-----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, Mkb3ol7kgcFb/J4SonR7jxm9aRqFR64R0luhLYFN3Oid/JvvQg4hNAY155Z9xs3L 02c+Gqj/Ugc0OqorCsfJlA== 0000893220-99-001338.txt : 19991208 0000893220-99-001338.hdr.sgml : 19991208 ACCESSION NUMBER: 0000893220-99-001338 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19991207 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: 99769655 BUSINESS ADDRESS: STREET 1: 50 EAST SWEDESFORD RD CITY: FRAZER STATE: PA ZIP: 19355 BUSINESS PHONE: 6104083820 10-K 1 FORM 10-K DECISIONONE CORPORATION 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, 1999 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 DECISIONONE CORPORATION: 9 3/4% SENIOR SUBORDINATED NOTES DUE 2007 DECISIONONE HOLDINGS CORP.: COMMON STOCK, $.01 PAR VALUE 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 [ ] No [X] Indicate by check mark whether DecisionOne Corporation (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] 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 10, 1999, as reported by the OTC Bulletin Board, was approximately $738,000. 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 10, 1999, 12,564,485 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 [X] 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
ITEM NO. PAGE - -------- ---- PART I 1. Business.................................................... 1 2. Properties.................................................. 15 3. Legal Proceedings........................................... 15 4. Submission of Matters to a Vote of Security Holders......... 16 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 16 6. Selected Financial Data..................................... 17 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 18 7A. Quantitative and Qualitative Disclosures about Market Risk........................................................ 30 8. Financial Statements and Supplementary Data................. 31 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 31 PART III 10. Directors and Executive Officers of the Registrant.......... 31 11. Executive Compensation...................................... 32 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 36 13. Certain Relationships and Related Transactions.............. 39 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... 40
3 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 ability to complete the Restructuring, as described herein, 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. PART I ITEM 1. BUSINESS Item 1. is presented with respect to both registrants submitting this filing, DecisionOne Holdings Corp. ("Holdings") and DecisionOne Corporation (collectively, the "Company"). GENERAL The Company is the largest independent provider of multivendor computer maintenance services in the United States, based on Dataquest Incorporated ("Dataquest") estimates for calendar year 1998. 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 that 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 data center, midrange, network and desktops. The Company provides support for over 30,000 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 service delivery organization comprised of more than 3,500 service professionals located in more than 150 service locations throughout the United States and Canada, as well as through strategic alliances in selected international markets. The Company services over 36,000 customers at over 145,000 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., Bank of America, DuPont Company, Southwestern Bell Corporation, Netscape Communications Corporation and Bell Atlantic. General Business Development. 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 1 4 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 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, a 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. 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 gained key network technical expertise to support its growing network service portfolio. Additionally, in its fiscal year 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. On August 7, 1997, the Company consummated a merger with an affiliate of DLJ Merchant Banking Partners II, L.P. ("DLJMB") pursuant to which DLJMB and certain of its affiliates (collectively, the "DLJMB Group") acquired approximately 10.9 million shares, or 87.4%, of the Holdings Common Stock in exchange for approximately $225 million (the "Merger"). Such equity proceeds, along with $145.5 million of net proceeds from the sale of the 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 Holdings common stock exercisable at $23 per share (the "11 1/2% Notes") and borrowings of $470 million under a $575 million senior secured loan facility (the "Existing Credit Facility") were used to repurchase approximately 26.5 million shares of common stock of Holdings for approximately $609.7 million, cash out then existing Holdings options and warrants, repay the Company's then existing revolving credit facility, and pay various fees and expenses incurred in connection with the Merger. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Current Operating Plan. The Company's results from operations have been significantly below those anticipated at the time of the Merger. The Company has continued to experience declining trends in revenues, earnings and EBITDA throughout fiscal 1998 and 1999, and has incurred net losses in both fiscal years. The declining trends have resulted principally from lower sales of new service contracts, continued erosion of the Company's existing revenue base, minimal acquisition growth and decreased per-incident revenues. On January 28, 1999, the Company initiated an operating plan intended to restore revenue growth and improve financial performance (the "Operating Plan"). The Operating Plan included the following key components: (i) focusing all aspects of the Company's operations -- from sales through service delivery -- on providing information technology support services to three customer groups: large corporate customers (also known as "Enterprise" customers), medium-sized accounts (also known as "Middle-Market" customers), 2 5 and alliance customers, including OEMs, software publishers, systems integrators, distributors and resellers, etc. (also known as "Strategic Alliance" customers); (ii) a cost-reduction program designed to reduce the Company's cost structure by $40 million annually upon full implementation, including a workforce reduction of more than 500 employees; and (iii) financial structure changes, including an additional $7.3 million investment by DLJMB and certain of its affiliates in the form of 14% Senior Unsecured Notes due 2006 (the "14% Notes"), and the Company's agreement with its lenders to waive all financial covenants under the Existing Credit Facility through July 29, 1999 (the "Waiver"). On July 14, 1999, Holdings' common stock was delisted from the NASDAQ National Market System. Since that date, Holdings' common stock has been quoted on the OTC Bulletin Board. Indebtedness Restructuring. On July 29, 1999, the Waiver expired. As a result, since July 29, 1999, the Company has been in default of certain financial covenants under the Existing Credit Facility. In addition, on August 2, 1999, the Company failed to make the interest payments due on both the 9 3/4% Notes and the 14% Notes. Given the existing events of default under the Existing Credit Facility, the Existing Credit Facility lenders (the "bank lending group") had previously delivered to the Company a notice prohibiting such payments. As a result of the Company's failure to comply with such financial covenants and to make such interest payments, events of default have occurred under the Existing Credit Facility and under the indentures for the 9 3/4% Notes and the 14% Notes. Accordingly, the bank lending group and the holders of the 9 3/4% Notes and the 14% Notes could declare the amounts outstanding under these debt instruments immediately due and payable and seek to exercise remedies, including, in the case of the Existing Credit Facility, foreclosure on the collateral securing such amounts. On August 2, 1999, the Company announced an agreement in principle with the bank lending group and the holders of the 14% Notes on the restructuring of its indebtedness (the "Indebtedness Restructuring"). Under the terms of the final agreement, the bank lending group would exchange approximately $523 million in existing indebtedness for approximately 94.6 percent of the reorganized Company's equity and $250 million in new senior secured bank debt (the "New Credit Agreement"). The agreement further provides that the holders of the 14% Notes would exchange their notes for (a) warrants equal to approximately 4.2 percent of the reorganized Company's fully diluted equity, at an exercise price based on an enterprise value of $350 million and (b) warrants equal to approximately 2.0 percent of the reorganized Company's equity, at an exercise price based on an equity valuation of $280 million. The holders of the 9 3/4% Notes would exchange their notes for (a) approximately 5.0 percent of the reorganized Company's equity; (b) warrants equal to approximately 2.8 percent of the reorganized Company's fully diluted equity, at an exercise price based on an enterprise value of $350 million; (c) warrants equal to approximately 5.0 percent of the reorganized Company's equity, at an exercise price based on an equity valuation of $200 million; and (d) warrants equal to approximately 3.0 percent of the reorganized Company's equity, at an exercise price based on an equity valuation of $280 million. In addition, the holders of the 11 1/2% Notes and the holders of unsecured claims of Holdings would receive a total of approximately 0.4 percent of the reorganized Company's equity. The proposed Indebtedness Restructuring will be implemented pursuant to a prepackaged bankruptcy subject to the approval of a United States Bankruptcy Court (the "Bankruptcy Court") pursuant to Chapter 11 of Title 11 of the United States Code, as amended (the "Bankruptcy Code") and the approval of the bank lending group and the holders of the 14% Notes. Management does not anticipate any adverse impact on customers, vendors or employees as a result of the Indebtedness Restructuring, since the Indebtedness Restructuring will address only the de-leveraging of the Company's balance sheet through the reduction of its indebtedness. However, there can be no assurance that the Indebtedness Restructuring will be approved by the Bankruptcy Court, nor that any adverse impact to the Company, its customers, creditors or employees will be avoided. See Note 2 to the Company's Consolidated Financial Statements as of and for the fiscal year ended June 30, 1999 for additional information. 3 6 INDUSTRY BACKGROUND According to Dataquest projections, the U.S. hardware maintenance and technology support services market was approximately $35.2 billion in 1998 and is projected to grow at a compound annual rate of 10.1% to $51.8 billion by the year 2002. 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) 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: large customers, who have complex computing environments, including data centers and tens of thousands of end-users; medium-sized customers that primarily maintain midrange and desktop computing systems; and strategic alliance customers, including a broad range of OEMs, software publishers, systems integrators, outsourcers and distributors/resellers, who are seeking complementary services to support their end-users. 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. In addition, in July 1999, the Company introduced its new web-base support capability, DecisionOne's ADVISE, which will initially provide users with online hardware maintenance request capability and real time status reporting on outstanding requests. Ultimately, 4 7 DecisionOne's ADVISE will give customers a single point of contact for all its desktop life cycle support services. 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 total cost of ownership and increase system availability and end-user productivity. The Company believes that One To 1's 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: Hardware Services: The Company provides warranty upgrades and post-warranty maintenance support 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. Network Services: NetworkOne services help customers manage the total life cycle of their complex network environments, from designing systems to maintaining network hardware on wide area and local area networks. The Company utilizes its network systems management engine, ControlOne, located at the Company's headquarters facility, to monitor, 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. TCO 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. Help Desk Services: CallOne services provide telephone technical support on more than 100 shrink-wrapped desktop software packages and a wide range of operating systems. The Company's Customer Support Centers ("CSCs") handle more than 370,000 calls per month for various types of customers including corporate help desk, Internet Service Providers and OEMs. CallOne services are available on a 24 hour a day, 7 day a week basis. Asset Management Services: The Company can inventory information technology asset data, such as personal computer location and number of software licenses, and provide information that leads to better asset management practices. Project Management Services: Through Project Management Services, the Company provides customized service programs to help system professionals manage all their information technology resources. For example, Technology Deployment Services can help companies roll out or retire desktop assets as part of a technology migration program. 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 developed 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, including planning, consulting 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, additions 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 help customers reduce data center costs, improve equipment performance and increase processor capacity. 5 8 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 support their distributed computing environments. 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 (such as IBM, Digital Equipment Corporation, Sun Microsystems, Inc., Sequent Computer Corporation, Hewlett-Packard and Memorex Telex Corporation), 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, value added resellers 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: Hardware Services: The Company repairs and refurbishes computer parts and assemblies at its network of 15 depot repair centers 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, such as handling the current disposition of equipment or configuring machines for new technology roll-outs. The Company has years of experience 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 products. These services help companies acquire inventory and maintain optimal stocking levels, allowing them to redirect funds normally spent on overstocking or replenishing inventory. Support Partner Programs. Customers increasingly demand turnkey services from vendors who can meet the total life cycle requirements of their systems. The Company is a services-only company, meaning it does not provide those aspects of the systems' life cycle 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 life cycle 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 sells its services through a sales force of approximately 100 sales professionals aligned under several sales organizations: Commercial Sales sells hardware repair, commercial help desk, network and project services (equipment installations, moves, additions and changes or IMAC) to large and multinational commercial customers. Alliance Sales sells repair, professional services and deployment services to OEMs, distributors and resellers. Logistics Sales sells parts repair and logistics support services to OEMs, resellers, third-party service providers and select commercial accounts. End-User Support Sales sells help desk services to internet service providers, software publishers, OEMs, systems integrators and outsourcers. 6 9 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 Fujitsu Australia Limited ("FAL"). The Company licenses certain of its proprietary multivendor support tools to FAL and to ICL Systems Service, which is ICL's multivendor services group in Western Europe. As a result, the Company is able to offer to 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 Company, 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. FAL, 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 FAL, the Company has supplied various management and sales support personnel to FAL. FAL also provides services to certain of the Company's multinational customers, including Sun Microsystems, Inc. SERVICE INFRASTRUCTURE Centralized Dispatch. When a customer places a call for remedial maintenance, the Company uses its Dispatch Data Gathering system ("DDG") to manage the process. When a customer is identified, the DDG system displays the customer's service level requirements and covered equipment. Specific information on the symptoms of the problem and the products that are malfunctioning are entered into the system to begin tracking the service event. The Company's Customer Support Representative ("CSR") selects, based upon the requirements of the service event, the appropriate Customer Service Engineer ("CSE") from a list of pre-assigned primary and back-up personnel and passes this information to the selected CSE. The Company maintains three CSCs in Malvern, Pennsylvania; Minneapolis, Minnesota; and Tulsa, Oklahoma. Customers can reach the CSCs by calling a toll free telephone number. The CSCs currently are staffed with over 600 CSRs. Parts Logistics. To meet the service needs of its customers, the Company stocks more than 2.5 million units of spare parts representing more than 150,000 different parts for more than 25,000 types of equipment. The Company maintains more than 2,200 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 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 Wilmington, Ohio. The Company also maintains six regional distribution centers in Atlanta, Georgia; Newark, New Jersey; Los Angeles, California; San Francisco, California; Chicago, Illinois; and Dallas, Texas. A major distribution center is also operated in Wilmington, Ohio to enable quick distribution of critical parts throughout the United States via Airborne's hub center. 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 spare parts assigned to its field workforce. It is located at distribution centers, field offices or customer sites. Parts information processed through FIS is integrated with the Company's other key systems, including DDG and International Support Information System ("ISIS"). 7 10 For a discussion of the Company's recent accounting change with respect to spare parts, see "Restructuring -- Significant Recent Events." Parts Repair. The Company repairs and refurbishes computer parts and assemblies at depot repair centers across the United States. Repair facilities are located in the following areas: Phoenix, Arizona; Los Angeles and San Francisco, California; Chicago, Illinois; Boston, Massachusetts; Nashua, New Hampshire; Columbus, Ohio; Philadelphia, Pennsylvania; and Dallas, Texas; with a major distribution center at an Airborne transportation hub in Wilmington, Ohio. These centers are either certified to ISO-9002 quality processes and standards or are in the process of obtaining certification. In addition to supporting the Company's business, parts repair is provided to OEMs, distributors and other third-party maintenance companies. Repair capabilities include systems logic boards, hard drive assemblies, LCD panels, monitors, 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. Effective July 1, 1999, the Company changed its method of accounting for spare parts. See "Accounting Change-Spare Parts" in "Management's Discussion and Analysis of Financial Condition and Results of Operations." Field Service. The Company delivers support through one of the most extensive field service infrastructures in the industry. Approximately 2,100 field service technicians deliver service to approximately 36,000 customers at over 145,000 customer sites. These field technicians are based out of more than 150 service offices located across the United States and Canada. Depending on customer requirements, some Company personnel are based at customer sites. Technical Support. The Company is a Microsoft Certified Support Center, providing help desk support for a full range of Microsoft business software applications and operating systems. It is also designated as an Authorized Support Center by Lotus Development Corporation. Technical support is delivered through the CSCs and ranges from basic end-user software support to second level professional support. Technical support is provided with respect to software such as Microsoft Office Suite and operating systems such as Novell Netware, Windows NT, Windows 95/98, Sun Solaris, and Linux. Groupware Products such as Lotus Notes and Internet browsers, such as the Netscape Navigator and Microsoft Explorer, are also fully supported. 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 a 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 FAL 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 personal computer-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. 8 11 MAXwatch(R). MAXwatch(R) is an on-site program for products of Digital Equipment Corporation 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 broad exposure to various computer system technologies. The Company's training facilities include 12 classrooms, 18,000 square feet of hands-on lab space, a curriculum of over 80 courses and computer-based training consisting of 800 titles and 4,000 hours of self-paced instructions. The Company has five training centers and labs located in Frazer, Pennsylvania; Malvern, Pennsylvania; Minneapolis, Minnesota; 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 36,000 customers at over 145,000 sites across the United States and Canada. The Company sells services primarily to three types of customers: large businesses that have complex computing support needs and typically maintain data center, distributed computing and desktop environments; medium-sized businesses that rely primarily on distributed systems for their computing needs; and OEMs and software developers that contract with the Company for warranty services, logistics support services or help desk support. The majority 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 personal computers. 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. The Company considers its principal competitors to include IBM, Compaq, Unisys Corporation, GetronicsWang and the multivendor service divisions of certain other OEMs, other national independent service organizations providing service that are not affiliated with OEMs such as Inacom Corporation, CompuCom Systems, Inc., Sykes Enterprises, Inc. and various regional service providers. The Company believes that the primary competitive factors in the computer services industry are the quality of a company's services, the ability to service a wide range of products supplied by a variety of vendors, the geographic coverage of a company's services and the cost to the customer of those services. The Company believes that customers are increasingly looking for service providers capable of providing a single-source solution for their increasingly complex multivendor systems. See "Risk Factors." EMPLOYEES As of June 30, 1999, the Company had approximately 5,050 full-time and 60 part-time employees. None of the Company's employees are currently covered by collective bargaining agreements. Management considers employee relations to be good. 9 12 RISK FACTORS FAILURE TO COMPLETE INDEBTEDNESS RESTRUCTURING As previously described, the proposed Indebtedness Restructuring is subject to formal approvals by both the bank lending group and the Bankruptcy Court prior to consummation. The Company believes that obtaining the approval of the bank lending group and the holders of the 14% Notes, before filing the Indebtedness Restructuring Plan (the "Plan") with the Bankruptcy Court would minimize disputes concerning the Indebtedness Restructuring and would, therefore, substantially reduce the time and costs of the bankruptcy case and afford the best opportunity to complete the Indebtedness Restructuring. There can be no assurance, however, that these approvals will be obtained, or that the Plan will be approved in the form submitted. Further, if the Plan is not approved, the Company will be forced to evaluate its available options, which include, but are not limited to, filing for protection under the Bankruptcy Code without a pre-approved plan of reorganization. Such a filing could result in liquidation, rather than a reorganization of the Company, and any such reorganization, even if undertaken, may not be accomplished on terms as favorable to the Company's creditors as the terms of the Indebtedness Restructuring. Additionally, it is possible that perceived difficulties from the Company's involvement in a bankruptcy case could adversely affect the relationships of the Company with its suppliers, customers and employees, and could have other adverse effects of the Company's business, particularly in the event of a bankruptcy other than pursuant to a pre-approved plan of reorganization. Management believes, however, that using a prepackaged plan of reorganization in connection with the Company's bankruptcy case will reduce the adverse effect of a bankruptcy filing on the Company's business because such a prepackaged case is likely to be completed more quickly than an ordinary bankruptcy case, disputes with and among creditor and equity holder groups will be minimized, and the Company will have the opportunity to take certain preparatory measures in advance of the filing. Upon filing of the approved Plan, the Company intends to seek promptly the authorization of the Bankruptcy Court to continue to pay in full, in the ordinary course of business, the general unsecured pre-petition claims of each trade creditor and customer of the Company. Additionally, the Company intends to seek the Bankruptcy Court's authorization to pay all accrued pre-petition salaries, wages and commissions and applicable taxes thereon, as well as medical and other benefits and other payroll-related liabilities, on an uninterrupted basis. While the Company expects that these authorizations will likely be granted by the Bankruptcy Court, there can be no assurance that these authorizations will be obtained. Even if the Company obtains the approval of the Plan from the bank lending group and the holders of the 14% Notes, there can be no assurance that the Bankruptcy Court will approve and confirm the Plan. Under the Bankruptcy Code, any party in interest, including the United States Trustee, any creditor or any equity holder, has the right to be heard by the Bankruptcy Court on any issue in the prepackaged proceeding. It is possible that such a party could challenge, among other things, the terms of the Plan, the adequacy of the Company's disclosure in its Disclosure Statement filed in connection with the bankruptcy filing or the adequacy of the time period allotted under the solicitation of acceptance of the Plan for considering whether to accept or reject the Plan. Further, even if such a challenge were not to occur, the Bankruptcy Court could decline to approve the Plan if it found that a statutory condition for confirmation had not been met. There can be no assurance that any such challenges and/or failures to meet statutory conditions would be resolved by the Company, that modifications of the Plan would not be required for its confirmation, or that such modifications would not require resolicitation for approvals from one or more classes of impaired claims or equity interests. Such events, were these to occur, could result in either non-confirmation of the Plan or a significant delay in Plan confirmation by the Bankruptcy Court, both of which could have a material adverse impact on the Company and its operations. 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 90% of the Company's revenues during fiscal year 1999, 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 10 13 Company believes that 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 (based on cost, quality and scope of services) 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 enter into new contracts, add additional services and equipment to existing contracts or consummate acquisitions could have a material adverse effect on the Company's profitability. See "Business -- Current Operating Plan" and "Management's Discussion and Analysis of Financial Conditions and Results of Operations." DEPENDENCE ON COMPUTER INDUSTRY TRENDS The Company's future success is dependent upon (i) 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, and (ii) its ability to diversify its services to meet the needs of clients with respect to these trends. The Company believes that these trends have resulted in a movement by both end-users and original equipment manufacturers (each, an "OEM") 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 that these trends will continue in the future, see "Indebtedness Restructuring," or that the Company will be able to diversify its available services to take advantage of such trends. See "Failure of Diversification Strategy." 