrees to be bound by such waiver of subrogation. 3. ACCESS. Access to the Leased Premises, including elevator service if applicable, shall be provided to Tenant and its invitees on a seven day-a-week, 24 hour-a-day basis. 4. LIEN ON PERSONAL PROPERTY. Regardless of whether Tenant is in default under the Lease, Landlord waives all right of distraint, attachment, lien, levy, execution against and security interest, statutory or otherwise, on and in Tenant's personal property and trade fixtures and such property located in the Leased Premises for which Tenant acts as bailor. Tenant reserves the right to remove any such property from the Leased Premises at any time. 5. CERTIFICATE OF OCCUPANCY. Landlord shall obtain a certificate of occupancy, or such other similar permit or license as is required by the locality in which the Leased Premises are situated, for Tenant's occupancy of the Leased Premises for the uses permitted by the Lease and for such build-out and work undertaken by Landlord at the commencement of the Lease or at such other times as stated in the Lease (not to include alterations made by Tenant thereafter). 6. CONSENT AND APPROVALS. Whenever any action of any party contemplated by the Lease requires the consent or approval of the other party, each party agrees that such consent shall not be unreasonably withheld or delayed. If the Lease contains any provision with respect to non-waiver of default, self-help, or the right to counsel fees in the event of enforcement of a party's rights under the Lease, then in each instance the provision shall be interpreted as though both parties are favored thereby. 7. SUBORDINATION. If, in connection with a financial arrangement related to the Building or any part thereof of which the Leased Premises are a part, a bank, insurance company or other lender requests a modification to the Leases, Tenant shall only be required to consent to or execute the same if the modifications do not materially increase any responsibility, monetary of otherwise, or decrease any rights of Tenant under the Lease. 8. NO SURCHARGE FOR PERMITTED USES. Landlord acknowledges and agrees that with respect to any insurance policies maintained by Landlord now or during the term of the Lease, Tenant's use of the Leased Premises in the regular course of business as permitted by the Lease shall not be the basis for imposing on Tenant any surcharge or other obligation by reason of increase in premiums or surcharge on Landlord; nor shall such use be the basis for any additional charges for utilities or otherwise, other than charges expressly set forth in the Lease. Tenant's obligation of performance in order to comply with the laws not currently enacted shall arise only from a change of law relating specifically to Tenant's use of the Leased Premises other than as general office use. 9. LIMITATIONS OF LIABILITY. In no event shall Tenant be liable, pursuant to any indemnification provision in the Lease or otherwise, for an consequential or indirect damage or loss. 12 FIRST AMENDMENT TO LEASE AGREEMENT ---------------------------------- August __, 1997 This First Amendment to Lease Agreement ("Amendment") is entered into as of the date set forth above by 3423 SouthPark Place Development Company ("Landlord") and DecisionOne Corp. ("Tenant"). BACKGROUND ---------- Effective as of April 10, 1997, Landlord and Tenant entered into a Lease Agreement ("Original Lease") pursuant to which Tenant agreed to lease 58,597 square feet of rentable space contained in the building located at 3423 SouthPark Place in Grove City, Ohio. The Original Lease further contemplated that Tenant was obligated to lease an additional 57,976 square feet of space ("Expansion Space") no later than nine months after the commencement date of the initial term of the Original Lease. Tenant has now expressed a desire (1) to accelerate the commencement date of its leasing of the Expansion Space, and (2) to lease an additional 57,976 square feet of space located adjacent to the Expansion Space ("New Space"). The location of the Expansion and New Spaces are shown on the floor plan attached hereto as Exhibit A. The parties now desire to enter into this Amendment to reflect the terms and conditions upon which Tenant's leasing of the Expansion and New Spaces will be effected. All capitalized terms which are used, but not defined herein, will have the meanings attributed to such terms in the Original Lease. AGREEMENT --------- Landlord and Tenant herby agree as follows: Section 1. ACCELERATION OF LEASING OF EXPANSION SPACE. The commencement date of Tenant's leasing of the Expansion Space (that is, bays 20-23, consisting of 57,976 square feet of rentable space) will be September 15, 1997 ("Expansion Space Commencement Date"). The term of Tenant's leasing of the Expansion Space will otherwise be co-terminus with its leasing of the initial Leased Premises under the Original Lease. Tenant will pay Base Rent to Landlord for the Expansion Space of $12,320 per month (the equivalent of $2.55 per rentable square foot per year). In addition to its obligation to pay such Base Rent, Tenant will, at all times from and after the Expansion Space Commencement Date, be required to comply with all of the provisions of the Original Lease for the remainder of the Lease Term (including, without limitation, the obligation to pay Estimated Operating Expense Payments in the same per rentable square foot amount then being paid by Tenant with respect to the initial Leased Premises). Section 2. LEASING OF NEW SPACE. Effective as of March 1, 1998 ("New Space Commencement Date"), Tenant will lease the New Space from Landlord (that is, bays 16-19, consisting of 57,976 square feet of rentable space). The term of Tenant's leasing of the New Space will otherwise be co-terminus with its leasing of the initial Leased Premises under the Original Lease. Tenant will pay Base Rent to Landlord for the New Space of $12,803 per 1 13 month (the equivalent of $2.65 per rentable square foot per year). In addition to its obligation to pay such Base Rent, Tenant will, at all times from and after the New Space Commencement Date, be required to comply with all of the provisions of the Original Lease for the remainder of the Lease Term (including, without limitation, the obligation to pay Estimated Operating Expense Payments in the same per rentable square foot amount then being paid by Tenant with respect to the initial Lease Premises). Section 3. TENANT IMPROVEMENTS. Landlord will provide a tenant improvement allowance of $125,000 to cover all hard and soft costs associated with the construction of improvements to the Expansion and New Spaces. The preliminary and final plans for any such improvements will be prepared, submitted and approved in accordance with the procedures set forth in Section 9 of the Original Lease. If the cost of the construction of any such improvements ultimately approved by Landlord and Tenant exceeds the amount of the aforementioned tenant improvement allowance, then such excess costs will be paid by Tenant in accordance with the provisions of Section 9 of the Original Lease. If the cost of the construction of the improvements ultimately approved by the Landlord and Tenant is less than the amount of the aforementioned tenant improvement allowance, then, at the election of Tenant, such diminished costs will either be (a) paid in cash to Tenant within 30 days after the completion of construction of the improvements, (b) credited against the next rent payments due from Tenant hereunder or (c) reserved for the construction of future improvements to the New and Expansion Spaces. Landlord will no longer be obligated under the terms of the Original Lease to construct a demising wall in Bay 24. Section 4. EARLY OCCUPANCY. Tenant will have access to the New and Expansion Spaces as of the date hereof, so as to permit Tenant to begin installing its fixtures and otherwise readying such space for its use and occupancy. Tenant's obligation to pay Base Rent with respect to the New and Expansion Spaces will not commence until the commencement dates set forth in Sections 1 and 2, respectively. Tenant will, however, from and after the date on which it assumes early occupancy of the New Expansion Spaces under this Section 4, be obligated to make Operating Expense Payments to Landlord with respect to the New and Expansion Spaces. The amount of such Operating Expense Payments will be calculated on the basis of a $.32 per rentable square foot per year formula and will be paid by Tenant in advance on or before the first day of each calendar month throughout the period of its early occupancy of the New and Expansion Spaces. Section 5. RENEWAL OPTIONS. The renewal options granted to Tenant pursuant to paragraph 3 of Exhibit F to the Original Lease will be fully applicable to each of the New and Expansion Spaces. In order to be effective, Tenant's exercise of any such renewal option must apply to all of the space being leased by it in the Building (that is, the initial Leased Premises, the Expansion Space and the New Space). In determining the Base Rent payable by Tenant during any exercised renewal term, the Base Rent payable by it with respect to each of the Initial Leased Premises, the Expansion Space and the New Space will be separately calculated using the formula set forth in paragraph 3 of Exhibit F to the Original Lease. Section 6. MISCELLANEOUS. Except as otherwise expressly provided herein, the Original Lease will remain in full force and effect. 2 14 Landlord and Tenant have executed this Amendment as of the date first set forth at the beginning hereof. WITNESSES: 3423 SOUTHPARK PLACE DEVELOPMENT COMPANY By Pizzuti Management Inc. - -------------------- /S/ CINDY L. SMITH By: /S/ RICHARD C. DALEY - ------------------ -------------------------------- Richard C. Daley, Vice President - ------------------ DECISIONONE CORP. /S/ MICHAEL MORRONE - ------------------- By: /S/ TOM FOGARTY TREASURER -------------------------------- (Name) (Title) STATE OF OHIO: COUNTY OF FRANKLIN: SS Before me, a notary public in and for said state and county, personally appeared Richard C. Daley, the Vice President of Pizzuti Management Inc., who acknowledged the signing of this Amendment to be his free act and deed on behalf of Landlord. Dated: 8/13/97 /S/ NOVA MENDELSON ------------------------------- Notary Public Nova Mendelson Commission Expires: 12/5/99 State of Pennsylvania ------------ County of Chester: SS ------- Before me, a notary public in and for said state and county, personally appeared Tom Fogarty, the Treasurer of DecisionOne Corp., who acknowledged the signing of this Amendment to be his free act and deed on behalf of Tenant. Date: 8/12/97 /S/ MARSHA E. KINTON ------------------------------- Notary Public ------------------------------------------- Notarial Seal Marsha E. Kinton, Notary Public East Whiteland Twp., Chester County My Commission Expires July 2, 2001 ------------------------------------------- Member Pennsylvania Association of Notaries 3 EX-10.25 3 LEASE 1 EXHIBIT 10.25 LEASE SUMMARY OF BASIC TERMS A. LEASE DATE: 2/14/95 B. LANDLORD: Metropolitan Life Insurance Company, a New York corporation C. TENANT: Decision Servcom, Inc., a Delaware corporation D. TRADE NAME (if any): None E. GUARANTOR (if any): None F. PREMISES (Section 1.1, Exhibit A): Approximately 60,000 rentable square feet, of Building D (the "Building") of Washington Business Park, which Building is known as 5330 East Washington Street, located in the City of Phoenix, County of Maricopa, State of Arizona, more particularly described on Exhibit A attached hereto. Project: The Building, other buildings, landscaping, parking spaces, roadways and walkways on the land commonly known as Washington Business Park, Phoenix, Arizona, which Project is more particularly described in Exhibit B attached hereto. G. Parking Spaces (Section 1.3): 1 Parking Space per 600 Rentable Square Feet, 16 of which shall be for Tenant's exclusive use, and the remainder for Tenant's nonexclusive use. H. TERM (Section 2.1): Projected Commencement Date: Expiration Date: The last day of the seventy second (72th) month period which begins on the Commencement Date. I. BASE MONTHLY RENT WITH ADJUSTMENT DATES (Section 3.1):
Month Base Monthly Rent/Month ----- ----------------------- 1 $25,200.00 2-4 Free 5-24 $25,200.00 25-48 $28,800.00 49-72 $31,800.00
Advance Rent paid upon Tenant's execution: $25,200 plus rental tax J. PERMITTED USE (Section 4.1): Subject to the prohibition of Hazardous Materials and other limitations and provisions of Article 4: general office, warehousing, repair of computer systems. K. ADDRESS FOR NOTICES (Article 23): To Landlord: With Copies To: Metropolitan Life Insurance Company Metropolitan Life Insurance Company 101 Lincoln Centre Drive, Suite 600 333 South Hope Street, Suite 2950 Foster City, CA 94404 Los Angeles, CA 90071 Attn: Vice President Attn: Assistant Vice President Real Estate Investments Real Estate Investments To Tenant: With Copies To: Decision Servcom, Inc. Decision Servcom, Inc. One Progress Avenue One Progress Avenue Horsham, PA 19044 Horsham, PA 19044 Attn: Richard A. Newton Attn: Law Department - i - 2 L. TAXES AND OPERATING COSTS (Section 3.4): Rentable Area of Premises: approximately 60,000 rentable square feet Tenant's Building Share: 66.3% Tenant's Project Share: 43.5% M. SECURITY DEPOSIT (Article 24): $31,800 N. BROKER(S) (Article 25): CB Commercial Real Estate Group, Inc. and Grubb & Ellis Company The provisions of the Lease identified above in parentheses are those provisions making reference to above-described Basic Terms. Each such reference in the Lease shall incorporate the applicable Basic Terms. In the event of any conflict between the Summary of Basic Terms and the Lease, the latter shall control. TENANT LANDLORD Decision Servcom, Inc. Metropolitan Life Insurance Company, a Delaware corporation a New York corporation By: /s/ E.W. Buckley By: /s/ Illegible Signature -------------------------------- ---------------------------------- Print Name: Print Name: ------------------------ -------------------------- Its: Its: ------------------------------- --------------------------------- By: -------------------------------- Print Name: ------------------------ Its: ------------------------------- - ii - 3 TABLE OF CONTENTS
Page SUMMARY OF BASIC TERMS ........................................................................ i TABLE OF CONTENTS ............................................................................. iii ARTICLE 1 - PREMISES/COMMON AREAS/PARKING ..................................................... 1 Section 1.1 - Premises ................................................................ 1 Section 1.2 - Common Areas ............................................................ 1 Section 1.3 - Parking ................................................................. 2 ARTICLE 2 - TERM/"AS IS" CONDITION OF PREMISES ................................................ 2 Section 2.1 - Term .................................................................... 2 Section 2.2 - Acceptance by Tenant; "AS IS" Nature of Premises ........................ 3 ARTICLE 3 - RENT, BASE MONTHLY RENT; TAXES, BUILDING COSTS AND PROJECT COSTS .................. 3 Section 3.1 - Rent .................................................................... 3 Section 3.2 - Base Monthly Rent ....................................................... 3 Section 3.3 - Intentionally Deleted ................................................... 3 Section 3.4 - Taxes, Building Costs and Project Costs ................................. 3 Section 3.5 - Additional Taxes ........................................................ 6 Section 3.6 - Late Payments: Charges; Interest; Default Rate .......................... 7 Section 3.7 - Consideration ........................................................... 7 Section 3.8 - Time and Manner of Payment in General ................................... 7 ARTICLE 4 - USE AND OCCUPANCY ................................................................. 7 Section 4.1 - Permitted Use ........................................................... 7 Section 4.2 - Compliance with Law ..................................................... 8 Section 4.3 - Compliance with Insurance Requirements .................................. 8 Section 4.4 - Certificates of Occupancy ............................................... 8 Section 4.5 - Life-Safety Systems ..................................................... 8 Section 4.6 - Prohibited Uses ......................................................... 9 Section 4.7 - Definition of Hazardous Material ........................................ 9 Section 4.8 - Tenant's Obligations ..................................................... 9 Section 4.9 - Landlord's Exculpation .................................................. 11 Section 4.10 - Right of Contribution .................................................. 11 Section 4.11 - Monitoring ............................................................. 11 Section 4.12 - Abatement Activities ................................................... 11 Section 4.13 - Effect on Proposed Assignments and Sublets ............................. 12 ARTICLE 5 - ASSIGNMENT/SUBLETTING/MORTGAGE .................................................... 12 Section 5.1 - Prohibition; Definitions ................................................ 12 Section 5.2 - Assignments or Subleases Subject to Landlord's Prior Written Consent .... 12 Section 5.3 - Share of Proceeds of Assignment or Sublease ............................. 13 Section 5.4 - Landlord Options to Terminate Lease ..................................... 14 ARTICLE 6 - ALTERATIONS ....................................................................... 14 Section 6.1 - Alterations ............................................................. 14 Section 6.2 - Mechanics' Liens ........................................................ 15 Section 6.3 - Alterations as Landlord's Property ...................................... 15 Section 6.4 - Indemnification ......................................................... 15 Section 6.5 - Survival ................................................................ 15 ARTICLE 7 - REPAIRS ........................................................................... 16 Section 7.1 - Tenant's Obligations/Procedures ......................................... 16 Section 7.2 - Landlord's Obligations and Rights ....................................... 16 Section 7.3 - Statutory Waivers ....................................................... 17 Section 7.4 - No Liability of Landlord ................................................ 17 ARTICLE 8 - SUBORDINATION/PROTECTION OF LENDERS ............................................... 17 Section 8.1 - Subordination ........................................................... 17 Section 8.2 - Attornment to Successor ................................................. 17 Section 8.3 - Lender's Right to Cure .................................................. 18 Section 8.4 - Tenant's Financial Statements ........................................... 18 Section 8.5 - Lease Modifications ..................................................... 18
- iii - 4 ARTICLE 9 - LIABILITY/INDEMNIFICATION ......................................................... 18 Section 9.1 - Landlord's Exculpation and Limited Liability ........................... 18 Section 9.2 - Tenant's Liability, Indemnification and Hold Harmless .................. 18 Section 9.3 - Survival and Conflicts with other Indemnity Provisions ................. 19 ARTICLE 10 - DAMAGE/DESTRUCTION ............................................................... 19 Section 10.1 - Destruction and Repair ................................................ 19 Section 10.2 - 180 Day and 60 Day Repair Criteria .................................... 19 Section 10.3 - Lack of Insurance Proceeds ............................................ 20 Section 10.4 - No Release of Liability ............................................... 20 Section 10.5 - Tenant's Negligence ................................................... 20 Section 10.6 - Express Agreement Re Damage and Destruction ........................... 20 ARTICLE 11 - EMINENT DOMAIN ................................................................... 20 Section 11.1 - Partial or Total Taking ............................................... 20 Section 11.2 - Award ................................................................. 20 Section 11.3 - Sale to Condemning Authority .......................................... 21 Section 11.4 - Proration/Abatement of Base Monthly Rent .............................. 21 Section 11.5 - Temporary Taking ...................................................... 21 ARTICLE 12 - UTILITIES ........................................................................ 21 Section 12.1 - Utilities ............................................................. 21 ARTICLE 13 - LANDLORD'S RIGHT OF ENTRY ........................................................ 21 ARTICLE 14 - TENANT'S INSURANCE ............................................................... 22 Section 14.1 - Tenant's Insurance .................................................... 22 Section 14.2 - General Requirements of Tenant's Insurance ............................ 22 Section 14.3 - Waiver of Subrogation ................................................. 23 Section 14.4 - Landlord's Insurance .................................................. 23 ARTICLE 15 - INSOLVENCY OR BANKRUPTCY ........................................................ 23 Section 15.1 - Insolvency or Bankruptcy .............................................. 23 Section 15.2 - Measure of Damages .................................................... 24 Section 15.3 - Provision of Services and Assumption of Lease ......................... 24 ARTICLE 16 - DEFAULT/REMEDIES ................................................................. 24 Section 16.1 - Events of Default ..................................................... 24 Section 16.2 - Remedies .............................................................. 25 ARTICLE 17 - LANDLORD'S RIGHT TO PERFORM ...................................................... 26 ARTICLE 18 - END OF TERM ...................................................................... 27 Section 18.1 - Condition of Premises ................................................. 27 Section 18.2 - Holding Over .......................................................... 27 Section 18.3 - Conditions of Termination ............................................. 27 ARTICLE 19 - QUIET POSSESSION ................................................................. 27 ARTICLE 20 - RULES AND REGULATIONS ............................................................ 28 ARTICLE 21 - NO WAIVER/ENTIRE AGREEMENT/MODIFICATION .......................................... 28 ARTICLE 22 - LANDLORD'S DEFAULT/LIABILITY ..................................................... 28 Section 22.1 - Force Majeure ......................................................... 28 Section 22.2 - Notice/Right to Cure .................................................. 28 Section 22.3 - Limitation of Landlord's Liability .................................... 28 Section 22.4 - Sale by Landlord ...................................................... 29 ARTICLE 23 - NOTICES .......................................................................... 29 Section 23.1 - Notices To Tenant ..................................................... 29 Section 23.2 - Notices to Landlord ................................................... 29 Section 23.3 - Time of Rendition of Notices .......................................... 29 ARTICLE 24 - SECURITY DEPOSIT ................................................................. 29 ARTICLE 25 - BROKERAGE ........................................................................ 30
- iv - 5 ARTICLE 26 - MISCELLANEOUS .................................................................... 30 Section 26.1 - Captions and Construction .............................................. 30 Section 26.2 - Definitions ............................................................ 30 Section 26.3 - Successors and Assigns ................................................. 30 Section 26.4 - Landlord's Approval .................................................... 30 Section 26.5 - Joint and Several Liability ............................................ 30 Section 26.6 - Governing Law .......................................................... 30 Section 26.7 - Severability ........................................................... 31 Section 26.8 - Security Systems ....................................................... 31 Section 26.9 - Time of the Essence .................................................... 31 Section 26.10 - Recordation ........................................................... 31 Section 26.11 - Change of Name ........................................................ 31 Section 26.12 - Estoppel Certificates ................................................. 31 Section 26.13 - Authority ............................................................. 31 Section 26.14 - Attorneys' Fees ....................................................... 31 Section 26.15 - Waiver of Trial By Jury ............................................... 32 Section 26.16 - Substitution of Premises .............................................. 32 Section 26.17 - Binding Effect ........................................................ 32 Section 26.18 - Exhibits and Addenda .................................................. 32 Section 26.19 - Signs ................................................................. 32 Section 26.20 - No Merger ............................................................. 32 Section 26.21 - Acknowledgement of Waivers and Limitations ............................ 32 Section 26.22 - Tenant's Equipment and Personal Property .............................. 32 ARTICLE 27 - OPTION TO EXTEND ................................................................. 32 Section 27 - Option to Extend ......................................................... 32