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 repair and maintain aging hardware, 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 cannot be serviced by the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." VARIABILITY OF PER INCIDENT REVENUES Per incident revenues, which consist primarily of revenues from services performed for customers on an as requested basis (e.g., projects, help desk services, parts repair, installations and moves, installation and de- installation of computer equipment), are subject to monthly variation due to the nature of per incident revenue transactions. Per incident revenues were approximately $190 million during fiscal year 1999. It is difficult for the Company's management to estimate the impact or amount of future per incident revenues because per incident revenues are dependent on customer demand, which fluctuates based upon various factors such as competition, the demand for "Year 2000" compliance assistance and customers' use of internal employees. In addition, since a significant amount of per incident revenues are mostly generated from the Company's customers with monthly maintenance contracts, a decrease in the number of such contracts has resulted in a decrease in per incident revenues. The Company may not be able to generate significant amounts of per incident revenue in the future. DEPENDENCE ON KEY PERSONNEL The Company's continued success, including the successful implementation of the Restructuring, 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 11 14 loss of the services of certain of these key employees or the failure to retain other qualified employees could have a material adverse effect on the Company's business. There can be no assurance that the Company will be able to retain qualified management personnel during or after the Indebtedness Restructuring period, and recently, the Company has experienced the loss of several key personnel. See "Business -- Indebtedness Restructuring" and "Directors and Executive Officers." FAILURE OF DIVERSIFICATION STRATEGY Certain changes in the industry have made it necessary for the Company to build its business beyond traditional hardware repair services in order to remain competitive. Among other factors, the shift from mainframe to client server environments, lower hardware prices, higher product reliability, longer warranty periods, more rapid innovation, and standardization and convergence of hardware and software have led to a number of new trends in the industry, including (i) the convergence of replacement cost and repair cost, (ii) a decline in hardware repair business opportunities, and (iii) a market shift from servers, to desktop computers and networks. As a result, the Company expects to continue to seek to diversify its services, particularly in emerging markets such as the desktop environment, and to consolidate its presence in existing markets by targeting specific customer groups. However, risks associated with pursuing a diversification strategy of this nature include, without limitation, the risk that the strategy chosen to be implemented is flawed or that such strategy fails to be successfully implemented because, among other reasons, the Company lacks financial resources or qualified personnel. As a result, the Company may not implement the diversification strategy successfully. In addition, there can be no assurance that the diversification strategy developed by the Company will generate sufficient revenues to offset the continuing decline in the Company's hardware repair revenues. 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 inventory. There can be no assurance that 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 New Credit Agreement or any other future indebtedness) to fund the Company's future growth. COMPETITION AND THE COMPETITIVE ADVANTAGE OF OEMS Competition among computer support service providers, both OEMs and independent service organizations, is intense. The Company believes that 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 personal computers. 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, information that relates to 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 12 15 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 that OEMs choose, for marketing reasons or otherwise, to expand their warranty periods or terms, the Company's business may be adversely affected. 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 a motion to terminate a 1956 consent decree (the "IBM Consent Decree") that, among other things, requires IBM to provide spare 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 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. On May 1, 1997, the court granted the joint motion. On February 5, 1998, the United States Court of Appeals for the Second Circuit affirmed the decision of the District Court. Consequently, certain of the remaining provisions of the IBM Consent Decree (primarily relating to sales and marketing restrictions on IBM) terminated either immediately upon, or within six months of, entry of the court order; all of the other remaining provisions (including those requiring IBM to provide parts and other support items to third parties) terminate on July 2, 2000 with respect to AS/400 systems and on July 2, 2001 with respect to System 360/370/390 mainframes. The impact, if any, upon the Company of the termination of such sales and marketing restrictions is impossible to predict because such impact 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. SINGLE SUPPLIERS FOR INVENTORY Spare 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 OEM for such spare part. 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 be 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. DIFFICULTIES IN MANAGING INVENTORY In order to service its customers, the Company is required to maintain a high level of spare 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 spare parts becoming excess, obsolete or otherwise unusable. In addition, rapid changes in technology could render significant portions of the Company's spare parts obsolete, thereby giving rise to write-offs and a reduction in profitability. The inability of the Company to manage its 13 16 spare 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. Effective July 1, 1999, the Company changed its accounting policy for spare parts. See "Accounting Change -- Spare Parts" included in Item 7 herein. FAILURE TO PRICE FIXED FEE CONTRACTS ACCURATELY 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 with sufficient accuracy in order 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. CONTINUING LEVERAGE AND ABILITY TO SERVICE DEBT Although the proposed Indebtedness Restructuring will significantly reduce the Company's debt service obligations, the Company will remain highly leveraged after consummation of the Plan. As of June 30, 1999, the principal amount of the Company's indebtedness was approximately $786.8 million. After giving effect to the Indebtedness Restructuring on a pro forma basis as of such date, the principal amount of the Company's indebtedness would have been approximately $253.0 million. Following completion of the Indebtedness Restructuring, the Company will continue to be subject to significant principal and interest payment obligations with respect to the New Credit Agreement. The Company's ongoing high leverage and significant debt service obligations will continue to pose a substantial risk to the holders of the Company's debt and equity following the Indebtedness Restructuring. Although the New Credit Agreement will revise the Existing Credit Agreement's financial and operating covenants in light of the Indebtedness Restructuring, the Company will continue to be subject to a number of significant restrictive financial and operating covenants. The covenants expected to be contained in the New Credit Agreement may impose more restrictive limitations upon the Company's operations than the covenants of the Existing Credit Agreement. Accordingly, the discretion of the Company's management will continue to be significantly limited by such covenants following consummation of the Indebtedness Restructuring. Management believes that, following completion of the Indebtedness Restructuring, the Company's operating cash flow, together with borrowings under the New Credit Agreement, will be sufficient to meet its anticipated future operating expenses, capital expenditures, and debt service obligations. However, the Company's ability to meet its debt service obligations and to comply with the financial and operating covenant restrictions contained in the New Credit Agreement, will depend on a number of factors, including its future operating performance and its ability to achieve the Operating Plan and its fiscal year 2000 Business Plan, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond its control. While management believes that the Company's financial projections are reasonable, there can be no assurance that such projections will prove to be correct, or that the Company will be able to meet its ongoing debt service obligations. 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 spare parts or capital expenditures, or to sell assets or reduce operating expenses, including, but not limited to, investment spending such as selling and marketing expenses, expenditures on management information systems, expenditures on new products and personnel-related expenses. If the Company is 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." After consummation of the proposed Indebtedness Restructuring, the Company will not have in place any sources of liquidity other than the New Credit Agreement and cash from operations. Any increase in the Company's debt service requirements or any reduction in amounts available for borrowings under the New 14 17 Credit Agreement could significantly affect the Company's ability to fund working capital and capital expenditures following the Indebtedness Restructuring. CONTROL BY DLJ Approximately 87.4% of the outstanding shares of the Company's common stock are currently held by the DLJMB 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 DLJMB Group controls the Company and has 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 DLJMB Group 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 DLJMB Group. As a result, stockholders may experience difficulty selling shares or obtaining prices that reflect the value thereof. If consummated, the proposed Restructuring would result in a significant change in control of the Company's common stock. See "Business -- Indebtedness Restructuring." ITEM 2. PROPERTIES Item 2 is presented with respect to both registrants submitting this filing, DecisionOne Holdings Corp. ("Holdings") and DecisionOne Corporation. FACILITIES The Company leases certain office and warehouse facilities under operating leases and subleases that expire at various dates through November 30, 2009. The Company's executive offices are located at the Frazer, Pennsylvania facility 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 Malvern, Pennsylvania (Depot/Call Center)................ 200,000 February 2006 Richfield, Minnesota (Call Center)....................... 83,360 May 2006 Hayward, California (Depot).............................. 91,112 September 2002 Northborough, Massachusetts (Depot)...................... 52,778 July 2001 Wilmington, Ohio (Warehouse)............................. 102,400 January 2001 Grove City, Ohio (Depot)................................. 116,573 July 2002 Phoenix, Arizona (Depot)................................. 60,000 April 2001 Devon, Pennsylvania (Office/Warehouse)................... 50,400 December 2005 College Station, Texas (Call Center)..................... 50,096 November 2009 Tulsa, Oklahoma (Office/Call Center)..................... 36,530 October 2004
The Company's management believes that its current facilities will be adequate to meet its operational requirements for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS Item 3 is presented with respect to both registrants submitting this filing, DecisionOne Holdings Corp. ("Holdings") and DecisionOne Corporation (collectively, the "Company"). 15 18 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. 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 initially estimated that its share of the costs of the clean up of one of the sites was approximately $500,000, of which $372,000 remained unpaid and accrued for in the accompanying consolidated balance sheet as of June 30, 1999. Complete information as to the scope of required clean up at these sites is not yet available and, therefore, management's evaluation may be affected as further information becomes available. However, in light of information currently available to management, including information regarding assessments of the sites to date and the nature of involvement of the Company's predecessor at the sites, it is management's opinion that the Company's potential additional liability, if any, for the cost of clean up of these sites will not be material to the consolidated financial position, results of operations or liquidity of the Company. See Note 18 to the Company's Consolidated Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1999. 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 traded in the over-the-counter market, in the "pink sheets" published by the National Quotation Bureau and is listed on the OTC Bulletin Board under the symbol "DOCI". The common stock shares previously traded on the Nasdaq National Market System from April 6, 1996 through July 14, 1999. As of September 10, 1999, there were approximately 600 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 through July 14, 1999, the date of delisting of the Common Stock, and by the National Quotation Bureau thereafter.
HIGH LOW ---- --- 1997 First Quarter............................................... 19 14 3/4 Second Quarter.............................................. 22 3/4 14 3/4 Third Quarter............................................... 30 22 3/8 Fourth Quarter.............................................. 34 3/8 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 8 1/2 Fourth Quarter.............................................. 10 4 3/4
16 19
HIGH LOW ---- --- 1999 First Quarter............................................... 6 3/32 1 3/8 Second Quarter.............................................. 3 9/16 1 1/4 Third Quarter*.............................................. 2 7/16 15/32
- --------------- * Through September 10, 1999. 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'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, 1999, 1998 and 1997 and as of June 30, 1999 and 1998 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".
YEARS ENDED JUNE 30, ------------------------------------------------------ THE COMPANY 1999 1998 1997 1996 1995 - ----------- --------- --------- -------- -------- -------- (IN THOUSANDS, EXCEPT PRO FORMA LOSS PER COMMON SHARE) STATEMENT OF OPERATIONS DATA:(1)(4) Revenues.................................. $ 725,943 $ 805,717 $785,950 $540,191 $163,020 Income (loss) before discontinued operations and extraordinary item....... (105,600) (183,130) 31,084 20,789 41,415 Net Income (loss)(2)...................... (105,600) (183,130) 31,084 18,862 42,528 Earnings (loss) per share................. (8.40) (13.05) 1.03 0.75 1.86 Pro forma net loss (unaudited)(3)......... (124,266) (183) Pro forma loss per common share (unaudited)(3).......................... (9.91) (0.01) BALANCE SHEET DATA:(1)(4) Consumable parts.......................... $ 15,859 $ 23,097 $ 29,052 $ 29,770 $ 3,455 Repairable parts.......................... 134,924 142,446 205,366 154,970 27,360 Total assets.............................. 455,887 541,987 623,105 514,510 135,553 Debt...................................... 786,840 744,323 237,509 190,903 25,571 Redeemable preferred stock................ -- -- -- -- 6,811 Total shareholders' equity (deficiency)... (467,156) (361,606) 214,888 180,793 14,677
- --------------- (1) The Selected Financial Data presented includes the results of operations and balance sheet data of the Company, including the following acquisitions: Servcom from September 1, 1994, BABSS from October 20, 1995 and certain assets of the U.S. computer service business of Memorex Telex from November 15, 1996. (2) The years ended June 30, 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 11 to the Company's Consolidated Financial Statements for additional information. (3) Pro forma net loss and loss per common share information for the fiscal years ended June 30, 1998 and 1997 is presented to reflect the Merger and related transactions as if these had occurred on July 1, 1996. 17 20 Historical per share data is not presented as this would not be meaningful. See Note 4 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 1999 presentation.
YEARS ENDED JUNE 30, ------------------------------------------------------ DECISIONONE CORPORATION 1999 1998 1997 1996 1995 - ----------------------- --------- --------- -------- -------- -------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA:(1)(4) Revenues.................................. $ 725,943 $ 805,717 $785,950 $540,191 $163,020 Income (loss) before discontinued operations and extraordinary item....... (162,918) (171,641) 31,084 20,789 41,415 Net Income (loss)(2)...................... (162,918) (171,641) 31,084 18,862 42,528 Pro forma net income (loss) (unaudited)(3).......................... (111,357) 5,726 BALANCE SHEET DATA:(1)(4) Consumable parts.......................... $ 15,859 $ 23,097 $ 29,052 $ 29,770 $ 3,455 Repairable parts.......................... 134,924 142,446 205,366 154,970 27,360 Total assets.............................. 451,711 606,439 623,105 514,510 135,553 Debt...................................... 683,344 652,077 237,509 190,903 25,571 Redeemable preferred stock................ -- -- -- -- 6,811 Total shareholder's equity (deficiency)... (367,336) (204,468) 214,888 180,793 14,677
- --------------- (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 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 11 to DecisionOne Corporation's Consolidated Financial Statements for additional information. (3) Pro forma net income (loss) for the fiscal years ended June 30, 1998 and 1997 is presented to reflect the Merger and related transactions as if these had occurred on July 1, 1996. See Note 4 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 1999 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. 18 21 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. ("Servcom"), certain assets and liabilities of which were acquired in August 1994 for cash consideration of approximately $29.5 million and BABSS, which was acquired in October 1995 for cash consideration of approximately $250.0 million. In addition, certain assets of the U.S. computer service business of Memorex Telex were acquired in November 1996 for cash consideration of approximately $24.4 million after certain purchase price adjustments. These acquisitions were accounted for as purchase transactions. 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 91% of the Company's revenues are derived from maintenance contracts covering a broad spectrum of computer services. 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. 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. Any failure to consummate acquisitions, enter into new contracts or add additional services and equipment to existing contracts, or any increase in erosion could have a material adverse effect on the Company's profitability. The Company has not completed any acquisitions since the first quarter of fiscal 1999 and it expects to be unable to finance acquisitions pending the restructuring of its indebtedness, see "Overview." 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. MERGER AND RECAPITALIZATION On August 7, 1997, the Company consummated the Merger with Quaker Holding Co. ("Quaker"), an affiliate of DLJMB. The Merger, which has been recorded as a recapitalization as of the consummation date for accounting purposes, occurred pursuant to an Agreement and Plan of Merger among the Company and Quaker dated May 4, 1997, as amended (the "Merger Agreement"). In accordance with the terms of the Merger Agreement, which was approved by the Company's shareholders on August 7, 1997, Quaker merged with and into the Company, and the holders of approximately 94.7% of shares of DecisionOne Holdings Corp. common stock outstanding immediately prior to the Merger received $23 per share in cash in exchange for these shares. Holders of approximately 5.3% of shares of 19 22 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 then existing revolving credit facility (see Note 4 and Note 10 to the Company's Consolidated Financial Statements). The Company incurred various expenses, aggregating approximately $69.0 million, in connection with consummating the Merger. These costs consisted primarily of compensation costs, underwriting discounts and commissions, professional and advisory fees and other expenses. This one-time charge was reflected during the first quarter of fiscal 1998. In addition to these expenses, the Company also incurred $22.3 million of capitalized debt issuance costs associated with the Merger financing. These costs are being charged to interest expense over the terms of the related debt instruments (see "Liquidity and Capital Resources"). RESULTS OF OPERATIONS The following discussion of results of operations is presented for the fiscal years ended June 30, 1999, 1998 and 1997. The results of operations of the Company include the operations of Memorex Telex from November 15, 1996. 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, ----------------------------------- 1999 1998 1997 --------- --------- --------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues........................................ $ 725,943 $ 805,717 $ 785,950 Cost of Revenues................................ 575,063 613,806 584,755 --------- --------- --------- Gross Profit.................................... 150,880 191,911 201,195 Selling, general and administrative expenses.... 120,625 142,462 105,675 Amortization of intangibles..................... 26,969 27,169 23,470 Merger expenses................................. -- 69,046 -- Loss on asset sales and disposals............... 1,491 87,458 -- Employee severance and unutilized lease losses........................................ 4,500 -- 4,300 --------- --------- --------- Total operating expenses........................ 153,585 326,135 133,445 --------- --------- --------- Operating income (loss)....................... (2,705) (134,224) 67,750 Interest expense, net of interest income........ 77,535 64,683 14,698 Provision (benefit) for income taxes............ 25,360 (15,777) 21,968 --------- --------- --------- Net income (loss)............................. $(105,600) $(183,130) $ 31,084 ========= ========= ========= OTHER DATA: EBITDA(1)....................................... $ 128,951 $ 166,834 $ 168,639 Less: Amortization of repairable parts........ 85,391 81,597 63,870 --------- --------- --------- Adjusted EBITDA(1).............................. $ 43,560 $ 85,237 $ 104,769 ========= ========= ========= Net cash provided by operating activities....... $ 71,900 $ 13,337 $ 88,974 Net cash (used in) investing activities......... (78,816) (98,629) (129,244) Net cash provided by financing activities....... 31,750 80,830 42,926
- --------------- (1) "EBITDA" represents income (loss) from continuing operations before interest expense, interest income, income taxes (benefit), depreciation, amortization of intangibles, amortization of repairable parts, amortization of discounts and capitalized expenditures related to indebtedness, merger expenses (approximately $69.0 million for the year ended June 30, 1998), loss on asset sales and disposals 20 23 (approximately $1.5 million and $87.5 million for the years ended June 30, 1999 and 1998 respectively), 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, -------------------------- 1999 1998 1997 ------ ------ ------ STATEMENT OF OPERATIONS DATA: Revenues.................................................... 100.0% 100.0% 100.0% Cost of Revenues............................................ 79.2% 76.2% 74.4% ----- ----- ----- Gross Profit................................................ 20.8% 23.8% 25.6% Selling, general and administrative expenses................ 16.6% 17.7% 13.4% Amortization of intangibles................................. 3.7% 3.4% 3.0% Merger expenses............................................. -- 8.6% -- Loss on asset sales and disposals........................... 0.2% 10.9% Employee severance and unutilized lease losses.............. 0.6% 0.0% 0.5% Total operating expenses.................................... 21.2% 40.5% 17.0% Operating income (loss)................................... (0.4)% (16.7)% 8.6% Interest expense, net of interest income.................... 10.7% 8.0% 1.9% Provision (benefit) for income taxes........................ 3.5% (2.0)% 2.8% ----- ----- ----- Net income (loss)......................................... (14.5)% (22.7)% 4.0% ===== ===== =====
OVERVIEW The Company has continued to experience declining trends in revenues, earnings and EBITDA for the three and twelve-month periods ended June 30, 1999 compared to the corresponding periods ended June 30, 1998. The declining trends principally result from lower sales of new service contracts, erosion of contract base, and minimal acquisition growth. On January 28, 1999, the Company initiated a corporate operating plan ("Operating Plan") intended to restore revenue growth and improve financial performance. The Operating Plan included the following key components: (i) focusing all aspects of the Company's operations -- from sales through service delivery -- on providing information technology support services to three customer groups: large corporate customers (also known as "enterprise accounts"), medium sized accounts (also known as the "middle market"), and alliance customers (including OEMs, software publishers, systems integrators, distributors and resellers, etc.); (ii) a cost-reduction program designed to reduce the Company's cost structure by $40 million annually upon full implementation, including a reduction in force of more than 500 employees; and (iii) financial structure changes, including DLJMB's additional $7.3 million investment in the form of senior unsecured notes in DecisionOne Corporation, and the Company's agreement with its lenders to waive financial covenants in the Company's credit agreement through July 29, 1999 (see "Liquidity and Capital Resources" for additional details). The Company is on schedule to achieve its $40 million annual cost reduction target. Notwithstanding the Operating Plan, the Company currently believes it is likely that its revenues will decline further in the next fiscal quarter compared to the fourth quarter ended June 30, 1999 and to the comparable prior year quarter ended September 30, 1998. 21 24 On August 2, 1999, the Company announced an agreement in principle with the bank lending group and the holders of the 14% Notes on the restructuring of its indebtedness (the "Indebtedness Restructuring"). Under the terms of the final agreement, the bank lending group would exchange approximately $523 million in existing indebtedness for approximately 94.6 percent of the reorganized Company's equity and $250 million in new senior secured bank debt (the "New Credit Agreement"). The agreement further provides that the holders of the 14% Notes would exchange their notes for (a) warrants equal to approximately 4.2 percent of the reorganized Company's fully diluted equity, at an exercise price based on an enterprise value of $350 million and (b) warrants equal to approximately 2.0 percent of the reorganized Company's equity, at an exercise price based on an equity valuation of $280 million. The holders of the 9 3/4% Notes would exchange their notes for (a) approximately 5.0 percent of the reorganized Company's equity; (b) warrants equal to approximately 2.8 percent of the reorganized Company's fully diluted equity, at an exercise price based on an enterprise value of $350 million; (c) warrants equal to approximately 5.0 percent of the reorganized Company's equity, at an exercise price based on an equity valuation of $200 million; and (d) warrants equal to approximately 3.0 percent of the reorganized Company's equity, at an exercise price based on an equity valuation of $280 million. In addition, the holders of the 11 1/2% Notes and the holders of unsecured claims of Holdings would receive a total of approximately 0.4 percent of the reorganized Company's equity. The Company did not make the $7.3 million interest payment on its 9 3/4% Notes, which was due on August 2, 1999 nor the interest payment due to the holders of the 14% Notes. The Waiver, pursuant to which the bank lending group agreed to waive certain financial covenants under its Existing Credit Facility, expired on July 29, 1999. The holders of the 9 3/4% Notes, the holders of the 14% Notes and the bank lending group have the right to declare the respective outstanding loan amounts immediately due and payable and seek to exercise remedies, including, in the case of the Existing Credit Facility, foreclosure on the collateral securing such amounts. While management does not believe such holders or the bank lending group will take such action, the Company has reflected all such loan amounts as current liabilities as of June 30, 1999 (see "Liquidity and Capital Resources"). The Company reported net income (loss) of $(105.6) million, $(183.1) million, and $31.1 million in fiscal 1999, 1998 and 1997, respectively. Operating income (loss) for the respective periods was $(2.7) million, $(134.2) million, and $67.8 million. Operating loss for the fiscal period ended June 30, 1999 includes a non-recurring loss on asset sales and disposals of $1.5 million, and $5.7 million for incremental re-engineering and Operating Plan related consulting fees. Operating loss for the fiscal period 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, 1999 and 1997 included special charges for employee severance of $4.5 and $4.3 million respectively. Excluding the respective charges in the 1999, 1998 and 1997 periods, operating income was $9.0 million for fiscal 1999 compared to $42.3 million for fiscal 1998 and $72.1 million for fiscal 1997. A more detailed discussion of items affecting the comparison of operating results is provided below. Fiscal 1999 Compared to Fiscal 1998 Revenues: Revenues decreased by $79.8 million, or 9.9%, to $725.9 million for the fiscal year ended June 30, 1999 from $805.7 million for the fiscal year ended June 30, 1998. This decrease was principally due to a decline in maintenance contract-based revenues as a result of equipment cancellations exceeding sales of new contracts. The Operating Plan is intended, in part, to restore revenue growth by increasing the Company's focus on selected customers within its enterprise, middle market, and alliance groups. While the Company expects these actions to result in revenue growth from current levels, the timing of such revenue growth, if any, is uncertain. The Company currently believes it is likely that its revenues will further decline in the next fiscal 22 25 quarter compared to the fourth quarter ended June 30, 1999 and to the comparable quarter ended September 30, 1998. Cost of Revenue: Cost of revenues decreased by $38.7 million, or 6.3%, to $575.1 million for the fiscal year ended June 30, 1999 from $613.8 million for the fiscal year ended June 30, 1998. The Company's re-engineering initiatives and variable cost reductions related to the revenue declines have resulted in lower costs of approximately $34.5 million for the twelve month period ended June 30, 1999. The Company has reduced its workforce and streamlined operations by consolidating from seven to four service regions. The lower costs are not proportionate to the revenue reductions due to the fixed nature of much of the Company's cost structure and since certain variable cost reduction actions typically trail revenue declines. Selling, General and Administrative Expenses: Selling, general and administrative expenses decreased by $21.9 million, or 15.4%, to $120.6 million for the fiscal year ended June 30, 1999 from $142.5 million for the fiscal year ended June 30, 1998. This decrease was principally due to (1) a non-recurring special charge to the provision for uncollectible receivables of $12.3 million as result of changes in management's estimates and (2) incremental non-recurring consulting fees of approximately $7.7 million incurred in connection with the Company's re-engineering efforts, both of which were incurred during the fiscal year ended June 30, 1998. The remaining decrease was attributable principally to decreased sales commission costs due to lower sales levels during fiscal 1999. Amortization of Intangibles: Amortization of intangible assets declined by $.2 million, or .7%, from $27.2 million for the fiscal year ended June 30, 1998 to $27.0 million for the fiscal year ended June 30, 1999. This decline resulted from completed amortization of certain intangibles offset by minimal acquisition growth during fiscal 1999. Loss on Asset Sales and Disposals: In connection with the Company's fiscal 1999 cost reduction program, the company sold all of its owned facilities, a multipurpose facility located in Tulsa, Oklahoma and a logistics service facility located in the suburbs of Milwaukee, Wisconsin, at a net loss of $1.5 million. During its annual fourth quarter fiscal 1998 physical inventory, management determined that over 1.2 million of its computer parts were obsolete. 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 cycle studies, the Company revised the useful lives of repairable parts and increased the obsolescence provision for consumable parts prospectively. Effective July 1, 1998 the Company amortized its existing composite group of repairable parts and future repairable parts purchases over an estimated average remaining life of three years. 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 loss of approximately $12.5 million. Operating income reflects $0.0 million, $0.5 million, and $1.7 million, in 1999, 1998, and 1997, respectively for amounts earned pursuant to these rights. Provision for Parent Company Receivables: The charge of $72.5 million for parent company receivables for the fiscal year ended June 30, 1999 represents a provision for amounts deemed by management to be uncollectible (see Note 17 to the DecisionOne Corporation consolidated financial statements). Interest Expense: DecisionOne Holdings Corp. interest expense, net of interest income, increased by $12.8 million from $64.7 million for the fiscal year ended June 30, 1998 to $77.5 million for the fiscal year 23 26 ended June 30, 1999. DecisionOne Corporation interest expense, net of interest income, increased by $10.4 million from $52.2 million for the fiscal year ended June 30, 1998 to $62.6 million for the fiscal year ended June 30, 1999. The respective increases are primarily attributable to the Company's increased debt levels as a result of the Merger and additional borrowings during fiscal 1999 (see "Liquidity and Capital Resources"). The interest expense, net of interest income is higher for DecisionOne Holdings Corp. 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 the $59.1 and $10.8 million parent company loans receivable held by DecisionOne Corporation. Income Taxes: The Company's income tax expense for the fiscal year ended June 30, 1999 reflects an increase in the valuation allowance by $25.4 million to reduce previously recognized gross deferred tax assets to the level where management believes that it is more likely than not that the tax benefit will be realized. Newly-arising net deferred tax assets during fiscal 1999 have been offset by a corresponding increase in the valuation allowance. The Company's income tax benefit of $15.8 million for the fiscal year ended June 30, 1998 was significantly reduced by a valuation allowance to the level where management believed that it was more likely than not that the tax benefit would be realized. The Company expects that its tax expense (benefit) in future periods will reflect effective tax rates which vary significantly from enacted statutory tax rates principally as a result of additional unrecognized tax benefits on newly-arising net deferred tax assets. Future effective tax rates may also be subject to volatility as a result of valuation allowance changes which arise from differences between management's projections of future taxable income, newly-arising net deferred tax assets and reversals of net deferred tax assets and corresponding actual results. 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. Cost of Revenue: 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. 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 regarding the collectibility of accounts receivable, (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. 24 27 Loss on Asset Sales and Disposals: During its annual fourth quarter fiscal 1998 physical inventory, management determined that over 1.2 million of its computer parts were obsolete. 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. 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 cycle studies, the Company revised the useful lives of repairable parts and increased the obsolescence provision for consumable parts prospectively. Effective July 1, 1998 the Company amortized its existing composite group of repairable parts and future repairable parts purchases over an estimated average remaining life of three years. 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 $0.0 million, $0.5 million, and $1.7 million in 1999, 1998, and 1997, respectively for amounts earned pursuant to these rights. Interest Expense: DecisionOne Holdings Corp. 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. 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 DecisionOne Holdings Corp. 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. ACCOUNTING CHANGE -- SPARE PARTS Effective July 1, 1999, the Company changed its method of accounting for repairable parts from the amortization method to the usage method. Under the amortization method, the Company amortized the cost of repairable parts over an estimated average useful life and recorded the costs of refurbishing repairable parts as a component of cost of revenues as incurred. Under the usage method, the Company will record in cost of revenues the cost of new and refurbished parts when used to service customers. Additionally, under the usage method, management will perform periodic assessments to determine the existence of excess or obsolete parts and will record any necessary provisions to reduce such parts to net realizable value, consistent with past practice. Management believes that this change in method for repairable parts more accurately reflects periodic results of operations based on parts used to service customers. The effect of this change will be recorded as a cumulative effect charge of approximately $74.4 million, during the fiscal quarter ending September 30, 1999. The Company does not expect to record any tax benefit resulting from this charge. See Notes 3 and 11 to the Company's consolidated financial statements for the year ended June 30, 1999. The pro forma effect of this change in accounting principle on prior years' operations is not presented because such effects are not reasonably determinable. 25 28 LIMITATION ON USE OF NET OPERATING LOSS CARRYFORWARDS AND OTHER TAX CREDITS As of June 30, 1999, the Company had tax loss carryforwards of approximately $152.1 million, $151.2 million and $10.1 million for Federal, state and foreign income tax purposes, respectively, which are scheduled to expire between 2000 and 2019. The Company also had minimum Federal tax credits of approximately $2.8 million as of June 30, 1999, with no applicable expiration period. These carryforwards and credits may be utilized, as applicable, to reduce future taxable income. As a result of the 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. The tax benefit recognized for these carryforwards has been reduced by a valuation allowance (see Note 11 to the Company's Consolidated Financial Statements). LIQUIDITY AND CAPITAL RESOURCES The Company incurred substantial indebtedness in connection with the Merger on August 7, 1997. Holdings received net proceeds of $85 million from the issuance of 11 1/2% Senior Discount Debentures due 2008 (the "11 1/2% Notes"). 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 (the "Existing 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 Existing Credit Facility and the purchase of approximately $225 million of Holdings common stock by the DLJMB Group were used to finance the payments of cash to cash-electing shareholders, to pay the holders of stock options and stock warrants canceled or converted, as applicable, in connection with the Merger, to repay DecisionOne Corporation's then existing revolving credit facility and to pay expenses incurred in connection with the Merger. See Note 4 and Note 10 to the Company's and DecisionOne Corporation's Consolidated Financial Statements for additional information. As of June 30, 1999, the Company had outstanding debt of approximately $786.8 million, as compared to approximately $744.3 million as of June 30, 1998. (See Note 10 to the Company's Consolidated Financial Statements.) During the three months ended March 31, 1998, the Company sought and obtained amendments to the Existing Credit Facility to revise certain financial performance measurements. The amended Existing Credit Facility contains various terms and covenants which, among other things, place certain restrictions on the Company's ability to pay dividends and incur additional indebtedness, and which require the Company to meet certain minimum financial performance measurements, including Adjusted EBITDA targets which increase over time. As of December 31, 1998, the Company obtained a waiver of certain financial covenants in the amended Existing Credit Facility until January 28, 1999 and on January 27, 1999, the Company entered into a Waiver of Financial Covenants (the "Waiver") pursuant to which the Company's lenders under the Existing Credit Facility (the "bank lending group") agreed to waive financial covenants in the amended Existing Credit Facility through July 29, 1999. The Waiver covered the quarters ending December 31, 1998, March 31, 1999 and June 30, 1999. Without the Waiver, the Company would not have been in compliance with certain financial covenants under the amend Existing Credit Facility. The Waiver required the Company, among other things, to meet certain additional financial covenants as of March 31, 1999, limited the additional borrowings available to the Company under its revolver to $10 million, and generally, required that interest payments on loans must be made monthly. In connection with the Waiver, the Company incurred waiver fees of approximately $4.3 million, which are being amortized as interest expense through July 1999. The Company met the required March 31, 1999 financial covenants contained in the Waiver. On January 27, 1999, Holdings' principal shareholder, DLJMB and certain of its affiliates, purchased $7.3 million of unsecured 14% Senior Notes (the "14% Notes") due 2006 in DecisionOne Corporation. The proceeds of the 14% Notes were used for general corporate purposes. 26 29 On July 29, 1999, the Waiver expired. As a result, since July 29, 1999, the Company has been in default of certain financial covenants under the Existing Credit Facility. In addition, on August 2, 1999, the Company failed to make the interest payments due on both the 9 3/4% Notes and the 14% Notes. Given the existing events of default under the Existing Credit Facility, the bank lending group had previously delivered to the Company a notice prohibiting such payments. As a result of the Company's failure to comply with such financial covenants and to make such interest payments, events of default have occurred under the Existing Credit Facility and under the indentures for the 9 3/4% Notes and the 14% Notes. Accordingly, the bank lending group, the holders of the 9 3/4% Notes, the holders of the 11 1/2 Notes, and the 14% Notes could declare the amounts outstanding under these debt instruments immediately due and payable and seek to exercise remedies, including, in the case of the Existing Credit Facility, foreclosure on the collateral securing such amounts. On August 2, 1999, the Company announced an agreement in principle with the bank lending group and the holders of the 14% Notes on the restructuring of its indebtedness (the "Indebtedness Restructuring"). Under the terms of the final agreement, the bank lending group would exchange approximately $523 million in existing indebtedness for approximately 94.6 percent of the reorganized Company's equity and $250 million in new senior secured bank debt (the "New Credit Agreement"). The agreement further provides that the holders of the 14% Notes would exchange their notes for (a) warrants equal to approximately 4.2 percent of the reorganized Company's fully diluted equity, at an exercise price based on an enterprise value of $350 million and (b) warrants equal to approximately 2.0 percent of the reorganized Company's equity, at an exercise price based on an equity valuation of $280 million. The holders of the 9 3/4% Notes would exchange their notes for (a) approximately 5.0 percent of the reorganized Company's equity; (b) warrants equal to approximately 2.8 percent of the reorganized Company's fully diluted equity, at an exercise price based on an enterprise value of $350 million; (c) warrants equal to approximately 5.0 percent of the reorganized Company's equity, at an exercise price based on an equity valuation of $200 million; and (d) warrants equal to approximately 3.0 percent of the reorganized Company's equity, at an exercise price based on an equity valuation of $280 million. In addition, the holders of the 11 1/2% Notes and the holders of unsecured claims of Holdings would receive a total of approximately 0.4 percent of the reorganized Company's equity. The proposed Indebtedness Restructuring will be implemented pursuant to a prepackaged bankruptcy subject to the approval of a United States Bankruptcy Court (the "Bankruptcy Court") pursuant to Chapter 11 of Title 11 of the United States Code, as amended (the "Bankruptcy Code") and the approval of the bank lending group and the holders of the 14% Notes. Management does not anticipate any adverse impact on customers, vendors or employees as a result of the Indebtedness Restructuring, since the Indebtedness Restructuring will address only the de-leveraging of the Company's balance sheet through the reduction of its indebtedness. However, there can be no assurance that the Indebtedness Restructuring will be approved by the Bankruptcy Court, nor that any adverse impact to the Company, its customers, creditors or employees will be avoided. See Note 2 to the Company's Consolidated Financial Statements as of and for the fiscal year ended June 30, 1999 for additional information. The interest rate applicable to outstanding borrowings under the amended Existing Credit Facility as of June 30, 1999, varies, at the Company's option, based upon LIBOR (plus applicable margins not to exceed 3.0%, as amended) or the Prime Rate (plus applicable margin not to exceed 1.75%). As of June 30, 1999, the weighted average interest rate applicable to loans under the Existing Credit Facility was 8.0%. Financial Condition: Cash flow from operating activities for the fiscal year ended June 30, 1999 was approximately $71.9 million. These funds, together with borrowings under the Existing Credit Facility, provided the required capital to fund repairable part purchases and capital expenditures of approximately $92.8 million as well as remaining payments on prior period acquisitions of contracts and assets of complementary businesses for approximately $2.8 million. In fiscal years 1998 and 1997, the Company generated net cash flow from operating activities of $13.3 million and $89.0 million, respectively. Cash flow from operating activities for fiscal year 1998 has been reduced by $69.0 million for non-recurring Merger expenses, which were funded through the proceeds of the 27 30 Merger financing. Cash required to fund the purchase of repairable parts and for capital expenditures totaled $88.5 million and $97.0 million, during fiscal years 1998 and 1997, respectively. Cash required to fund the acquisition of contracts and assets of complimentary businesses were approximately $10.2 million and $32.3 million during fiscal years 1998 and 1997, 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's fiscal year ended 1999 EBITDA -- as defined in footnote (1) above -- was $129.0 million, as compared to EBITDA of $166.8 million for the fiscal year ended June 30, 1998 and EBITDA of $168.6 million for the fiscal year ended June 30, 1997. Adjusted EBITDA was $43.6 million, $85.2 million, and $104.8 million in fiscal 1999, 1998, and 1997, respectively. 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 originally estimated that its share of the costs of the cleanup of one of the sites was approximately $500,000, of which $372,000 remained unpaid and accrued in the accompanying consolidated balance sheet as of June 30, 1999. Complete information as to the scope of required cleanup at these sites is not yet available and, therefore, management's evaluation may be affected as further information becomes available. However, in light of information currently available to management, including information regarding assessments of the sites to date and the nature of involvement of the Company's predecessor at the sites, it is management's opinion that the Company's potential additional liability, if any, for the cost of cleanup of these sites will not be material to the consolidated financial position, results of operations or liquidity of the Company. See Note 18 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 This Year 2000 disclosure is being designated as a Year 2000 Readiness Disclosure under the Year 2000 Information and Readiness Disclosure Act of 1998, Public Law 105-271. As is the case with most other businesses, the Company has evaluated and continues to address the Year 2000 readiness of both its information technology systems and its non-information technology systems (collectively referred to as "Systems"). Such Year 2000 readiness efforts are designed to identify, address and resolve issues that may be created by computer programs written to use two digits rather than four to define the applicable year. Any of the Company's computer programs having time-sensitive software may otherwise 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 mainframe information technology systems all of which have been remediated and placed into service, the most recent mission-critical mainframe system having been placed in service in September, 1999. Additionally, the Company is in the process of 28 31 implementing Year 2000-Ready releases from its software vendor for the Company's packaged financial and human resources/payroll systems. The Company has installed, tested and placed these packaged software upgrades into service. The Company has also identified approximately seventy (70) non-mission critical information technology systems which the Company is in the process of remediating by using in-house personnel or by seeking certifications and/or upgrades from its vendors. Subsequently, the Company expects most of these non-mission critical systems to be compliance tested by in-house personnel on an on-going basis through the balance of the year. The Company has commenced remediation of its non-information technology systems and expects to have such remediation complete during the balance of the year. The Company has ongoing communications with all of its significant business partners via Vendor Readiness Surveys to determine their plans to comply with Year 2000. All responses are evaluated as received to determine if additional action is required to determine the compliance of the business partner. The Company engaged a consulting firm to assess the Company's processes in place to achieve Year 2000 readiness, and also has in place a Year 2000 Steering Committee which meets regularly and periodically reports the progress of Year 2000 readiness to the Company's executive management and the Board of Directors. The Company's approach to addressing Year 2000 readiness is to minimize the possibility of any Year 2000-related interruptions or miscalculations. Worst-case Year 2000 scenarios include the interruption of certain aspects of the Company's business as a result of information technology systems failure or the failure of the Company's business partners. Any such failure could have an impact on future results; consequently, the Company is in the process of formulating contingency plans. The Company's approach to contingency planning is to employ a combination of existing disaster recovery plans and to develop additional plans as needed. Because the Company has elected to remediate its mission critical legacy systems as opposed to replacing them, during a worst-case scenario, the Company would invoke the disaster recovery plan the Company has developed under its standard operating procedures. The Company performed an initial test of the disaster recovery plan at an off-site facility in March, 1999. While certain issues arose during the test relating to disaster recovery, the Company was able to set the operating system date to February 29, 2000. In addition, the Company's highest priority legacy system, the Service Delivery System (DDG), has always had a back-up system residing on a different platform. This back-up system has always stored four-digit year dates and is used when the primary system is taken off line for maintenance. This back-up system is in the process of being tested for Year 2000 readiness. To gain a greater degree of confidence that all other mainframe applications will function properly, the Company conducted an integrated system test, once remediation work was completed. The Company is planning to conduct this test at an off-site facility specially developed for Year 2000 testing. Additionally, one of the most critical facets of the Company's contingency planning involves ensuring adequate staffing to meet potentially-significant service call volume increases. To prepare for this possibility, the Company has placed substantial restrictions on authorized leave time for essential call-center, operational, and information technology personnel during the critical initial three weeks of January, 2000. The Company believes that additional contingency plans may need to be developed relating to its suppliers. In June, 1998, the Company began the process of surveying its vendors, suppliers, and key business associates to determine their level of Year 2000 readiness. Responses to these inquiries continue to be received, reviewed and assessed. The Company continues to identify which of its vendors, suppliers, and business associates are mission-critical and to develop alternate means as necessary. The Company plans to identify mission-critical vendors and to establish related contingency planning through the balance of the year. In the meantime, the Company continues to monitor the need for additional contingency planning. As of June 30, 1999 the Company incurred costs of approximately $5.0 million and expects to incur approximately $3.0 million thereafter to remediate or upgrade all of the Company's Systems. The $3.0 million represents approximately 10% 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 and upgrade 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 29 32 plans. There can be no assurance that these estimates will be achieved and actual results may be materially different. Specific factors that might cause such material differences include, but are 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 may not be Year 2000 compliant. Although the Company believes it is taking adequate measures to address Year 2000 issues, the Company is uncertain how it may be affected by litigation given the evolving nature of such litigation. The Company believes, however, that it does not have material exposure to liability for such claims. While the Company does not believe that the Year 2000 matters presented in this discussion 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, given the forward-looking nature of the Year 2000 issues. 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 Existing 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 Existing Credit Facility, term loans, senior discount debentures, and senior subordinated notes in effect at June 30, 1999 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 10 to the consolidated financial statements contain descriptions of the Company's Existing 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).
FISCAL YEAR OF MATURITY ------------------------------------------------------------- TOTAL DUE FAIR VALUE AT INTEREST RATE SENSITIVITY 2000 2001 2002 2003 2004 THEREAFTER AT MATURITY JUNE 30, 1999 - ------------------------- ------- ------- ------- ------- -------- ---------- ----------- ------------- (DOLLARS IN THOUSANDS) DEBT: Fixed Rate.............. -- -- -- -- -- $305,700 $305,700 $ 8,192 Average Interest Rate... -- -- -- -- -- 10.7% -- -- Variable Rate........... $19,325 $36,875 $49,062 $73,438 $126,874 $217,514 $523,088 $235,390 Average Interest Rate... 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% -- -- INTEREST RATE INSTRUMENTS: Variable to Fixed Swaps................. $75,000 -- -- -- -- -- $ 75,000 $ (115) Average Pay Rate........ 5.9% -- -- -- -- -- -- -- Average Receive Rate.... 5.7% -- -- -- -- -- -- -- COLLARS:................ $25,000 $75,000 -- -- -- -- $100,000 $ (237) Average Cap Rate........ 5.8% 6.7% -- -- -- -- -- -- Average Floor Rate...... 5.7% 5.7% -- -- -- -- -- --
30 33 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Attached hereto and a part of this report are financial statements and supplementary data for DecisionOne Holdings Corp. and DecisionOne Corporation listed in Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF REGISTRANT DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth certain information concerning the directors and executive officers of the Company as of June 30, 1999. Officers are appointed until the next annual meeting of stockholders and until their successors are duly appointed.