LIST OF EXHIBITS/ADDENDA EXHIBIT A - Premises EXHIBIT B - Project Description EXHIBIT C - Confirmation of Lease Term EXHIBIT D - Work Letter and Construction Agreement EXHIBIT E - Landlord's Work Letter EXHIBIT F - Rules and Regulations EXHIBIT G - Sign Program EXHIBIT H - Form of Subordination, Non-disturbance and Attornment Agreement EXHIBIT I - Landlord's Consent to Encumbrance of Equipment - v - 6 GENERAL LEASE PROVISIONS ARTICLE I - PREMISES/COMMON AREAS/PARKING Section 1.1 - Premises Upon and subject to the terms, covenants and conditions hereinafter set forth and all matters of record, Landlord hereby leases to Tenant and Tenant hereby hires from Landlord the Premises comprising the area described in Paragraph F of the Summary of Basic Terms, substantially as outlined on the floor plan(s) that have been signed by Landlord and Tenant and that are attached hereto as Exhibit A. The plan attached as Exhibit A is used solely for the purpose of identifying or designating the Premises under the terms of this Lease and any markings, measurements, dimensions, footages or notes of any kind contained thereon have no bearing upon any of the terms, covenants, conditions, provisions or agreement of this Lease and are not to be considered a part thereof. Section 1.2 - Common Areas 1.2.1 Tenant shall have the right to the nonexclusive use of all areas and facilities outside the Premises that are provided and designated by Landlord from time to time for the general non-exclusive use of tenants at the Project, and which are located (a) within the Building (herein called "Building Common Areas"), and (b) outside the Building and outside other buildings designed for occupancy by tenants (and constructed from time to time by Landlord), but within the exterior boundary lines of the Project, including, without limitation, parking areas, loading and unloading areas, roadways, walkways and landscaped area (herein called "Project Common Areas"). The Building Common Areas (if any) and the Project Common Areas collectively are sometimes herein called the "Common Areas." Landlord shall at all times have the right to use such Common Areas. 1.2.2 Landlord shall maintain the Common Areas in a manner reasonably comparable to the manner other properties similar in size, character and location are maintained and operated by institutional owners. The manner in which the Common Areas are operated and the expenditures therefor shall be at the sole discretion of Landlord. The use of Common Areas shall be subject to the Rules and Regulations (as defined in Article 20) and the provisions of any covenants, conditions and restrictions affecting the Project, as Landlord shall make from time to time, as further provided in Section 1.2.4 and Article 20. 1.2.3 Exhibit A and Exhibit B show the approximate location of the Premises, Common Areas and Project and are not meant to constitute an agreement as to the specific location of the Premises, Common Areas or the elements thereof or of the means of access to the Premises, Building or the Project. Landlord hereby reserves the right, at any time and from time to time, as long as reasonable access to the Premises and Building remains available, to (a) use the Common Areas while engaged in making alterations in or additions or repairs to the Project, and (b) close temporarily any of the Common Areas for maintenance purposes. Tenant agrees that no diminution of light, air, or view by any structure that may be erected in, about or outside the Project after the date hereof shall entitle Tenant to any reduction of Base Monthly Rent or any other Rent (as defined below) or result in any liability of Landlord to Tenant. 1.2.4 Landlord reserves the right, from time to time, to grant such easements, rights and dedications as Landlord deems necessary or desirable, and to cause the recordation of parcel maps and covenants, conditions and restrictions in addition to the covenants, conditions and restrictions existing as of the Lease Date affecting the Project. Unless required by governmental authorities, Landlord shall not exercise its rights under this Section 1.2.4 if such easements, rights, dedications, maps and covenants, conditions and restrictions unreasonably interfere with Tenant's use of the Premises. At Landlord's request, Tenant shall promptly join in the execution of any of the aforementioned documents. The Building and the Project may be known by any name that Landlord may choose, which name may be changed from time to time in Landlord's sole discretion. 1.2.5 The rights of Tenant hereunder in and to the Common Areas shall at all times be subject to the rights of Landlord specified under this Lease. Tenant shall not use the Common Areas for its day-to-day business other than using appropriately designated areas of the Common Areas for ingress and egress, parking, or loading and unloading. Without limiting the generality of the foregoing, storage, either permanent or temporary, of any materials, supplies, equipment or refuse in the Common Areas is strictly prohibited. Should Tenant violate this provision of the Lease, such violation shall be considered a material violation of this lease and Landlord may, at its option after reasonable written advance notice to Tenant, remove said materials, supplies or equipment from the Common Areas and place such items in storage, the cost thereof to be paid by Tenant to Landlord as additional Rent under this Lease within ten (10) days after Tenant's receipt of a statement submitted by Landlord. All subsequent costs in connection with the storage of said items shall be paid to Landlord by Tenant as accrued. Tenant agrees that receiving and shipping goods and merchandise and all removal of refuse shall be made only by way of the designated loading areas immediately adjacent to and serving the Premises. If, in the opinion of Landlord, unauthorized persons are using the Common Areas by - 1 - 7 reason of the presence of Tenant in the Premises, Tenant, upon demand of Landlord, shall correct such situation by appropriate action or proceedings against all such unauthorized persons. Nothing herein shall affect the right of Landlord at any time to remove any such unauthorized persons from said areas or to prevent the use of any of said areas by unauthorized persons. Section 1.3 - Parking Tenant shall have the right for the benefit of Tenant and its employees, customers and invitees to use of the number of "Parking Spaces" set forth in Paragraph G of the Summary of Basic Terms on an unassigned, unreserved basis for parking by vehicles no larger than full-sized passenger automobiles or pick-up trucks on, and only on, those portions of the Project Common Areas provided and designated by Landlord from time to time for parking. Tenant shall not at any time park or permit the parking of motor vehicles, belonging to it or to others, so as to interfere with the walkways, roadways, or loading areas, or in any portion of the parking areas not designated by Landlord for such use by Tenant. ARTICLE 2 - TERM/"AS IS" CONDITION OF PREMISES Section 2.1 - Term 2.1.1 The term of this Lease (the "Term") shall commence upon the Commencement Date. The "Commencement Date," shall be the earliest of (i) sixty (60) days after the date possession of the Premises are made available to Tenant or (ii) the date that a temporary certificate of occupancy (or its equivalent) for the Tenant Improvements (as defined below) is issued by the City of Phoenix or Landlord is provided with all documents or occupancy approvals (written or oral) which are customarily given prior to the actual delivery of a temporary certificate of occupancy or (iii) the date that Tenant, or any person occupying any of the Premises with Tenant's permission, commences business operations from the Premises. When the actual Commencement Date has occurred, Landlord and Tenant shall execute a written memorandum in the form of Exhibit C to the Lease confirming said actual Commencement Date, but the failure of either or both to do so shall not affect the establishment of the Commencement Date. If Landlord shall be unable to give possession of the Premises on the Projected Commencement Date for any reason, any such delay resulting therefrom shall be deemed excused and Landlord shall not be subject to any liability for the failure to give possession on said date. 2.1.2 Landlord hereby agrees that upon execution of the Lease by both Tenant and Landlord, Landlord shall deliver possession of the Premises to Tenant so that Tenant and its authorized agents, contractors, subcontractors and employees may, during ordinary business hours, at Tenant's sole risk, enter upon and use the Premises for the sole purposes of constructing and installing the Tenant Improvements (as defined in the Work Letter) in the Premises pursuant to the "Work Letter" (attached hereto as Exhibit D and incorporated herein by this reference) and of installing Tenant's personal property in the Premises; provided, however, that (i) all of the provisions of the Lease, other than with respect to the payments of Base Monthly Rent, Tenant's Building Share of Building Costs and Tenant's Project Share of Taxes and Project Costs, shall apply during such early entry, (specifically including, but not limited to, the provisions of Article 9 of the Lease relating to the indemnification of Landlord, which indemnity obligations shall include any matter arising out of or in connection with such entry and Tenant's performance and observance of, or failure timely to perform and observe, its obligations under the Work Letter); (ii) Tenant shall pay for and provide evidence of the insurance to be provided by Tenant pursuant to the provisions of Article 14 of the Lease; (iii) such entry shall not, in Landlord's opinion, jeopardize any insurance maintained in connection with the Premises or Project; (iv) Tenant shall pay utility charges and other charges in connection with such early entry reasonably allocated to Tenant by Landlord; (v) all such construction and installations shall be performed by a licensed contractor approved in advance by Landlord, at Tenant's sole expense, in compliance with all applicable laws and covenants, conditions and restrictions of record, in accordance with the Work Letter and, furthermore, the work shall be done in a good and workmanlike manner conforming in quality and design with the Premises; (vi) all Tenant Improvements constructed or installed in the Premises shall immediately become and remain the property of Landlord; (vii) all Tenant's personal property installed by Tenant shall be and remain the property of Tenant upon installation and Tenant shall, subject to Article 7 of the Lease, upon the termination of this Lease, at Tenant's expense, remove any Tenant's personal property installed by Tenant and return the Premises to its condition as of the execution of this Lease, normal wear and tear and damage caused by casualty (subject to the other provisions of the Lease) excepted; and (viii) Tenant, its agents, contractors or subcontractors in the construction of the Tenant Improvements will not cause any labor difficulties for Landlord, its agents, contractors or subcontractors. Tenant shall not use the Premises to commence the conduct or operation of its business during the period of such early entry. 2.1.3 Landlord shall perform the work and make the installations in the Premises and the Project substantially as set forth in "Landlord's Work Letter" hereto as Exhibit E and incorporated herein by this reference. Landlord's Work (as defined in the Landlord's Work Letter) shall be performed by Landlord's general contractor. Other than Landlord's Work, Landlord has no obligation to improve, alter, repair or remodel the Premises. All such installations shall immediately become and remain the property of Landlord. - 2 - 8 Section 2.2 - Acceptance by Tenant; "AS IS" Nature of Premises Neither Landlord nor Landlord's agents have made any representations or promises with respect to the Project, Building or the Premises except as herein expressly set forth. Tenant acknowledges and agrees that Tenant has been afforded ample opportunity to inspect the Premises, the Building and the Project, and has investigated their condition to the extent Tenant desires to do so, including their environmental condition, and that Landlord has no obligation to remodel or to make any repairs, alterations or improvements to the Premises or the Building or remediate any condition therein, except as expressly provided in the Lease. The taking of possession of the Premises by Tenant shall be conclusive evidence, as against Tenant, that Tenant accepts the same to its then "AS IS" condition and that the Premises, the Building and the Project were in good and satisfactory condition at the time such possession was so taken subject to: (i) completion of items listed on a written punchlist mutually agreed upon by Landlord and Tenant (which in no event shall relate to items constructed pursuant to the Work Letter), and (ii) latent defects in any portion of Landlord's Work reported to Landlord in writing within ninety (90) days after the Commencement Date. As Tenant's sole right and remedy, and as Landlord's sole obligation, with respect to such punchlist items and latent defects, Landlord shall, with reasonable diligence, cause such items to be completed or corrected at its own expense; Landlord shall have no responsibility, liability, duty to indemnify, defend or hold Tenant harmless from any damages, losses, claims, liabilities, awards or actions related, directly or indirectly, to such items. For purposes of this Section 2.2 latent defects shall not include any defects which were readily apparent at the time the punchlist was delivered to Landlord. Notwithstanding the foregoing, Landlord's obligation with respect to latent defects shall not apply to equipment, materials or items implemented in the Project by Landlord or are part of Landlord's Work which were specified by Tenant, but Landlord shall assign to Tenant Landlord's interest in any warranty from a subcontractor regarding such equipment or material after Tenant's written request for same. Landlord shall have no responsibility, liability, duty to indemnify, defend or hold Tenant harmless from any damages, losses, claims, liabilities, awards or actions related, directly or indirectly to such items. ARTICLE 3 - RENT; BASE MONTHLY RENT; TAXES, BUILDING COSTS AND PROJECT COSTS Section 3.1 - Rent "Rent" as used herein shall refer to the Base Monthly Rent (as defined in Section 3.2, below), as it may be adjusted as hereinafter provided in this Lease, plus all other sums and monetary obligations of Tenant payable to Landlord under this Lease including, but not limited to the following: (a) Any late charges or interest due pursuant to Sections 3.6.1 and 3.6.2; (b) Tenant's Building Share of Taxes and Building Costs due pursuant to this Article 3; (c) Tenant's Project Share of Taxes and Project Costs due pursuant to this Article 3; and (d) Any consideration received by Tenant which is due to Landlord pursuant to Article 5. Section 3.2 - Base Monthly Rent Tenant shall pay to Landlord commencing on the Commencement Date and thereafter during the Term the Base Monthly Rent set forth in the Summary of Basic Terms, which sum shall be payable by Tenant in consecutive monthly installments on or before the first day of each month ("Monthly Installment(s)"), in advance, in the manner described more particularly in Section 3.8.1, provided, however, that Tenant shall pay the amount of Advance Rent set forth in Paragraph I of the Summary of Basic Terms concurrently with Tenant's execution of this Lease, which shall be a credit against the first Monthly Installments as they become due. If the Commencement Date should occur on a day other than the first day of a calendar month, or the Expiration Date should occur on a day other than the last day of a calendar month, then the Monthly Installment for such fractional month shall be prorated on a daily basis based upon a thirty (30) day calendar month. In addition to the Base Monthly Rent, Tenant shall pay the amount of any Rent, Rent increase or adjustment, and additional payments when and as hereinafter provided in this Lease. Notwithstanding anything to the contrary contained herein, Landlord's rent concession granted to Tenant for Months 2, 3 and 4 of the Term extends only to Base Monthly Rent, and Tenant shall pay all other Rent and additional payments when and as due as hereinafter provided for in the Lease, including Tenant's Building Share of Building Costs and Tenant's Project Share of Taxes and Project Costs relating to Months 2, 3 and 4. Section 3.3 - Intentionally Deleted Section 3.4 - Taxes, Building Costs and Project Costs 3.4.1 Definitions. The following terms shall be defined as set forth below: (a) "Computation Year" shall mean the calendar year, provided that Landlord, upon notice to Tenant, may change the Computation Year from time to time to any other twelve (12) consecutive month - 3 - 9 period and, in the event of any such change, Tenant's Building Share of Building Costs and Tenant's Project Share of Taxes and Project Costs shall be equitably adjusted for the Computation Years involved in any such change. (b) "Tenant's Building Share" shall be Sixty-Six and Three-Tenths percent (66.3%) and has been computed by dividing the Rentable Area of the Premises by the total Rentable Area of the Building. Rentable Area of the Premises shall be 60,000 square feet and Rentable Area of the Building shall be 90,506 square feet. (c) "Tenant's Project Share" shall be Forty-Three and Five-Tenths percent (43.5%) and has been computed by dividing the Rentable Area of the Premises by the total Rentable Area of the Project. Rentable Area of the Project shall be 137,824 square feet. Tenant acknowledges that it has been given an opportunity to verify the accuracy of the square footage figures set forth in the foregoing Section 3.4.1(b) and this Section 3.4.1(c). Whether or not Tenant has taken the opportunity to verify the foregoing figures, Tenant agrees to accept such square footage figures as being accurate. Landlord reserves the right to increase or decrease the size of the Project or the buildings therein designed for occupancy by tenants, and to recalculate the Rentable Area contained therein, and in the event of any such increase, decrease or recalculation, Landlord shall recompute Tenant's Project Share. (d) "Taxes" shall mean all taxes and assessments, general or special, ordinary or extraordinary, unforeseen as well as foreseen, levied upon or with respect to all or any portion of the Project and the areas used in connection with the operation of the Project, the Rent, and the personal property contained in the Project and used in connection with the management and maintenance of the Project imposed by federal, state or local governments or governmental assessment districts. Taxes shall not include Landlord's income, franchise, capital stock, estate or inheritance taxes. Taxes shall include, without limitation, all general real property taxes, general and special assessments, gross receipts taxes, annual or periodic license or use fees, excise, transit charges, housing fund and child care assessments, charges imposed for social services, police, fire, or environmental protection, other business taxes and the cost of contesting by appropriate proceedings any of the aforementioned Taxes (with respect either to validity or amount). If, because of any change in the method of taxation of real estate, any tax or assessment is imposed upon Landlord or upon the owner of the land and/or the Building and/or the Project or any part thereof and/or the areas used in connection with the operation of the Building and/or the Project or the rents or income therefrom, in substitution for or in lieu of any tax or assessment which would otherwise be a real estate tax or assessment, such other tax or assessment shall be deemed to be included in Taxes. If any Taxes are specially assessed by reason of the occupancy or activities of one or more tenants and not the occupancy or activities of the tenants as a whole, such taxes shall be allocated by Landlord to the tenant or tenants whose occupancy or activities, brought about such assessment and Tenant shall pay any such taxes so allocated to Tenant. In case there shall be a reduction of the assessed valuation for any tax year, the Rent on account of Tenant's Building Share and Project Share of Taxes shall be recalculated and Landlord, after receiving a refund or after the delinquency date of its next tax bill in the event Landlord is given a credit, will credit against the Rent on account of Tenant's Building Share and Project Share of Taxes next becoming due from Tenant such sums as may be due to Tenant by reason of the recalculation, less the expenses incurred in effecting such reduction. (e) "Building Costs" shall mean the aggregate amount of all Operating Costs (defined below) to the extent the same are incurred with respect to the Building, as distinguished from the portion of Operating Costs incurred solely with respect to the Project Common Areas or solely with respect to the Project generally. (f) "Project Costs" shall mean the aggregate amount of (i) insurance Costs (defined below) plus (ii) Operating Costs, but for purposes of this Section 3.4.1(f) excluding Building Costs from Operating Costs. (g) "Insurance Costs" shall mean, with respect to all or any portion of the Project, including, without limitation, the Building, other buildings and Improvements in the Project, Project Common Areas and the areas used in connection with the Project, the aggregate amount of all costs, expenses and expenditures paid or incurred by Landlord or Landlord's authorized representatives of fire, extended coverage, all-risk, property damage, boiler, sprinkler, rent, public liability or commercial general liability, earthquake or other insurance and the deductible portion of any insured loss otherwise covered by such insurance. (h) No Double Counting. In no event shall any portion of Building Costs, Project Costs or Insurance Costs be assessed or counted against Tenant more than once. (i) "Operating Costs" shall mean, with respect to the Building or to all or any portion of the Project and the areas used in connection therewith, as the case may be, the aggregate amount of all costs, expenses and expenditures paid or incurred, by Landlord or Landlord's authorized representatives of: (i) wage and labor costs and expenses applicable to persons engaged in the management, operation, maintenance, overhaul or repair, whether they be employed by Landlord or as independent contractors (including, without limitation, the cost effect of any increase or decrease in the hours of employment or the number of paid holidays or vacation days, social security taxes, unemployment insurance taxes and the cost (if any) of providing - 4 - 10 disability, hospitalization, medical, welfare, pension, retirement, or other benefits applicable with respect to such employees); (ii) utilities, utilities surcharges, water and sewer charges, fuel, building supplies and materials, other supplies and materials, equipment, tools, service contracts, security, or any costs levied, assessed or imposed by, or at the direction of, or resulting from statutes or regulations or interpretations thereof, promulgated by any federal, state, regional, municipal or local government authority in connection with the use or occupancy of the Building or the Common Areas or the Project, including, without limitation, the Parking facilities serving the Project; (iii) a management foe and costs incurred in or associated with the management of the Project; (iv) the repair, replacement and maintenance of the nonstructural portions of the Project or any portion thereof, (including, without limitation, the plumbing, heating, ventilating, air-conditioning, elevator, electrical, security, fire and life-safety systems installed or furnished by Landlord and the nonstructural portions of the roof of the Building); (v) costs incurred in or associated with providing, operating, maintaining, repairing and replacing the Common Areas and facilities therein; (vi) gardening and landscaping, maintenance of signs and tenant directories, repairs, repainting, maintenance, resurfacing, painting, lighting, cleaning, janitorial services, refuse removal and similar items; (vii) assessments or maintenance charges if the Landlord is obligated to pay such charges; (viii) capital expenditures together with all costs, and interest thereon at an annual rate equal to the reference rate of interest announced publicly from time to time by Bank of America N.T. & S.A. (or any successor bank) at its San Francisco Headquarters, or any successor rate of interest thereto (the "Reference Rate") plus two (2) percentage points, but in no event in excess of the maximum rate of interest permitted to be contracted by law, all amortized over their actual useful life, (ix) rental of personal property used in connection with any of the foregoing; (x) the costs and expenses paid or incurred by Landlord or Landlord's authorized representatives of legal, accounting and consulting fees and of permits, certificates and licenses required in connection with the Project or any portion thereof, (xi) depreciation and amortization of personal property used exclusively for the management or operation of the Project (or a reasonable and equitable pro rata share of such depreciation and amortization if such personal property is not so exclusively used); and (xii) such other items as are now or hereafter customarily included in the cost and expense of managing, operating, maintaining overhauling and repairing all or any portion of the Project and areas used in connection with the operation thereof. All such costs, expenses and expenditures shall be determined in accordance with generally accepted accounting principles which shall be consistently applied (with accruals appropriate to Landlord's business). Landlord agrees that in any event the replacement of the following items at the Building shall be amortized over their actual useful life with interest thereon at an annual rate equal to the Reference Rate plus two (2) percentage points: (i) entire or the major portion of the roof membrane (but not the patching of lesser portions of the roof membrane from time to time), (ii) condenser, compressor, cooling coils and blower which are part of the heating, ventilating and air conditioning system, and (iii) ceiling or wall mounted space heaters. Operating Costs shelf not include "Operating Costs Exclusions" defined below. (j) "Operating Costs Exclusions" shall mean (i) the initial construction cost of the Project, or the costs of providing Landlord's Work to Tenant, or depreciation of such costs; (ii) debt service (including, without limitation, interest, principal and any impound payments) required to be made on any mortgage or deed of trust recorded with respect to all or any part of the Project other than debt service and financing charges imposed pursuant to Section 3.41(i)(viii); (iii) any rent payable under any ground lease now or hereafter affecting the Project; (iv) leasing commissions and other costs and expenses incurred in connection with negotiations or disputes with prospective or present tenants in the Project; (v) expenditures relating to the repair of the structural components of each of the following: foundations, exterior walls, roof and any interior load bearing walls of the Building (but with respect to the roof these provisions do not exclude and Tenant shall, subject to Section 3.4.1(i) and Section 7.2, bear all other roof costs) of the Premises; (vi) capital expenditures relating to repairs, alterations or improvements to the Building required by governmental authorities to comply with building code provisions existing as of the Lease Date and, with respect to requirements of the American with Disabilities Act (ADA), to comply with ADA provisions as interpreted and as enforced as of the Lease Date; (vii) costs, expenses and expenditures to the extent incurred with respect to other buildings designed for occupancy by tenants in the Project, as distinguished from costs, expenses and expenditures incurred solely with respect to Project Common Areas or solely with respect to the Project generally; (viii) costs of complying with Environmental Laws relating to Hazardous Materials affecting the Premises, Building or Project unless made the responsibility of Tenant pursuant to Section 4.8; and (ix) specific costs which, pursuant to other provisions of this Lease, Tenant is obligated to pay in full, including without limitation costs of Tenant's performance of obligations to be performed by Tenant under this Lease and payments which Tenant is obligated to make directly to any party, including, without limitation, providers of goods, services, utilities or labor. 3.4.2 Tenant shall pay in advance on the first day of each month to landlord as additional Rent one twelfth (1/12) of each of (a) Tenant's Building Share of Building Costs and Taxes for each Computation Year and (b) Tenant's Project Share of Taxes and Project Costs for each Computation Year, in an amount estimated by Landlord and be filed by Landlord to Tenant. Landlord shall have the right to revise such estimate from time to time (but no more than twice in any Computation Year). Any assessments which are included as Taxes shall be payable over the maximum allowable term that the same can be paid without penalty or additional cost. With reasonable promptness after Landlord has received the tax bills and support for Operating Costs for a Computation Year, but not more than one hundred eighty (180) days after the close of such year, Landlord shall furnish Tenant with a statement (herein called "Landlord's Statement") showing a comparison of estimated Building Costs, Taxes and Project Costs to the actual costs of the same for such Computation Year, and Tenant's Building Share and Tenant's Project Share of those estimated and actual amounts. If Tenant's Building Share of actual Building Costs and actual Taxes and Tenant's Project Share of actual Taxes - 5 - 11 and Project Costs for such Computation Year exceeds Tenant's payments of the estimated amounts of such categories for such Computation Year, Tenant shall pay to Landlord the difference within thirty (30) days after Landlord's Statement is given to Tenant, and if the total amount of Building Costs, Taxes and Project Costs respectively paid by Tenant for any such Computation Year shall exceed Tenant's Building Share of actual Building Costs and Tenant's Project Share of actual Taxes and Project Costs for such Computation Year, such excess shall be credited against the next installments of Tenant's Building Share of Building Costs and actual Taxes and Tenants Project Share of Taxes and Project Costs due from Tenant to Landlord hereunder. If there is an increase in Taxes (by reason of an increase in assessed valuation or otherwise) affecting prior Computation Year(s) at any time after rendition of Landlord's Statement for such year(s), Tenant shall pay to Landlord the Tenant's Project Share and/or Building Share of such increase in Taxes attributable to such year(s) within thirty (30) days after Landlord's Statement is given to Tenant. Notwithstanding any other provision of the Lease to the contrary, Tenant shall have the right, within ninety (90) days following Landlord's delivery to Tenant of Landlord's Statement for any Computation Year, and following thirty (30) days prior written notice to Landlord, to have an independent certified public accountant reasonably acceptable to Landlord ("CPA") inspect Landlord's books and records with regard to Landlord's calculation of the Building Costs, Taxes and Project Costs incurred during such Computation Year. Such inspection shall be conducted during normal business hours at the location where such books and records are normally maintained and all information secured therefrom shall be kept confidential by Tenant and the CPA. If Landlord disagrees with any part of the CPA's inspection, then Landlord shall be entitled to meet with the CPA and Tenant to discuss corrections or revisions in the CPA's inspection to attempt to resolve any differences for a period of twenty (20) business days after Landlord's receipt of the CPA's written report of its inspection. The CPA shall take into consideration any comments of Landlord or Tenant and shall then issue its final written report, with such corrections or changes as shall be consistent with the Lease and otherwise which the CPA deems appropriate. If the CPA's inspection of Landlord's books and records reveals that Building Costs, Taxes or Project Costs are overstated by Landlord, Landlord shall at its election within thirty (30) days after the CPA's final written report, either refund or provide Tenant a credit against Rent next due in the amount of any resulting overpayment by Tenant. If the CPA's inspection of Landlord's books and records reveals that Operating Costs or Taxes are understated, Tenant shall pay to Landlord within thirty (30) days after the CPA's final written report the amount of any resulting underpayment by Tenant. Such inspection, including without limitation the fees and costs of the CPA, shall be at Tenant's sole cost and expense, provided that if the CPA's inspection reveals that Landlord overstated Building Costs, Taxes and Project Costs to the extent that the charges payable by Tenant in the aggregate were overstated by more than ten percent (10%), Landlord shall pay the reasonable fees of the CPA. If Tenant does not timely exercise the right to inspect Landlord's books and records provided herein, Landlord's Statement for such Computation Year shall be deemed final and binding on Landlord and Tenant. 3.4.3 If the Term shall commence or the Lease shall terminate on a date other than the first or last day of a Computation Year, Tenant's Building Share of Building Costs and Tenant's Project Share of Taxes and Project Costs for such partial Computation Year shall be appropriately adjusted by Landlord. To the extent such Building Costs, Taxes and Project Costs are not affected by Tenant's occupancy of the Premises or by this Lease, Tenant's Building Share and Tenant's Project Share of those items shall be in the proportion that the number of days of the Term included in such partial Computation Year bears to 365. During such partial Computation Year(s) Tenant shall pay Tenant's Building Share of Building Costs and Taxes and Tenant's Project Share of Taxes and Project Costs in the same time and manner provided in Section 3.4.2 with the following exceptions that (i) if the Commencement Date is not the first day of a Computation Year, on or before the first day of the Term, or as soon thereafter as practicable, Landlord may bill Tenant, and Tenant shall pay, an amount payable per month for the remainder of the Computation Year which in the aggregate shall equal Tenant's Building Share of estimated Building Costs and Taxes and Tenant's Project Share of estimated Taxes and Project Costs for the partial Computation Year; and (ii) if the Lease terminates before the end of a Computation Year and if Landlord's Statement shows that (a) Tenant has overpaid, Landlord shall remit the amount of such overpayment to Tenant within fifteen (15) days after issuance of Landlord's Statement or (b) Tenant has underpaid, Tenant shall pay Landlord the amount of such underpayment to Landlord within fifteen (15) days after issuance of Landlord's Statement. 3.4.4 For purposes of calculating estimated taxes and Taxes, Building Costs and Project Costs for any period during which the Building or Project is less than ninety percent (90%) occupied there shall be added those amounts of Taxes, Building Costs and Project Costs which Landlord determines, in good faith, it would have incurred had the Project been ninety percent (90%) occupied during any such period. Section 3.5 - Additional Taxes In addition to the Base Monthly Rent and other Rent to be paid by Tenant hereunder, as additional Rent hereunder, Tenant shall reimburse Landlord, upon demand, for any and all taxes payable by Landlord (other than net income taxes) whether or not now customary or within the contemplation of the parties hereto: (a) by reason of the manner of occupancy or activities of Tenant; or (b) upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises, the Building, the Project, or any portion thereof; or (c) upon the value of Tenant's personal property located in the Premises or in any storeroom, garage or any other place in the Premises or the Building or the Project, or the areas used in connection with the operation of the Building or Project, it being - 6 - 12 the intention of Landlord and Tenant that, to the extent possible, such personal property taxes shall be billed to and paid directly by Tenant; or (d) resulting from overstandard tenant improvements to the Premises whether title thereto is in Landlord or Tenant; or (e) upon this transaction; or (f) upon, allocable to, or measured by the Rent payable hereunder, including without limitation, any gross receipts tax or excise tax levied by any governmental or taxing body with respect to the receipt of such Rent. The foregoing taxes may be referred to as "Additional Taxes". Additional Taxes paid by Tenant pursuant to this Section 3.5 shall not be included in any computation pursuant to Section 3.4. Section 3.6 - Late Payments: Charges; Interest; Default Rate 3.6.1 Tenant acknowledges that the late payment of Rent or any other sum due from Tenant will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impractical to fix. Such costs include, without limitation, processing and accounting charges, late charges that may be imposed on Landlord by the terms of any encumbrance, or notes secured by any encumbrance, covering the Premises and the cost of money used by Landlord in place of such Rent or other sum. Therefore, if any Monthly Installment of Base Monthly Rent is not paid within five (5) days that such is due, or any other sum due hereunder is not paid within ten (10) days of written notice that such payment is due, Tenant shall pay to Landlord as additional Rent, without necessity of prior notice or demand, an additional sum of five percent (5%) of said installment of Rent or other amount as a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of late payment by Tenant. Acceptance of any late charges shall not constitute a waiver of Tenant's default with respect to the overdue amount, or prevent Landlord from exercising any of the rights and remedies available to Landlord under this Lease or under law or equity. 3.6.2 Notwithstanding any other provisions of this Lease, any Monthly Installment of Base Monthly Rent is not paid within five (5) days that such is due, or any other sum due hereunder is not paid within ten (10) days of written notice that such payment is due shall bear interest from the date such payment is due until the same have been fully paid, at a rate (the "Default Rate") that is equal to the lesser of (i) five (5) percentage points above the announced prime rate (as it may be announced from time to time) of the then largest bank in Arizona as determined by Landlord, and (ii) the highest rate permitted to be contracted for by law. The payment of such interest shall not constitute a waiver by Landlord of any default by Tenant hereunder. Section 3.7 - Consideration The Base Monthly Rent has been established in contemplation that (i) Tenant will occupy the Premises for the entire Term and (ii) in the event of any Assignment or Sublet of this Lease or all or any portion of the leasehold estate created hereby, Landlord and Tenant have agreed that Landlord shall have the rights and options provided in Article 5, including, without limitation, the right to terminate this Lease. Tenant expressly acknowledges and agrees that this Section 3.7 was a material inducement to Landlord in establishing the Base Monthly Rent in the amount herein provided and that Landlord has relied on this covenant and agreement in executing this Lease. Section 3.8 - Time and Manner of Payment in General 3.8.1 All Rent shall be payable in lawful money of the United States of America at the address specified for Landlord in the Summary of Basic Terms, or at such other place as Landlord shall designate, without any prior demand therefor and without any abatement, deduction or setoff whatsoever. 3.8.2 Except where a longer or shorter period is specifically provided for in this Lease with respect to a particular expenditure, Tenant shall pay to Landlord, within ten (10) days after notice by Landlord to Tenant of bills or statements therefor: (a) sums equal to all expenditures made and monetary obligations incurred by Landlord in connection with the remedying by Landlord of Tenant's default, including, without limitation, expenditures made and obligations incurred for reasonable legal counsel fees, (b) sums equal to all losses, costs, liabilities, damages and expenses referred to in Article 9, and (c) sums equal to all expenditures made and monetary obligations incurred by Landlord in collecting or attempting to collect the Base Monthly Rent, or any other Rent or sum of money accruing under this Lease or in enforcing or attempting to enforce any rights of Landlord under this Lease or pursuant to law, including, without limitation, expenditures made and obligations incurred for reasonable legal counsel fees. Tenant's obligations under this Article 3 shall survive the termination of this Lease. ARTICLE 4 - USE AND OCCUPANCY Section 4.1 - Permitted Use Tenant shall use and occupy the Premises only for the specific purposes set forth in Paragraph J of the Summary of Basic Terms, and for no other purpose. The character of the occupancy of the Premises, as restricted by this Article 4 and as further restricted by Article 5, and any of the Rules and Regulations attached - 7 - 13 to this Lease or hereafter adopted, is an additional consideration and inducement to Landlord for the granting of this Lease. Section 4.2 - Compliance with Law 4.2.1 Tenant, at Tenant's expense, shall comply with all laws, rules, orders, ordinances, directions, regulations and requirements of federal, state, county and municipal authorities pertaining to Tenant's use or occupancy of the Premises, the Building and the Project and with the recorded covenants, conditions and restrictions, regardless of when they become effective, including, without limitation, all applicable federal, state and local laws, regulations or ordinances pertaining to air and water quality, Hazardous Materials (as defined below), and waste disposal, air emissions and other environmental matters, all zoning and other land use matters, and utility availability and with any direction of any public officer or officers, pursuant to law, which shall impose any duty upon Landlord or Tenant with respect to the use of occupancy of the Premises. Tenant shall at Tenant's sole cost and expense take all proper and necessary action to cause the Premises to be kept, maintained, used and occupied in compliance with the Americans With Disabilities Act of 1990, as amended from time to time. 4.2.2 Without limiting its obligations under Section 4.2.1, Tenant covenants and agrees to comply with all laws, rules, regulations and guidelines now or hereafter made applicable to the Premises by government or other public authorities respecting the disposal of waste, trash, garbage and other matter (liquid or solid), generated by Tenant, its employees, agents, contractors, invitees, licensees, guests and visitors, the disposal of which is not otherwise the express obligation of Landlord under this Lease, including, but not limited to, laws, rules, regulations and guidelines respecting recycling and other forms of reclamation (all of which are herein collectively referred to as "Waste Management Requirements"). Tenant covenants and agrees to comply with all rules and regulations established by Landlord to enable Landlord from time to time to comply with Waste Management Requirements applicable to Landlord (i) as owner of the Premises and (ii) in performing Landlord's obligations under this Lease, if any. Section 4.3 - Compliance with Insurance Requirements Tenant shall not do or permit to be done any act or thing in or upon the Premises which will invalidate or be in conflict with any insurance policy covering the Building or Project or any of the areas used in connection with the operation thereof or its fixtures, appurtenances or equipment or the property located therein, and shall not do, or permit anything to be done, in or upon the Premises, or bring or keep anything therein, which shall increase the rates of any insurance on the Building or Project or any of the areas used in connection with the operation thereof of its fixtures, appurtenances or equipment or on property located therein. If by reason of the failure of Tenant to comply with the provisions of this Article 4 any insurance premium shall at any time be higher than it otherwise would be, then, without Landlord's waiving any rights it may have against Tenant hereunder as a result of such failure, Tenant shall reimburse Landlord for that part of all such premiums thereafter paid by Landlord which shall have been charged because of such violations by Tenant, and shall make such reimbursement upon the first day of the month following such expenditure by Landlord. Section 4.4 - Certificates of Occupancy Tenant shall not at any time use or occupy the Premises in violation of the certificates of occupancy issued for the Premises, Building or Project. In the event that any department of the city or county of the state in which the Project is located shall hereafter at any time contend or declare that the Premises are used for a purpose which is in violation of such certificate or certificates of occupancy, Tenant shall immediately discontinue such use of the Premises. Failure by Tenant to discontinue such use after such notice shall be considered a default under this Lease and Landlord shall have the right to exercise any and all rights and privileges and remedies given to Landlord by and pursuant to the provisions of Article 16 hereof. Any statement in this Lease of the nature of the business to be conducted by Tenant in the Premises shall not be deemed or construed to constitute a representation or guaranty by Landlord that such business is lawful or permissible or will continue to be lawful or permissible under any certificate of occupancy issued for the Premises, Building or Project or otherwise permitted by law. Section 4.5 - Life-Safety Systems If there now is or shall be installed in the Building or Project a sprinkler system, heat or smoke detection system or any other so-called life-safety system and (i) any such system or any of its appliances shall be damaged or injured or not in proper working order by reason of any act or omission of Tenant or Tenant's agents, servants, employees, contractors, visitors or licensees, Tenant shall forthwith restore the same to good working condition; and (ii) if the Insurance Services Office or any similar body or any bureau, department or official of the state, county or city government, or any governmental authority having jurisdiction over the Premises, shall require or recommend that any changes, modifications, alterations, or additional equipment be made or supplied in or to any such system by reason of Tenant's specific business, or the location of partitions, trade fixtures, or other contents of the Premises, Tenant shall, at Tenant's expense, promptly make and supply such changes, modifications, alterations, or additional equipment. - 8 - 14 Section.4.6 - Prohibited Uses 4.6.1 Tenant shall not occupy or permit any portion of the Premises to be occupied for a use which would be prohibited by any other portion of this Lease (including but not limited to any Rules and Regulations then in effect) or in violation of law. Nothing in this Section 4.6.1 shall expand the permitted use of the Premises as set forth in Section 4.1. 4.6.2 Tenant shall not do or permit to be done any act or thing upon the Premises which shall or might subject Landlord to any liability or responsibility for injury to any person or persons or to any property by reason of any business or operation being carried on upon the Premises or for any other reason, and Tenant hereby indemnities and agrees to protect, defend and hold harmless Landlord against any such liability or responsibility except to the extent of Landlord's gross negligence or willful misconduct. Business machines and mechanical equipment shall be placed and maintained by Tenant at Tenant's expense in settings sufficient to absorb and prevent vibration. Tenant shall not install any machine or equipment which may adversely affect the structure of the Building without obtaining Landlord's prior written consent, which consent may be conditioned on such terms as Landlord may require. Tenant shall not place a load upon any floor of the Premises exceeding the floor load per square foot area which such floor was designed to carry and which is allowed by law. Section 4.7 - Definition of Hazardous Material As used herein, the terms "Hazardous Material" or "Hazardous Materials" shall mean any hazardous or toxic substance, material or waste which is or becomes regulated by any local governmental authority, the State of Arizona or the United States Government and include (i) petroleum, natural gas, synthetic gas, asbestos, (ii) any substance designated as a "hazardous substance" pursuant to Section 1317 of the Federal Water Pollution Control Act (33 U.S.C. Section 1251 et. seq.), (iii) any substance defined as a "hazardous waste" pursuant to Section 6903 of the Federal Resource Conservation and Recovery Act, (42 U.S.C. Section 6901 et seq.) ("RCRA"), or (iv) any substance defined as "hazardous substances" pursuant to Section 9601 of the Comprehensive Environmental Response, Compensation and Liability Act, (42 U.S.C. Section 9601 et seq.) ("CERCLA"). Section 4.8 - Tenant's Obligations 4.8.1 Tenant shall not use, generate, handle, manufacture, produce, store, release, discharge or dispose of, on, under or about the Project or Premises, or transport to or from the Project or Premises, any Hazardous Material or allow its employees, agents, contractors, invitees or any other person or entity to do so. Without in any way limiting, affecting or derogating from the foregoing prohibition, Tenant shall be bound by, observe and perform the conditions, covenants and provisions set forth in this Article 4 with respect to Hazardous Materials. The foregoing prohibition of Hazardous Materials shall not apply to any ordinary use and incidental storage of small and insignificant amounts of substances in the regular and ordinary use of common office business machines provided the same do not constitute, give rise to, or create any substantial risk of any occurrence, condition, or event as a consequence of which pursuant to any Environmental Law: (i) Tenant, Landlord, or any owner, occupant, or person having any interest in the Premises shall be liable, or (ii) the Premises shall be subject to any legal restriction on use, ownership or transferability, or (iii) any Remedial Work (defined below) shall be required. 4.8.2 Tenant, at its sole cost, shall comply with all Environmental Laws (defined below) relating to Hazardous Materials on, under or about the Project, Premises or Building, including the responsibility to obtain and maintain current all permits required for its operations in connection with Hazardous Materials. The term "Environmental Laws" shall mean any and all federal, state or local laws, ordinances, rules or regulations, or requirements of governmental agencies or instrumentalities, pertaining to Hazardous Materials or to health, industrial hygiene or environmental conditions on, under, in or about the Premises, Building or Project, including, without limitation, the following (as amended from time to time): CERCLA; RCRA, and the Clean Air Act, 42 U.S.C. Section 7401 et. seq. 4.8.3 Without limiting the generality of Arizona Revised Statutes Section 36-3501 et. seq., Tenant shall be responsible for and shall protect, defend, indemnify, and hold Landlord and its directors, officers, employees, agents, representatives, contractors, successors and assigns, any lessor under any ground or underlying lease and any mortgagee or beneficiary under any mortgage or deed of trust encumbering the Project, Premises or Building (for purposes of this Section 4.8 collectively "Landlord Indemnitees") harmless from and against all claims, costs, damages (consequential or otherwise), fines judgments, penalties, losses and liabilities, (including, without limitation, (i) diminution in value of the Premises, Building or Project, (ii) damages for the loss or restriction on use of rentable or usable space or of any amenity on the Premises, Building or Project, (iii) loss of rental income, (iv) cost of any investigation, monitoring, removal, restoration, abatement, repair, clean-up, detoxification or other ameliorative work of any kind or nature required by any governmental agency having jurisdiction thereof, Landlord Indemnitees, or by any private party (collectively "Remedial Work"), (v) damages arising from any adverse impact on marketing of space in the Building or Project, (vi) costs of the preparation and implementation of any closure, remedial or other required plans, (vii) damage to natural resources or to property other than the Premises, Building or Project or harm to any person - 9 - 15 or animal, and (viii) sums paid in settlement of claims, attorneys' fees, consultant fees and expert fees), arising (directly or indirectly) in any way whatsoever out of or attributable to Tenant's or its employees', agents', representatives', contractors', successors', assigns', sublessees', Transferees' (as defined hereinbelow) and invitees' (collectively herein "Agents") use, generation, handling, manufacture, production, storage, release, threatened release, discharge, disposal or transportation of Hazardous Materials on, under, in or about the Project, Premises or Building (collectively a "Release" or "Released"). 4.8.4 In the event of the occurrence of a Release, Tenant shall, at its sole expense and within thirty (30) days after demand by Landlord (or such shorter period of time as may be required under applicable laws or by any governmental entity having jurisdiction thereof) commence to perform and thereafter diligently prosecute to completion such remedial work as is necessary to restore the Premises and the Project to the condition existing prior to such Release, including, without limitation, any investigation, monitoring, removal, restoration, abatement, repair, clean-up, remediation, detoxification or other ameliorative work necessary to remediate the effects of any Release (the "Remedial Work"). All such Remedial Work shall be performed in conformance with the requirements of Landlord and all applicable laws including, but not limited to all Environmental Laws and regulations relating to Hazardous Materials. All Remedial Work shall be performed in accordance with the terms and conditions of this Lease and by one or more contractors, approved in advance in writing by Landlord, and under the supervision of a consulting engineer approved in advance in writing by Landlord. All costs and expenses of such Remedial Work shall be paid by Tenant including, without limitation, the charges of such contractor(s) and/or the consulting engineer, and Landlord's reasonable attorneys' fees and costs incurred in connection with monitoring or review of such Remedial Work. In the event Tenant shall fail to timely commence, or cause to be commenced, or fail to diligently prosecute to completion such Remedial Work, Landlord may, but shall not be required to, cause such Remedial Work to be performed and all costs and expenses thereof, or incurred in connection therewith, shall become immediately due and payable. 4.8.5 In the event there is a release, discharge or disposal of or contamination by a Hazardous Material which is of the type that has been stored, handled, transported or otherwise used or permitted by Tenant on or about the Premises or Project and such Hazardous Material is of the type not presently known to exist on or about the Premises, Building or Project, Tenant shall have the burden of proving that such release, discharge, disposal or contamination is not a Release. If Tenant fails to prove that any such release, discharge, disposal or contamination is not a Release then such release, discharge, disposal or contamination shall be deemed a Release and the provisions of this Section 4.8 would be applicable thereto. 4.8.6 Upon the expiration or earlier termination of this Lease, Tenant shall remove from the Premises, Building and Project all Hazardous Materials placed or Released, or permitted to be placed or Released, on the Premises, Building and Project by Tenant, its employees, agents, contractors or invitees and all trade fixtures, furnishings and/or equipment associated with the use, storage or disposal of Hazardous Materials placed or permitted to be placed on the Premises, Building or Project by Tenant, its employees, agents, contractors or invitees and perform any closure work, investigation and environmental remedial work required by applicable Environmental Laws or by any governmental authority having jurisdiction with respect to the Premises or Tenant's activities thereon. Removal and disposal of any and all such Hazardous Materials, equipment or fixtures shall be performed in strict accordance with all applicable Environmental Laws. 4.8.7 In any matter covered by this Section 4.8 the Landlord Indemnitees shall have the right to employ its or their own counsel at the expense of Tenant. The Landlord Indemnitees shall have the right, but not the obligation, at the expense of Tenant, to settle, adjust or compromise any claim, suit or judgment against the Landlord Indemnitees arising out of the matters covered herein. 4.8.8 Tenant shall give immediate written notice to Landlord of: (a) Any action, proceeding or inquiry by any governmental authority with respect to the presence of any Hazardous Material on the Project, Premises or Building or the migration thereof from or to other property; (b) All demands or claims made or threatened by any third party against Tenant or the Project, Premises or Building relating to any loss or injury resulting from any Hazardous Materials; (c) Any spill, release, discharge or nonroutine disposal of Hazardous Materials that occurs with respect to the Project, Premises or Building or Tenant's operations, (e) Tenant's discovery of any occurrence or condition on, under, in or about the Project, Premises or Building or any real property adjoining or in the vicinity of the Project, Premises or Building which may cause the Premises, Building or Project or any part thereof to be subject to any restrictions on the ownership, occupancy, transferability or use under any Environmental Law. 4.8.9 Tenant's obligations under this Article 4 shall survive the termination of this Lease. - 10 - 16 Section 4.9 - Landlord's Exculpation 4.9.1 Landlord and Tenant acknowledge that Landlord may become legally liable for the costs of complying with Environmental Laws relating to Hazardous Materials which are not the responsibility of Landlord or Tenant, including the following: (i) Hazardous Material present in the soil or ground water on the Premises, Building or Project of which Landlord has no actual knowledge as of the Commencement Date; (ii) a change in Environmental Laws which make Hazardous Materials which are present on the Premises, Building or Project as of the Commencement Date, whether known or unknown to Landlord, a violation of such new Environmental Laws; (iii) Hazardous Materials that migrate, flow, percolate, diffuse or in any way move to or under the Premises, Building or Project, or (iv) Hazardous Materials present on or under the Premises, Building or Project as a result of any discharge, dumping or spilling (whether accidental or otherwise) by prior or other occupants or lessees of the Premises, Building or Project or their agents, employees, contractors or invitees, or by others. 