NAME AGE POSITION - ---- --- -------- Karl R. Wyss................... 58 Chairman and Chief Executive Officer and Director Thomas J. Fitzpatrick*......... 41 Executive Vice President, Chief Operating Officer and Chief Financial Officer Thomas M. Farrell.............. 48 Senior Vice President of End User and Software Support Services Joseph S. Giordano*............ 44 Senior Vice President of Sales and Marketing Charles N. Heller.............. 61 Senior Vice President of Logistics Thomas M. Molchan.............. 44 Senior Vice President, General Counsel and Corporate Secretary Kirk Scott*.................... 36 Senior Vice President, Technology Services and Chief Technology Officer Dwight T. Wilson............... 43 Senior Vice President -- Human Resources Peter T. Grauer................ 54 Director Lawrence M.v.D. Schloss........ 45 Director Kirk B. Wortman................ 37 Director
Karl R. Wyss was named Chairman and Chief Executive Officer of the Company in February 1999. Since 1993, Mr. Wyss has served as Managing Director and Senior Operating Partner for DLJ Merchant Banking Partners. Prior to joining DLJ, Mr. Wyss served as Chairman and Chief Executive Officer of Lear Siegler, Inc. from 1989 to 1993. Thomas J. Fitzpatrick was named the Chief Operating Officer, Executive Vice President and Chief Financial Officer in February 1999. Mr. Fitzpatrick served as the Executive Vice President and Chief Financial Officer of the Company from April 1998 to February 1999 and was Vice President and Chief Financial Officer of the Company from August 1996 through April 1998. Prior to August 1996, Mr. Fitzpatrick was Vice President of Network Finance at Bell Atlantic Network Services, Inc. Mr. Fitzpatrick served more than eight years at Bell Atlantic Business Systems Services, Inc. ("BABSS"), including over four years as Vice President and Chief Financial Officer. On September 7, 1999, Mr. Fitzpatrick left the Company. On that date, Thomas J. Fogarty was named Senior Vice President and Chief Financial Officer. Thomas M. Farrell was named Senior Vice President of End User and Software Support Services of the Company in February 1999. From May 1997 to February 1999, Mr. Farrell served as Vice President of End User and Software Support Services. Prior to being employed by the Company, Mr. Farrell served as Vice President of Sykes Enterprises (1995-1997) and Chief Operating Officer of Quick Start Technologies (1993-1995). 31 34 Joseph S. Giordano was named Senior Vice President of Sales and Marketing in February 1999. Mr. Giordano served as the Senior Vice President -- Field Operations of the Company since October 1995. From October 1993 to October 1995, Mr. Giordano was Vice President Sales and Service Delivery of BABSS. From January 1991 to October 1993, he was an Area General Manager of BABSS. Charles N. Heller has served as Senior Vice President of Logistics for the Company since January 1996. Mr. Heller served as Vice President and General Manager of BABSS from 1983 to December 1995. Thomas M. Molchan has been General Counsel and Corporate Secretary of the Company since October 1995 and was named a Senior Vice President in April 1998. From December 1986 to October 1995, he was Vice President and General Counsel of BABSS. Kirk Scott was named Senior Vice President, Technical Services and Chief Technology Officer for the Company in February 1999. Mr. Scott served as Vice President of Network Support Services from November 1996 to February 1999. From March 1996 to November 1996 Mr. Scott served as Director of Technology Development for the Company. Prior to being employed by the Company, Mr. Scott was employed by Genicom/Harris Adacom as the Director of Technology and Development from December 1991 to March 1996. On September 30, 1999, Mr. Scott left the Company. Dwight T. Wilson was named Senior Vice President -- Human Resources of the Company in February 1999. From October 1995 to February 1999, Mr. Wilson served as Vice President -- Human Resources of the Company. From April 1994 to October 1995, Mr. Wilson was Vice President -- Human Resources of BABSS. From October 1990 to March 1994, Mr. Wilson was Director, Human Resources Policies and Planning of BABSS. Peter T. Grauer has been a Director of the Company since August 1997 and a Managing Director of DLJ Merchant Banking II, Inc. since September 1992. From April 1989 to September 1992, he was Co-Chairman of Grauer & Wheat, Inc., an investment firm specializing in leveraged buyouts. Prior to April 1989, Mr. Grauer was a Senior Vice President of Donaldson, Lufkin & Jenrette Securities Corporation. Mr. Grauer is a director of Total Renal Care Holdings, Inc. and Thermadyne Holdings Corp. Lawrence M.v.D. Schloss has been a Director of the Company since August 1997 and the Managing Partner of DLJ Merchant Banking II, Inc. since November 1995. Prior to November 1995, he was the Chief Operating Officer and Managing Director of DLJ Merchant Banking, Inc. Mr. Schloss currently serves as Chairman of the Board of McCulloch Corporation and as a director of Thermadyne Holdings Corp. Kirk B. Wortman has been a Director of the Company since August 1997 and a Principal of DLJ Merchant Banking II, Inc. since February 1997. For the five years prior to joining DLJ Merchant Banking II, Inc. he worked in the Leveraged Finance Group within DLJ's Investment Banking Group, most recently as a Senior Vice President. * No longer an executive officer of the Company as of October, 1999. ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth for the years ended June 30, 1999, 1998 and 1997 certain compensation paid by the Company to its current and former Chief Executive Officers and the four other most highly paid executive officers of the Company whose cash compensation exceeded $100,000 for the year ended June 30, 1999. 32 35 SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ANNUAL COMPENSATION ---------------- ------------------------------------- SECURITIES OTHER UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ANNUAL ($) OPTIONS/SARS (#) COMPENSATION ($)(1) - --------------------------- ---- ---------- --------- ---------- ---------------- ------------------- Karl R. Wyss............. 1999 175,385(2) 200,000(2) -- -- -- Chairman and Chief 1998 -- -- -- -- -- Executive Officer 1997 -- -- -- -- -- Stephen J. Felice(3)..... 1999 243,879(4) -- -- 173,000 300,944 Former President and 1998 271,000 250,000 -- 173,000 -- Chief Executive 1997 225,000 300,000 -- 9,000 -- Officer Thomas J. Fitzpatrick(5)... 1999 250,000 261,250(6) -- 100,000 1,985 Executive Vice 1998 200,800 75,000 -- 100,000 -- President, Chief 1997 168,077(7) 155,000(7) 224,908(8) 100,000 -- Operating Officer and Chief Financial Officer Thomas M. Molchan........ 1999 205,000 93,250(9) -- 50,000 2,011 Senior Vice President 1998 159,900 40,000 -- 50,000 -- and General Counsel 1997 139,300 95,000 -- 10,000 -- Joseph S. Giordano(10)... 1999 180,731 95,800(11) -- 30,000 2,138 Senior Vice President, 1998 170,000 40,000 -- 30,000 -- Sales and Marketing 1997 140,000 84,150 -- 21,000 -- Thomas Farrell........... 1999 165,000 80,050(12) -- 25,000 1,137 Senior Vice President, 1998 165,000 45,000 -- 25,000 -- End User Support 1997 18,404(13) -- 104,880(14) -- -- Services
- --------------- (1) Includes company contributions to DecisionOne's defined contribution plan in 1999 of: Mr. Wyss $0, Mr. Felice $944, Mr. Fitzpatrick $1,985, Mr. Molchan $2,011, Mr. Giordano $2,138, and Mr. Farrell $1,137. In addition, Mr. Felice was paid $300,000 in severance pursuant to the agreement between the Company and him, dated February 17, 1999. (2) Mr. Wyss joined the Company and was named Chief Executive Officer on February 18, 1999. The salary and bonus shown reflect the amount earned after such date through June 30, 1999. (3) Mr. Felice's employment terminated on February 18, 1999. (4) In addition to base salary, $4,264 was paid for unused vacation. (5) Mr. Fitzpatrick's employment terminated subsequent to the end of the fiscal year. (6) Mr. Fitzpatrick received a bonus of $73,750 for performance during fiscal 1999 and a bonus of $187,500 pursuant to his participation in the Executive Retention Plan. (7) Mr. Fitzpatrick joined the Company and was named an executive officer on August 12, 1996. The salary and bonus reflect the amount earned after such date through June 30, 1997. Of the bonus amount, $30,000 was a one-time signing bonus. (8) Of this amount, $223,908 was for relocation assistance. The other $1,000 was for tax preparation assistance. (9) Mr. Molchan received a bonus of $42,000 for performance during fiscal 1999 and a bonus of $51,250 pursuant to his participation in the Executive Retention Plan. (10) Mr. Giordano's employment terminated subsequent to the end of the fiscal year. (11) Mr. Giordano received a bonus of $45,800 for performance during fiscal 1999 and a bonus of $50,000 pursuant to his participation in the Executive Retention Plan. (12) Mr. Farrell received a bonus of $38,800 for performance during fiscal 1999 and a bonus of $41,250 pursuant to his participation in the Executive Retention Plan. (13) Mr. Farrell joined the Company on May 12, 1997. The salary reflects the amount earned after such date through June 30, 1997. 33 36 (14) This amount was for relocation assistance. The following table summarizes stock options granted during fiscal 1999 to the persons named in the Summary Compensation Table. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE --------------------------------------------------------- VALUE AT ASSUMED NUMBER OF PERCENT OF ANNUAL RATES OF STOCK SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OR OPTION TERM ($)(2) OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------- NAME GRANTED (#)(1) FISCAL 1999 ($/SH) DATE 5% 10% - ---- -------------- ------------- ----------- ---------- --------- ----------- Karl R. Wyss................. -- -- -- -- -- -- Stephen J. Felice............ 173,000 9.9% 6.1041 8/06/07 553,951 1,350,797 Thomas J. Fitzpatrick........ 87,000 5.0% 6.1041 8/06/07 278,577 679,302 13,000 0.7% 6.1041 4/26/08 45,969 114,403 Thomas M. Molchan............ 30,000 1.7% 6.1041 8/06/07 96,061 234,242 20,000 1.1% 6.1041 4/26/08 70,721 176,005 Joseph S. Giordano........... 30,000 1.7% 6.1041 8/06/07 96,061 234,242 Thomas Farrell............... 25,000 1.4% 6.1041 8/06/07 80,051 195,202
- --------------- (1) All stock option grants since August 7, 1997 were cancelled and new grants were issued on December 14, 1998 with an exercise price at the then current market price. The number of shares, vesting schedules and expiration dates were retained from the cancelled grants. The shares underlying these grants are subject to the terms of the Investors' Agreement. Half of the shares underlying each grant vests in four equal annual installments commencing on the first anniversary date of the original grant. The other half of the shares underlying each grant vests on the seventh anniversary of the original grant, but vesting may accelerate over the first four anniversaries of the original grant if certain financial goals are met. The shares underlying unvested options are cancelled upon termination of the optionee's service with the Company. (2) Potential Realizable Values are calculated by applying an assumed annual compounded annual rate of return to the per share price of the Company's common share on the date of grant from the date of the grant until the end of the term of the option. These amounts are reported net of the option exercise price, but before any taxes associated with exercise or subsequent sale of the underlying stock. The 5% and 10% assumed rates are mandated by rules of the Securities and Exchange Commission. The actual value to be realized by the option holder may be greater or less than the values estimated in this table. The following table summarizes option exercises during fiscal 1999 and the value at June 30, 1999 of vested and unvested options for each person named in the Summary Compensation Table. Year-end values are based upon a price of $2.00 per share, which was the closing market price of a share of Common Stock on June 30, 1999, the last trading day of the fiscal year. 34 37 AGGREGATED OPTION/SAR EXERCISES IN LAST YEAR AND YEAR-END OPTION/SAR VALUES
NUMBER OF SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN- OPTIONS AT JUNE 30, 1999 THE-MONEY OPTIONS AT SHARES (#)(1) JUNE 30, 1999 ($) ACQUIRED VALUE --------------------------- --------------------------- NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- --------------- ------------ ----------- ------------- ----------- ------------- Karl R. Wyss............ -- -- -- -- -- -- Stephen J. Felice....... -- -- 46,084 151,375 -- -- Thomas J. Fitzpatrick... -- -- 31,101 87,500 -- -- Thomas M. Molchan....... -- -- 18,316 43,750 -- -- Joseph S. Giordano...... -- -- 15,816 26,250 -- -- Thomas Farrell.......... -- -- 3,125 21,875 -- --
- --------------- (1) All shares issued upon exercise of options and all shares underlying unexercised options are subject to the terms of the Investors' Agreement. The following table summarizes the "repriced" stock option grants to executive officers through June 30, 1999. TEN-YEAR OPTION/SAR REPRICINGS
NUMBER OF MARKET LENGTH OF SECURITIES PRICE OF EXERCISE ORIGINAL UNDERLYING STOCK AT PRICE AT OPTION TERM OPTIONS/ TIME OF TIME OF REMAINING REPRICED OR REPRICING OR REPRICING OR NEW AT DATE OF AMENDED AMENDMENT AMENDMENT EXERCISE REPRICING OR NAME DATE (#) ($)(1) ($) PRICE ($) AMENDMENT - ---- -------- ----------- ------------ ------------ --------- ------------ Stephen J. Felice*............ 12/14/98 173,000 6.1041 20.6084 6.1041 104 Months Former President and Chief Executive Officer James S. Burkhardt*........... 12/14/98 100,000 6.1041 20.6084 6.1041 113 Months Former Senior Vice President, Sales and Marketing Thomas Farrell................ 12/14/98 25,000 6.1041 20.6084 6.1041 104 Months Senior Vice President, End User Support Services Thomas J. Fitzpatrick*........ 12/14/98 87,000 6.1041 20.6084 6.1041 104 Months Executive Vice President, 12/14/98 13,000 6.1041 20.6084 6.1041 112 Months Chief Operating Officer and Chief Financial Officer Joseph S. Giordano*........... 12/14/98 30,000 6.1041 20.6084 6.1041 104 Months Senior Vice President, Sales and Marketing Charles N. Heller............. 12/14/98 15,000 6.1041 20.6084 6.1041 104 Months Senior Vice President, Logistics Thomas M. Molchan............. 12/14/98 30,000 6.1041 20.6084 6.1041 104 Months Senior Vice President and 12/14/98 20,000 6.1041 20.6084 6.1041 112 Months General Counsel Kirk Scott*................... 12/14/98 20,000 6.1041 20.6084 6.1041 104 Months Senior Vice President and Chief Technology Officer Dwight T. Wilson.............. 12/14/98 25,000 6.1041 20.6084 6.1041 104 Months Senior Vice President, Human Resources
- --------------- * No longer an executive officer as of November, 1999. 35 38 (1) The Market Price of Stock is the fair market value of a share of common stock as defined in the 1997 Management Incentive Plan -- the average reported closing price of a share for the three trading days immediately preceding the date of a stock option grant. (2) The new exercise price was set higher than the market price because the intent of the Compensation Committee of the Board of Directors at the time was to set the exercise price for all stock option grants at the same exercise price as the original stock option grants. Stock Option "Repricing". On December 14, 1998, the Compensation Committee cancelled all outstanding stock option grants and replaced them with new grants, equal in the number of securities underlying each grant, at the then current fair market value of a share of common stock, $6.1041. The new grants retained the same vesting schedules and expiration dates as the cancelled grants. The Committee chose this action in light of the decline in the trading price of common stock over the previous several months. It recognized that key employees were not motivated by stock option grants that were well out-of-the-money. In a very competitive information technology employment market, the Committee acted to support the Company in retaining key employees. COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS PETER T. GRAUER, CHAIRMAN LAWRENCE M.V.D. SCHLOSS KIRK B. WORTMAN EMPLOYMENT, SEVERANCE AND RETENTION AGREEMENTS Mr. Felice entered into an employment agreement with DecisionOne Holdings Corp. and DecisionOne Corporation (the "Companies") as of August 7, 1997, pursuant to which he served as the President and Chief Operating Officer of the Companies. In connection with the termination of his employment in February 1999, the Companies and Mr. Felice entered into an agreement pursuant to which Mr. Felice received a severance payment of $300,000. As provided in his employment agreement, Mr. Felice is subject to a perpetual confidentiality covenant, a one-year non-competition covenant and a two-year non-solicitation covenant. Messrs. Farrell, Giordano, Heller, Molchan and Wilson have severance arrangements with DecisionOne Corporation which provide for a severance payment of one times base annual salary and a continuation of certain benefits for up to one year in the event of termination without cause, or if their work location is moved by more than 50 miles from its present location and the employee chooses not to accept relocation. Recipients of severance benefits are required to sign a release of claims against the Company and to agree to a one-year non-solicitation covenant. In March 1999, DecisionOne Corporation established an Executive Retention Bonus Plan (the "Retention Plan") in order to retain the services of key executives during the implementation of the Company's Operating Plan. Pursuant to the Retention Plan, Messrs. Fitzpatrick, Farrell, Giordano, Heller, Molchan, Scott and Wilson and certain other officers received in August 1999 a retention bonus ranging from three to nine months' base salary. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as of November 12, 1999 (except as otherwise noted) regarding the ownership of Common Stock (i) by each person known by the Company to be the beneficial owner of more than five percent of the Company's outstanding Common Stock, (ii) by each director of the Company, (iii) by each executive officer of the Company named in the Summary Compensation Table 36 39 included elsewhere in this proxy statement and (iv) by all current executive officers and directors of the Company as a group.