4.9.2 In the event any of the circumstances described in Section 4.9.1 materialize, Landlord and Tenant agree that under such circumstances (i) Landlord shall have no liability to Tenant for and no obligation to indemnify, defend, protect and hold Tenant harmless from any damages, claims, penalties, judgments, fines, costs, liabilities or losses (including, without limitation, diminution in value of the Premises, Building or Project, damages for the loss or restriction on use of rentable or usable space or of any amenity on or in the Premises, Building or Project, loss of business, damages for harm to natural resources or to property other than the Premises, Building or Project or injury to persons or animals, and sums paid in settlement of claims, attorneys' fees, consultant and expert fees) which Tenant may incur during or after the Term as a result of such contamination, (ii) the provisions of Article 10 shall apply in the event there is any restriction on Tenant's use of the Premises, and (iii) the cost of complying with the Environmental Laws relating to Hazardous Materials affecting the Premises, Building or Project for which Landlord is legally liable and which are paid or incurred by Landlord shall not be Project Operating Costs unless the cost of such compliance, as between Landlord and Tenant, is made the responsibility of Tenant pursuant to Section 4.8. Section 4.10 - Right of Contribution Except as expressly provided in this Article 4 to the contrary (including but not limited to the treatment of Project Operating Costs), neither Landlord nor Tenant shall be deemed to have waived any rights of contribution which either party may have against the other party at law in connection with costs, claims, damages or liabilities arising out of or resulting from the use, presence, disposal or clean-up of Hazardous Materials in the Premises, Building or Project. Section 4.11 - Monitoring 4.11.1 Entry for Inspection and Testing. Tenant expressly agrees that Landlord shall have the right to enter the Premises to inspect the Premises and/or to perform an environmental investigation and assessment of the Premises (an "Environmental Assessment") upon reasonable notice to Tenant, and that this right of entry shall include, without limitation, the right to test for any release, threatened release, discharge or disposal of any Hazardous Material. Landlord's entry shall be carried out in a manner so as not unreasonably to interrupt or interfere with Tenant's business operations. An Environmental Assessment may include, without limitation, the review of any documents, materials, inventory, financial data or notices or correspondence to or from private parties or governmental authorities, the review of any storage, use and disposal facilities and procedures associated with the storage, use and disposal of Hazardous Materials, and the testing of the soils and groundwater at or under the Premises. Tenant shall pay for the cost of such Environmental Assessments if in the reasonable judgment of Landlord or its environmental consultant, a release, threatened release, discharge or disposal of any Hazardous Material caused by Tenant has occurred or in the event of a default by Tenant in any of its obligations under Section 4.7 through Section 4.13. In all other cases, the cost of such Environmental Assessments shall neither be Project Operating Costs nor borne by Tenant directly, but shall be at Landlord's cost. If Landlord reasonably so requires, Tenant shall comply, at its sole cost and expense, with all recommendations contained in any Environmental Assessment, including any recommendation with respect to the precautions which should be taken with respect to activities on the Premises or any recommendations for additional testing and studies to detect the presence of Hazardous Materials. Section 4.12 - Abatement Activities To the extent that any testing or monitoring demonstrates that significant levels of contamination by Hazardous Materials at the Project exist or are increasing, Landlord shall have the right but not the obligation to identify the source of the contamination and seek to have it abated by the responsible parties. Landlord may undertake, or cause to be undertaken, voluntary clean-up activities to ameliorate or stabilize any Hazardous Materials in the Project. The determination whether to undertake any clean-up activities shall be made by Landlord in its sole and absolute discretion based upon its consultant's or expert's recommendations and Landlord's determination of the feasibility of the proposed activities, their cost, their projected efficiency, and the levels of contamination of the Hazardous Materials in the Project in comparison with the levels of contamination in other properties in the vicinity of the Project. Tenant agrees to cooperate fully with - 11 - 17 Landlord and with any parties designated by Landlord at Landlord's expense to perform testing, monitoring or clean-up activities in the Project. Section 4.13 - Effect on Proposed Assignments and Sublets Without in any way limiting or affecting Landlord's right to withhold its consent for other reasons, it shall not be unreasonable for Landlord to withhold its consent to any proposed transfer, assignment or sublease if (i) the proposed transferee's anticipated use of the Premises or Project involves the use, generation, handling, manufacture, production, storage, testing, treatment, discharge or disposal of Hazardous Materials; (ii) the proposed transferee has been required by any prior landlord, lender or governmental authority to take remedial action in connection with Hazardous Material contaminating a property if the contamination resulted from such transferee's actions or use of the property in question; or (iii) the proposed transferee is subject to an enforcement order issued by any governmental authority in connection with the use, disposal or storage of Hazardous Materials. ARTICLE 5 - ASSIGNMENT/SUBLETTING/MORTGAGE Section 5.1 - Prohibition; Definitions 5.1.1 Subject only to the exceptions provided in Section 5.2 below, neither Tenant nor Tenant's legal representatives, successors or assigns shall assign this Lease ("Assign" or "Assignment"), or transfer, sublet, license or permit the Premises or any part thereof to be used or occupied by others (collectively, "Sublet" or "Sublease"); furthermore, in no event shall Tenant or Tenant's legal representatives or assigns pledge, hypothecate, mortgage or otherwise encumber this Lease (collectively, "Mortgage"). Any such Assignment, Sublease or Mortgage (whether voluntary or by operation of law) shall be voidable at the option of Landlord, and shall constitute a material breach of this Lease. No interest of Tenant in this Lease or the Premises shall be assignable or assigned by operation of law and Tenant shall not suffer or permit either such an assignment or any involuntary assignment of any nature whatsoever. By way of example and not limitation it shall be deemed an Assignment under this Lease and shall be subject to all the provisions of this Article 5, if either (a) Tenant consists of more than one party and there is a purported assignment from one such party to any other or others of such parties constituting Tenant, or (b) there is any transfer of control of Tenant, whether by transfer of shares of stock, partnership interests or otherwise or (c) there is a transfer of a major portion of Tenant's assets but not an assignment and assumption of this Lease in accordance with Section 5.2. As used in the immediately preceding sentence, the term "Tenant" shall also mean any entity that has guaranteed Tenant's obligations under this Lease. As used in this Article, the term "control" or "controls" or "controlled" shall mean either the possession, directly or indirectly, through one or more intermediaries, of the power to direct or cause the direction of the management and policies of the controlled Person (as defined below) or the ownership, directly or indirectly, of fifty percent (50%) of the voting power of, or the equity interests in the controlled Person (as defined below). The term Person shall mean individuals, groups, partnerships, firms, associations, corporations, trusts or any other form of business or legal entity. The Person who is the actual assignee, sublessee, licensee, occupant, transferee or any other recipient of an Assignment or Sublease is herein referred to as "Transferee". Notwithstanding the foregoing, a transfer of control of Tenant (by stock transfer, merger or consolidation) to an affiliated entity (as defined below) shall not be deemed an assignment under this Section. For purposes of this Section 5, an "affiliated entity" shall mean (a) a corporation all or at least 75% of the stock of which is owned, held and controlled by Tenant (so long as Tenant owns such percentage); or (b) a corporation which owns, holds and controls all or at least 75% of all stock of Tenant (so long as Tenant owns such percentage) ("Parent"); or (c) a corporation of which at least 75% of its stock is owned, held and controlled by Parent; or (d) notwithstanding any provision of the foregoing to the contrary, the shares of stock of Decision Servcom, Inc. a Delaware corporation may be sold or transferred, without obtaining the prior written consent of Landlord, but subject to the other conditions and provisions of this Section 5, in the following events: (i) such stock is publicly traded through the New York, American or Pacific Stock Exchanges or the NASDAQ national market and its price is listed at least daily in the Wall Street Journal and such sale is a public sale effected through such exchange or market. 5.1.2 If there is an Assignment or Sublet, whether in violation of or in compliance with this Article, then: (a) Landlord may collect rent from the Transferee and apply the net amount collected to the rent herein reserved, but no such collection shall be deemed either a waiver of the covenants and conditions of this Article 5, or the acceptance of the Transferee as Tenant, or a release of Tenant from the further performance by Tenant of the obligations on the part of Tenant herein contained or an alteration of Tenant's primary liability for such obligations; or (b) in the event of default by any Transferee, or any other successor of Tenant, in the performance or observance of any of the terms of this Lease of any Sublease or Assignment agreement, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such Transferee or successor. Section 5.2 - Assignments or Subleases Subject to Landlord's Prior Written consent Notwithstanding any contrary provision of Article 5.1.1, Tenant may Assign or Sublet only upon the following express conditions which are agreed to be reasonable: - 12 - 18 5.2.1 The proposed Assignment or Sublease shall be subject to and conditioned on the prior written consent of Landlord, which consent will not be unreasonably withheld or conditioned or delayed and, without limiting the generality of the foregoing, it shall be deemed reasonable for Landlord to withhold, condition or revoke such consent it among other things the following conditions are not satisfied: 5.2.1.1 the use to be made of the Premises by the proposed Transferee is the expressly permitted use under Section 4.1 and would not be prohibited by any other portion of this Lease (including but not limited to any Rules and Regulations then in effect) and would not create greater demands upon the facilities, systems or services of the Premises, the Building or Project or any part thereof than the demands created by Tenant; 5.2.1.2 the character, business stability, reputation, history of timely lease performance and financial responsibility of the proposed Transferee are both (a) of high quality and (b) satisfactory to Landlord in the good faith exercise of its business judgment, and in any event the proposed Transferee demonstrates, by virtue of its net worth, ratio of assets to liabilities, net income and cash flow, among other things, the ability to perform (i) all obligations of Tenant in the case of an Assignment and (ii) the obligations of Tenant allocable to the Sublease space in the case of a Sublease; 5.2.1.3 the proposed Transferee is then neither a prospective tenant of the Project with whom Landlord is in negotiation for rental of space in the Project nor a tenant of the Project; 5.2.1.4 any proposal for alterations to the Premises requested by the proposed Transferee satisfies the covenants and conditions of Article 6; and 5.2.1.5 all of the conditions set forth below are satisfied. 5.2.2 Tenant shall pay to Landlord Landlord's then standard processing fee (currently Five Hundred Dollars ($500)) and any taxes or other charges imposed upon Landlord or the Project as a result of such Assignment or Sublease, and shall reimburse Landlord for all costs, including the reasonable fees of attorneys, architects, engineers or other consultants incurred by Landlord in connection with such Assignment or Sublease, whether or not such proposed Assignment or Sublease is consented to by Landlord. 5.2.3 Tenant shall deliver to Landlord with its request for Landlord's consent the proposed Assignment or Sublease and current financial statements of the proposed Transferee, prepared by an independent certified public accountant, and promptly upon Landlord's request for same, any additional documents or information reasonably related to the proposed transaction or Transferee. 5.2.4 Tenant shall deliver to Landlord an executed original counterpart of the Assignment or Sublease, which by its terms shall be binding on Tenant and the Transferee subject only to Landlord's consent being obtained and the execution by Tenant, the proposed Transferee and Landlord of Landlord's consent. Every Assignment or Sublease shall provide, among other things, that: (a) it is and shall be subject and subordinate to the provisions of this Lease, (b) the termination of this Lease shall, at Landlord's sole election, constitute a termination of every such Assignment or Sublease and (c) the covenants and conditions of this Lease shall be covenants and conditions of the Assignment or Sublease, and the proposed Transferee shall assume for the benefit of Landlord, and shall perform faithfully and shall be bound by, all of the covenants and conditions of this Lease from and after the effective date of the Assignment or Sublease, limited, in the case of a Sublease, to the extent they apply to the space in question. 5.2.5 The consent by Landlord to an Assignment or Sublease shall not in any way be construed to relieve Tenant or the assignee or sublessee from obtaining the express consent in writing of Landlord with respect to any subsequent Assignment or Sublease. Landlord may, but shall not be obligated to, consent to subsequent Assignments or Subletting of this Lease or amendments or modifications to this Lease with Transferees or other successors of Tenant, without notifying Tenant, and without obtaining its consent thereto and such action shall not relieve Tenant of liability under this Lease. 5.2.6 Tenant shall not be released from Tenant's obligations under this Lease nor shall Tenant's primary liability to pay Rent and to perform all other obligations to be performed by Tenant under this Lease be altered by (a) any Assignment or Sublease, regardless of Landlord's consent, or (b) any failure by Landlord after any Assignment or Sublease, regardless of Landlord's consent, to give Tenant notice of default under or in respect of any of the terms, covenants, conditions, provisions or agreements of this Lease. Section 5.3 - Share of Proceeds of Assignment or Sublease Fifty percent (50%) of that portion of rent and all other consideration payable to or for the benefit of Tenant in connection with any Assignment or Sublease which is in excess of the Rent (which for purposes of this Section 5.3 shall mean the Base Monthly Rent plus those Building Costs, Project Costs and Taxes payable by Tenant pursuant to Section 3.4) which Tenant is obligated to pay Landlord under this Lease (in the event of a Sublease or Assignment of less than the entire Premises, prorated to reflect obligations allocable to that portion of the Premises subject to the Sublease or Assignment) less Tenant's costs shall be payable - 13 - 19 to Landlord as additional Rent under this Lease without affecting or reducing any other obligation of Tenant under this Lease. Such excess shall be payable to Landlord at the same time as such rent or other consideration is payable to Tenant, provided, however, that fifty percent (50%) of the cash equivalent of any non-cash consideration payable to or for the benefit of Tenant at any time in connection with an Assignment or Sublease shall be paid by Tenant to Landlord at the time Landlord gives its consent. For purposes hereof, the term "Tenant's Costs" shall mean: (a) the amount of any reasonable out-of-pocket broker's fee or commissions paid to a broker unrelated to Tenant as a result of any assignment or subletting by Tenant hereunder and reasonable out-of-pocket counsel fees paid to outside (and not in-house) counsel and disbursements incurred with respect to such assignment or subletting, and (b) reasonable advertising expenses directly related to the assignment of this Lease or subletting of the space. Section 5.4 - Landlord Options to Terminate Lease With respect to any Assignment or Sublet except any made in accordance with Landlord's prior written consent, it is expressly agreed and understood that in addition to Landlord's other rights set forth in this Article 5, Landlord shall have the following options, exercisable in Landlord's sole discretion: (a) in the event of a Sublease or Assignment of substantially all the Premises, to terminate this Lease as of the date proposed by Tenant for the commencement of the term of the proposed Sublease or Assignment; and (b) without regard to the size of the portion of the Premises to be affected by the proposed Sublease or Assignment, to declare this Lease to be so modified so as to exclude therefrom, and to be terminated as to, the space subject to the proposed Sublease or Assignment, such modification to become effective on the date proposed by Tenant for the commencement of the term of the Sublease or Assignment, with the Base Monthly Rent, and amounts payable by Tenant pursuant to Section 3.4 for Building Costs, Taxes and Project Costs, to be adjusted in proportion to the reduction in Rentable Area of the Premises. If Landlord exercises either of its options to terminate under this Section 5.4, the provisions of this Lease applicable to Tenant's obligations on expiration or termination shall apply to the space as to which the termination applies. ARTICLE 6 - ALTERATIONS Section 6.1 - Alterations Tenant shall not make any alterations, additions or improvements including, but not limited to, the initial tenant improvement in or to the Premises or parking space configuration in the Project Common Areas (collectively, "Alterations") without first meeting the following requirements: (a) Prior to the commencement of any Alterations, Tenant shall submit plans and specifications prepared by an architect and/or structural engineer licensed by the state where Project is located for Landlord's approval, which approval shall not be unreasonably withheld or delayed, and obtain any necessary governmental permits and deliver a copy thereof to Landlord; (b) The Alterations shall be made at Tenant's sole cost and expense and by a contractor or mechanic designated by Landlord or a contractor or mechanic chosen by Tenant and approved by Landlord, which approval shall not be unreasonably withheld or delayed; (c) Tenant shall provide satisfactory evidence of contractor's comprehensive general liability insurance covering Landlord, builder's risk insurance, and workmen's compensation insurance all in form and substance satisfactory to Landlord; (d) Tenant shall provide a performance and payment bond satisfactory in form and substance to Landlord for all Alterations which in Landlord's reasonable judgment will cost more than Five Thousand Dollars ($5,000) to complete, and such other security as Landlord may reasonably require to insure payment for the completion of all Alterations free and clear of liens; (e) Tenant shall give Landlord at least ten (10) business days' notice before commencing any proposed Alterations so that Landlord can post and record a notice of nonresponsibility and any other notice as may be permitted by law, to protect Landlord from having its interest in Premises made subject to a mechanic's lien; (f) All Alterations shall be made in full compliance with all laws, rules, orders, ordinances, directions, regulations and requirements of all governmental agencies, offices, departments, bureaus and boards having jurisdiction; (g) All of Tenant's contractors, subcontractors, employees, servants and agents must work in harmony with and shall not interfere with any labor employed by Landlord, or Landlord's contractors; (h) Tenant shall be fully responsible if any shutdown of plumbing, electrical or air conditioning equipment jeopardizes or invalidates any warranties covering the Building; - 14 - 20 (i) Landlord expressly reserves the right to revoke its consent upon notice to Tenant in the event of the breach which is not de minimis in nature of any of the terms or conditions hereof, in which case all work on the Alterations shall immediately cease to the extent directed by Landlord in such notice until the breach in question is cured to Landlord's satisfaction; (j) Tenant shall reimburse Landlord for any and all costs or expenses reasonably incurred by Landlord in connection with the Alterations, including without limitation architectural or engineers' fees and attorneys' fees; and (k) Tenant shall provide Landlord with a cost and expense breakdown of the Alterations. 6.1.1 Notwithstanding any provision of Section 6.1(a) to the contrary, Tenant may make Alterations in or to the Premises at any one time which cost less than Five Thousand Dollars ($5,000) and which in the aggregate do not exceed Thirty Thousand Dollars ($30,000) per year without obtaining Landlord's prior written consent provided (i) such Alterations do not adversely affect the foundations, structural components, exterior walls, roof or roof membrane, or the heating, ventilating and air conditioning systems of the Building, or its exterior appearance, (ii) such Alterations do not impair the use of the Building or materially reduce the value or marketability of the Premises and/or Building, (iii) Tenant complies with all other provisions of Section 6.1. Tenant shall have no right to make any Alterations to the structure of the Building or the roof under this Lease. 6.1.2 At the same time Tenant submits detailed specifications, floor plans and necessary permits to Landlord for review for the purpose of obtaining Landlord's consent to any proposed Alteration, Tenant may request Landlord to indicate whether or not such proposed alteration or addition is to be removed from the Premises upon the expiration of the Term of this Lease and whether Tenant is to perform all restoration made necessary by the removal of any such Alteration. In the event Tenant does not request Landlord to make such indication, or when Tenant does not obtain Landlord's prior consent to any alteration or addition pursuant to Section 6.1.1, Landlord shall have the right to require Tenant to remove any alteration or addition upon expiration of the Term of this Lease and to perform all restoration made necessary by such removal. Section 6.2 - Mechanics' Liens Any mechanics' lien filed against the Premises, Building or Project for work done or claimed to have been done by or materials claimed to have been furnished to Tenant or its agents shall be discharged by Tenant at its expense within ten (10) days thereafter by the filing of the bond required by law, by payment, by satisfaction or otherwise. Failure to so discharge any such lien shall constitute a default hereunder. If Tenant has not caused the lien to be so released within such 10-day period, Landlord, in addition to all other remedies provided in this Lease and by law, shall have the right, but shall not be obligated, to cause the lien to be released by such means as Landlord deems proper, including payment of the claim giving rise to the lien. All payments made and expenses incurred by Landlord in connection with the lien shall be considered additional Rent pursuant to Section 3.1 above. Section 6.3 - Alterations as Landlord's Property All Alterations, whether made and/or paid for by Tenant or Landlord, shall immediately become a part of the realty and shall be and remain Landlord's property, and shall not be removed without the written consent of Landlord. Notwithstanding the foregoing, all goods, effects, personal property, cubicles, partitions, local area network cabling, detachable walls, business and trade fixtures, machinery and equipment owned by Tenant or installed at Tenant's expense in the Premises shall remain the personal property of Tenant and may be removed by Tenant at any time, and from time to time, during the Term of this Lease provided Tenant shall, in removing any such property, repair or, at Landlord's option, shall pay to Landlord the cost of repairing all damage to the Premises and the Building caused by such removal and to restore the Premises to their original condition as of the Commencement Date. Section 6.4 - Indemnification Tenant's indemnity obligations under Article 9 of this Lease shall include any matter arising out of or connected with (i) the making, maintenance, repair, installation, removal or existence of any Alterations (including, but not limited to, claims or liability for breach of warranty, worker's compensation, personal injury or property damages) and (ii) Tenant's performance and observance of, or failure to timely perform and observe, its obligations under this Article 6. Notwithstanding the previous sentence, Landlord shall have no right to settle mechanics' or materialmen's liens within the ten (10) day period described in Section 6.2 or any liens which are bonded over. Section 6.5 - Survival Tenant's obligations under this Article 6 shall survive the expiration or earlier termination of this Lease. - 15 - 21 ARTICLE 7 - REPAIRS Section 7.1 - Tenant's Obligations/Procedures 7.1.1 Subject to the provisions of Section 7.1.2, Section 7.2, Article 10 and Article 11, Tenant shall operate, maintain, keep clean, provide janitorial services for, and take good care of the Premises and the fixtures therein (including, without limitation, the floor and window coverings), and provide for the disposal of trash, garbage, and waste arising in connection with Tenant's use or occupancy, all at Tenant's sole cost and expense and, subject to the provisions of Article 6 hereof, shall make all repairs and replacements, at its sole cost and expense as and when Landlord deems reasonably necessary to preserve in good working order and condition the Premises and every part thereof, including, without limitation, all plumbing, electrical and lighting facilities and equipment, fixtures, interior walls, interior surfaces of exterior walls, ceilings, doors, windows, roof membrane, plate glass, skylights and, subject to Section 7.1.2, the heating, ventilating and air conditioning systems located within the Premises or serving the Premises and located within or on the Building, serving the Premises except if and to the extent any of such Building systems are located within the premises of any other tenant of the Building and to such extent, after reasonable written notice to Landlord, Landlord shall cause such work to be performed at Tenant's sole cost and expense. Tenant shall maintain, repair and operate the Premises, the fixtures therein and such Building systems serving the Premises in a good condition comparable to the manner other buildings in projects similar in size, character and location are maintained and operated by institutional owners. All repairs and replacements shall be in quality and class equal to the original work. Upon the expiration or other termination of the Term of this Lease, Tenant shall surrender the Premises to Landlord in as good order, condition and repair as they were received by Tenant, ordinary wear and tear and damage caused by casualty (subject to the other provisions of the Lease) excepted. All repairs and replacements made by Tenant pursuant to this Section 7.1 shall be subject to the conditions set forth in Article 6. 7.1.2 At Landlord's option exercisable from time to time, either Landlord or Tenant shall procure and maintain, at Tenant's expense (payable by Tenant directly to the provider of such service), a heating, ventilating and air conditioning system maintenance contract to provide for inspection, maintenance and repair of such systems. If Landlord elects to have Tenant obtain such contract, the form and substance of the contract and the qualifications of the service provider shall be satisfactory to Landlord. Without limiting the generality of the foregoing, such contract shall name Landlord as an express third party beneficiary of the contract, shall be assignable to Landlord, shall be terminable upon thirty (30) days advance written notice, shall provide for inspections, repairs and maintenance to be performed at a minimum frequency of once every three (3) months, shall provide for a written report to Landlord of each such occasion of inspection, maintenance or repair, and an original of such contract shall be delivered to Landlord. If Landlord elects to procure and maintain such maintenance contract, Tenant shall pay to Landlord from time to time, within ten (10) days after delivery of a statement therefor, the cost of such contract. 7.1.3 Supplementing the provisions of Sections 7.1.1 and 7.1.2 and not in limitation or derogation thereof, Tenant shall be obligated to pay directly to the parties entitled thereto all direct and indirect fees, costs and expenses, in connection with performance of Tenant's obligations set forth in Sections 7.1.1 and 7.1.2, including, without limitation, the following: (i) all wage and labor costs and expenses paid or incurred by Tenant or Tenant's authorized representatives and applicable to the persons engaged in the operation, maintenance, overhaul or repair of all or any portion of the Premises or fixtures therein, whether they be employed by Tenant or as independent contractors (including, without limitation, the cost effect of any increase or decrease in the hours of employment or the number of paid holidays or vacation days, social security taxes, unemployment insurance taxes and the cost (if any) of providing disability, hospitalization, medical, welfare, pension, retirement, or other benefits applicable with respect to such persons); (ii) the cost and expense of utilities, utility surcharges, water and sewer charges, fuel, building supplies and materials, services contracts, janitorial services, or any costs levied, assessed or imposed by, or at the direction of, or resulting from statutes or regulations or interpretations thereof, promulgated by any federal, state, regional, municipal or local government authority in connection with the use or occupancy of the Premises. Section 7.2 - Landlord's Obligations and Rights Landlord, subject to reimbursement pursuant to Article 3 and further subject to the provisions of Article 10 and Article 11, shall keep in good condition and repair the following: (a) the foundations, exterior walls, structural condition of interior bearing walls and roof of the Premises; and (b) the Common Areas, including, without limitation, the parking lots, utilities installations, roadways, walkways, sidewalks, landscaping, fences and Project signs. Notwithstanding the foregoing sentence, (i) Landlord shall not be responsible for any such maintenance, upkeep, repair or replacement to the extent that the same may be made necessary by or arise from placement or servicing of, or other activities in relation to the location of, equipment on the roof of the Premises or the Building in which Tenant is located, or penetration of the roof by such equipment, regardless of Tenant's having obtained, prior to the placement of any such equipment, the written approval of Landlord, unless and until Tenant pays Landlord therefor, including at Landlord's option advance payment on an estimated basis, the full cost of any such maintenance, upkeep, repair or replacement; (ii) Landlord shall not, unless and except as otherwise expressly provided in the Work Letter, be obligated to paint the exterior or interior surface of exterior walls, nor shall Landlord be required to maintain, repair or replace doors, - 16 - 22 windows or plate glass of the Premises; and (iii) Landlord shall have no obligation to repair, but without obligation to do so may elect to repair, at the expense of Tenant, all damage or injury to the Premises, or to the Building or Project and its fixtures, appurtenances or equipment or to any of the areas used in connection with the operation of the Building or Project, caused or done by Tenant or Tenant's agents, servants, employees, contractors, visitors or licensees or caused by moving property of Tenant in or out of the Building or the Project, or by the installation or removal of furniture or other property, or resulting from fire, heating, ventilating or air conditioning unit or system, short circuits, overflow or leakage of water, steam, gas, sewage or odors, or by frost or by bursting or leaking of pipes or plumbing works, or gas, or from any other source, due to the negligence, or willful misconduct of Tenant or Tenant's agents, servants, employees, contractors, visitors or licensees. Section 7.3 - Statutory Waivers Tenant hereby waives all rights under the provisions of any law in existence during the Term, authorizing a tenant to make repairs at the expense of a landlord. Section 7.4 - No Liability of Landlord Unless and except to the extent caused by Landlord's gross negligence or willful misconduct and except as provided in Article 10 hereof, there shall be no allowance to Tenant for diminution of rental value, and no liability on the part of Landlord by reason of inconvenience, annoyance or injury to business arising from the making of, or the failure to make, any repairs, alterations, decorations, additions or improvements in or to any portion of the Premises, Building or the Project (or any of the areas used in connection with the operation thereof or in or to any fixtures, appurtenances or equipment), or by reason of the active or passive negligence of Tenant or any other tenant or occupant of the Building or Project. In no event shall Landlord be responsible for any consequential damages arising or alleged to have arisen from any of the foregoing matters. Notwithstanding the foregoing, if Landlord receives, as the result of any interruption in services or as a result of the making of or failure to make any of the above-mentioned repairs, alterations, decorations, additions or improvements, when any of the foregoing prevented Tenant's use of the Premises, rental insurance proceeds, then to the extent of such proceeds received, Tenant's Rent shall be abated. ARTICLE 8 - SUBORDINATION/PROTECTION OF LENDERS Section 8.1 - Subordination 8.1.1 This Lease shall be subject and subordinate to all ground or underlying leases, mortgages and deeds of trust which now or hereafter encumber or otherwise affect the real property of which the Premises forms a part or encumber or affect the ground or underlying leases, and all renewals, modifications, consolidations, replacements and extensions thereof, without the necessity of executing any instrument to effectuate such subordination; provided, however, upon the request of Landlord, Tenant, or Tenant's successors-in-interest, shall execute and deliver any and all instruments desired by Landlord evidencing such subordination in the manner requested by Landlord. Notwithstanding the foregoing, within ten (10) days after the written request of Landlord, Tenant agrees to execute any appropriate instrument making this Lease and the leasehold estate created hereby superior to the lien of any ground or underlying lease, mortgage or deed of trust. Notwithstanding the foregoing, upon Tenant's request, Landlord agrees to make good faith efforts to obtain nondisturbance on behalf of Tenant substantially in the form of the agreement attached hereto as Exhibit H and incorporated herein by this reference. Section 8.2 - Attornment to Successor 8.2.1 Tenant agrees that, at the option of the landlord under any ground or underlying lease now or hereafter affecting the real property of which the Premises forms a part, Tenant shall attorn to said landlord in the event of the termination or cancellation of such ground or underlying lease and, if requested by said landlord, shall enter into a new lease with said landlord (or a successor ground lessee designated by said landlord) for the balance of the Term then remaining hereunder upon the same terms and conditions as those herein provided. 8.2.2 In the event of foreclosure or exercise of power of sale under any mortgage or deed of trust now or hereafter affecting the real property of which the Premises forms a part, the holder of any such mortgage or deed of trust ("Holder") (or purchaser at any sale pursuant thereto) shall have the option (a) to require Tenant to attorn to such Holder or purchaser, and to enter into a new lease with such Holder or purchaser (as Landlord) for the balance of the term then remaining hereunder upon the same terms and conditions as those herein provided, or (b) notwithstanding this Article 8, to elect that this Lease become or remain, as the case may be, superior to said mortgage or deed of trust and to require Tenant to attorn. Tenant agrees to execute and deliver any further instruments requested by such Holder or purchaser to evidence such attornment or superiority. - 17 - 23 Section 8.3 - Lender's Right to Cure If Landlord is in default, Tenant will accept cure of any default by any Holder whose name and address shall have been furnished to Tenant in writing. Tenant may not terminate this Lease for Landlord's default unless Tenant gives notice of such intent to terminate to each such Holder and the default is not cured within thirty (30) days after the time period given to Landlord to cure any such default in this Lease or within such greater time as may be reasonably necessary to cure such default. A default which cannot reasonably be cured within said thirty (30) day period shall be deemed cured within said period if work necessary to cure the default is commenced within such time and the Holder proceeds diligently thereafter with such work until the default is cured. Section 8.4 - Tenant's Financial Statements 8.4.1 Tenant agrees that Landlord is hereby authorized to request a credit report on Tenant at any time and from time to time subsequent to the Lease Date from any third party. 8.4.2 Upon default under this Lease by Tenant, or upon any request by Tenant for Landlord's approval of an Assignment or Sublease pursuant to Article 5 above, or upon request of Landlord made not more than once during any Computation Year for any reason whatsoever, Tenant agrees to promptly provide Landlord with a full, true and correct current audited annual financial statement (certified by Tenant's regular certified public accountant) or, if a current annual audited financial statement should not be available, a full, true and correct current unaudited annual financial statement (certified by the chief financial officer of Tenant), covering the financial condition of Tenant, the same to be accompanied by all financial statements of any kind issued by Tenant to any bank or other financial institution or credit reporting service at any time during the twelve (12) months next immediately preceding the date of said current financial statement. 8.4.3 Within ten (10) days after Landlord's written request, Tenant shall deliver to Landlord, or to any actual or prospective Holder that Landlord designates, such the most recent quarterly financial statements as are available to verify the financial condition of Tenant, or any Transferee or guarantor of Tenant, to facilitate the financing or refinancing of the Building or Project, or the creation, extension or renewal of any underlying or ground lease affecting the Project. 8.4.4 Tenant represents and warrants to Landlord and such Holder that each financial statement delivered by Tenant is or shall be, as the case may be, accurate in all material respects to the best of Tenant's actual knowledge as of the date of such statement. Section 8.5 - Lease Modifications If any prospective Holder should require, as a condition of any ground or underlying lease, mortgage, or deed of trust, or modification of any provision of this Lease, Tenant shall approve and execute any such modifications within ten (10) days after written request, provided such modifications do not increase any monetary obligation of Tenant hereunder or otherwise materially and adversely alter the rights or obligations of Landlord or Tenant hereunder. ARTICLE 9 - LIABILITY/INDEMNIFICATION Section 9.1 - Landlord's Exculpation and Limited Liability Landlord, its employees and agents shall not be liable to Tenant and Tenant waives all claims against Landlord for any injury to or death of any person or for loss of use of or damage to or destruction of property in or about the Premises, Building or the Project by or from any cause whatsoever, including without limitation earthquake or earth movement, gas leak, fire, oil spills or contamination, electricity or leakage from the roof, walls, basement or other portion of the Premises, Building or the Project, except to the extent caused by the gross negligence or willful misconduct of Landlord, its employees or agents, but in no event shall Landlord be liable for consequential damages, including, without limitation, loss of profits or damages from business interruptions. Landlord is not liable for latent defects in the Premises, Building or Project, except that such lack of liability shall not excuse Landlord from its obligations to repair and maintain the Premises, Building and Project to the extent it is specifically obligated to do so under this Lease. Section 9.2 - Tenant's Liability, Indemnification and Hold Harmless To the extent permitted by law, Tenant hereby indemnifies and agrees to protect, defend and hold Landlord (its employees, agents, property manager) harmless against all claims, liability, damages or loss of every nature whatsoever and against all costs and expenses, including, but not limited to, reasonable fees of attorneys of Landlord's choice and expert witnesses and expenses in connection therewith, arising out of either (i) any failure of Tenant to timely perform or observe its obligations hereunder or (ii) arising out of or connected with any matter expressly referenced elsewhere in the Lease as being included within Tenant's indemnity obligation under this Article 9 or any injury to or death of any person or for loss of use of or damage to or destruction of property or for violation of law (A) occurring in, on or about the Premises, from - 18 - 24 any cause whatsoever, except to the extent caused by the gross negligence or willful misconduct of Landlord or its employees, agents or contractors or (B) occurring in, on or about any portion of the Building or Project or areas used in connection with the Project, the use of which Tenant has in common with other tenants (including, without limitation, elevators, stairways, passageways or hallways and other portions of the Common Areas), when such claim, injury or damage is caused in whole or in part by the act, neglect, default, or omission of Tenant, its employees, agents, contractors, invitees, licensees, visitors, assignees or subtenants including, without limitation, the default by Tenant in the observance or performance of any of its obligations hereunder. Landlord reserves the right to settle, compromise or dispose of any and all suits, claims and actions related to the foregoing indemnities in its sole discretion and the exercise of said right shall not reduce Tenant's obligations hereunder. Any defense made by Tenant under this Article 9 shall be made only with counsel (i) previously approved in writing by Landlord which approval shall not be unreasonably withheld in its sole discretion, and (ii) willing to cooperate with counsel of Landlord's choice in connection with such defense. Section 9.3 - Survival and Conflicts with other Indemnity Provisions The provisions of this Article 9 shall not diminish Landlord's rights and Tenant's obligations set forth in Article 4 and Section 6.4. The provisions of this Article 9 shall survive the expiration or earlier termination of this Lease. Any waiver of claims against Landlord and/or indemnification of Landlord pursuant to the terms of this Lease, including without limitation the terms of this Article 9, shall in no event be deemed to apply to Landlord's fraud, willful injury to the person or property of another, or violation of any law, whether willful or negligent, to the extent such waiver or indemnity would violate Arizona law. ARTICLE 10 - DAMAGE/DESTRUCTION Section 10.1 - Destruction and Repair If the Premises shall be damaged by fire or other cause, and if Tenant shall give prompt notice to Landlord of such damage, Landlord, at Landlord's expense, shall repair such damage and restore the Premises to substantially the condition it was in prior to such fire or casualty; provided, however, that Landlord shall have no obligation to repair any damage or to replace Tenant's personal property, trade fixtures or equipment, Alterations or any other property or effects of Tenant. Notwithstanding the foregoing, Landlord shall have no obligation to repair such damage and restore the Premises to substantially the condition it was in prior to such fire or casualty: (i) to the extent there are governmental restrictions which preclude Landlord from repairing and restoring the Premises or the Building to substantially the condition it was in prior to such fire or other casualty; or (ii) if Tenant is in default which is not de minimis under this Lease. Except as otherwise provided in this Article 10, if the entire Premises shall be rendered untenantable by reason of any such damage, the Base Monthly Rent shall abate for the period from the date of such damage to the date when such damage to the Premises shall have been repaired, and if only a part of the Premises shall be rendered untenantable, the Base Monthly Rent shall abate for such period in the proportion that the area of the part of the Premises so rendered untenantable bears to the total area of the Premises; provided, however, if, prior to the date when all of such damage shall have been repaired, any part of the Premises so damaged shall be rendered tenantable or shall be used or occupied by Tenant or any person or persons claiming through or under Tenant, then the amount by which Base Monthly Rent shall abate shall be equitably apportioned for the period from the date of any such use or occupancy to the date when all such damage shall have been repaired. Section 10.2 - 180 Day and 60 Day Repair Criteria 10.2.1 Notwithstanding the provisions of Section 10.1, if prior to or during the Term, the Premises shall be so damaged by fire or other casualty that, in Landlord's architect's or contractor's opinion determined in its reasonable discretion, it will take longer than one hundred eighty (180) days from the date of the casualty to substantially complete the repair and restoration of the Premises or Building, then Landlord shall give to Tenant as soon as possible but in no event later than sixty (60) days after the casualty, notice of such opinion ("the 180 Day Notice"). If such repairs and restoration cannot in Landlord's architect's or contractor's opinion be substantially completed within one hundred eighty (180) days after the date of the casualty, Landlord and Tenant shall each have the right to terminate this Lease by giving written notice to the other within fifteen (15) days after Tenant's receipt of the 180 Day Notice. 10.2.2 Notwithstanding any provision herein to the contrary, Landlord and Tenant shall each have the right to terminate this Lease in the event the Premises is damaged by a fire or other casualty during the last year of the Term of this Lease if in Landlord's architect's or contractor's opinion determined in its reasonable discretion it will take longer than sixty (60) days to substantially complete the repair and restoration of the Premises. Landlord shall give notice of such opinion (the "60 Day Notice") as soon as possible, but in no event later than thirty (30) days after such casualty. In the event either party elects to terminate this Lease pursuant to this Section 10.2.2 such party shall give written notice to the other, which must be received by the other party no later than five (5) days after Tenant's receipt of the 60 Day Notice. - 19 - 25 10.2.3 In the event Landlord or Tenant delivers such a written termination notice pursuant to Section 10.2.1 or Section 10.2.2, this Lease and the Term shall terminate thirty (30) days thereafter with the same effect as if the expiration of such thirty (30) day period was the Expiration Date, and Rent shall be apportioned as of such date. In the event that this Lease is not so terminated and the actual time to substantially complete the repair and restoration of the Premises takes longer than one hundred eighty (180) days (or sixty (60) days in the event Landlord gives a 60 Day Notice), Tenant shall have no claim or remedy of any kind whatsoever against Landlord for any costs, damages, losses, liabilities or penalties it incurs, provided Landlord diligently prosecutes the repair and restoration of the Premises to substantial completion. Section 10.3 - Lack of Insurance Proceeds Notwithstanding anything contained in this Article 10 to the contrary, in no event shall Landlord be required to spend for any repair, replacement or reconstruction of the Premises an amount greater than the insurance proceeds actually received by Landlord (plus the amount of reimbursement of deductibles actually received from Tenant as Building Costs or Project Costs) as a result of the fire or other casualty causing such loss, damage or destruction. Section 10.4 - No Release of Liability Except to the extent expressly provided otherwise in this Lease, including, without limitation the provisions of Section 14.3, nothing contained in this Lease shall relieve Tenant of any liability to Landlord or to its insurance carriers that Tenant may have under law or under the provisions of this Lease in connection with any damage to the Premises or the Project by fire or other casualty. Section 10.5 - Tenant's Negligence Notwithstanding the provisions of Section 10.1, if any such damage or destruction is due to the negligent act or omission of Tenant, any person claiming through or under Tenant, or any of their employees, suppliers, shippers, customers or invitees, then there shall be no abatement (to the extent such is provided herein) of Base Monthly Rent by reason of such damage, unless Landlord is reimbursed for such abatement of Base Monthly Rent pursuant to any rental insurance policies that Landlord may, in its sole discretion, elect to carry. Section 10.6 - Express Agreement Re Damage and Destruction The provisions of this Lease, including this Article 10, constitute an express agreement between Landlord and Tenant with respect to any and all damage to, or destruction of, all or any part of the Premises, the Building or any other portion of the Project, and it is agreed that any statute or regulation of the State of Arizona with respect to any rights or obligations concerning damage or destruction in the absence of an express agreement between the parties, and any similar statute or regulation, now or hereafter in effect, shall have no application to this Lease or to any damage to or destruction of all or any part of the Premises, the Building or any other portion of the Project. ARTICLE 11 - EMINENT DOMAIN Section 11.1 - Partial or Total Taking If all or substantially all of the Premises or Building is condemned or taken in any manner for public or quasi-public use, including, but not limited to, a conveyance or assignment in lieu of a condemnation or taking, this Lease shall automatically terminate as of the earlier of the date of the vesting of title or the date of dispossession of Tenant as a result of such condemnation or other taking. If less than all or substantially all of the Premises or Building is so condemned or taken, this Lease shall automatically terminate only as to the portion of the Premises so taken as of the earlier of the date of the vesting of title or the date of dispossession of Tenant as a result of such condemnation or taking. If such portion of the Premises or Building is condemned or otherwise taken so as to require, in the opinion of Landlord, a substantial alteration or reconstruction of the remaining portions thereof, this Lease may be terminated by Landlord, as of the earlier of the date of the vesting of title or the date of dispossession of Tenant as a result of such condemnation or taking, by written notice to Tenant given within sixty (60) days following notice to Landlord of the date on which said vesting or dispossession will occur. Tenant hereby specifically waives any and all rights it may have under any law, statute, ordinance or regulation to terminate this Lease upon partial condemnation of the Premises, Building, or Project and the parties hereto specifically agree that this Lease shall not automatically terminate upon condemnation. Section 11.2 - Award Landlord shall be entitled to the entire award in any condemnation proceeding or other proceeding for taking for public or quasi-public use, including, without limitation, any award made for the value of the leasehold estate created by this Lease and Alterations which are the property of Landlord. No award for any partial or entire taking shall be apportioned, and Tenant hereby assigns to Landlord any award that may be - 20 - 26 made in such condemnation or other taking, together with any and all rights of Tenant now or hereafter arising in or to same or any part thereof; provided, however, that nothing contained herein shall be deemed to give Landlord any interest in, or to require Tenant to assign to Landlord, any award made to Tenant specifically for its relocation expenses, the taking of personal property and trade fixtures belonging to Tenant, or the interruption of or damage to Tenant's business if such award is made separately to Tenant and not as part of the damages recoverable by Landlord. Section 11.3 - Sale to Condemning Authority Landlord may, without any obligation to Tenant and without obtaining Tenant's consent, agree to sell and/or convey to the condemnor the Premises, Building or Project or any portion thereof sought by the condemnor, free from this Lease and the rights of Tenant hereunder, without first requiring that any action or proceeding be instituted air, if instituted, pursued to a judgment. In the event Landlord sells and/or conveys all or any portion of the Premises, Building or Project to a condemnor this Lease shall terminate on the date the deed or other document evidencing such conveyance is recorded. Tenant shall still be entitled to any awards it would have received under this Article 11 had a condemnation in lieu of sale occurred. Section 11.4 - Proration/Abatement of Base Monthly Rent In the event of an automatic or elective termination of this Lease pursuant to Section 11.1 or of sale pursuant to Section 11.3, the Rent shall be equitably prorated as of the date of termination of this Lease. In the event of a partial condemnation or taking that is permanent, but does not result in a termination of this Lease as to the entire Premises pursuant to Section 11.1, the Rent shall abate in proportion to the portion of the Premises taken by such condemnation of other taking. Section 11.5 - Temporary Taking If all or any portion of the Premises is condemned or otherwise taken for public or quasi-public use for a limited or temporary period of time, this Lease shall remain in full force and effect and Tenant shall continue to perform all terms, conditions and covenants of this Lease, except that the Base Monthly Rent shall be abated in accordance with Section 11.3 but only during the period of any such limited or temporary condemnation or taking. The apportionment of any award shall be governed by the provisions of Section 11.2. ARTICLE 12 - UTILITIES Section 12.1 - Utilities 12.1.1 Tenant shall pay directly to the providers of all services for separately metered or directly billed water, gas, heat, light, power, telephone and other utilities and services supplied to the Premises, all fees, costs and expenses of such services, together with any Taxes thereon. Landlord makes no representation with respect to the adequacy or fitness of the heating, ventilating or air conditioning equipment in the Project to maintain temperatures that may be required for, or because of, any equipment of Tenant other than normal fractional horsepower office equipment, and Landlord shall have no liability for loss or damage in connection therewith. 