NUMBER OF SHARES PERCENTAGE BENEFICIALLY OF BENEFICIAL OWNER OWNED(1) CLASS(1) - ---------------- ------------ ---------- DLJ Merchant Banking Partners II, L.P. group(2)(3).......... 11,075,165 88.2% The Apollo group(3)(4)...................................... 810,117 6.4 The Bain Capital group(3)(5)................................ 810,117 6.4 The THL group(3)(6)......................................... 810,117 6.4 Stephen J. Felice........................................... -- -- Thomas J. Fitzpatrick....................................... -- -- Joseph S. Giordano.......................................... -- -- Thomas M. Molchan(3)(7)..................................... 36,917 * Thomas Farrell(3)(8)........................................ 24,630 * Karl R. Wyss(9)............................................. -- -- Peter T. Grauer(9).......................................... -- -- Lawrence M.v.D. Schloss(9).................................. -- -- Kirk B. Wortman(9).......................................... -- -- All current executive officers and directors as a group (11 persons)(3)............................................... 133,479 1.1
- --------------- * Less than one percent. (1) Applicable percentage of ownership is based on 12,551,819 shares of Common Stock outstanding as of November 12, 1999. In accordance with the rules of the Securities and Exchange Commission, options to purchase shares of Common Stock that are exercisable as of November 12, 1999 or exercisable within 60 days thereafter are deemed to be outstanding and beneficially owned by the person holding such options for purpose of computing such person's percentage ownership, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. The persons listed in the table have sole voting or investment power with respect to the shares listed opposite their name unless noted otherwise. (2) 7,520,009 shares (approximately 59.9% of the outstanding Common Stock) are held directly by DLJMB and the following investors related to DLJMB (collectively, "DLJ Entities"): DLJ Offshore Partners, II, C.V. ("Offshore"), a Netherlands Antilles limited partnership; DLJ Diversified Partners, L.P. ("Diversified"), a Delaware limited partnership; DLJMB Funding II, Inc. ("Funding"), a Delaware corporation; DLJ Merchant Banking Partners II-A, L.P. ("DLJMBPIIA"), a Delaware limited partnership; DLJ Diversified Partners-A L.P. ("Diversified A"), a Delaware limited partnership; DLJ Millennium Partners, L.P. ("Millennium"), a Delaware limited partnership; DLJ Millennium Partners-A, L.P. ("Millennium A"), a Delaware limited partnership; DLJ EAB Partners, L.P. ("EAB"), a Delaware limited partnership; UK Investment Plan 1997 Partners ("UK Partners"), a Delaware partnership; and DLJ First ESC LLC, a Delaware limited liability company ("DLJ First"). See "Certain Relationships and Related Transactions." The address of each of DLJMB, Diversified, Funding, DLJMBPIIA, Diversified A, Millenium, Millenium A, DLJ First and EAB is 277 Park Avenue, New York, New York 10172. The address of Offshore is John B. Gorsiraweg 14, Willemstad, Curacao, Netherlands, Antilles, The address of UK Partners is 2121 Avenue of the Stars, Fox Plaza, Suite 3000, Los Angeles, California 90067. (3) Because of the restrictions on transfer, voting requirements and other provisions of the Investors' Agreement (See "Certain Relationships and Related Transactions"), the DLJ Entities are also deemed to beneficially own (a) the 3,398,970 shares held by the following institutional investors (collectively, "Institutional Investors") which are parties to the Investors' Agreement: Apollo Advisors II, L.P. and related entities ("Apollo"), Bain Capital, Inc. and related entities ("Bain Capital"), Thomas H. Lee 37 40 Company and related entities ("THL"), certain investment funds associated with DLJ Capital Corp. ("Sprout") and Ontario Teacher's Pension Plan Board ("Teachers"); (b) the 133,479 shares held by the executive officers named in the Summary Compensation Table as further detailed in Notes (7) and (8) below; and (c) 22,707 shares subject to the Investors' Agreement held by other members of management of the Company (together with the executive officers referred to above, the "Management Shareholders"). Therefore, the share amounts set forth opposite the names of the other entities and individuals in the table are also included in the ownership of the DLJ Entities shown in the table. Details concerning the share ownership of Apollo, Bain Capital and THL are set forth in Notes (4)-(6) below. Sprout holds 475,504 shares (approximately 3.8% of the outstanding Common Stock) and Teachers holds 493,115 shares (approximately 3.9% of the outstanding Common Stock). Sprout's shares are held by DLJ Capital Corp. ("DLJCC"), a Delaware corporation, Sprout Growth II, L.P., a Delaware limited partnership, The Sprout CEO Fund, L.P., a Delaware limited partnership and one additional entity managed by the Sprout Group, the venture capital affiliate of DLJ. DLJCC is a wholly owned subsidiary of DLJ. Sprout Growth II, L.P. has two general partners: DLJCC is the managing general partner and DLJ Growth Associates II, L.P. is the general partner. DLJ Growth Associates II, L.P. is a Delaware limited partnership, whose general partners are a group of individual employees of DLJCC and DLJ Growth Associates (II), Inc., a Delaware corporation which is a wholly owned subsidiary of DLJCC. DLJCC is the managing general partner of The Sprout CEO Fund. The address of Sprout is 277 Park Avenue, New York, New York 10172. Teachers is an independent corporation established in 1990 to administer the benefits and manage the investments of the pension plan for over 200,000 Ontario teachers. The address of Teachers is 5650 Yonge Street, 5th Floor, North York, Ontario M2M 4H5. (4) Apollo's shares are held by Apollo Investment Fund III, L.P., a Delaware limited partnership ("AIF III"), Apollo Overseas Partners III, L.P., a Delaware limited partnership ("Overseas Partners"), and Apollo (U.K.) Partners III, L.P., a limited partnership organized under the laws of England ("Apollo UK Partners") (collectively, "Apollo Entities"). Each of the Apollo Entities is principally engaged in the business of investment securities. Apollo Advisors II, L.P., a Delaware limited partnership ("Advisors"), is the general partner of AIF III and the managing general partner of Overseas Partners and Apollo UK Partners. Advisors is principally engaged in the business of providing advice regarding investments by, and serving as the general partner of, the Apollo Entities. The address of Apollo is 1301 Avenue of the Americas, 38th Floor, New York, New York 10019. (5) Bain Capital's shares are held by Bain Capital Fund V, L.P., Bain Capital Fund, V-B, L.P., BCIP Associates, and BCIP Trust Associates, L.P. Bain Capital Investors V, Inc. is the general partner of Bain Capital Partners V, L.P. ("BCP V"), a Delaware limited partnership. BCP V is the general partner of Bain Capital Fund V, L.P. and Bain Capital Fund V-B, L.P. (the "Bain Fund Vs"), both of which are Delaware limited partnerships. The Bain Fund Vs' primary business activity is to make investments in private equity securities and other interests in business organizations, domestic and foreign. BCIP Associates, a general partnership, and BCIP Trust Associates, L.P., a limited partnership (together the "BCIPs"), are both organized under the laws of the state of Delaware. The BCIPs' primary business activity is to make investments in private equity securities and other interests in domestic and foreign business organizations. The address of Bain Capital is Two Copley Place, Boston, Massachusetts 02116. (6) THL's shares are held by Thomas H. Lee Equity Fund III, L.P., a Delaware limited partnership ("Fund III"), Thomas H. Lee Foreign Fund III, L.P., a Delaware limited partnership ("Foreign Fund"), THL Co-Investors III-A, LLC, a Massachusetts limited liability company ("Co-Investors A"), the THL Co- Investors III-B, LLC, a Massachusetts limited liability company ("Co-Investors B"). The general partners of each of Fund III and Foreign Fund is THL Equity Advisors III Limited Partnership, a Massachusetts limited partnership ("Equity Advisors"). The general partner of Equity Advisors is THL Equity Trust III, a Massachusetts business trust, the beneficial owners of which are affiliates of 38 41 Thomas H. Lee Company. The manager of each of Co-Investors A and Co-Investors B. is Thomas H. Lee. The address of THL is 75 State Street, 26th Floor, Boston, Massachusetts 02109. (7) Consists of 4,851 shares, 20,000 shares subject to the Investors' Agreement issuable upon exercise of options exercisable as of November 12, 1999 or within 60 days thereafter ("Option Shares") and 12,066 shares subject to the Investors' Agreement issuable upon exercise of fully-vested options (the "Rollover Options") resulting from the conversion by certain Management Shareholders of options outstanding at the time of the Recapitalization. (8) Consists of 12,130 shares and 12,500 Option Shares. (9) Messrs. Wyss, Schloss, Grauer and Wortman are officers of DLJ Merchant Banking II, Inc., an affiliate of DLJMB. DLJ Merchant Banking II, Inc. is the general partner of DLJ Merchant Banking II, L.P. Share data shown for such individuals excludes shares shown as held by the DLJ Entities, as to which such individuals disclaim beneficial ownership. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Investors' Agreement restricts transfers of the shares of Common Stock by the Management Shareholders, permits the Management Shareholders to participate in certain sales of shares of Common Stock by the DLJ Entities, requires the Management Shareholders to sell shares of Common Stock in certain circumstances should the DLJ Entities choose to sell any such shares owned by the DLJ Entities, permits the Management Shareholders and the Institutional Investors to purchase equity securities proposed to be issued by the Company on a preemptive basis in the event the DLJ Entities choose to acquire any such equity securities, and provides for certain registration rights. The Investors' Agreement also provides that the DLJ Entities have the right to appoint a majority of the members of the Board of Directors of the Company. On January 1, 1999, the Company entered into an agreement with The Equitable Life Assurance Society of the United States ("Equitable"), which is an affiliate of Donaldson, Lufkin and Jenrette, Inc. and the DLJ Entities. Under the agreement, the Company performed installation of computer hardware and software at Equitable's Harmon Meadow location. All services under the agreement have been completed. The Company believes that the services were rendered at such prices and upon such terms and conditions as would apply in an arm's-length transaction between unrelated parties. In addition, DLJ Capital Funding, Inc., an affiliate of the DLJ Entities, received customary fees and reimbursement of expenses in connection with the arrangement and syndication of the new credit facility entered into by a subsidiary of the Company in connection with the Recapitalization and as a lender thereunder. DLJSC, an affiliate of the DLJ Entities, received customary fees in connection with the underwriting of the Senior Subordinated Notes and the Debentures issued by the Company in connection with the Recapitalization. DLJSC received a merger advisory fee of $5.0 million from the Company upon consummation of the Recapitalization. The Company has entered into an agreement with DLJSC pursuant to which DLJSC will act as the Company's exclusive financial advisor for an annual fee of $500,000. In addition, the Company agrees to engage DLJSC in connection with any financial transaction (as defined in the agreement) on usual and customary terms for such engagements. The agreement continues until the earlier of (i) August 6, 2002 or (ii) such time as the DLJ Entities shall own less than 20% of the outstanding Common Stock. In connection with the Recapitalization, the Company extended non-recourse loans (the "Loans") to the following executive officers, in the amounts shown, to fund, in whole or in part, their purchase of shares of Common Stock: Stephen J. Felice -- $249,979.89; Thomas J. Fitzpatrick -- $116,664.15; Joseph S. Giordano -- $99,971.35; Thomas M. Molchan -- $99,971.35; and Thomas Farrell -- $124,989.95. Each of the Loans matures on August 7, 2001, with interest at the rate of 6.39% per annum and principal due and payable at maturity. The Loans are secured by a pledge of the shares of Common Stock purchased with the 39 42 Loans and any shares of Common Stock obtained through the borrower's exercise of Rollover Options or options issued under the Plan. The Loans to Messrs. Felice, Fitzpatrick and Giordano were cancelled upon termination of their employment with the Company, and those employees forfeited their right, title and interest in the shares of Common Stock and all options which were pledged as security for the Loans. For Messrs. Molchan and Farrell, the loan amounts shown above represent the amount outstanding as of November 12, 1999 and the largest aggregate amount of indebtedness outstanding at any time since July 1, 1999. 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) 4.9 Specimen of DecisionOne Corporation's 14% Senior Notes due 2006 (included in Exhibit 4.10).(10) 4.10 14% Senior Notes Indenture dated as of January 27, 1999 between DecisionOne Corporation and State Street Bank and Trust Company as Trustee.(10) 10.1* Management Incentive Plan.(6) 10.2* Direct Investment Program.(6) 10.3 Investors' Agreement dated August 7, 1997.(6)
40 43
EXHIBIT NO. DESCRIPTION - ----------- ----------- 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.(8) 10.6 Amendment No. 3, dated March 18, 1998 to the Credit Agreement.(9) 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* Employment Letter with James J. Greenwell (Exhibit 10.10).(1) 10.10 Amended and Restated Registration Rights Agreement (Exhibit 10.11).(1) 10.11 First Amendment to Amended and Restated Registration Rights Agreement (Exhibit 10.12).(1) 10.12* Employment Letter with Joseph S. Giordano (Exhibit 10.17).(2) 10.13* Employment Letter with Thomas J. Fitzpatrick (Exhibit 10.22).(3) 10.14* Employment Letter with Thomas M. Molchan.(4) 10.15* Employment Letter with Dwight T. Wilson.(4) 10.16 Intercompany Note made by the Company in favor of DecisionOne Corporation dated as of August 7, 1997.(6) 10.17* Form of Purchase Agreement dated as of August 7, 1997.(6) 10.18* Form of Option Agreement dated as of August 7, 1997.(6) 10.19* Employment Letter for James S. Burkhardt.(12) 10.20 Waiver of Financial Covenants.(10) 10.21* Agreement with Stephen J. Felice dated February 17, 1999.(11) 12 Computation of Ratios of Earnings to Fixed Charges.(5) 21+ Subsidiaries of the Registrant. 23+ Consent of Deloitte & Touche LLP. 24+ Power of Attorney. 27+ Financial Data Schedule.
- --------------- (1) Filed as an Exhibit to Registration Statement No. 333-1256 on Form S-1 filed with the Securities and Exchange Commission on February 9, 1996. + Filed herewith. * Compensation plans and arrangements for executives and others. (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 Corporation 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 November 14, 1997. (8) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on February 12, 1998. 41 44 (9) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 1998. (10) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on February 16, 1999. (11) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 17, 1999. (12) Filed as an Exhibit to the Annual Report on Form 10-K for DecisionOne Corporation filed with the Securities and Exchange Commission on September 28, 1998. 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).(6) 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.(6) 4.3 Specimen of the Company's 14% Senior Notes due 2006 (included in Exhibit 4.4).(7) 4.4 14% Senior Notes Indenture dated as of January 27, 1999 between the Company and State Street Bank and Trust as Trustee.(7) 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).(6) 10.10 Intercompany Note made by the DecisionOne Holdings Corp. in favor of the Company dated as of August 7, 1997.(6) 10.11* Agreement with Stephen J. Felice dated February 17, 1999.(8) 10.12 Waiver of Financial Covenants.(7) 10.13*+ Executive Retention Plan. 10.14+ Lease for Devon, PA office and warehouse. 10.15+ Lease for College Station, TX call center. 10.16+ Lease for Wilmington, OH warehouse. 10.17 Lease for Richfield, Minnesota call center.(10) 10.18 Lease for Grove City, Ohio depot.(9) 10.19 Lease for Phoenix, Arizona depot.(9) 10.20*+ Executive Severance Plan. 12.1 Statement Regarding Computation of Ratios.(1)
42 45
EXHIBIT NO. DESCRIPTION - ----------- ----------- 21+ Subsidiaries of the Registrant. 23+ Consent of Deloitte & Touche LLP. 24+ Power of Attorney. 27+ Financial Data Schedule.
- --------------- (1) Filed as an Exhibit to Registration Statement No. 333-28411 on Form S-1 filed with the Securities and Exchange Commission on June 3, 1997. + Filed herewith. * Compensation plans and arrangements for executives and others. (2) Filed as an Exhibit to Registration Statement No. 333-1256 on Form S-1 filed with the Securities and Exchange Commission on February 9, 1996. (3) Filed as an Exhibit to Pre-Effective Amendment No. 1 to Registration Statement No. 333-1256 on Form S-1 filed with the Securities and Exchange Commission on March 14, 1996. (4) Filed as an Exhibit to the Annual Report on Form 10-K filed by DecisionOne Holdings Corp. with the Securities and Exchange Commission on September 30, 1996. (5) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed by DecisionOne Holdings Corp. with the Securities and Exchange Commission on May 15, 1997. (6) Filed as an Exhibit to the Annual Report on Form 10-K filed by DecisionOne Holdings Corp. with the Securities and Exchange Commission on September 29, 1997. (7) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed by DecisionOne Holdings Corp. with the Securities and Exchange Commission on February 1, 1999. (8) Filed as an Exhibit to the Quarterly Report on Form 10-Q filed by DecisionOne Holdings Corp. with the Securities and Exchange Commission on May 17, 1999. (9) Filed as an Exhibit to the Annual Report on Form 10-K for DecisionOne Holdings Corp. with the Securities and Exchange Commission on September 28, 1998. (10) Filed as an Exhibit to the Quarterly Report on Form 10-Q for DecisionOne Holdings Corp. with the Securities and Exchange Commission on February 12, 1998. (b) Current Reports on Form 8-K filed during the quarter ended June 30, 1999: None. 43 46 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 November , 1999. DECISIONONE HOLDINGS CORP. By: /s/ KARL R. WYSS ------------------------------------ Karl R. Wyss Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the indicated persons. Each person whose signature appears below in so signing also makes, constitutes and appoints Karl Wyss and Thomas J. Fogarty, and each of them acting for him and in his name, place and stead in any and all capacities, to execute and cause to be filed with the Securities and Exchange Commission any and all amendments to this report, and in each case to file the same, with all exhibits thereto and other documents in connection therewith, and hereby ratifies and confirms all that said attorney-in-fact or his substitute or substitutes may do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE --------- ----- ---- /s/ KARL R. WYSS Chairman and Chief Executive December 6, 1999 - ----------------------------------------------------- Officer (Principal Karl R. Wyss Executive Officer) /s/ THOMAS J. FOGARTY Senior Vice President and December 6, 1999 - ----------------------------------------------------- Chief Financial Officer Thomas J. Fogarty (Principal Financial and Accounting Officer) /s/ PETER T. GRAUER Director December 6, 1999 - ----------------------------------------------------- Peter T. Grauer /s/ LAWRENCE M.V.D. SCHLOSS Director December 6, 1999 - ----------------------------------------------------- Lawrence M.v.D. Schloss /s/ KIRK B. WORTMAN Director December 6, 1999 - ----------------------------------------------------- Kirk B. Wortman
44 47 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 November , 1999. DECISIONONE CORPORATION By: /s/ KARL R. WYSS ------------------------------------ Karl R. Wyss Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the indicated persons. Each person whose signature appears below in so signing also makes, constitutes and appoints Karl Wyss and Thomas J. Fogarty, and each of them acting for him and in his name, place and stead in any and all capacities, to execute and cause to be filed with the Securities and Exchange Commission any and all amendments to this report, and in each case to file the same, with all exhibits thereto and other documents in connection therewith, and hereby ratifies and confirms all that said attorney-in-fact or his substitute or substitutes may do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE --------- ----- ---- /s/ KARL R. WYSS Chairman and Chief Executive December 6, 1999 - ----------------------------------------------------- Officer (Principal Karl R. Wyss Executive Officer) /s/ THOMAS J. FOGARTY Senior Vice President and December 6, 1999 - ----------------------------------------------------- Chief Financial Officer Thomas J. Fogarty (Principal Financial and Accounting Officer) /s/ PETER T. GRAUER Director December 6, 1999 - ----------------------------------------------------- Peter T. Grauer /s/ KIRK B. WORTMAN Director December 6, 1999 - ----------------------------------------------------- Kirk B. Wortman
45 48 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS OF DECISIONONE HOLDINGS CORP.: Independent Auditors' Report................................ F-2 Consolidated Balance Sheets as of June 30, 1999 and 1998................................................... F-3 Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended June 30, 1999, 1998 and 1997............................................... F-4 Consolidated Statements of Shareholders' Deficiency for the Years Ended June 30, 1999, 1998 and 1997........... F-5 Consolidated Statements of Cash Flows for the Years Ended June 30, 1999, 1998 and 1997........................... F-6 Notes to Consolidated Financial Statements................ F-7 CONSOLIDATED FINANCIAL STATEMENTS OF DECISIONONE CORPORATION: Independent Auditors' Report.............................. F-29 Consolidated Balance Sheets as of June 30, 1999 and 1998................................................... F-30 Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended June 30, 1999, 1998 and 1997............................................... F-31 Consolidated Statements of Shareholder's Deficiency for the Years Ended June 30, 1999, 1998 and 1997........... F-32 Consolidated Statements of Cash Flows for the Years Ended June 30, 1999, 1998 and 1997........................... F-33 Notes to Consolidated Financial Statements................ F-34 FINANCIAL STATEMENT SCHEDULES: Schedule I -- Condensed Financial Information of Registrant (DecisionOne Holdings Corp. only)........... S-1 Schedule II -- Valuation and Qualifying Accounts.......... S-7