12.1.2 In the event any governmental entity promulgates or revises any statute, ordinance or building, fire or other code or imposes mandatory or voluntary controls or guidelines on Landlord, the Project or any part thereof, relating to the use or conservation of energy, water, gas, light or electricity or the reduction of automobile or other emissions or the provision of any other utility or service provided with respect to this Lease, or in the event Landlord is required or elects to make alterations to the Project or any other part thereof in order to comply with such mandatory or voluntary controls or guidelines, Landlord may, in its sole discretion, require Tenant to comply with such mandatory or voluntary controls or guidelines or Landlord may, in its sole discretion, make such alterations to the Project or any other part thereof. All costs incurred by Landlord in connection with such laws, ordinances, guidelines or controls, including alterations to the Project shall be included in Operating Costs and assessed to Tenant pursuant to Section 3.4, except to the extent that such costs are to be entirely the responsibility of Tenant pursuant to this Lease, in which latter case such costs shall be entirely assessed to Tenant. Neither such compliance nor the making of such alterations shall in any event entitle Tenant to any damages, relieve Tenant of the obligation to pay the full Rent reserved hereunder or constitute or be construed as a constructive or other eviction of Tenant. ARTICLE 13 - LANDLORD'S RIGHT OF ENTRY Landlord and Landlord's agents shall have the right to enter the Premises at all times, to examine the same and to make such repairs or alterations, decorations, additions or improvements as Landlord may reasonably deem necessary or desirable, including without limitation the use and maintenance of pipes and conduits in and through the Premises, and Landlord and Landlord's agents shall be allowed to take all material into and upon the Premises that may be required therefor without the same constituting an eviction of Tenant in whole or in part, and subject to the provisions of Article 10, the Base Monthly Rent reserved shall in no way abate while said repairs, alterations, decorations, additions or improvements are being made, by reason - 21 - 27 of inconvenience, annoyance or injury to the business of Tenant because of the prosecution of any such work, or otherwise. Landlord and Landlord's agents are expressly granted permission to inspect the Premises at any reasonable time and to show the Premises at any reasonable time to prospective tenants, mortgagees, purchasers, lessees of the Building or Project and other persons with a business interest therein. If, during the last month of the Term, Tenant shall have removed all or substantially all of Tenant's property therefrom, Landlord may immediately enter and alter, renovate and redecorate the Premises, without elimination or abatement of Rent or other compensation, and such acts shall have no effect upon this Lease. If Tenant shall not be personally present to open and permit an entry into the Premises, at any time, when for any reason entry therein shall be necessary or permissible hereunder, Landlord or Landlord's agents may enter the same by a master key, or may forcibly enter the same, without rendering Landlord or such agents liable therefor (if during such entry Landlord or Landlord's agents shall accord reasonable care to Tenant's property), and without in any manner affecting the obligations, terms, covenants, conditions, provisions or agreements of this Lease. Nothing herein contained, however, shall be deemed or construed to impose upon Landlord any obligation, responsibility or liability whatsoever, for the care, supervision or repair of the Project or the Building or any part thereof, other than as otherwise provided in this Lease. Notwithstanding any provision in this Article 13 to the contrary, Landlord agrees to provide Tenant with at least 24 hours prior notice (except when Landlord reasonably determines that an emergency situation exists) and Tenant shall have the right to accompany Landlord or Landlord's employees, agents, contractors and representatives when Landlord enters the Premises. Landlord shall use reasonable efforts to accommodate Tenant's desire to have all entry into the Premises during normal business hours. ARTICLE 14 - TENANT'S INSURANCE Section 14.1 - Tenant's Insurance Tenant shall carry at its expense and maintain in force during the Term the following insurance: (a) Commercial General Liability Insurance with a Broad Form Liability Endorsement (including protective liability coverage on operations of independent contractors engaged in construction and also blanket contractual liability insurance) on an "occurrence" basis against claims for "personal injury" liability, including without limitation bodily injury, death or property damage liability with a limit of not less than Five Million Dollars ($5,000,000) in the event of "personal injury" to any number of persons or of damages to property arising out of any one "occurrence"; such insurance shall cover Tenant's indemnity obligations hereunder (excluding the indemnity obligations relating to Hazardous Materials, so long as such indemnity obligations are not generally insured for by tenants in the vicinity of the Project) and may be furnished under a "primary" policy and an "umbrella" policy, provided that it is primary insurance and not excess over or contributory with any insurance in force for Landlord; (b) insurance against loss or damage by fire and such other risks and hazards as are insurable under present and future standard forms of fire and extended coverage insurance policies, to the personal property, furniture, furnishings and fixtures belonging to Tenant located in the Premises for not less than 100% of the actual replacement value thereof; (c) Worker's Compensation and Employee's Liability Insurance (as required by state law); and (d) such other insurance as is generally required by owners of lenders on buildings similar in size, character, age and location as the Building. Section 14.2 - General Requirements of Tenant's Insurance 14.2.1 All such insurance shall name Landlord, any mortgagee and/or ground or underlying lessor as additional insureds and shall provide that Landlord and any additional insureds shall receive thirty (30) days' written notice from the insurer prior to any cancellation or change of coverage, and shall contain a cross liability or severability clause. 14.2.2 All insurance required to be carried by Tenant hereunder shall be written only as primary insurance and non-contributing and shall be effected with only such companies as Landlord shall approve, but in any event not with any company of less repute than those having a general policy rating of A and a financial rating of XV as rated in the most current available "Best's Insurance Reports". In the event "Best's Insurance Reports" is not currently published, such minimum standard shall be that published by any other nationally recognized publisher of such information. Landlord's approval shall be deemed to have been given unless Landlord in writing disapproves such company (i) not later than one month after submission of a policy or certificate to Landlord or (ii) at any time due to claims experience. Any insurance carried by Landlord shall not be contributory. 14.2.3 Tenant shall deliver true and correct copies of the policies of insurance required hereunder and original certificates thereof to Landlord at least ten (10) days before the Commencement Date, and thereafter at least thirty (30) days before the expiration dates of expiring policies. - 22 - 28 14.2.4 In the event Tenant shall fail to procure such insurance, or to deliver such policies or certificates, Landlord may, at its option, without waiving any rights or remedies which Landlord may have for Tenant's default hereunder, procure such insurance for the account of Tenant, and the cost thereof shall be paid to Landlord within ten (10) days after delivery to Tenant of bills therefor. Nothing contained in this Article 14 shall be construed as a limitation of Tenant's liability hereunder. Section 14.3 - Waiver of Subrogation (a) Subject to the rights of Landlord under Article 3 to collect, utilize and replenish Building Costs and Project Costs for the purposes therein set forth, Landlord waives any and all rights of recovery against Tenant for or arising out of damage to or destruction of the Premises, the Building or the Project, or any part thereof, from causes then included under standard "all risk" coverage owner's property insurance policies or endorsements whether or not such policies are in effect covering Landlord or Tenant and whether or not such damage or destruction shall have been caused by the negligence of Tenant, its agents, employees, contractors, visitors or licensees, but only to the extent that Landlord's insurance policies then in force permit such waiver. Tenant waives any and all rights of recovery against Landlord for or arising out of damage to or destruction of any property of Tenant, from causes then included under standard "all risk" coverage property insurance policies or endorsements whether or not such policies are then in effect covering Landlord or Tenant and whether or not caused by the negligence of Landlord, its agents, employees, contractors, visitors or licensees, but only to the extent that Tenant's insurance policies then in force permit such waiver. Landlord and Tenant represent that their present insurance policies now in force permit such waiver. (b) If at any time during the term of this Lease either party shall give no less than five (5) days prior notice to the other certifying that any insurance carrier which has issued any such policy covering any of the property above mentioned has refused to consent to the aforesaid waiver of subrogation, or such carrier revokes a consent previously given or cancels or threatens to cancel any policy previously issued and then in force and effect because of such waiver of subrogation, then, in any of such events, the waiver in this Article 14 shall thereupon be of so further force and effect as to the loss, damage or destruction covered by such policy; provided, however, that if at any time thereafter such consent shall be obtained therefor from any existing or substitute insurance company, the waiver hereinabove provided for shall again become effective. The cost of obtaining any such waiver shall be deemed a cost of such policy. Section 14.4 - Landlord's Insurance Landlord shall procure, at Tenant's cost and expense as an Operating Cost under Article 3, the following insurance: (a) Commercial General Liability Insurance (including protective liability coverage on operations of independent contractors engaged in construction and also blanket contractual liability insurance) on an "occurrence" basis for the benefit of Landlord as named insured against claims for "personal injury" liability, including, without limitation, bodily injury, death or property damage liability; (b) Insurance against loss or damage by fire and such other risks and hazards as are insurable under present and future standard forms of fire and extended coverage insurance policies, covering the full replacement cost (to the extent such coverage is available at a commercially reasonable cost) of all structures of the Premises; and (c) Landlord may, but is not obligated to carry such other insurance (including, without limitation, insurance against loss of rents and/or earthquake insurance) with respect to the Landlord or the Premises, Building and/or Project: (i) as is generally carried by Metropolitan Life Insurance Company for similar properties, for as long as Metropolitan Life Insurance Company has an ownership interest in the Landlord or any portion of the Project; and (ii) after Metropolitan no longer has an ownership interest in the Landlord or any portion of the Project, as is generally carried by owners of, or required by lenders on, buildings or projects similar in size, character and location as the Building or Project. Tenant shall be entitled to obtain at its own cost and expense any additional insurance Tenant reasonably desires to protect itself as a result of Tenant agreeing to the exculpatory language in Articles 6 and 9. ARTICLE 15 - INSOLVENCY OR BANKRUPTCY Section 15.1 - Insolvency or Bankruptcy 15.1.1 In addition to the occurrences set forth in Section 16.1 hereinafter, the following events shall constitute a default under this Lease: (i) Tenant admits in writing its inability to pay its debts as they mature; (ii) Tenant makes an assignment for the benefit of creditors or takes any other similar action for the protection or benefit of creditors; (iii) Tenant gives notice to any governmental body of insolvency or pending insolvency, or suspension or pending suspension of operations; (iv) Tenant files a voluntary petition in bankruptcy or has an involuntary petition filed against him, her or it and such petition has not been dismissed - 23 - 29 within sixty (60) days; (v) Tenant files any petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or other similar relief under any present or future bankruptcy statute, regulation or law; (vi) a court of competent jurisdiction enters an order, judgment or decree approving a petition filed against Tenant seeking any relief described in the preceding subparagraph (v) and such order, judgment or decree shall remain unvacated and unstayed for an aggregate of sixty (60) days from the date of entry thereof; (vii) a trustee, receiver, conservator or liquidator of Tenant or of all or any substantial part of its property or its interest in the Premises is employed or appointed and such receivership remains undissolved for sixty (60) days; or (viii) this Lease or any estate of Tenant hereunder is levied upon under any writ of attachment or execution, and such writ shall remain unvacated and unstayed for ten (10) days. 15.1.2 Upon the filing of a petition by or against Tenant under the United States Bankruptcy Code, Tenant, as debtor in possession, and any trustee who may be appointed agree to: (a) perform each and every obligation of Tenant under this Lease until such time as this Lease is either rejected or assumed by order of the United States Bankruptcy Court; (b) pay in the manner and at the time provided hereunder as reasonable compensation for use and occupancy of the Premises; (c) reject or assume this Lease within sixty (60) days of the filing of such petition under Chapter 7 of the Bankruptcy Code or within one hundred twenty (120) days (or such shorter term as Landlord, in its sole discretion, may deem reasonable so long as notice of such period is given) of the filing of a petition under any other Chapter; (d) give Landlord at least forty-five (45) days prior written notice of any abandonment of the Premises; any such abandonment to be deemed a rejection of this Lease; and (e) do all other things of benefit to Landlord otherwise required under the Bankruptcy Code. Tenant, as debtor in possession, and any such trustee shall be deemed to have rejected this Lease in the event of the failure to comply with any of the above requirements and to have consented to the entry of an order by an appropriate Bankruptcy Court requiring compliance with any of the above requirements, waiving all rights to notice of the entry of such order. Section 15.2 - Measure of Damages In the event of the termination of this Lease pursuant to Section 15.1, Landlord shall be entitled to the same rights and remedies as those set forth in Sections 16.1 and 16.2 and in Article 18 of this Lease. Section 15.3 - Provision of Services and Assumption of Lease In the event of the occurrence of any of those events specified in Section 15.1, if Landlord shall not choose to exercise, or by law shall not be able to exercise, its rights hereunder to terminate this Lease upon the occurrence of such events, then, in addition to any other rights of Landlord hereunder or by law, (i) Landlord shall not be obligated to provide Tenant with any of the services specified in Article 12, unless Landlord has received compensation in advance for such services, and the parties agree that Landlord's estimate of the compensation required with respect to such services shall control, and (ii) neither Tenant, as debtor-in-possession, nor any trustee or other person (hereinafter collectively called the "Assuming Tenant") shall be entitled to assume this Lease unless, on or before the date of such assumption, the Assuming Tenant (x) cures, or provides adequate assurance that the latter will promptly cure, any existing default under this Lease, (y) compensates, or provides adequate assurance that the Assuming Tenant will promptly compensate, Landlord for any pecuniary loss (including, without limitation, attorneys' fees and disbursements) resulting from such default, and provides adequate assurance of future performance under this Lease, it being covenanted and agreed by the parties that, for such purposes, any cure or compensation shall be effected by the immediate payment of any monetary default or any required compensation, or the immediate correction or bonding of any nonmonetary default; any "adequate assurance" of such cure or compensation shall be effected by the establishment of an escrow fund for the amount at issue or by bonding and "adequate assurance" of future performance shall be effected by the establishment of an escrow fund for the amount at issue or by bonding, it being covenanted and agreed by Landlord and Tenant that the foregoing provision was a material part of the consideration for this Lease. ARTICLE 16 - DEFAULT/REMEDIES Section 16.1 - Events of Default It shall be deemed conclusively a material breach of this Lease, and the occurrence of any of the following shall constitute a default by Tenant: - 24 - 30 (a) Tenant fails to make (i) payment of any Monthly Installment of Base Monthly Rent within five (5) days of when due, or (ii) any other payment of Rent pursuant to this Lease within ten (10) days of written notice of when due; or (b) Tenant fails to perform or honor any obligation, covenant, condition or representation required to be performed or made by Tenant under this Lease (other than those described above in Section 16.1(a) and except as otherwise provided below in Sections 16.1(c) through 16.1(h)) and shall fail, for a period of ten (10) days after delivery of written notice from Landlord specifying such failure ("Landlord's Nonmonetary Default Notice"), to cure said failure (which cure shall include payment to Landlord for compensation for any damages suffered by Landlord due to such failure and prior to such cure), unless such failure cannot be cured within said thirty (30) days, in which case it shall be deemed an event of default under this Lease if Tenant either (1) fails to commence to cure the applicable default within such thirty (30) day period, (ii) fails, after commencing to cure within such thirty (30) day period, to use due diligence to cure the applicable default within such period of time as may be reasonably necessary, or (iii) fails to cure the applicable default within sixty (60) days after Landlord's Nonmonetary Default Notice; or (c) Tenant abandons the Premises for a period of thirty (30) days, and Tenant fails to (i) give Landlord fifteen (15) days prior written notice of such intent to abandon and (ii) keep in place all signage it has erected or constructed in the Common Areas, Premises, Building or Project; or (d) Tenant fails to timely perform or observe any obligation required to be performed or observed by Tenant under this Lease within any time period specifically set forth in this Lease for such performance or observance; or (e) Tenant fails to timely perform or observe any obligation required to be performed or observed by Tenant under this Lease (other than an obligation described in 16.1(a), above) and in its sole judgment, Landlord determines that such failure subjects the Premises, Building or Project to the risk of physical damage which is not de minimis in nature, or disturbs or threatens to disturb other tenants in the Project which disturbance is not de minimis, or subjects the Landlord to the risk of civil damages, equitable forfeiture or restraint or criminal penalties, or consists of, results in or threatens the cancellation of any insurance policy required to be kept under this Lease or constitutes a violation of any contractual obligation of Landlord; or (f) Any of the events described in Section 15.1.1 shall occur; or (g) Tenant assigns, or transfers, by operation of law or otherwise, or enters into an agreement to assign or transfer any or all of its interests under this Lease without obtaining Landlord's prior written consent (other than as expressly permitted under Article 5 hereof) or permits, commits, suffers or maintains any unlawful act, nuisance or waste on or about the Premises, the Building or the Project or areas used in connection therewith; or (h) Tenant fails to pay, or deposit with Landlord, timely any amount of money due to Landlord pursuant to Exhibit D or Tenant Delay under Exhibit D exceeds thirty (30) days. Section 16.2 - Remedies In the event of any such default or breach by Tenant, Landlord may at any time thereafter, with or without notice and demand and without limiting Landlord in the exercise of any rights or remedies otherwise available at law or in equity which Landlord may have by reason of such default or breach do any one or more of the following: (a) Re-enter upon the Premises with or without process of law and with or without terminating the Lease and take possession of the same and of all trade fixtures, furnishings, equipment and other personal property of Tenant, including the right to change door locks (or other means of prohibiting Tenant from having occupancy of the Premises) and suspend utilities and services and expel or remove Tenant and all other parties occupying the Premises, using such force as may reasonably be necessary to do so without being liable to Tenant for any loss or damage occasioned thereby. Personal property may be removed by Landlord from the Premises and stored in such place as Landlord shall designate for the account of and at the expense and risk of Tenant and Landlord shall in no event be liable for any damage or loss thereto. Landlord may, at its option, and after giving Tenant prior notice thereof, sell said personal property at public or private sale for such price and upon such terms as Landlord may determine, applying the proceeds of such sale against the balance owing by Tenant to Landlord under this Lease, including the expense of such removal and sale. (b) With or without terminating the Lease lock the doors to the Premises and exclude Tenant and all other persons therefrom (except those authorized by Landlord in its sole discretion). (c) Institute suit against Tenant to collect each installment of rent or other sum as it becomes due or to enforce any other obligation under this Lease. - 25 - 31 (d) With or without terminating the Lease, terminate Tenant's right to possession of the Premises by any lawful means, in which case Tenant shall immediately surrender possession of the Premises to Landlord and Landlord shall have the right to reenter the Premises and remove all persons and property therefrom using all force reasonably necessary for this purpose without being guilty in any manner of trespass or conversion, any claim by reason of such reentry being expressly waived. In such event Landlord shall be entitled to recover from Tenant all damages actually incurred by Landlord by reason of Tenant's default including, but not limited to, the cost of recovering possession of the Premises; reasonable expenses (including commissions) of reletting, including necessary renovation and alteration of the Premises, the removal of special improvements made for Tenant, reasonable attorney's fees, reasonable advertising expenses, the actual costs of protecting and caring for the Premises while vacant, and the actual cost of removing and storing Tenant's property; the worth at the time of the award of all unpaid rent, additional rent and other sums payable under the Lease that are or become due and payable prior to the time of such award (plus all interest and late charges payable with respect thereto); the worth at the time of award of the amount by which the unpaid rent, additional rent and other sums payable under the Lease for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Tenant proves could be or could have been reasonably avoided; and that portion of any leasing commission paid by Landlord based upon or pursuant to this Lease applicable to the unexpired term of this Lease. All of the foregoing amounts shall be and become immediately due and payable from Tenant to Landlord upon a default, at Landlord's election which may be exercised with or without the giving of notice. (e) Maintain Tenant's right to possession in which case this Lease shall continue in effect whether or not Tenant shall have abandoned the Premises. In such event Landlord shall be entitled to enforce all of Landlord's rights and remedies under this Lease, including, without limitation, the right to recover the rent as it becomes due hereunder and any other damages incurred by Landlord from time to time. Notwithstanding that Landlord shall have maintained Tenant's right to possession or shall not have terminated the Lease for a default, Landlord may at any time thereafter, upon notice to Tenant, terminate the Lease and/or Tenant's right to possession for such prior default. (f) Pursue any other remedy now or hereafter available to Landlord under the laws or judicial decisions of Arizona. Unpaid installments of rent and other unpaid monetary obligations of Tenant under the terms of this Lease shall bear interest from the date due at the Default Rate. (g) No re-entry or taking of possession by Landlord and/or acceptance of keys to the Premises by Landlord shall be construed as an election on Landlord's part to terminate or accept a surrender of this Lease unless a written notice of such intention is then or thereafter served on Tenant. (h) No failure by Landlord to insist upon the strict performance of any covenant, agreement, term or condition of this Lease or to exercise any right or remedy consequent upon a breach thereof, and no acceptance of full or partial rent during the continuance of any such breach, shall constitute a waiver of any such breach or of such covenant, agreement, term or condition. No covenant, agreement, term or condition of this Lease to be performed or compiled with by either party to this Lease, and no breach thereof, shall be waived, altered, modified or terminated except by written instrument executed by both the other party hereto. No waiver of any breach shall affect or alter this Lease, but each and every covenant, agreement, term and condition of this Lease shall continue in full force and effect with respect to any other then existing or subsequent breach thereof. (i) If Tenant causes a breach of any of the covenants, agreements, terms or conditions contained in this Lease, Landlord shall be entitled to invoke any right and remedy under this Lease or allowed at law or in equity or by statute or otherwise as though re-entry, summary proceedings and other remedies which were not provided for in this Lease. (j) Tenant agrees that in the event of a default, Landlord will incur damages which are beyond normally encountered leasehold damages and Landlord shall be entitled to collect and recover all special damages incurred by reason of Tenant's default including, without limitation, all costs of any build-out or improvements done for Tenant, the full amount of any concessions or inducements previously granted Tenant, plus any other special damages incurred by Landlord. (k) All rights and remedies of Landlord herein enumerated shall be cumulative and none shall exclude any other right or remedy allowed by law. All rights and remedies of Landlord, whether enumerated herein or allowed by law, may be pursued singly, cumulatively, or consecutively and pursuit of one such right or remedy shall not, except to the extent required by law, be deemed an election of remedies or a waiver of any other remedies. ARTICLE 17 - LANDLORD'S RIGHT TO PERFORM If Tenant shall default in the timely performance of any obligation on Tenant's part to be performed under this Lease, Landlord may immediately, or at any time thereafter, without notice, perform the same for the account of Tenant. If Landlord at any time is compelled to pay or elects to pay any sum of money or do any act which will require the payment of any sum of money (including but not limited to employment of - 26 - 32 attorneys or incurring of costs) by reason of the failure of Tenant to comply with any term, covenant, condition, provision or agreement hereof, the sum or sums so paid or incurred by Landlord with interest at the Default Rate shall be due from Tenant to Landlord promptly upon demand by Landlord, as additional rent. ARTICLE 18 - END OF TERM Section 18.1 - Condition of Premises Upon the expiration or other termination of the Term, Tenant shall quit and surrender the Premises to Landlord, broom clean, in as good order, condition and repair as it now is or may hereafter be placed, ordinary wear and tear and damage caused by casualty (subject to the other provisions of the Lease) excepted. Tenant shall remove all property of Tenant, as directed by Landlord. Subject to Section 6.1.2, at Landlord's option, Landlord may require Tenant to remove any Alterations or other improvements installed on Tenant's behalf in the Premises, unless Landlord agreed in writing to non-removal at the time Landlord consented to such Alterations or other improvements. If Tenant shall remove any such property, Alterations or improvements permitted or required to be removed from the Premises, Tenant shall repair or, at Landlord's option, shall pay to Landlord the cost of repairing, any damage arising from such removal. Any property left on the Premises at the expiration or other termination of this Lease, or after the happening of any of the events of default set forth in Article 16, may, at the option of Landlord, either be deemed abandoned or be placed in storage at a public warehouse in the name of and for the account of and at expense and risk of Tenant or otherwise disposed of by Landlord in the manner provided by law. Tenant expressly releases Landlord of and from any claims and liability for damage to or destruction or loss of property left by Tenant upon the Premises at the expiration or other termination of the Lease and Tenant hereby indemnifies Landlord against any and all claims and liability with respect thereto. Section 18.2 - Holding Over If Tenant holds over after the Term with the express written consent of Landlord such tenancy shall be from month to month only and shall not be a renewal hereof, and Tenant shall pay as Rent to Landlord for the use and occupancy of the Premises for each month Tenant holds over an amount agreed to be one and one-quarter (1.25) times the Rent which is due on the last month of the Term, and Tenant shall also comply with all of the terms, covenants, conditions, provisions and agreements of this Lease for the time during which Tenant holds over. If without the express written consent of Landlord, Tenant shall fail to vacate the Premises after the expiration of the Term or sooner termination of this Lease for any cause or after Tenant's right to occupy the Premises ceases, thereafter, and notwithstanding anything to the contrary contained elsewhere in this Lease, Tenant shall pay as Rent to Landlord for the use and occupancy of the Premises for each month Tenant holds over an amount agreed to be one and one-half (1.5) times the Rent which is due on the last month of the Term, and Tenant shall also comply with all of the terms, covenants, conditions, provisions and agreements of this Lease for the time during which Tenant holds over. If the Premises are not surrendered at the end of the Term or of a permitted hold over period, Tenant shall be additionally responsible to Landlord for all damage (including but not limited to the loss of Rent) which Landlord shall suffer by reason thereof, and Tenant hereby indemnifies Landlord against all claims made by any succeeding lessee against Landlord, resulting from delay by Landlord in delivering possession of the Premises to such succeeding Tenant. Tenant's obligation to observe or perform all of the terms, covenants, conditions, provisions and agreements of this Article shall survive termination of this Lease. Section 18.3 - Conditions of Termination In the event that this Lease terminates for any reason prior to the Expiration Date (including but not limited to termination by Landlord), such termination will terminate any and all agreements for the extension of this Lease (whether expressed in an option, exercised or not, or in a collateral document or otherwise). Any right herein contained on the part of Landlord to terminate this Lease shall continue during any extension hereof. Any option on the part of Tenant herein contained for an extension hereof shall not be deemed to give Tenant any option for a further extension beyond the first extended term. No act of thing done by Landlord or Landlord's agents during the Term shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept such surrender shall be valid unless in writing signed by Landlord. No employee of Landlord or Landlord's agents shall have any power to accept the keys of the Premises prior to the termination of this Lease. ARTICLE 19 - QUIET POSSESSION Landlord hereby expressly covenants and agrees with Tenant (in lieu of any implied covenant of quiet possession) that upon Tenant's paying Rent and all other charges and observing and performing all the terms, covenants, conditions, provisions and agreements of this Lease on Tenant's part to be observed or performed, Tenant shall have quiet possession of the Premises for the Term as to anyone claiming by, through or under Landlord, subject, however, to the terms of this Lease and of any ground leases, underlying leases, covenants, conditions and restrictions, mortgages and deeds of trust affecting all or any portion of the Project or any of the areas used in connection with the operation of the Project. - 27 - 33 ARTICLE 20 - RULES AND REGULATIONS Tenant and Tenant's agents, employees, contractors, visitors and licensees shall observe faithfully and comply strictly with the Rules and Regulations attached hereto as Exhibit F and made a part hereof, and such other and further reasonable Rules and Regulations as Landlord or Landlord's representatives may from time to time adopt. Any addition or change in the Rules and Regulations shall become effective within five (5) days after written notice thereof given by Landlord or its representatives. Landlord shall not be responsible for the performance of, and shall not be liable to Tenant or any other Person for violation of, any of said Rules and Regulations, or the breach of any term, covenant, condition, provision or agreement in any lease or in any covenants, conditions and restrictions affecting the Project, by any other tenant in the Project or other Person. ARTICLE 21 - NO WAIVER/ENTIRE AGREEMENT/MODIFICATION The failure of Landlord to seek redress for violation of, or to insist upon the strict performance of any term, covenant, condition, provision or agreement of this Lease, or any of the Rules and Regulations attached to this Lease or hereafter adopted by Landlord, shall not prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of any original violation. No provision of this Lease shall be deemed to have been waived by Landlord, unless such waiver be in writing signed by Landlord. The acceptance by Landlord of Rent with knowledge of the breach of any term, covenant, condition, provision or agreement of this Lease shall not be deemed a waiver of such breach. No payment by Tenant or receipt by Landlord of a lesser amount than the Monthly Installment shall be deemed to be other than on account of the earliest stipulated Rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such Rent or pursue any other remedy in this Lease provided. This Lease contains the entire agreement between the parties, and recites the entire consideration given and accepted by the parties. There are no oral agreements between Landlord and Tenant affecting this Lease, and this Lease supersedes and cancels any and all prior negotiations, arrangements, correspondence, communications, brochures, agreements and understandings, if any, whether oral or written, between Landlord and Tenant or displayed by Landlord to Tenant with respect to the subject matter of this Lease. There are no representations between Landlord and Tenant other than those contained in this Lease and all reliance with respect to any representations is based solely upon the terms of this Lease. Any agreement hereafter made shall be ineffective to change, modify, waive or discharge any provision of this Lease in whole or in part unless such agreement is in writing and signed by the party against whom enforcement of the change, modification, waiver or discharge is sought. This Lease may be executed in one or more duplicates or counterparts, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument. ARTICLE 22 - LANDLORD'S DEFAULT/LIABILITY Section 22.1 - Force Majeure This Lease and the obligation of Tenant to pay Rent and all other sums due hereunder to keep, observe and perform all of the other terms, covenants, conditions, provisions and agreements of this Lease on the part of Tenant to be kept, observed or performed shall in no way be affected, impaired or excused because Landlord is unable to fulfill any of its obligations under this Lease, or is delayed or curtailed in any way from doing so, by reason of any cause beyond Landlord's reasonable control, including, but not limited to, acts of God, strike or labor troubles, fuel or energy shortages, governmental preemption or curtailment in connection with a national emergency or in connection with any rule, order, guideline or regulation of any department or governmental agency or by reason of the conditions of supply and demand which have been or are affected by a war or other emergency. Any such prevention, delay or curtailment shall be deemed excused and Landlord shall not be subject to any liability resulting therefrom. Section 22.2 - Notice/Right to Cure Landlord shall not be deemed to be in default in the performance of any obligation required to be performed by it hereunder unless and until it has failed to perform such obligation within thirty (30) days after written notice by Tenant to Landlord specifying the nature of Landlord's failure to perform such obligation; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be deemed to be in default if it shall commence such performance within such thirty (30) day period and thereafter shall diligently prosecute the same to completion. All rights to cure provided to Landlord under this Section 22.2 shall also be accorded to any mortgagee, ground lessor or beneficiary under a deed of trust encumbering the Building or the Project. Section 22.3 - Limitation of Landlord's Liability 22.3.1 The liability of Landlord hereunder or in connection with the Premises, Building or Project shall be limited to its interest in the Building, and in no event shall any other assets of Landlord be subject to any claim arising out of or in connection with the Lease, Premises, Building or Project. - 28 - 34 22.3.2 If, at any time during the term of this Lease, the holder of Landlord's interest hereunder is a partnership or joint venture, Tenant agrees to look only to the assets of such partnership or joint venture in the Building and neither Landlord nor its partners or joint venturers shall have personal liability with respect to any obligations or payments due or which may become due from Landlord hereunder. A deficit in the capital account of any partner or joint venturer shall not be considered an asset of such partnership or joint venture. Section 22.4 - Sale by Landlord Landlord shall have the right at any time and from time to time to sell, transfer, convey and assign by any means its rights, obligations and/or interest in this Lease and/or in the Building, Project or any part thereof. Upon such sale, transfer, conveyance or assignment, Landlord shall be freed and relieved of such covenants and obligations. Landlord (or the transferee or assignee) shall give Tenant prompt notice of such a transfer or assignment. ARTICLE 23 - NOTICES Section 23.1 - Notices To Tenant Except as otherwise in this Lease provided, a bill, demand, statement, consent, notice or communication which Landlord may desire or be required to give to Tenant shall be deemed sufficiently given or rendered if in writing, delivered personally to Tenant or sent by certified, registered or express United States mail (return receipt requested and postage prepaid) or sent (prepaid) by overnight or same day carrier or courier service which maintains records of delivery, attempts at delivery and receipts in a manner similar to those records kept by the U.S. Postal Service for its certified mail, return receipt requested service, addressed to Tenant at the address set forth in Paragraph K of the Summary of Basic Terms, with a copy to Tenant's legal department at the same address, or at such other address as Tenant shall designate by notice given as herein provided. Section 23.2 - Notices to Landlord Any notice, request, demand or communication by Tenant to Landlord must be in writing and delivered personally to an officer of Landlord or sent by certified (return receipt requested) or overnight or same day carrier or courier (postage fully prepaid), addressed to Landlord, at the address set forth in the Basic Lease Information, or at such other address as Landlord shall designate by notice given as herein provided. If Tenant is notified of the identity and address of Landlord's mortgagee or beneficiary under a deed of trust, or ground or underlying lessor, Tenant shall give such party notice of any default by Landlord hereunder in the same manner Tenant is to give Landlord notice hereunder, and if an opportunity to cure such default is provided herein, such party shall have a reasonable opportunity to cure such default before Tenant's exercising any remedy available to it. Section 23.3 - Time of Rendition of Notices The time of the rendition of such bills or statements and of the giving of such consents, notices, demands, requests or communications (collectively "notice") by Tenant or Landlord shall be deemed to be the earlier of (i) the date received, (ii) if the notice is sent by certified or registered mail (return receipt requested, postage prepaid), upon delivery as indicated in the return receipt, or (iii) if the notice is sent by express mail or by overnight or same day carrier or courier, (prepaid) upon delivery as indicated in the return receipt or records of delivery or attempted delivery. Rejection or refusal to accept a notice, request, demand, or the inability to deliver same because of a changed address of which no notice was given shall be deemed to be a receipt of the notice, request or demand sent. Notwithstanding any provision to the contrary contained in this Lease, no provision in this Lease shall preclude service of notices in accordance with any state or local law. ARTICLE 24 - SECURITY DEPOSIT Tenant shall deposit in cash with Landlord the sums specified in this Article as security for the faithful performance by Tenant of all the terms, covenants and conditions of this Lease (the "Security Deposit"). Paragraph M of the Summary of Basic Terms sets forth the initial amount of Tenant's Security Deposit, which Tenant shall deposit with Landlord upon Tenant's execution of this Lease. Tenant shall, before the Option Term commences, deposit in cash with Landlord an additional amount so that the amount of the Security Deposit equals the amount required during the Option Term as determined by Section 27(a)(2). Landlord shall have the right, without waiving any of Landlord's other rights and remedies under this Lease, upon the occurrence of any of the events of default described in Article 16, to apply the Security Deposit to remedy any failure by Tenant to repair or maintain the Premises or to perform any other terms, covenants or conditions contained herein. If Tenant has kept and performed all terms, covenants and conditions of the Lease during the Term, Landlord will within thirty (30) days following the termination hereof return the Security Deposit to Tenant or the last permitted assignee of Tenant's interest hereunder at the expiration of the Term. Should Landlord use any portion of the Security Deposit to cure any default by Tenant hereunder, Tenant shall replenish the Security Deposit to the full amount within ten (10) days after notice. Landlord shall not be - 29 - 35 required to keep the Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on any portion of the Security Deposit. Upon any sale or transfer of its interest in the Building, Landlord may transfer the Security Deposit to its successor in interest and thereupon, Landlord shall be released from any liability or obligation with respect thereto. ARTICLE 25 - BROKERAGE Tenant represents and warrants that the broker or brokers specified in Article N of the Summary of Basic Terms was/were the sole broker or brokers who negotiated and brought about the consummation of this Lease, and that no discussions or negotiations were had with any other broker, agent or finder concerning the leasing of the Premises. Based on the foregoing representation and warranty, Landlord has agreed with Tenant that Landlord shall pay such commission or compensation due to said broker or brokers in connection with the consummation of this Lease pursuant to any agreement between Landlord and such broker. Each party hereby agrees to indemnify, protect, defend and hold the other harmless from and against any claims for brokerage commissions made by any broker, agent or finder not specified in Article N of the Summary of Basic Terms arising out of any dealings, actions, discussions, negotiations or contracts allegedly had with or on behalf of such party, and from and against any and all losses, costs, expenses, liabilities and damages suffered or incurred by such party as a consequence thereof, including, without limitation, attorneys' fees and costs. ARTICLE 26 - MISCELLANEOUS Section 26.1 - Captions and Construction The marginal notes and headings are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope or intent of this Lease nor do they in any way affect this Lease. The language in all parts of this Lease shall be construed according to its normal and usual meaning and not strictly for or against either Landlord or Tenant. Section 26.2 - Definitions The term "Landlord" as used in this Lease means only the owner or mortgagee in possession or grantee in possession under a deed of trust, or the owner of a lease of the Project (or part thereof in which the Premises is situated) for the time being. The words "re-enter" and "re-entry" as used in this Lease are not restricted to their technical legal meaning. Section 26.3 - Successors and Assigns The covenants contained in this Lease shall bind and inure to the benefit of Landlord and Tenant and their respective legal representatives and successors, and, except as otherwise provided in this Lease, their assigns. Section 26.4 - Landlord's Approval The review, approval, inspection or examination by Landlord of any item to be reviewed, approved, inspected or examined by Landlord under the terms of this Lease or the Exhibits attached hereto shall not constitute the assumption of any responsibility by Landlord for either the accuracy or sufficiency of any such item or the quality or suitability of such items for its intended use, and shall not constitute an assumption of risk with respect to same, nor a representation or certification by Landlord nor an estoppel against Landlord that such matter is safe or reasonable or in compliance with applicable laws. Any such review, approval, inspection or examination by Landlord is for the sole purpose of protecting Landlord's interests in the Project and under this Lease, and no third parties, including, without limitation Tenant or any person or entity claiming through or under Tenant, or the contractors, agents, employees, visitors or licensees of Tenant or any such person or entity, shall have any rights hereunder. Section 26.5 - Joint and Several Liability If a partnership or more than one legal person at any time constitutes Tenant, (1) each partner and each legal person is jointly and severally liable for the keeping, observing and performing of all of the terms, covenants, conditions, provisions and agreements of this Lease to be kept, observed or performed by Tenant, and (2) the term "Tenant" as used in this Lease shall mean and include each such partner or legal person jointly and severally and the act of or notice from or notice or refund to, or the signature of, any one or more of them, with respect to this Lease, including but not limited to any renewal, extension, expiration, termination or modification of this Lease, shall be binding upon each and all of the persons executing this Lease as Tenant with the same force and effect as if each and all of them had so acted or so given or received such notice or refund or so signed. Section 26.6 - Governing Law This Lease shall be governed by and construed in accordance with the laws of the State of Arizona. - 30 - 36 37 enforcing or establishing its rights hereunder, including without limitation, court costs and all fees, costs and expenses for legal representation, including, without limitation, expert witness fees. Section 26.15 - Waiver of Trial By Jury; Venue Jurisdiction The respective parties hereto hereby waive trial by jury and any objection to venue in Maricopa County, and agree and consent to personal jurisdiction of the courts of the State of Arizona, in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matter whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises, or any claim of injury or damage, or the enforcement of any remedy under any statute, emergency or otherwise. Section 26.16 - Substitution of Premises Intentionally Deleted Section 26.17 - Binding Effect Submission of this instrument for examination or signature by Tenant does not constitute an offer to lease, or a reservation of or option for a lease, and it is not effective as a lease or otherwise until execution by and delivery to both Landlord and Tenant. Section 26.18 - Exhibits and Addenda Any rider, addenda or exhibit attached hereto is made a part hereof. Section 26.19 - Signs Tenant shall have the right to display and maintain, at Tenant's expense, on the exterior of the Premises, or in the interior of the Premises if visible from the exterior of the Premises, only such signs, names, insignia, trademarks and other descriptive, symbolic or decorative material of any kind ("Sign" or "Signs"): (a) as shall have first received the written approval of Landlord as to type, size, color, location and other design features; (b) as shall comply with the provisions and criteria of the Sign Program set forth on Exhibit G attached hereto to the extent applicable; and (c) for which Tenant has first obtained, at Tenant's expense, all required governmental approvals. Landlord's review of Signs shall be made in accordance with the provisions and criteria set forth on Exhibit G to the extent applicable. Notwithstanding any other provision of this Lease, in no event shall Tenant make any alteration or addition to or improvement on or visible from the exterior of the Premises without Landlord's prior written consent, which may be withheld in Landlord's sole and absolute discretion. Section 26.20 - No Merger The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger, and shall, at the option of Landlord terminate all or any existing subleases or subtenancies, or may, at the option of Landlord, operate as an assignment to it of any or all such subleases or subtenancies. Section 26.21 - Acknowledgement of Waivers and Limitations TENANT SPECIFICALLY ACKNOWLEDGES THAT THIS LEASE CONTAINS CERTAIN WAIVERS OF CERTAIN STATUTORY AND COMMON LAW RIGHTS AND CERTAIN LIMITATIONS ON DAMAGES AND THAT TENANT HAS AGREED THERETO. Section 26.22 - Tenant's Equipment and Personal Property With respect to equipment and personal property (including, without limitation, spare parts) that Tenant has financed or uses in connection with Tenant's business, which equipment is either not affixed to the Premises and is not necessary to the use of the Premises by any tenant, Landlord agrees to execute, from time to time upon request by Tenant and upon payment of a reasonable fee to defray Landlord's administrative costs (and out-of-pocket costs, if incurred) "Landlord's Consent to Encumbrance of Equipment" attached hereto as Exhibit I and incorporated herein, to confirm Landlord's status of its lien rights with respect to such property. ARTICLE 27 - OPTION TO EXTEND Section 27 - Option to Extend Landlord hereby grants to Tenant the option (the "Option") to extend the Term (the "Initial Term") for an additional five (5) years (the "Option Term"), but only in strict accordance with the terms and conditions set forth below: - 32 - 38 (a) The Option must be exercised, if at all, by written notice to Landlord at twelve (12) months prior to the Expiration Date of the initial Term. All of the terns and conditions of the Lease applicable as of such Expiration Date shall continue to apply during the Option Term, except that: (1) The Base Monthly Rent during the Option Term shall be the Prevailing Market Rental as of the date of the Landlord's Notice (both as defined below). (2) The Security Deposit shall be increased, if necessary, within fifteen (15) days after Prevailing Market Rental has been determined to equal one hundred ten percent (110%) of the Base Monthly Rent for the last month of the Option Term. (b) The "Prevailing Market Rental" shall mean and include all rental and other monetary payments, together with all escalations, including, without limitation, consumer price indexing and adjustments in Base Monthly Rent, which the Landlord could obtain from a third party desiring to lease the Premises for the Option Term, taking into account the age of the Project, the size, the quality of construction of the Project and the Premises, the services provided under the terms of the Lease, the rental then being obtained for new leases of space comparable to the Premises in the Phoenix/Valley of the Sun area and all other factors that would be relevant to such third party; provided, however, that Prevailing Market Rental shall be stated net of any free rent concessions included in such market rental and no allowance or credit for the construction of tenant improvements (or reduction in rental as a result of the absence of such allowance or credit) shall be taken into account in determining Prevailing Market Rental. (c) In the event Tenant exercises the Option, Landlord shall use commercially reasonable efforts to notify Tenant of its opinion of the Prevailing Market Rental at least one hundred fifty (150) days prior to the Expiration Date of the Initial Term (the "Landlord's Notice"). Within thirty (30) days following its receipt of the Landlord's Notice, Tenant shall deliver written notice to Landlord either accepting the Prevailing Market Rental set forth in the Landlord's Notice or disputing the same and setting forth Tenant's opinion of the Prevailing Market Rental (the "Tenant's Notice"). Failure to timely give a proper Tenant's Notice shall be conclusively deemed to be Tenant's waiver and revocation of the Option. (d) At any time within thirty (30) days following its receipt of the Tenant's Notice, Landlord shall have the option to either (1) accept the Prevailing Market Rental set forth in the Tenant's Notice, or (2) submit the dispute to arbitration in accordance with Section 2(e) below. Landlord's failure to notify Tenant of its election under clause (1) above shall be conclusively deemed to be Landlord's election to submit the determination of Prevailing Market Rental to arbitration under clause (2) above. (e) Any arbitration under this Section 27 shall be conducted in the County of Maricopa in accordance with the then prevailing rules of the American Arbitration Association or its successor for arbitration of commercial disputes, modified as follows, and any judgment or award rendered therein shall be final and binding upon the parties and may be entered in any court of competent jurisdiction: (1) At any time concurrently with or after Landlord's election under Section 27(d)(2) above, Landlord shall appoint a qualified real estate appraiser familiar with the prevailing market rentals of warehouse and "R&D" buildings in Maricopa County who is a member of the National Institute of Real Estate Appraisers (a "Qualified Appraiser") to act as an arbitrator hereunder. Within ten (10) business days after such appointment by Landlord, Tenant may by written notice to Landlord appoint another Qualified Appraiser to also act as an arbitrator hereunder. Tenant's failure to so appoint a second arbitrator shall be conclusively deemed to be Tenant's appointment of the arbitrator appointed by Landlord. (The date of such notice by Tenant or, if none is given, the last date such notice could have been given shall be hereinafter referred to as the "Selection Date"). (2) Within ten (10) business days after the Selection Date, the appointed arbitrators shall meet to determine (or the sole arbitrator shall alone determine) the Prevailing Market Rental. In the event two (2) arbitrators are appointed under clause (e)(1) above who are unable to agree upon a determination of the Prevailing Market Rental within thirty (30) days after the Selection Date, they shall appoint a Qualified Appraiser to act as an additional arbitrator hereunder. In the event no such appointment is made within thirty-five (35) days after the Selection Date, Landlord and Tenant shall jointly appoint a Qualified Appraiser as such third arbitrator or, if they cannot agree thereon, either party may petition the then Chief Judge of the United States District Court having jurisdiction over the City of Phoenix to appoint a Qualified Appraiser as such third arbitrator. (3) Within fifteen (15) business days after the appointment of the third arbitrator, the appointed arbitrators shall meet to determine the Prevailing Market Rental. In the event all three (3) appraisers do not agree on the Prevailing Market Rental, the average of the determinations of the two (2) appraisers which are closest in value shall be the Prevailing Market Rental. - 33 - 39 (4) The arbitrators shall render their determination in writing with counterpart copies to each party. Such determination shall be certified by each arbitrator as his opinion of the Prevailing Market Rental or, where such determination was arrived at through averaging under clause (e)(3) above, each arbitrator's individual determination shall be set forth and certified by him. In no event shall any arbitrator modify any provision of the Lease in arriving at his determination. (5) In the event of any failure, refusal or inability of an arbitrator to act, a successor shall be appointed in the same manner provided above for such arbitrator's appointment. Each party shall beat all costs and expenses of the arbitrator appointed (or deemed appointed) by it and both shall equally share all costs and expenses of the third arbitrator, if any. All attorneys' fees and expenses of witnesses shall be paid by the party engaging such attorney or calling such witness. (6) Each arbitrator shall have the right to consult experts and competent authorities regarding factual information or evidence pertaining to a determination of the Prevailing Market