F-1 49 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, 1999 and 1998, and the related consolidated statements of operations and comprehensive income (loss), shareholders' deficiency and cash flows for each of the three years in the period ended June 30, 1999. Our audits also included the related 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999 in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company's recent losses from operations, significant shareholders' deficiency, default under terms of its credit agreement, and the related Indebtedness Restructuring and planned Bankruptcy court filings raise substantial doubt about its ability to operate as a going concern. Management's plans concerning these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania September 1, 1999 F-2 50 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1999 AND 1998 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1999 1998 --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 31,249 $ 6,415 Restricted cash........................................... 3,410 Accounts receivable, net of allowances of $18,066 and $22,572................................................ 93,134 114,082 Consumable parts, net of allowances of $8,906 and $9,271................................................. 15,859 23,097 Prepaid expenses and other assets......................... 21,738 28,106 --------- --------- Total current assets.............................. 165,390 171,700 REPAIRABLE PARTS, Net of accumulated amortization of $141,842 and $135,277..................................... 134,924 142,446 PROPERTY AND EQUIPMENT...................................... 25,028 29,095 INTANGIBLES................................................. 128,509 154,029 DEFERRED TAX ASSET.......................................... 25,360 OTHER ASSETS................................................ 2,036 19,357 --------- --------- TOTAL ASSETS...................................... $ 455,887 $ 541,987 ========= ========= LIABILITIES AND SHAREHOLDERS' DEFICIENCY CURRENT LIABILITIES: Current portion of debt................................... $ 778,866 $ 13,311 Notes payable -- related party............................ 7,300 Accounts payable and accrued expenses..................... 92,635 101,851 Deferred revenues......................................... 28,876 40,758 Other liabilities......................................... 8,540 10,925 --------- --------- Total current liabilities......................... 916,217 166,845 DEBT........................................................ 674 731,012 OTHER LIABILITIES........................................... 6,152 5,736 SHAREHOLDERS' DEFICIENCY: Preferred stock, $.01 par value; authorized 15,000,000; none outstanding....................................... -- -- Common stock, $.01 par value; authorized 30,000,000; issued and outstanding 12,564,485 shares in 1999 and 12,584,219 shares in 1998.............................. 126 126 Additional paid-in capital................................ 242,181 242,181 Accumulated deficiency.................................... (706,795) (601,195) Accumulated other comprehensive income (loss)............. (2,668) (2,718) --------- --------- Total shareholders' deficiency.................... (467,156) (361,606) --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY.... $ 455,887 $ 541,987 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-3 51 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1999 1998 1997 --------- --------- -------- REVENUES................................................... $ 725,943 $ 805,717 $785,950 COST OF REVENUES........................................... 575,063 613,806 584,755 --------- --------- -------- GROSS PROFIT............................................... 150,880 191,911 201,195 OPERATING EXPENSES: Selling, general and administrative expenses............. 125,125 142,462 109,975 Amortization of intangibles.............................. 26,969 27,169 23,470 Merger expenses.......................................... 69,046 Loss on asset sales and disposals........................ 1,491 87,458 --------- --------- -------- OPERATING INCOME (LOSS).................................... (2,705) (134,224) 67,750 INTEREST EXPENSE, Net of interest income of $622 in 1999, $1,417 in 1998, and $197 in 1997......................... 77,535 64,683 14,698 --------- --------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (BENEFIT).......................................... (80,240) (198,907) 53,052 PROVISION (BENEFIT) FOR INCOME TAXES....................... 25,360 (15,777) 21,968 --------- --------- -------- NET INCOME (LOSS).......................................... $(105,600) $(183,130) $ 31,084 ========= ========= ======== OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: FOREIGN CURRENCY TRANSLATION ADJUSTMENTS................. (85) (912) (38) PENSION LIABILITY ADJUSTMENT............................. 135 (517) (25) --------- --------- -------- COMPREHENSIVE INCOME (LOSS)................................ $(105,550) $(184,559) $ 31,021 ========= ========= ======== BASIC EARNINGS (LOSS) PER COMMON SHARE..................... $ (8.40) $ (13.05) $ 1.03 ========= ========= ======== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING....... 12,577 14,033 30,110 ========= ========= ======== PRO FORMA INFORMATION (UNAUDITED) -- See Note 4: Pro forma net loss....................................... $(124,266) $ (183) ========= ======== Pro forma net loss per share............................. $ (9.91) $ (.01) ========= ======== Pro forma weighted average number of common shares outstanding........................................... 12,545 14,200 ========= ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 52 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (IN THOUSANDS, EXCEPT NUMBER OF SHARES OF COMMON STOCK)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) -------------------------------------- COMMON STOCK FOREIGN TOTAL -------------------- ADDITIONAL CURRENCY PENSION SHARE- NUMBER OF PAID-IN ACCUMULATED TRANSLATION LIABILITY HOLDERS' SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT ADJUSTMENT DEFICIENCY ----------- ------ ---------- ----------- ----------- ---------- ---------- BALANCE, JUNE 30, 1996.......... 27,340,288 $273 $ 255,262 $ (73,516) $ 622 $(1,848) $ 180,793 Net income...................... 31,084 31,084 Adjustment to pension liability................... (25) (25) Tax benefit -- disqualifying stock disposition........... 2,635 2,635 Foreign currency translation adjustment.................. (38) (38) Exercise of stock options..... 477,544 5 434 439 ----------- ---- --------- --------- ----- ------- --------- BALANCE, JUNE 30, 1997.......... 27,817,832 278 258,331 (42,432) 584 (1,873) 214,888 Net loss...................... (183,130) (183,130) Adjustment to pension liability................... (517) (517) Foreign currency translation adjustment.................. (912) (912) Repurchase of common stock in connection with recapitalization............ (26,506,705) (265) (244,639) (375,633) (620,537) Issuance of common stock in connection with recapitalization............ 11,108,354 111 226,472 226,583 Purchase and retirement of common stock................ (23,026) (85) (85) Issuance of warrants.......... 1,880 1,880 Exercise of stock options..... 187,764 2 222 224 ----------- ---- --------- --------- ----- ------- --------- BALANCE, JUNE 30, 1998.......... 12,584,219 126 242,181 (601,195) (328) (2,390) (361,606) Net loss...................... (105,600) (105,600) Adjustment to pension liability................... 135 135 Foreign currency translation adjustment.................. (85) (85) Common stock retired.......... (19,734) -- -- ----------- ---- --------- --------- ----- ------- --------- BALANCE, JUNE 30, 1999.......... 12,564,485 $126 $ 242,181 $(706,795) $(413) $(2,255) $(467,156) =========== ==== ========= ========= ===== ======= =========
The accompanying notes are an integral part of these consolidated financial statements. F-5 53 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (IN THOUSANDS)
1999 1998 1997 --------- --------- --------- OPERATING ACTIVITIES: Net income (loss)........................................... $(105,600) $(183,130) $ 31,084 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Loss on asset sales and disposals....................... 1,491 87,458 Depreciation............................................ 13,842 15,729 13,549 Amortization of repairable parts........................ 85,391 81,597 63,870 Amortization of intangibles............................. 26,969 27,169 23,470 Provision for uncollectible receivables................. 4,266 15,515 7,849 Provision for consumable parts obsolescence............. 4,188 1,852 2,554 Provision for deferred taxes............................ 25,360 Changes in operating assets and liabilities, net of effects from companies acquired, which provided (used) cash: Accounts receivable................................... 16,682 (802) (38,365) Consumable parts...................................... 3,057 (1,889) (6,038) Accounts payable and accrued expenses................. (9,588) 4,581 3,885 Deferred revenues..................................... (12,714) (20,311) (25,427) Net changes in other assets and liabilities........... 18,556 (14,432) 12,543 --------- --------- --------- Net cash provided by operating activities............. 71,900 13,337 88,974 --------- --------- --------- INVESTING ACTIVITIES: Capital expenditures...................................... (16,402) (10,222) (10,540) Repairable spare parts purchases, net..................... (76,415) (78,239) (86,446) Acquisitions of companies and contracts................... (2,793) (10,168) (32,258) Proceeds from asset sales................................. 16,794 -- -- --------- --------- --------- Net cash used in investing activities................. (78,816) (98,629) (129,244) --------- --------- --------- FINANCING ACTIVITIES: Proceeds from issuance of common stock in connection with recapitalization........................................ 226,583 439 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.............................. 32,292 476,918 43,625 Principal payments under capital leases................... (457) (480) (1,075) Other..................................................... (85) (2,268) (63) --------- --------- --------- Net cash provided by financing activities............. 31,750 80,830 42,926 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................................... 24,834 (4,462) 2,656 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................................................... 6,415 10,877 8,221 --------- --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 31,249 $ 6,415 $ 10,877 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Net cash paid (received) during the year for: Interest................................................ $ 64,091 $ 41,644 $ 15,640 Income taxes............................................ (9,365) 4,031 8,381 Noncash investing/financing activities: Issuance of seller notes in connection with acquisitions.......................................... 2,224 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-6 54 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1999, 1998 AND 1997 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 3,500 service professionals in over 150 service locations throughout North America and through strategic alliances in selected international markets. 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. The Company operates as one business segment (See Note 3). 2. INDEBTEDNESS RESTRUCTURING The Company has continued to experience declining trends in revenues, and earnings throughout fiscal 1999. The declining trends principally result from lower sales of new service contracts, erosion of contract base, and minimal growth from acquisitions. As previously announced, on January 28, 1999, the Company initiated a corporate operating plan ("Operating Plan") intended to restore revenue growth and improve financial performance. The Operating Plan included the following key components: (i) focusing on all aspects of the Company's operations -- from sales through service delivery -- on providing information technology support services to three customer groups: large corporate customers (also known as "enterprise accounts"), medium sized accounts (also known as "middle market"), and alliance customers (including OEMs, software publishers, systems integrators, distributors and resellers, etc.); (ii) a cost-reduction program designed to reduce the Company's cost structure by $40 million annually upon full implementation, including a reduction in force of more than 500 employees; and (iii) financial structure changes, including an additional $7.3 million investment in the form of 14% Senior Unsecured Notes due 2006 (the "14% Notes") in DecisionOne Corporation by an affiliate of DLJ Merchant Banking Partners II, L.P. ("DLJMB"), and the Company's agreement with its lenders to waive certain financial covenants in the Company's credit agreement through July 29, 1999 (the "Waiver"). On July 14, 1999, the reorganized Company's common stock was delisted from the NASDAQ national market System. Since that date, the Company's common stock has been quoted on the OTC Bulletin Board. On August 2, 1999, the Company announced an agreement in principle with the bank lending group and the holders of the 14% Notes on the restructuring of its indebtedness (the "Indebtedness Restructuring"). Under the terms of the final agreement, the bank lending group would exchange approximately $523 million in existing indebtedness for approximately 94.6 percent of the reorganized Company's equity and $250 million in new senior secured bank debt (the "New Credit Agreement"). The agreement further provides that the holders of the 14% Notes would exchange their notes for (a) warrants equal to approximately 4.2 percent of the reorganized Company's fully diluted equity, at an exercise price based on an enterprise value of $350 million and (b) warrants equal to approximately 2.0 percent of the reorganized Company's equity, at an exercise price based on an equity valuation of $280 million. The holders of the 9 3/4% Senior Subordinated Notes due 2007 (the "9 3/4% Notes") would exchange their notes for (a) approximately 5.0 percent of the reorganized Company's equity; (b) warrants equal to approximately 2.8 percent of the reorganized Company's F-7 55 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) fully diluted equity, at an exercise price based on an enterprise value of $350 million; (c) warrants equal to approximately 5.0 percent of the reorganized Company's equity, at an exercise price based on an equity valuation of $200 million; and (d) warrants equal to approximately 3.0 percent of the reorganized Company's equity, at an exercise price based on an equity valuation of $280 million. In addition, the holders of the 11 1/2% Senior Discount Debentures due 2008 (the "11 1/2% Notes") and the holders of unsecured claims of Holdings would receive a total of approximately 0.4 percent of the reorganized Company's equity. The Company did not make the $7.3 million interest payment on its 9 3/4% Notes, which was due on August 2, 1999 nor the interest payment due to the holders of the 14% Notes. The Waiver, pursuant to which the bank lending group agreed to waive certain financial covenants under its Existing Credit Facility, expired on July 29, 1999. The holders of the 9 3/4% Notes, the holders of the 11 1/2% Notes, the holders of the 14% Notes and the bank lending group have the right to declare the respective outstanding loan amounts immediately due and payable and seek to exercise remedies, including, in the case of the Existing Credit Facility, foreclosure on the collateral securing such amounts. As such, the Company has reflected all such loan amounts as current liabilities as of June 30, 1999 (See Note 10). The Company's proposed Indebtedness Restructuring will be subject to the approval of a United States Bankruptcy Court (the "Bankruptcy Court") pursuant to Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"). The Indebtedness Restructuring will be accomplished through a plan of reorganization (the "Plan") in a prepackaged case under Chapter 11 of the Bankruptcy Code. The Plan along with a related disclosure statement will be delivered to the bank lending group and the holders of the 14% Notes in connection with the Company's pre-petition solicitation of acceptances of the proposed Plan. If, by the end of the solicitation period, the requisite acceptances have been received from the bank lending group and the holders of the 14% Notes, the Company intends to file a petition under Chapter 11 and to use the acceptances received pursuant to the solicitation to seek confirmation of the Plan. With respect to all the other creditors and equity holders of the Company that are impaired under the Plan, the Company intends to seek confirmation of the Plan under the "cram down" provisions of the Bankruptcy Code. The Plan will only be confirmed if the Bankruptcy Court determines that all the requirements of the Bankruptcy Code have been met, including, without limitation, that the Plan is (i) accepted by all impaired classes of claims and equity interests or, if rejected by an impaired class, that the Plan does not "discriminate unfairly" and is "fair and equitable" as to such class, (ii) feasible and (iii) in the "best interests" of creditors and equity holders impaired under the Plan. The accompanying consolidated financial statements have been prepared on a going concern basis of accounting and do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company's recent losses from operations, significant shareholders' deficiency, default under the terms of its credit agreement, and the related Indebtedness Restructuring and planned Bankruptcy Court filings raise substantial doubt about the Company's ability to operate as a going concern. The appropriateness of using the going concern basis is dependent upon, among other things, (i) the Company's ability to reverse its declining revenue trends; (ii) the Company's ability to generate sufficient cash from operations and/or obtain additional financing to meets its obligations prior to confirmation of a plan of reorganization; (iii) confirmation of the Company's plan of reorganization under the Bankruptcy Code, and (iv) the Company's ability to achieve profitable operations and generate sufficient cash from operations and/or obtain additional financing after such confirmation. 3. 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. F-8 56 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pro Forma Information (Unaudited) -- The pro forma information included in the accompanying statement of operations and in Note 4 has been prepared to reflect the Company's recapitalization and merger with Quaker Holding Co. ("Quaker") and related transactions as if these had occurred on July 1, 1996. 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. Restricted Cash -- Restricted cash at June 30, 1999 represents amounts deposited into a trust as security for letters of credit issued by the Company for certain employee obligations of the Company (see Note 10). 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. The Company had 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 abnormal retirement of computer parts (see Note 5) and related life studies, the Company revised the useful lives of repairable parts and increased the obsolescence provision for consumable parts prospectively. Effective July 1, 1998 the Company began amortizing its existing composite group of repairable parts and future repairable part purchases over an estimated average remaining life of three years. Accounting Change - Repairable Parts -- Effective July 1, 1999, the Company changed its method of accounting for repairable parts from the amortization method to the usage method. Under the amortization method, the Company amortized the cost of repairable parts over an estimated average useful life and recorded the costs of refurbishing repairable parts as a component of cost of revenues as incurred. Under the usage method, the Company will record in cost of revenues the cost of new and refurbished parts when used to service customers. Additionally, under the usage method, management will perform periodic assessments to determine the existence of excess or obsolete parts and will record any necessary provisions to reduce such parts to net realizable value, consistent with past practice. Management believes that this change in method for repairable parts more accurately reflects periodic results of operations based on parts used to service customers. The effect of this change will be recorded as a cumulative effect charge of approximately $74.4 F-9 57 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) million, during the fiscal quarter ending September 30, 1999. The Company does not expect to record any tax benefit resulting from this charge. See Note 11 to the Company's consolidated financial statements for the year ended June 30, 1999. The pro forma effect of this change in accounting principle on prior years' operations is not presented because such effects are not reasonably determinable. 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 Notes 6 and 8). 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 8). 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. Income Taxes -- The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities and expected benefits of utilizing net operating loss carryforwards. The impact on deferred taxes of changes in tax rates and laws, if any, applied to the years during which temporary differences are expected to be settled, are reflected in the consolidated financial statements in the period of enactment. F-10 58 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Foreign Currency Translation -- Gains and losses resulting from foreign currency translation are accumulated as a separate component of accumulated other comprehensive income (loss). 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 other comprehensive income (loss). 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 10, the fair values of debt such as the Existing Credit Facility, the senior discount debentures, the senior unsecured notes and the senior subordinated notes and the fair values of interest rate swaps and collars are based primarily 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 -- The Company follows 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 13). Derivative Financial Instruments -- Derivative financial instruments, which constitute interest rate swap and collar agreements (see Note 10), 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. Earnings (Loss) Per Common Share -- In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, Earnings Per Share, which the Company adopted during fiscal 1998. 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 (loss) 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 F-11 59 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 losses incurred for the fiscal year ended June 30, 1999 and 1998. The total weighted average common stock equivalents that would have been used to determine diluted earnings per share as of June 30,1999 and 1998 were as follows: common stock options of approximately 1,341,000 in 1999 and 1,568,000 in 1998 and common stock warrants of 313,047 in 1999 and 1998. Comprehensive Income (Loss) -- In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income -- The Company adopted this pronouncement in fiscal 1999. Components of comprehensive income for the Company include net income (loss), pension liability adjustment and foreign currency translation. Business segmentation -- In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires segments to be determined based on how management measures performance and makes decisions about allocating resources. Except for geographic information set forth below, the adoption of SFAS No. 131 has not resulted in any changes to presentation of financial data in fiscal 1999, as the Company operates as one business segment. Summary geographic financial information for the Company for the fiscal years ended June 30, 1999, 1998 and 1997 as is as follows:
UNITED STATES CANADA TOTAL COMPANY ------------- ------- ------------- 1999 Total revenues................................. $696,797 $29,146 $725,943 Total assets................................. $442,569 $13,318 $455,887 1998 Total revenues............................... $772,683 $33,034 $805,717 Total assets................................. $523,604 $18,383 $541,987 1997 Total revenues............................... $755,254 $30,696 $785,950 Total assets................................. $605,764 $17,341 $623,105
Recent Accounting Pronouncements -- In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement, which revises certain disclosure requirements for the Company's retirement plan assets and obligations, is effective for fiscal periods beginning after December 15, 1997. Restatement of prior years' information is required, where available. As this statement only requires a change in methods of disclosure and not in accounting methods, it did not have any impact on the Company's consolidated financial position and results of operations. The Company adopted SFAS No. 132 in fiscal 1999, as required. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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 assets or liabilities at fair value. This statement is effective for fiscal years beginning after June 15, 1999, although early adoption is encouraged. In June, 1999, the FASB issued SFAS No. 137, which defers the effective date of SFAS No. 133 until June 15, 2000. 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 1999 presentation. F-12 60 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. MERGER, RECAPITALIZATION AND PRO FORMA INFORMATION On August 7, 1997, the Company consummated a merger with Quaker Holding Co. ("Quaker"), an affiliate of DLJ Merchant Banking Partners II, L.P. ("DLJMB"). 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 per share 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 then existing revolving credit facility (see Note 10). 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 then 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 (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 years ended June 30, 1998 and 1997 assumes that the merger had occurred on July 1, 1996. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the merger occurred as of July 1, 1996 or which may result in the future.
UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED JUNE 30, --------------------- 1998 1997 --------- -------- PRO FORMA LOSS STATEMENT INFORMATION: Revenues.................................................... $ 805,717 $785,950 Operating income (loss)..................................... (65,178) 67,750 Loss from continuing operations before income tax provision (benefit)................................................. (134,971) (312) Net loss.................................................... (124,266) (183) Loss per common share....................................... $ (9.91) $ (0.01) Weighted average common shares outstanding................ 12,545 14,200
F-13 61 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The 1998 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 11). 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. The 1997 pro forma net loss reflects a net increase in interest expense of approximately $53.4 million ($31.3 million after related pro forma tax effect), attributable to additional financing incurred in connection with the merger, net of repayment of the Company's existing revolving credit facility. Pro forma weighted average common and common equivalent shares outstanding include 12,499,978 shares outstanding immediately subsequent to the merger on August 7, 1997 and dilutive common stock warrants and stock options (convertible into 281,960 and 1,418,530 shares of common stock, respectively) issued in connection with or immediately subsequent to the merger. 5. LOSS ON ASSET SALES AND DISPOSALS In connection with the company's fiscal 1999 cost reduction program, the Company sold all of its owned facilities, consisting of a multi-purpose facility located in Tulsa, Oklahoma, and a Logistics service facility located in a suburb of Milwaukee, Wisconsin, at a total net loss of approximately $1.5 million. Management determined that over 1.2 million of its computer parts were obsolete during its annual fourth quarter physical inventory in fiscal 1998. 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. 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 the fourth quarter of fiscal 1998. 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 6). 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-14 62 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. BUSINESS AND CONTRACT ACQUISITIONS During the years ended June 30, 1999, 1998 and 1997, the Company acquired certain net assets of other service companies as follows (in thousands):
CONSIDERATION EXCESS PURCHASE ----------------------------------------------- PRICE OVER FAIR NUMBER OF LIABILITIES TOTAL PURCHASE VALUE OF NET ASSETS YEARS ENDED ACQUISITIONS CASH ASSUMED NOTES PRICE OTHER TANGIBLES ACQUIRED - ----------- ------------ ------- ----------- ------ -------------- --------------- ------------------- Non-significant business or maintenance contract acquisitions: June 30, 1997...... 9 $32,258 $45,829 $2,201 $80,288 $32,239 $48,049 June 30, 1998...... 4 10,168 6,317 $4,538 21,023 4,600 16,423 June 30, 1999...... 1 2,793 1,204 -- 3,997 139 3,858
Included in non-significant 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. Pro forma information has not been presented with respect to those acquisitions, as the Company does not consider these acquisitions to be significant. 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. 7. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
JUNE 30, -------------------- 1999 1998 -------- -------- (IN THOUSANDS) Land and buildings.......................................... $ -- $ 6,312 Equipment................................................... 10,292 15,335 Computer hardware and software.............................. 41,480 32,459 Furniture and fixtures...................................... 7,088 9,628 Leasehold improvements...................................... 7,034 5,190 -------- -------- 65,894 68,924 Accumulated depreciation and amortization................... (40,866) (39,829) -------- -------- $ 25,028 $ 29,095 ======== ========
The principal lives (in years) used in determining depreciation and amortization rates of various assets are: buildings (20-40); equipment (3-10); computer hardware and software (3-5); furniture and fixtures (5-10) and leasehold improvements (term of related leases). Depreciation and amortization expense was approximately $13,842,000, $15,729,000, and $13,549,000 for the fiscal years ended 1999, 1998 and 1997, respectively. As more fully described in Note 5, the Company sold both of its owned facilities during fiscal 1999. F-15 63 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. INTANGIBLES Intangibles consisted of the following:
JUNE 30, -------------------- 1999 1998 -------- -------- (IN THOUSANDS) Excess purchase price over fair value of net assets acquired.................................................. $138,307 $137,241 Customer lists.............................................. 60,370 60,370 Noncompete agreements....................................... 4,331 9,231 Other intangibles........................................... 9,881 8,014 -------- -------- 212,889 214,856 Accumulated amortization.................................... (84,380) (60,827) -------- -------- $128,509 $154,029 ======== ========
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); non-compete agreements (3-5) and other (1-6). Amortization expense relating to intangibles was approximately $26,968,000, $27,169,000, and $23,470,000 for the fiscal years ended 1999, 1998 and 1997, respectively. 9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consisted of the following:
JUNE 30, ------------------- 1999 1998 ------- -------- (IN THOUSANDS) Accounts payable............................................ $39,102 $ 56,040 Compensation and benefits................................... 21,175 20,928 Interest.................................................... 7,098 11,485 Unused leases............................................... 531 175 Pension accrual............................................. 1,145 1,515 Accrued professional fees................................... 880 568 Non-income taxes and other.................................. 22,704 11,140 ------- -------- $92,635 $101,851 ======= ========
F-16 64 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. DEBT Debt consists of the following:
JUNE 30, -------------------- 1999 1998 -------- -------- (IN THOUSANDS) Existing Credit Facility: Revolving credit loans.................................... $ 65,700 $ 30,700 Term loans................................................ 457,388 467,938 Senior discount debentures, 11 1/2%, due 2008............... 103,496 92,246 Senior subordinated notes, 9 3/4%, due 2007................. 150,000 150,000 Senior unsecured notes, 14%, due 2006....................... 7,300 -- Seller noninterest-bearing notes payable.................... 2,664 2,179 Seller note payable -- purchase of spare parts.............. -- 508 Capitalized lease obligations, payable in varying installments.............................................. 292 752 -------- -------- 786,840 744,323 Less current portion........................................ 786,166 13,311 -------- -------- $ 674 $731,012 ======== ========
In connection with the Company's merger with Quaker (see Note 4), 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 the Existing Credit Facility, senior discount notes, and senior subordinated notes which, in the aggregate, provided financing of approximately $810 million, subject to certain conditions. As more fully described in Note 2, during fiscal 1999 the Company sought and obtained a waiver (the "Waiver") of certain financial covenants contained in its new 1997 Credit Facility (the "Existing Credit Facility"). In connection with the Waiver, The Company incurred waiver fees of approximately $4.3 million, which are being amortized as interest expense through July, 1999. This Waiver expired on July 29, 1999, and the Company is currently, therefore, in technical default under the terms of the Existing Credit Facility. As a result of this default, all amounts outstanding under the Existing Credit Facility could become immediately due and payable, and have been classified as current liabilities in the accompanying consolidated balance sheet as of June 30, 1999. Additionally, as a result of this default, any additional borrowings under the Existing Credit Facility are subject to the approval of the holders of the Existing Credit Facility. As more fully described in Note 2, on August 2, 1999, the Company announced an agreement in principle with the bank lending group and the holders of the 14% Notes on the restructuring of its indebtedness (the "Indebtedness Restructuring"). Although Company management expects the Indebtedness Restructuring to be consummated, such consummation is subject to various approvals outside of the Company's control. Currently, the Company does not have in place any alternate sources of liquidity if the Indebtedness Restructuring, or another similar debt restructuring agreement, is not consummated. The Company had average borrowings of approximately $770,177,000 during 1999 at an average interest rate of approximately 9.0%. Maximum borrowings during 1999 were approximately $788,000,000. The Company had average borrowings of $699,873,000 and $221,069,000 during 1998 and 1997, respectively, at an average interest rate of 9.0% and 6.4%, respectively. Maximum borrowings during 1998 and 1997 were $751,016,000 and $243,350,000, 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, 1999 and 1998, no amounts were outstanding under F-17 65 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the agreement. At June 30, 1997, approximately $471,000 (in U.S. dollars) was outstanding under this agreement. Annual maturities on long-term debt outstanding at June 30, 1999, are as follows (in thousands): 2000, $786,166; 2001, $612, and 2002, $62. The Company has approximately $10,325,000 of letters of credit outstanding as of June 30, 1999. The Company bears the credit risk on this amount to the extent that it does not comply with the provisions of certain agreements. The letters of credit, net of amounts deposited in trust as restricted cash (see Note 3) reduce the amount available under the Company's revolving loans under its Existing Credit Facility. EXISTING CREDIT FACILITY The Existing 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 Company incurred debt issuance costs of approximately $14,375,000 in connection with the Existing 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 Existing 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, 1999 were 8.47%, 8.71% and 8.96% for term loan A, term loan B, and the revolving loans, respectively. The Existing 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 EBITDA, (2) Leverage Ratio, (3) Interest Coverage Ratio, and (4) Fixed Charge Ratio. Additionally, the Company has pledged the assets of substantially all of its subsidiaries as collateral security for the Existing Credit Facility. During the third quarter of fiscal 1998, the Company sought and obtained amendments to the Existing 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 estimated fair value of the Existing Credit Facility was approximately $235.4 million and is based on quoted market prices as of June 30, 1999. SENIOR DISCOUNT DEBENTURES (11 1/2% NOTES) 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. 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 F-18 66 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of $23.00 per share, subject to adjustment under certain circumstances. The warrants expire on August 1, 2007. The senior discount debentures are subordinate to the Existing Credit Facility, the senior subordinated notes and the senior unsecured notes. The estimated fair value of the senior discount debentures and the attached warrants as of June 30, 1999 was approximately $1.1 million and is based on quoted market prices for that publicly traded debt. SENIOR SUBORDINATED NOTES (9 3/4% 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 senior subordinated notes are subordinate to the Existing Credit Facility and the senior unsecured notes. The estimated fair value of the senior subordinated notes as of June 30, 1999 was approximately $6.7 million and is based on quoted market prices. SENIOR UNSECURED NOTES (14% NOTES) On January 27, 1999, the Company's principal shareholder, DLJMB and certain of its affiliates, purchased $7,300,000 of unsecured 14% senior notes due 2006 in DecisionOne Corporation. The proceeds of the 14% senior notes were used for general corporate purposes. The senior unsecured notes are subordinate only to the Existing Credit Facility. The estimated fair value of the senior unsecured notes as of June 30, 1999, was approximately $0.3 million based on indicative quoted market rates. SELLER NOTES PAYABLE In connection with certain acquisitions (see Note 6), 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 accrued interest at an interest rate of approximately 8%, and required quarterly payments of principal and interest of approximately $273,000 through December 1998. REVOLVING CREDIT LOANS -- 1997 AND PRIOR The Company had a revolving credit facility of $300,000,000, which was repaid in connection with the Company's merger in August, 1997 (see Note 4). INTEREST RATE RISK MANAGEMENT The use of interest rate risk management instruments, such as Swaps and Collars, is required under the terms of the Existing 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. F-19 67 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, 1999:
NOTIONAL AMOUNT MATURITIES AVERAGE INTEREST RATE ESTIMATED FAIR VALUE --------------- ---------- --------------------- -------------------- Variable to Fixed Swaps.............. $ 75,000,000 2000 5.9% $(115,000) Collars.............. $100,000,000 2000 - 2001 5.7% - 6.7% $(237,000)
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, 1999 was not significant. 11. INCOME TAXES The provision (benefit) for income taxes consists of the following:
YEARS ENDED JUNE 30, ------------------------------ 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) Current: Federal.............................................. $ -- $ (8,209) $10,909 State.............................................. -- 100 3,616 Foreign............................................ -- (372) 1,080 Deferred: Federal............................................ 21,483 (6,991) 6,460 State.............................................. 3,877 (917) 16 Foreign............................................ -- 612 (113) ------- -------- ------- Provision (benefit) for income taxes................. $25,360 $(15,777) $21,968 ======= ======== =======
F-20 68 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The tax effects of temporary differences consisted of the following:
JUNE 30, ----------------------- 1999 1998 --------- -------- (IN THOUSANDS) Gross deferred tax assets: Accounts receivable......................................... $ 6,139 $ 7,869 Inventory................................................. 4,038 2,819 Accrued expenses.......................................... 5,798 6,348 Unused leases............................................. (133) (277) Fixed assets.............................................. 1,964 1,714 Intangibles............................................... 21,781 17,049 Debt issuance costs....................................... 8,155 3,743 Other..................................................... 2,447 1,298 Operating loss carryforwards.............................. 62,763 53,554 Tax credit carryforwards.................................. 2,969 2,969 --------- -------- Gross deferred tax assets................................... 115,921 97,086 Valuation allowance......................................... (115,921) (57,833) --------- -------- Gross deferred tax assets less valuation allowance.......... -- 39,253 Gross deferred tax liabilities -- repairable spare parts.... -- (13,893) --------- -------- Net deferred tax asset...................................... $ -- $ 25,360 ========= ========
Net operating loss and minimum tax credit carry forwards available at June 30, 1999 expire in the following years:
YEAR OF AMOUNT EXPIRATION -------------- ---------- (IN THOUSANDS) Federal operating losses............................... $152,085 2006 - 2019 State operating losses................................. 151,178 2000 - 2019 Foreign operating losses............................... 10,148 2000 - 2006 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 1999, 1998 and 1997 to income before income taxes, and the actual provision (benefit) for income taxes follows:
1999 1998 1997 ----- ----- ---- Federal income tax provision at statutory tax rate.......... (35.0)% (35.0)% 35.0% State income taxes, net of federal income tax provision..... (5.1) (3.9) 5.0 Foreign income taxes........................................ 1.2 (0.4) 0.4 Change in valuation allowance............................... 72.4 29.1 Other....................................................... (1.9) 2.3 1.0 ----- ----- ---- Actual income tax provision (benefit) effective tax rate.... 31.6% (7.9)% 41.4% ===== ===== ====
As a result of the Company's merger with Quaker on August 7, 1997 (see Note 4), 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 F-21 69 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 2000 and 2019. The Company recorded an increase in the valuation allowance of $58,088,000 during the year ended June 30, 1999 from $57,833,000 as of June 30, 1998 to $115,921,000 as of June 30, 1999. 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. 12. OTHER LIABILITIES Other (noncurrent) liabilities consisted of the following:
JUNE 30, ------------------ 1999 1998 ------ ------ (IN THOUSANDS) Accrued severance........................................... $3,847 $2,973 Other noncurrent liabilities................................ 2,305 2,763 ------ ------ $6,152 $5,736 ====== ======
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 unutilized lease losses. 13. STOCK-BASED COMPENSATION PLANS In connection with the Company's merger with Quaker on August 7, 1997 (see Note 4), 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. In July 1998, the Company increased the aggregate number of shares of Company Common Stock reserved for issuance to the Management Incentive Plan by 250,000 shares. The aggregate number of shares of Company common stock permitted for issuance pursuant to the Incentive Plan was 1,948,280 as of June 30, 1999. 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. F-22 70 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the Incentive Plan activity for the years ended June 30, 1999 and 1998 is as follows:
1999 1998 ------------------------------ ----------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ------ ---------------- --------- ---------------- Balance, beginning of year...................... 1,584,774 $19.86 0 $ 0.00 Options granted............. 1,748,625 6.92 1,904,828 19.09 Options exercised......... -- -- (107,264) 0.96 Options cancelled......... (2,236,603) 16.70 (212,790) 22.58 ---------- --------- Balance, end of year........ 1,096,796 $ 4.85 1,584,774 $19.86 ========== =========
The following tables summarize information about options outstanding at June 30, 1999:
OUTSTANDING OPTIONS ------------------------------------------------------ RANGE OF WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE PRICES NUMBER OF SHARES CONTRACTUAL LIFE EXERCISE PRICE --------------- ---------------- ---------------- ---------------- $1.96 332,000 9.8 $ 1.96 $6.10 - $7.17 685,288 8.4 $ 6.14 $12.54 - $15.01 74,508 8.1 $14.26 $26.75 5,000 8.1 $26.75 --------- Total 1,096,796 8.8 $ 5.52 =========
EXERCISABLE OPTIONS ------------------------------------ RANGE OF WEIGHTED AVERAGE EXERCISE PRICE NUMBER OF OPTIONS EXERCISE PRICE - --------------- ----------------- ---------------- $6.10 - $7.17 95,662 $ 6.38 $12.54 - $15.01 74,508 $14.26 $26.75 5,000 $26.75 ------- Total 175,170 $10.31 =======
On December 14, 1998, the Company repriced 1,225,625 stock option grants, with an exercise price of $6.10, the then-quoted market price. Of these repriced stock option grants, 577,625 were cancelled subsequently during fiscal 1999. 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 net loss and net loss per share for fiscal 1999 and pro forma net loss and pro forma loss per share (see Note 4) would have been increased to the following adjusted amounts (dollars in thousands, except per share amounts):
1999 1998 --------- --------- Net loss -- as reported..................................... $(105,600) $(183,130) Net loss -- as adjusted..................................... $(105,975) $(185,607) Basic loss per share -- as reported......................... $ (8.40) $ (13.05) Basic loss per share -- as adjusted......................... $ (8.43) $ (13.23)
The weighted average fair value of options granted during fiscal 1999 and 1998 is estimated as $3.09 and $10.88, respectively, on the date of the grant using the Black-Scholes option pricing model with the following F-23 71 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) assumptions: volatility of 57.0% and 46.0%, respectively, risk-free interest rate of 5.81% and 5.52%, respectively, dividend yield of 0.0% and an expected life of 5 years for both fiscal 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 and 1997:
OPTIONS PRICE RANGE ---------- --------------- 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 ==========
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 was $9.61. The assumptions used to determine the fair value were as follows: risk-free interest rate of 6.58 %; expected volatility of 27.1% in 1997 and 27.0%; and an expected life of 10 years. 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 would have been approximately $4.4 million. 14. 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 2009. 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, 1999 and thereafter are as follows (in thousands): 2000............................................... $20,092 2001............................................... 17,194 2002............................................... 12,188 2003............................................... 9,749 2004............................................... 7,661 Thereafter......................................... 7,623 ------- $74,507 =======
Rental expense amounted to approximately $23,405,000, $19,379,000, and $17,367,000, for the fiscal years ended 1999, 1998 and 1997, respectively. F-24 72 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. SHAREHOLDERS' DEFICIENCY In connection with the merger (see Note 4), 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, 1999 and 1998 were $995,000 and $1,329,000, respectively. The Company has recorded the employee loans receivable as a reduction to shareholders' deficiency. On August 7, 1997, the Company amended its Certificate of Incorporation to decrease the number of authorized shares of common stock to 30,000,000 shares, and to increase the number of authorized shares of preferred stock to 15,000,000 shares. 16. 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 1999, 1998, and 1997 were $1,070,000, $1,013,000 and $0, respectively. 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. Periodic (income) cost, and related financial information with respect to the defined benefit pension plan is as follows:
1999 1998 ------ ------- (IN THOUSANDS) CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year..................... $9,156 $ 7,290 Service cost................................................ -- -- Interest cost............................................... 610 611 Plan amendments............................................. -- -- Actuarial (gain) loss....................................... 70 1,613 Benefits paid............................................... (929) (358) ------ ------- Benefit obligation at end of year........................... $8,907 $ 9,156 ====== ======= CHANGE IN PLAN ASSETS: Fair Value of plan assets at beginning of year.............. $7,858 $ 6,128 Actual return on plan assets................................ 747 1,506 Employer contributions...................................... 284 582 Benefits paid............................................... (928) (358) ------ ------- Fair Value of plan assets at end of year.................... $7,961 $ 7,858 ====== ======= RECONCILIATION OF FUNDED STATUS: Funded status............................................... $ (947) $(1,298) Unrecognized transition asset............................... 405 438 Unrecognized prior service cost............................. -- -- Unrecognized (gain) loss.................................... 2,255 2,390 ------ ------- Net amount recognized....................................... $1,713 $ 1,530 ====== =======
F-25 73 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999 1998 ------ ------- (IN THOUSANDS) AMOUNTS RECOGNIZED ON THE CONSOLIDATED BALANCE SHEETS CONSIST OF: Intangible asset............................................ $ 405 $ 438 Accrued benefit liability................................... (947) (1,298) Accumulated other comprehensive income...................... 2,255 2,390 ------ ------- Accrued benefit cost........................................ $1,713 $ 1,530 ====== =======
1999 1998 1997 ----- ----- ----- PERIOD (INCOME) COST: Service Cost............................................... -- -- -- Interest Cost.............................................. $ 610 $ 611 $ 521 Expected return on plan assets............................. (631) (525) (409) Amortization of transition asset........................... 33 33 33 Amortization of prior service costs........................ Amortization of (gain) loss................................ 88 115 (23) ----- ----- ----- Total Net periodic benefit (income) cost................... $ 100 $ 234 $ 122 ===== ===== =====
The discount rate used in determining the actuarial present value of the projected benefit obligation was 7.25% for 1999, 7.0% for 1998, and 7.5% for 1997. The expected long-term rate of return on assets was 8.5% for 1999, 1998 and 1997. The mortality table used for 1999 and 1998 was the 1983 Group Annuity Mortality Table for Males and Females and the mortality table used for 1997 was the UP-1984 Unisex Mortality Table. 17. EMPLOYEE SEVERANCE AND UNUTILIZED LEASE COSTS During the second quarter of fiscal 1997, in connection with the Memorex Telex acquisition (see Note 6), 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. During the year ended June 30, 1999, the Company recorded charges of $4.5 million, included in selling, general and administrative expenses, for estimated future severance costs in accordance with SFAS No. 112, which reflects the actuarially determined benefit costs for the separation of employees who are entitled to benefits under pre-existing separation pay plans, including employees separated under the Operating Plan (see Note 2). See Note 12 for further information regarding accrued severance and unutilized lease losses. 18. 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. F-26 74 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company initially estimated that its share of the costs of the clean-up of one of these sites was approximately $500,000, of which $372,000 and $460,000 remained unpaid and accrued in the accompanying consolidated balance sheets as of June 30, 1999 and 1998, respectively. Complete information as to the scope of required clean-up at these sites is not yet available and, therefore, management's evaluation may be affected as further information becomes available. However, in light of information currently available to management, including information regarding assessments of the sites to date and the nature of involvement of the Company's predecessor at the sites, it is management's opinion that the Company's potential additional liability, if any, for the cost of clean-up of these sites will not be material to the consolidated financial position, results of operations or liquidity of the Company. The Company is also party to various legal proceedings incidental to its business. Certain claims, suits and complaints arising in the ordinary course of business have been filed or are pending against the Company. In the opinion of management, these actions can be successfully defended or resolved without a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. During the fourth quarter of fiscal 1997, the Company received $2.0 million in full settlement of a claim against its former insurance carrier, related to unreimbursed losses. This settlement was reflected as a reduction of selling, general and administrative costs in the accompanying statement of operations. 19. RELATED PARTY TRANSACTIONS During the years ended June 30, 1999 and 1998, respectively, the Company incurred costs of approximately $528,000 and $500,000 for financial advisory services to the DLJ Group. Of these amounts, approximately $528,000 and $0 remained unpaid at June 30, 1999 and 1998, respectively. As more fully described in Note 10, on January 27, 1999, the DLJ Group purchased $7,300,000 of unsecured 14% senior notes due 2006 by DecisionOne Corporation. Interest expense of approximately $430,000 remained unpaid at June 30, 1999, with respect to these obligations. 20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of the unaudited quarterly financial information for the fiscal years ended 1999 and 1998:
QUARTER ENDED ------------------------------------------------- SEPT. 30, DEC. 31, MARCH 31, JUNE 30(1), --------- -------- --------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 Revenues............................... $196,044 $185,017 $176,005 $ 168,877 Gross profit........................... 47,565 34,235 32,534 36,546 Net loss............................... (10,992) (25,649) (24,481) (44,478) Basic loss per share................... $ (0.87) $ (2.04) $ (1.95) $ (3.54)
F-27 75 DECISIONONE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTER ENDED ----------------------------------------------------- SEPT. 30(2), DEC. 31, MARCH 31, JUNE 30(3), ------------ -------- --------- ------------ (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) Basic net income (loss) per share..... (3.07) (0.86) (0.87) (8.25) 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)
- --------------- (1) Net loss for the fourth quarter of 1999 includes a charge of $25.4 million to reduce deferred tax assets to the level where management believes it is more likely than not that such tax benefits will be realized (See Note 11). (2) Net loss for the first quarter of 1998 includes $69.0 million of pre-tax merger expenses (See Note 4). (3) 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 5). F-28 76 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, 1999 and 1998, and the related consolidated statements of operations, shareholder's deficiency and cash flows for each of the three years in the period ended June 30, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999 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. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company's recent losses from operations, significant shareholders' deficiency, default under terms of its credit agreement, and the related Indebtedness Restructuring and planned Bankruptcy court filings raise substantial doubt about its ability to operate as a going concern. Management's plans concerning these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania September 1, 1999 F-29 77 DECISIONONE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1999 AND 1998 (IN THOUSANDS)