Rental; provided, however that any such consultation shall be made in the presence of Landlord, Tenant and all other appointed arbitrators with full right on each of their part to cross-examine. (f) In the event the determination of the Prevailing Market Rental has been submitted to arbitration but such arbitration has not been concluded prior to the commencement of the Option Term, Tenant shall pay to Landlord the amount determined under Section 27(c) above based on the Prevailing Market Rental set forth in the Landlord's Notice as Rent and Additional Rent for the Option Term. In the event the Prevailing Market Rental determined by arbitration results in any Rent, Additional Rent or any other payment which may become due under the Lease different from such amount, Tenant shall immediately pay to Landlord any increase therein and Landlord shall credit any reduction therein against the next Monthly Installments due from Tenant to Landlord under the Lease. (g) The Option shall be personal to Decision Servcom, Inc., a Delaware corporation, and not assignable or transferrable to any other entity. (h) Upon the occurrence of any of the following events, Landlord shall have the option, exercisable at any time prior to the commencement of the Option Term, to terminate all of the provisions of this Article 27 whereupon no prior or subsequent exercise of the Option shall be of any force or effect: (1) Tenant's failure to timely exercise the Option in strict accordance with Section 27(a) above or to timely deliver a proper Tenant's Notice in strict accordance with Section 27(c) above. (2) The existence at the commencement of the Option Term of any default on the part of Tenant under the Lease or of any state of facts which with the passage of time or the giving of notice, or both, would constitute such a default. (3) Tenant's third default under the Lease prior to the commencement of the Option Term, notwithstanding that all such defaults may subsequently be cured. (i) Time shall be of the essence with respect to all of the provisions of this Article 27. IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this Lease as of the day and year set forth in Paragraph A of the Summary of Basic Terms. LANDLORD: METROPOLITAN LIFE INSURANCE COMPANY, a New York corporation By: Illegible Signature ------------------------- ------------------------- Print name Its: ------------------- - 34 - 40 TENANT: DECISION SERVCOM INC., a Delaware corporation By: --------------------------- --------------------------- Print name Its: ---------------------- By: /s/ E.W. BUCKLEY --------------------------- E.W. BUCKLEY --------------------------- Print name Its: DIRECTOR-CORP SERVICES ---------------------- - 35 - EX-10.26 4 EMPLOYMENT OFFER 1 Exhibit 10.26 STEPHEN J. FELICE President April 18, 1998 [DECISION ONE LOGO] Mr. James S. Burkhardt 326 Dutton Road Sudbury, MA 01776 Dear Jim: As we discussed, I have revised our offer of employment with DecisionOne Corporation (the "Company"). You will begin your career with DecisionOne on or before May 18, 1998 in the position of Senior Vice President of Sales and Marketing. Your annual base salary will be $240,000 ($9,230.77 biweekly) and you will be eligible for an annual bonus targeted at $160,000. The annual bonus will be composed of two elements: * Approximately 70% of your bonus target will be based on corporate sales results, with an accelerated rate of bonus achievement for above reasonable and realistically achievable target results. This bonus opportunity is uncapped. The sales results target will be established via mutual agreement between you and me, incorporating a ramp-up period giving you time to improve the results. * Approximately 30% of your bonus target will be based on corporate earnings. This element of the bonus will range between 0% to 200% achievement, depending on our financial results. I will give you more specifics about the bonus plan as we get closer to your start date. Stock Options. You will be provided the opportunity to participate in the company stock option program. Subject to approval by the Compensation Committee of the Board of Directors, you will receive an option to purchase 100,000 shares of DecisionOne stock at an exercise price of $20.6084, the same exercise price as every participant has received. The grant will be equally split between a time vesting option and a performance vesting option. The time vesting option, to the extent possible under Internal Revenue Code, is intended to be treated as an Incentive Stock Option. The performance vesting option is not intended to be treated as an Incentive Stock Option. On each of the first four anniversaries of the Date of Grant, 25% of the time vesting option shall vest and become exercisable. The performance vesting option shall vest and become exercisable on the seventh anniversary of the Date of Grant. Notwithstanding the preceding sentence, 25% of the performance vesting option will vest on the thirtieth day following the availability of audited financial statements with respect to each of fiscal years 1999, 2000, 2001, and 2002, if the "Implied Equity Value" set forth below for the immediately preceding June 30 (each a "Valuation Date") is achieved: VALUATION DATE IMPLIED EQUITY VALUE June 30, 1999 $32.17 June 30, 2000 $47.93 June 30, 2001 $66.13 June 30, 2002 $91.26 DecisionOne Corporation * 50 East Swedesford Road * Frazer, PA 19355 610/296-6094 * 610/296-5250 2 -2- April 18, 1998 Any portion of the performance vesting option which is not accelerated on a Valuation Date shall vest on the next subsequent Valuation Date if the Implied Equity Value set forth above is achieved for such subsequent Valuation Date. Implied Equity Value shall be calculated as follows: A fraction (i) the numerator calculated as (a) 7.5 times (b) the Pro Forma Consolidated Cash Flow for the applicable fiscal year less (x) all short term and long term Indebtedness of the Company and (y) all preferred stock plus the sum of (w) any annual engagement fee payable to Donaldson, Lufkin & Jenrette Securities Corporation for such fiscal year, (x) cash and cash equivalents, (y) the proceeds which would be received from the exercise of all outstanding options and (z) the proceeds which would be received from the exercise of all outstanding warrants and (ii) the denominator calculated as the fully diluted outstanding number of shares. For purposes of this calculation convertible securities will be treated as converted if they are "in the money". These options are personal to the Optionee and may be exercised only by the Optionee or his or her representative in the event of the Optionee's Disability and death. Any Incentive Stock Option shall not be transferable other than by will or the laws of descent and distribution and pursuant to Article 3 of the Investors' Agreement. The vested portion of any Nonqualified Stock Option may be transferred pursuant to Article 3 of the Investors' Agreement and to (i) the spouse, children or grandchildren of the Optionee ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members or (iii) a partnership in which such Immediate Family Members are the only partners, provided that (x) there may be no consideration for any such transfer and (y) subsequent transfer of transferred Options shall be prohibited except by will or the laws of descent and distribution. Upon change of control, the time vesting option shall vest in its entirety and become immediately exercisable and, if the Implied Equity Value as of the June 30 immediately preceding the change of control was achieved, the performance vesting option shall vest in its entirety and become immediately exercisable. The Optionee shall, as a condition precedent to the exercise of these Options and his receipt of Shares, execute an instrument agreeing to be bound by the Investors' Agreement or, at the election of the Company, a counterpart of the Investors' Agreement. Severance Agreement. If your employment is involuntarily terminated by the Company without cause, or by you for good reason, other than by reason of death or disability, and you are not offered comparable employment in an executive capacity by another DecisionOne Holdings Corp. company, in exchange for a release of all claims against the Company, the Company will pay to you, during the twelve (12) month period commencing with the effective date on which your employment is so terminated (the "Severance Period"), in lieu of all other severance payments from the Company, an aggregate amount equal to your then current annual base salary, payable in equal biweekly installments in accordance with the Company's normal payroll practices, provided, however, that if you shall become employed by another organization at any time during the Severance Period, then during the remainder of the Severance Period, each such installment payment shall be reduced to one-half the amount otherwise so payable, and the total shall be reduced accordingly. In addition, during the Severance Period, you will be entitled to continue to receive the standard medical, dental, and life insurance coverage paid by the Company as in effect on the date of termination, provided, however, that if you shall become employed by another organization during the Severance Period as aforesaid, such benefits shall forthwith cease and terminate at the time you become eligible for coverage under the medical insurance plan of such organization, but in no case shall the Company's obligation to provide standard medical, dental and life insurance coverage go beyond the Severance Period. 3 -3- April 18, 1998 For the purposes of this letter, "cause", "good reason" and "change in control" shall each be defined as provided in Section 2 of the 1997 Management Incentive Plan of the Company. Work Location. Your office location will be in the Company's headquarters in Frazer PA; however, you will not be expected to relocate to the Frazer area for at least 24 months. You will have an office in Frazer and in our Wayland, MA branch. We will provide an apartment at Company expense for you in the Frazer area. We will also pay for all ordinary and reasonable expenses incurred by you in your travel between Frazer and Waltham. If we decide for you to relocate to the Frazer area after 24 months, you will be reimbursed under the Company's relocation assistance plan. The Company waives the 12-month limitation for benefits under the plan. Other Benefits. You and your dependents will be eligible for the Company's standard health and welfare benefits after 60 days of employment. The benefits package offered at DecisionOne qualifies under the IRS Code Section 125 as a Cafeteria Plan allowing the premiums paid, through payroll deduction, to be withheld on a before-tax basis. You will receive detailed information regarding the plans and your selections after your employment begins. You will receive four weeks of paid vacation for each 12 month period of employment with the Company. Non-Competition/Confidential Information. As a condition of this offer of employment, you acknowledge and recognize the highly competitive nature of the businesses of the Company and its affiliates and accordingly agree that during the employment term and through the first anniversary of the date of termination of employment, you will not directly or indirectly accept an engagement with any person or entity engaged in the multivendor computer maintenance business or any other line of business of the Company or any of its affiliates accounting for 5% or more of the Company's gross revenues (including without limitation by performing or soliciting the performance of services for any customer or client of the Company or any of its affiliates), whether such engagement is as an officer, director, proprietor, employee, partner, investor (other than as a holder of less than 1% of the outstanding capital stock of a publicly traded corporation), consultant, advisor, agent, sales representative or other participant, in any geographic area in which the Company or any of its affiliates conducted any such competing line of business. During the employment term and through the second anniversary of the date of termination of employment, you will not induce, or cause any person or entity to induce, any employee of the Company or any of its affiliates to engage in any activity in which you are prohibited to engage by the foregoing paragraph or to terminate his or her employment with the Company or any of its affiliates, and will not employ or offer employment, or cause any person or entity to employ or offer employment, to any person who was employed by the Company or any of its affiliates unless such person shall have ceased to be employed by the Company or any of its affiliates for a period of at least 12 months. You will not at any time (whether during or after your employment with the Company) disclose or use for his own benefit or purposes or the benefit or purposes of any other person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise other than the Company and any of its affiliates, any trade secrets, information, data, or other confidential information relating to customers, development programs, costs, marketing, trading, investment, sales activities, promotion, credit and financial data, manufacturing processes, financing methods, plans, or the business and affairs of the Company generally, or of any of its affiliates, provided that the foregoing shall not apply to information which is not unique to the Company or which is generally known to the industry or the public other than as a result of your breach of this covenant. You agree that upon termination of your employment with the Company for any reason, you will return immediately all memoranda, books, papers, plans, information, letters and other data, and all copies thereof or therefrom, in any way relating to the business of the Company and its affiliates, except that you may retain or personal notes, notebooks and diaries. You 4 -4- April 18, 1998 further agree that you will not retain or use for your account at any time any trade names, trademark or other proprietary business designation used or owned in connection with the business of the Company or its affiliates. You will be promptly reimbursed for all ordinary and reasonable expenses incurred by you in furtherance of the Company's business. Upon the start of employment with DecisionOne, you will need to agree to our Business Conduct Guidelines, disclose any conflicts of interest, and agree to comply with the securities reporting requirements and trading restrictions of Section 16(b) of the Securities Exchange Act of 1934 as an executive officer of DecisionOne Holdings Corp. Please be advised that neither this offer of employment nor any statements made by any officer or employee of the Company constitutes an employment contract, and that you will be an "at-will" employee of the Company. The substantive laws of the Commonwealth of Pennsylvania shall govern this letter of agreement. Please sign and fax this letter by the close of business on Monday, April 20 to the fax number below and mail the originals to me also. Jim, as we discussed, you are being presented with an opportunity to play a significant role in DecisionOne's future. I have every confidence that you will lead a very successful sales and marketing team at DecisionOne and that you will help us fulfill our vision to be the world's best provider of information technology support services. Sincerely, /s/ DWIGHT T. WILSON ----------------------- for STEVE FELICE I accept the offer of employment discussed in this letter. /s/ JAMES S. BURKHARDT 4/20/98 - --------------------------------- ---------- James S. Burkhardt Date EX-10.27 5 OFFER OF EMPLOYMENT WITH DECISIONONE CORPORATION 1 Exhibit 10.27 STEPHEN J. FELICE April 20, 1998 President [DECISION ONE LOGO] Mr. Dennis M. Callagy 7503 Bromwich Court Dallas, TX 75252 Dear Dennis: I would like to extend to you an offer of employment with DecisionOne Corporation. After an extensive search, we've selected you as the right individual to lead our major account operations efforts into the future. You will begin your career with DecisionOne on or before May 11, 1998 in the position of Senior Vice President of Major Account Operations. Your annual base salary will be $190,000 ($7,307.69 biweekly) and you will be eligible for an annual bonus targeted at $76,000. The annual bonus will be composed of two elements: * Approximately 60% of your bonus target will be based on business results from the major accounts: revenue, profit, and customer satisfaction. The performance targets will be established via mutual agreement between you and me. * Approximately 40% of your bonus target will be based on corporate earnings. Each element of the bonus will range between 0% to 200% achievement, depending on results. I will give you more specifics about the bonus plan as we get closer to your start date. You will receive a signing bonus of $10,000, payable (less applicable withholdings) on your first day of employment; provided, however, that you shall repay said bonus if you leave the company's employ before one year. You will also receive your annual target bonus for the fiscal year ending June 30, 1998, prorated for the period from your first day of employment through June 30, 1998, payable on or before August 15, 1998 provided that you are an employee of the company on the date of employment. You will be provided the opportunity to participate in the company stock option program. Subject to approval by the Compensation Committee of the Board of Directors, you will receive an option to purchase 50,000 shares of DecisionOne stock at an exercise price of $20.6084, the same exercise price as every participant has received. The vesting schedule, as well as all other terms and conditions, will be specified in the stock option agreement. There is a provision that accelerates vesting of the options in the event of a change in ownership control. If your employment by the Company is involuntarily terminated without cause, other than by reason of death or disability, and you are not offered employment in an executive capacity by another DecisionOne Holdings Corp. company, in exchange for a release of all claims against the Company, the Company will pay to you, during the twelve (12) month period commencing with the effective date on which your employment is so terminated (the "Severance Period"), in lieu of all other severance payments from the Company, an aggregate amount equal to your then current annual base salary, payable in equal biweekly installments in accordance with the Company's normal payroll practices, provided, however, that if you shall become employed by another organization at any time during the Severance Period, then during the remainder of the Severance Period, each such Decision One Corporation * 50 East Swedesfor Road * Frazer, PA 19355 610/296-6094 * Fax 610/296-5250 2 -2- April 20, 1998 installment payment shall be reduced to one-half the amount otherwise so payable, and the total shall be reduced accordingly. In addition, during the Severance Period, you will be entitled to continue to receive the standard medical, dental, and life insurance coverage paid by the Company as in effect on the date of termination, provided, however, that if you shall become employed by another organization during the Severance Period as aforesaid, such benefits shall forthwith cease and terminate at the time you become eligible for coverage under the medical insurance plan of such organization, but in no case shall the Company's obligation to provide standard medical, dental and life insurance coverage go beyond the Severance Period. Any benefit payable under this paragraph shall be referred to as "Severance Benefits". For the purposes of this letter, "cause" shall mean a determination by the Board of Directors or the Chief Executive Officer of DecisionOne that you (i) failed to obey the reasonable and lawful orders of the Board of Directors, (ii) acted with gross negligence in the performance of your duties, (iii) willfully breached or habitually neglected your duties, or (iv) committed a felony or any act involving dishonesty, fraud, or moral turpitude. Your office location will be in the Company's headquarters in Frazer PA. You will be reimbursed for your costs to move from the Dallas area under the Company's relocation assistance plan. Reimbursement for incurred costs which results in W-2 income will be grossed-up to cover your tax liability. Our intent is to "keep you whole" for all reasonable expenses that you incur during your relocation. You will have an annual entitlement to four weeks of vacation time off which accrues on a monthly basis, in addition to 11 annual holidays plus any necessary time for illnesses and other reasonable causes. Also, you and your dependents will be eligible for the Company's standard health and welfare benefits after 60 days of employment. The benefits package offered at DecisionOne qualifies under the IRS Code Section 125 as a Cafeteria Plan allowing the premiums paid, through payroll deduction, to be withheld on a before-tax basis. You will receive detailed information regarding the plans and your selections after your employment begins. As a condition of this offer of employment, you acknowledge and recognize the highly competitive nature of the businesses of the Company and its affiliates. Accordingly, you agree that during the employment term and through the first anniversary of the date of termination of employment, if you are eligible for Severance Benefits hereunder, or the Company at its option elects to pay you Severance Benefits, then you will not directly or indirectly accept an engagement with any person or entity engaged in the multivendor computer maintenance business or any other line of business of the Company or any of its affiliates accounting for 5% or more of the Company's gross revenues (including without limitation by performing or soliciting the performance of services for any customer or client of the Company or any of its affiliates), whether such engagement is as an officer, director, proprietor, employee, partner, investor (other than as a holder of less than 1% of the outstanding capital stock of a publicly traded corporation), consultant, advisor, agent, sales representative or other participant, in any geographic area in which the Company or any of its affiliates conducted any such competing line of business. During the employment term and through the second anniversary of the date of termination of employment, you will not induce, or cause any person or entity to induce, any employee of the Company or any of its affiliates to engage in any activity in which you are prohibited to engage by the foregoing paragraph or to terminate his or her employment with the Company or any of its affiliates, and will not employ or offer employment, or cause any person or entity to employ or offer employment, to any person who was employed by the Company or any of its affiliates unless such person shall have ceased to be employed by the Company or any of its affiliates for a period of at least 12 months. 3 -3- April 20, 1998 You will not at any time (whether during or after your employment with the Company) disclose or use for his own benefit or purposes or the benefit or purposes of any other person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise other than the Company and any of its affiliates, any trade secrets, information, data, or other confidential information relating to customers, development programs, costs, marketing, trading, investment, sales activities, promotion, credit and financial data, manufacturing processes, financing methods, plans, or the business and affairs of the Company generally, or of any of its affiliates, provided that the foregoing shall not apply to information which is not unique to the Company or which is generally known to the industry or the public other than as a result of your breach of this covenant. You agree that upon termination of your employment with the Company for any reason, you will return immediately all memoranda, books, papers, plans, information, letters and other data, and all copies thereof or therefrom, in any way relating to the business of the Company and its affiliates, except that you may retain or personal notes, notebooks and diaries. You further agree that you will not retain or use for your account at any time any trade names, trademark or other proprietary business designation used or owned in connection with the business of the Company or its affiliates. Upon the start of employment with DecisionOne, you will need to agree to our Business Conduct Guidelines, disclose any conflicts of interest, and agree to comply with the securities reporting requirements and trading restrictions of Section 16(b) of the Securities Exchange Act of 1934 as an executive officer of DecisionOne Holdings Corp. Please be advised that neither this offer of employment nor any statements made by any officer or employee of the Company constitutes an employment contract, and that you will be an "at-will" employee of the Company. The substantive laws of the Commonwealth of Pennsylvania shall govern this letter of agreement. Please sign and fax this offer letter by the close of business on Friday, April 17 to me at the fax number below and mail the originals to me also. If you have any questions or concerns, either leave me a voice mail or call Dwight Wilson at 610/296-6224. Dennis, as we discussed, you are being presented with an opportunity to play a significant role in DecisionOne's future. I have every confidence that you will lead a very successful major accounts team at DecisionOne and that you will help us fulfill our vision to be the world's best provider of information technology support services. Sincerely, /s/ STEPHEN J. FELICE ------------------------- Stephen J. Felice I accept the offer of employment discussed in this letter. /s/ DENNIS M. CALLAGY 4/15/98 - --------------------------------- ---------- Dennis M. Callagy Date EX-23 6 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-03267, 333-19095, 333-33043, 333-33045 on Form S-8 and 333-33057, 333-33061 on Form S-3 of DecisionOne Holdings Corp., of our reports dated September 4, 1998 appearing in this Annual Report on Form 10-K of DecisionOne Holdings Corp. and DecisionOne Corporation for the year ended June 30, 1998. Deloitte & Touche LLP Philadelphia, Pennsylvania September 24, 1998 EX-24 7 POWERS OF ATTORNEY 1 Exhibit 24 The undersigned hereby makes, constitutes and appoints Stephen J. Felice, Thomas J. Fitzpatrick and Thomas M. Molchan, each of them acting alone, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him in his name, place and stead, in any and all capacities, to execute and cause to be filed with the Securities and Exchange Commission the Annual Report on Form 10-K for the fiscal year ended June 30, 1998 of DecisionOne Holdings Corp. and any amendents thereto pursuant to the Securities Exchange Act of 1934, with all exhibits thereto and other documents in connection therewith, and hereby ratifies and confirms all that said attorney-in-fact or his substitute or substitutes may do or cause to be done by virtue hereof. Dated: September 17, 1998 /s/ Peter T. Grauer* ---------------------------- /s/ Peter T. Grauer * Identical powers-of-attorney (other than the signature blocks) were executed by Lawrence M.v.D. Schloss and Kirk B. Wortman. EX-24.1 8 POWERS OF ATTORNEY 1 Exhibit 24.1 The undersigned hereby makes, constitutes and appoints Stephen J. Felice, Thomas J. Fitzpatrick and Thomas M. Molchan, each of them acting alone, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him in his name, place and stead, in any and all capacities, to execute and cause to be filed with the Securities and Exchange Commission the Annual Report on Form 10-K for the fiscal year ended June 30, 1998 of DecisionOne Corporation and any amendents thereto pursuant to the Securities Exchange Act of 1934, with all exhibits thereto and other documents in connection therewith, and hereby ratifies and confirms all that said attorney-in-fact or his substitute or substitutes may do or cause to be done by virtue hereof. Dated: September 17, 1998 /s/ Peter T. Grauer* ---------------------------- /s/ Peter T. Grauer * Identical powers-of-attorney (other than the signature blocks) were executed by Giles D. Harlow, Kirk B. Wortman and Richard C. Yancey. EX-27.1 9 FINANCIAL DATA SCHEDULE
5 1,000 0001040354 DECISIONONE CORP. 12-MOS JUN-30-1998 JUL-01-1997 JUN-30-1998 5,205 0 136,654 22,572 23,097 170,181 68,924 39,829 606,439 166,345 638,766 0 0 0 (204,468) 606,439 805,717 805,717 613,806 613,806 183,673 15,515 52,204 (186,428) (14,787) (171,641) 0 0 0 (171,641) (171,641) (171,641)
EX-27.2 10 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1,000 0001007588 DECISIONONE HOLDINGS CORP. 12-MOS JUN-30-1998 JUL-01-1997 JUN-30-1998 6,415 0 136,654 22,572 23,097 171,700 68,924 39,829 541,987 166,845 731,012 0 0 126 (361,732) 541,987 805,717 805,717 613,806 613,806 183,673 15,515 64,683 (198,907) (15,777) (183,130) 0 0 0 (183,130) (9.91) (9.91)
-----END PRIVACY-ENHANCED MESSAGE-----