1999 1998 --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 30,061 $ 5,205 Restricted cash........................................... 3,410 Accounts receivable, net of allowances of $18,066 and $22,572................................................ 93,134 114,082 Consumable parts, net of allowances of $8,906 and $9,271................................................. 15,859 23,097 Prepaid expenses and other assets......................... 18,750 27,797 --------- --------- Total current assets.............................. 161,214 170,181 REPAIRABLE PARTS, Net of accumulated amortization of $141,842 and $135,277..................................... 134,924 142,446 PROPERTY AND EQUIPMENT...................................... 25,028 29,095 INTANGIBLES................................................. 128,509 154,029 PARENT COMPANY RECEIVABLES, net of allowances of $72,546 and $0........................................................ 69,867 DEFERRED TAX ASSET.......................................... 24,370 OTHER ASSETS................................................ 2,036 16,451 --------- --------- TOTAL ASSETS...................................... $ 451,711 $ 606,439 ========= ========= LIABILITIES AND SHAREHOLDER'S DEFICIENCY CURRENT LIABILITIES: Current portion of debt................................... $ 675,370 $ 13,311 Notes payable -- related party............................ 7,300 Accounts payable and accrued expenses..................... 92,135 101,351 Deferred revenues......................................... 28,876 40,758 Other liabilities......................................... 8,540 10,925 --------- --------- Total current liabilities......................... 812,221 166,345 DEBT........................................................ 674 638,766 OTHER LIABILITIES........................................... 6,152 5,796 SHAREHOLDER'S DEFICIENCY: Common stock, no par value; one share authorized, issued and outstanding in 1999 and 1998....................... -- -- Additional paid-in capital................................ 12,323 12,323 Accumulated deficit....................................... (376,991) (214,073) Accumulated other comprehensive income (loss)............. (2,668) (2,718) --------- --------- Total shareholder's deficiency.................... (367,336) (204,468) --------- --------- TOTAL LIABILITIES AND SHAREHOLDER'S DEFICIENCY.... $ 451,711 $ 606,439 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-30 78 DECISIONONE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (IN THOUSANDS)
1999 1998 1997 --------- --------- -------- REVENUES................................................. $ 725,943 $ 805,717 $785,950 COST OF REVENUES......................................... 575,063 613,806 584,755 --------- --------- -------- GROSS PROFIT............................................. 150,880 191,911 201,195 OPERATING EXPENSES: Selling, general and administrative expenses........... 125,125 142,462 109,975 Amortization of intangibles............................ 26,969 27,169 23,470 Merger expenses........................................ -- 69,046 -- Loss on asset sales and disposals...................... 1,491 87,458 -- Provision for parent company receivables............... 72,546 -- -- --------- --------- -------- OPERATING INCOME (LOSS).................................. (75,251) (134,224) 67,750 INTEREST EXPENSE, Net of interest income of $4,903 in 1999, $5,442 in 1998 and $197 in 1997, of which $4,323, $5,236 and $0 represent related party interest income for 1999, 1998 and 1997, respectively.................. 62,644 52,204 14,698 --------- --------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (BENEFIT)........................................ (137,895) (186,428) 53,052 PROVISION (BENEFIT) FOR INCOME TAXES..................... 25,023 (14,787) 21,968 --------- --------- -------- NET INCOME (LOSS)........................................ $(162,918) $(171,641) $ 31,084 ========= ========= ======== OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: FOREIGN CURRENCY TRANSLATION ADJUSTMENTS............... (85) (912) (38) PENSION LIABILITY ADJUSTMENT........................... 135 (517) (25) --------- --------- -------- COMPREHENSIVE LOSS....................................... $(162,868) $(173,070) $ 31,021 ========= ========= ======== PRO FORMA INFORMATION (UNAUDITED) -- See Note 4: Pro forma net income (loss)............................ $(111,357) $ 5,726 ========= ========
The accompanying notes are an integral part of these consolidated financial statements. F-31 79 DECISIONONE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDER'S DEFICIENCY YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (IN THOUSANDS, EXCEPT NUMBER OF SHARES OF COMMON STOCK)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) ------------------------ FOREIGN TOTAL ADDITIONAL CURRENCY PENSION SHARE- PAID-IN ACCUMULATED TRANSLATION LIABILITY HOLDER'S CAPITAL DEFICIT ADJUSTMENT ADJUSTMENT DEFICIENCY ---------- ----------- ----------- ---------- ---------- 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) Net loss.......................... (162,918) (162,918) Adjustment to pension liability... 135 135 Foreign currency translation adjustment..................... (85) (85) --------- --------- ----- ------- --------- BALANCE, JUNE 30, 1999.............. $ 12,323 $(376,991) $(413) $(2,255) $(367,336) ========= ========= ===== ======= =========
The accompanying notes are an integral part of these consolidated financial statements. F-32 80 DECISIONONE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (IN THOUSANDS)
1999 1998 1997 --------- --------- --------- OPERATING ACTIVITIES: Net income (loss)....................................... $(162,918) $(171,641) $ 31,084 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Loss on asset sales and disposals....................... 1,491 87,458 Depreciation......................................... 13,842 15,729 13,549 Amortization of repairable parts..................... 85,391 81,597 63,870 Amortization of intangibles.......................... 26,968 27,169 23,470 Provision for uncollectible receivables.............. 76,812 15,515 7,849 Provision for consumable parts obsolescence.......... 4,188 1,852 2,554 Provision for deferred taxes......................... 25,023 Changes in operating assets and liabilities, net of effects from companies acquired, which provided (used) cash: Accounts receivable................................ 16,682 (802) (38,365) Consumable parts................................... 3,057 (1,889) (6,038) Accounts payable and accrued expenses.............. (9,588) 4,081 3,885 Deferred revenues.................................. (12,714) (20,311) (25,427) Cumulative effect of accounting change Net changes in other assets and liabilities........ 3,688 (26,631) 12,543 --------- --------- --------- Net cash provided by operating activities.......... 71,922 12,127 88,974 --------- --------- --------- INVESTING ACTIVITIES: Capital expenditures.................................... (16,402) (10,222) (10,540) Repairable spare parts purchases, net................... (76,415) (78,239) (86,446) Acquisitions of companies and contracts................. (2,793) (10,168) (32,258) Proceeds from sales of assets........................... 16,794 -- -- --------- --------- --------- Net cash used in investing activities.............. (78,816) (98,629) (129,244) --------- --------- --------- FINANCING ACTIVITIES: Capital contributions................................... 349 439 Payment of dividends to Parent.......................... (244,000) Loan made to Parent..................................... (69,617) Net proceeds from borrowings............................ 32,292 397,195 43,625 Principal payments under capital leases................. (457) (480) (1,075) Other................................................... (85) (2,617) (63) --------- --------- --------- Net cash provided by financing activities.......... 31,750 80,830 42,926 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 24,856 (5,672) 2,656 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.............. 5,205 10,877 8,221 --------- --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR.................... $ 30,061 $ 5,205 $ 10,877 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Net cash paid (received) during the year for: Interest............................................. $ 64,091 $ 38,472 $ 15,640 Income taxes......................................... $ (8,712) 4,031 8,381 Noncash investing/financing activities: Issuance of seller notes in connection with acquisitions....................................... 2,224 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-33 81 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1999, 1998 AND 1997 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 3,500 service professionals in over 150 service locations throughout North America and through strategic alliances in selected international markets. 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 year ended June 30, 1997. The Company's wholly owned, direct international subsidiaries are not significant to the Company's consolidated financial statements. 2. INDEBTEDNESS RESTRUCTURING The Company has continued to experience declining trends in revenues, and earnings throughout fiscal 1999. The declining trends principally result from lower sales of new service contracts, erosion of contract base, and minimal growth from acquisitions. As previously announced, on January 28, 1999, the Company initiated a corporate operating plan ("Operating Plan") intended to restore revenue growth and improve financial performance. The Operating Plan included the following key components: (i) focusing on all aspects of the Company's operations -- from sales through service delivery -- on providing information technology support services to three customer groups: large corporate customers (also known as "enterprise accounts"), medium sized accounts (also known as "middle market"), and alliance customers (including OEMs, software publishers, systems integrators, distributors and resellers, etc.); (ii) a cost-reduction program designed to reduce the Company's cost structure by $40 million annually upon full implementation, including a reduction in force of more than 500 employees; and (iii) financial structure changes, including an additional $7.3 million investment in the form of 14% Senior Unsecured Notes due 2006 (the "14% Notes") in DecisionOne Corporation by an affiliate of DLJ Merchant Banking Partners II, L.P. ("DLJMB"), and the Company's agreement with its lenders to waive certain financial covenants in the Company's credit agreement through July 29, 1999 (the "Waiver"). On July 14, 1999, Holdings' common stock was delisted from the NASDAQ national market System. Since that date, the Holdings' common stock has been quoted on the OTC Bulletin Board. On August 2, 1999, the Company announced an agreement in principle with the bank lending group and the holders of the 14% Notes on the restructuring of its indebtedness (the "Indebtedness Restructuring"). Under the terms of the final agreement, the bank lending group would exchange approximately $523 million in existing indebtedness for approximately 94.6 percent of the reorganized Company's equity and $250 million in new senior secured bank debt (the "New Credit Agreement"). The agreement further provides that the F-34 82 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) holders of the 14% Notes would exchange their notes for (a) warrants equal to approximately 4.2 percent of the reorganized Company's fully diluted equity, at an exercise price based on an enterprise value of $350 million and (b) warrants equal to approximately 2.0 percent of the reorganized Company's equity, at an exercise price based on an equity valuation of $280 million. The holders of the 9 3/4% Senior Subordinated Notes due 2007 (the "9 3/4% Notes") would exchange their notes for (a) approximately 5.0 percent of the reorganized Company's equity; (b) warrants equal to approximately 2.8 percent of the reorganized Company's fully diluted equity, at an exercise price based on an enterprise value of $350 million; (c) warrants equal to approximately 5.0 percent of the reorganized Company's equity, at an exercise price based on an equity valuation of $200 million; and (d) warrants equal to approximately 3.0 percent of the reorganized Company's equity, at an exercise price based on an equity valuation of $280 million. In addition, the holders of the 11 1/2% Senior Discount Debentures due 2008 (the "11 1/2% Notes") and the holders of unsecured claims of Holdings would receive a total of approximately 0.4 percent of the reorganized Company's equity. The Company did not make the $7.3 million interest payment on its 9 3/4% Notes, which was due on August 2, 1999 nor the interest payment due to the holders of the 14% Notes. The Waiver, pursuant to which the bank lending group agreed to waive certain financial covenants under its Existing Credit Facility, expired on July 29, 1999. The holders of the 9 3/4% Notes, the holders of the 11 1/2% Notes, the holders of the 14% Notes and the bank lending group have the right to declare the respective outstanding loan amounts immediately due and payable and seek to exercise remedies, including, in the case of the Existing Credit Facility, foreclosure on the collateral securing such amounts. As such, the Company has reflected all such loan amounts as current liabilities as of June 30, 1999 (See Note 10). The Company's and Holdings' proposed Indebtedness Restructuring will be subject to the approval of a United States Bankruptcy Court (the "Bankruptcy Court") pursuant to Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"). The Indebtedness Restructuring will be accomplished through a plan of reorganization (the "Plan") in a prepackaged case under Chapter 11 of the Bankruptcy Code. The Plan along with a related disclosure statement will be delivered to the bank lending group and the holders of the 14% Notes in connection with the Company's pre-petition solicitation of acceptances of the proposed Plan. If, by the end of the solicitation period, the requisite acceptances have been received from the bank lending group and the holders of the 14% Notes, the Company intends to file a petition under Chapter 11 and to use the acceptances received pursuant to the solicitation to seek confirmation of the Plan. With respect to all the other creditors and equity holders of the Company that are impaired under the Plan, the Company intends to seek confirmation of the Plan under the "cram down" provisions of the Bankruptcy Code. The Plan will only be confirmed if the Bankruptcy Court determines that all the requirements of the Bankruptcy Code have been met, including, without limitation, that the Plan is (i) accepted by all impaired classes of claims and equity interests or, if rejected by an impaired class, that the Plan does not "discriminate unfairly" and is "fair and equitable" as to such class, (ii) feasible and (iii) in the "best interests" of creditors and equity holders impaired under the Plan. The accompanying consolidated financial statements have been prepared on a going concern basis of accounting and do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company's recent losses from operations, significant shareholders' deficiency, default under the terms of its credit agreement, and the related Indebtedness Restructuring and planned Bankruptcy Court filings raise substantial doubt about the Company's ability to operate as a going concern. The appropriateness of using the going concern basis is dependent upon, among other things, (i) the Company's ability to reverse its declining revenue trends; (ii) the Company's ability to generate sufficient cash from operations and/or obtain additional financing to meets its obligations prior to confirmation of a plan of reorganization; (iii) confirmation of the Company's plan of reorganization under the Bankruptcy Code, and F-35 83 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (iv) the Company's ability to achieve profitable operations and generate sufficient cash from operations and/or obtain additional financing after such confirmation. 3. 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 4 has been prepared to reflect the Company's and Holding's recapitalization and merger with Quaker Holding Co. ("Quaker") and related transactions as if these had occurred on July 1, 1996. Cash and Cash Equivalents -- Cash and cash equivalents are highly liquid investments with remaining maturities of three months or less at the time of purchase. Cash equivalents, consisting primarily of repurchase agreements with banks, are stated at cost, which approximates fair market value. Restricted Cash -- Restricted cash at June 30, 1999 represents amounts deposited into a trust as security for letters of credit issued by the Company for certain employee obligations of the Company (see Note 10). 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. The Company had 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 abnormal retirement of computer parts (See Note 5) and related life studies the Company revised the useful lives of repairable parts and increased the obsolescence provision for consumable parts prospectively. Effective July 1, 1998, the Company began amortizing its existing composite group of repairable parts and future repairable part purchases over an estimated average remaining life of three years. F-36 84 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Accounting Change - Repairable Parts -- Effective July 1, 1999, the Company changed its method of accounting for repairable parts from the amortization method to the usage method. Under the amortization method, the Company amortized the cost of repairable parts over an estimated average useful life and recorded the costs of refurbishing repairable parts as a component of cost of revenues as incurred. Under the usage method, the Company will record in cost of revenues the cost of new and refurbished parts when used to service customers. Additionally, under the usage method, management will perform periodic assessments to determine the existence of excess or obsolete parts and will record any necessary provisions to reduce such parts to net realizable value, consistent with past practice. Management believes that this change in method for repairable parts more accurately reflects periodic results of operations based on parts used to service customers. The effect of this change will be recorded as a cumulative effect charge of approximately $74.4 million, during the fiscal quarter ending September 30, 1999. The Company does not expect to record any tax benefit resulting from this charge. See Note 11 to the Company's consolidated financial statements for the year ended June 30, 1999. The pro forma effect of this change in accounting principle on prior years' operations is not presented because such effects are not reasonably determinable. 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 Notes 6 and 8). 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 8). 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 F-37 85 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. Income Taxes -- The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities and expected benefits of utilizing net operating loss carryforwards. The impact on deferred taxes of changes in tax rates and laws, if any, applied to the years during which temporary differences are expected to be settled, are reflected in the consolidated financial statements in the period of enactment. Holdings and its wholly owned subsidiaries file a consolidated tax return. The Company participates in a tax sharing agreement with the consolidated group whereby consolidated income tax expense or benefit is allocated to the Company as if the Company was filing separate tax returns. 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. Debt -- As more fully described in Note 10, fair values of debt such as the Existing Credit Facility, the senior discount debentures, the senior unsecured notes 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 10), 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. Comprehensive Income (Loss) -- In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income -- The Company adopted this pronouncement in fiscal 1999. Components of comprehensive income for the Company include net income (loss), pension liability adjustment and foreign currency translation. F-38 86 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Business segmentation -- In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires segments to be determined based on how management measures performance and makes decisions about allocating resources. Except for geographic information set forth below, the adoption of SFAS No. 131 has not resulted in any changes to presentation of financial data in fiscal 1999, as the Company operates as one business segment. Summary geographic financial information for the Company for the fiscal years ended June 30, 1999, 1998 and 1997 as is as follows:
UNITED STATES CANADA TOTAL COMPANY ------------- ------- ------------- 1999 Total revenues................................. $696,797 $29,146 $725,943 Total assets................................. 442,569 13,318 455,887 1998 Total revenues............................... 772,683 33,034 805,717 Total assets................................. 523,604 18,383 541,987 1997 Total revenues............................... 755,254 30,696 785,950 Total assets................................. 605,764 17,341 623,105
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement, which revises certain disclosure requirements for the Company's retirement plan assets and obligations, is effective for fiscal periods beginning after December 15, 1997. Restatement of prior years' information is required, where available. As this statement only requires a change in methods of disclosure and not in accounting methods, it did not have any impact on the Company's consolidated financial position and results of operations. The Company adopted SFAS No. 132 in fiscal 1999, as required. 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. In June, 1999, the FASB issued SFAS No. 137, which defers the effective date of SFAS No. 133 until June 15, 2000. 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 1999 presentation. 4. MERGER, RECAPITALIZATION AND PRO FORMA INFORMATION On August 7, 1997, the Company and Holdings consummated a merger with Quaker Holding Co. ("Quaker"), an affiliate of DLJ Merchant Banking Partners II, L.P. ("DLJMB"). 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. 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 per share in cash in exchange for each of these shares. Holders of approximately 5.3% of shares of Holdings F-39 87 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 then existing revolving credit facility (see Note 10). 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 and a $10.8 million subordinated promissory note, each due 2010, 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 then 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 years ended June 30, 1998 and 1997 assumes that the merger had occurred on July 1, 1996. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the merger occurred as of July 1, 1996 or which may result in the future.
(UNAUDITED) (IN THOUSANDS) YEAR ENDED JUNE 30, -------------------- 1998 1997 -------- -------- PRO FORMA LOSS STATEMENT INFORMATION: Revenues.................................................... $805,717 $785,950 Operating income (loss)..................................... (65,178) 67,750 Income (loss) from continuing operations before income taxes..................................................... (120,972) 9,772 Net income (loss)........................................... (111,357) 5,726
The 1998 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 11). The 1997 pro forma net income reflects a net increase in interest expense of approximately $43.3 million ($25.4 million after related pro forma tax effect), attributable to additional financing incurred in connection with the merger, net of repayment of the Company's existing revolving credit facility. F-40 88 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. LOSS ON ASSET SALES AND DISPOSALS In connection with the company's fiscal 1999 cost reduction program, the Company sold all of its owned facilities, consisting of a multi-purpose facility located in Tulsa, Oklahoma, and a Logistics service facility located in a suburb of Milwaukee, Wisconsin, at a total net loss of approximately $1.5 million. Management determined that over 1.2 million of its computer parts were obsolete during its annual fourth quarter physical inventory in fiscal 1998. 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 the fourth quarter of fiscal 1998. 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 6). On June 29, 1998, the Company sold its contractual profit participation rights back to ICL at a pretax loss of approximately $12.5 million. 6. BUSINESS AND CONTRACT ACQUISITIONS During the years ended June 30, 1999, 1998 and 1997, the Company acquired certain net assets of other service companies as follows (in thousands):
CONSIDERATION EXCESS PURCHASE ----------------------------------------------- PRICE OVER FAIR NUMBER OF LIABILITIES TOTAL PURCHASE VALUE OF NET ASSETS YEARS ENDED ACQUISITIONS CASH ASSUMED NOTES PRICE OTHER TANGIBLES ACQUIRED - ----------- ------------ ------- ----------- ------ -------------- --------------- ------------------- Non-significant business or maintenance contract acquisitions: June 30, 1997...... 9 $32,258 $45,829 $2,201 $80,288 $32,239 $48,049 June 30, 1998...... 4 10,168 6,317 4,538 21,023 4,600 16,423 June 30, 1999...... 1 2,793 1,204 -- 3,997 139 3,858
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. F-41 89 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
JUNE 30, -------------------- 1999 1998 -------- -------- (IN THOUSANDS) Land and buildings.......................................... $ -- $ 6,312 Equipment................................................... 10,292 15,335 Computer hardware and software.............................. 41,480 32,459 Furniture and fixtures...................................... 7,088 9,628 Leasehold improvements...................................... 7,034 5,190 -------- -------- 65,894 68,924 Accumulated depreciation and amortization................... (40,866) (39,829) -------- -------- $ 25,028 $ 29,095 ======== ========
The principal lives (in years) used in determining depreciation and amortization rates of various assets are: buildings (20-40); equipment (3-10); computer hardware and software (3-5); furniture and fixtures (5-10) and leasehold improvements (term of related leases). Depreciation and amortization expense was approximately $13,842,000 , $15,729,000, and $13,549,000 for the fiscal years ended 1999, 1998 and 1997, respectively. As more fully described in Note 5, the Company sold both of its owned facilities during fiscal 1999. 8. INTANGIBLES Intangibles consisted of the following:
JUNE 30, -------------------- 1999 1998 -------- -------- (IN THOUSANDS) Excess purchase price over fair value of net assets acquired.................................................. $138,307 $137,241 Customer lists.............................................. 60,370 60,370 Noncompete agreements....................................... 4,331 9,231 Other intangibles........................................... 9,881 8,014 -------- -------- 212,889 214,856 Accumulated amortization.................................... (84,380) (60,827) -------- -------- $128,509 $154,029 ======== ========
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); noncompete agreements (3-5) and other (1-6). Amortization expense relating to intangibles was approximately $26,968,000, $27,169,00, and $23,470,000, for the fiscal years ended 1999, 1998 and 1997, respectively. F-42 90 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consisted of the following:
JUNE 30, ------------------- 1999 1998 ------- -------- (IN THOUSANDS) Accounts payable............................................ $39,102 $ 56,040 Compensation and benefits................................... 21,175 20,928 Interest.................................................... 7,098 11,485 Unused leases............................................... 531 175 Pension accrual............................................. 1,145 1,515 Accrued professional fees................................... 880 568 Non-income taxes and other.................................. 22,204 10,640 ------- -------- $92,135 $101,351 ======= ========
10. DEBT Debt consists of the following:
JUNE 30, -------------------- 1999 1998 -------- -------- (IN THOUSANDS) Existing Credit Facility: Revolving credit loans...................................... $ 65,700 $ 30,700 Term loans................................................ 457,388 467,938 Senior subordinated notes, 9 3/4%, due 2007................. 150,000 150,000 Senior unsecured notes, 14%, due 2006....................... 7,300 -- Seller noninterest-bearing notes payable.................... 2,664 2,179 Seller note payable -- purchase of spare parts.............. -- 508 Capitalized lease obligations, payable in varying installments.............................................. 292 752 -------- -------- 683,344 652,077 Less current portion........................................ 682,670 13,311 -------- -------- $ 674 $638,766 ======== ========
In connection with the Company's merger with Quaker (see Note 4), 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 Existing Credit Facility, senior discount notes, and senior subordinated notes which, in the aggregate, provide financing of approximately $810 million, subject to certain conditions. As more fully described in Note 2, during fiscal 1999 the Company sought and obtained a waiver (the "Waiver") of certain financial covenants contained in its new 1997 Credit Facility (the "Existing Credit Facility"). In connection with the Waiver, The Company incurred waiver fees of approximately $4.3 million, which are being amortized as interest expense through July, 1999. This Waiver expired on July 29, 1999, and the Company is currently, therefore, in technical default under the terms of the Existing Credit Facility. As a result of this default, all amounts outstanding under the Existing Credit Facility could become immediately due and payable, and have been classified as current liabilities in the accompanying consolidated balance sheet F-43 91 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) as of June 30, 1999. Additionally, as a result of this default, any additional borrowings under the Existing Credit Facility are subject to the approval of the holders of the Existing Credit Facility. As more fully described in Note 2, on August 2, 1999, the Company announced an agreement in principle with the bank lending group and the holders of the 14% Notes on the restructuring of its indebtedness (the "Indebtedness Restructuring"). Although Company management expects the Indebtedness Restructuring to be consummated, such consummation is subject to various approvals outside of the Company's control. Currently, the Company does not have in place any alternate sources of liquidity if the Indebtedness Restructuring, or another similar debt restructuring agreement, is not consummated. The Company had average borrowings of approximately $675,417,000 during 1999 at an average interest rate of 8.3%. Maximum borrowings during 1999 were approximately $690,055,000. The Company had average borrowings of $609,629,000 and $221,069,000 during 1998 and 1997, respectively, at an average interest rate of 8.2% and 6.4%, respectively. Maximum borrowings during 1998 and 1997 were $659,732,000 and $243,350,000, 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, 1999 and 1998, no amounts were outstanding under this agreement. At June 30, 1997, approximately $471,000 (in U.S. dollars) was outstanding under this agreement. Annual maturities on long-term debt outstanding at June 30, 1999, are as follows (in thousands): 2000, $682,670; 2001, $612 and; 2002, $62. The Company has approximately $10,325,000 of letters of credit outstanding as of June 30, 1999. The Company bears the credit risk on this amount to the extent that it does not comply with the provisions of certain agreements. The letters of credit, net of amounts deposited in trust as restricted cash (see Note 3), reduce the amount available under the Company's revolving loans under its Existing Credit Facility. EXISTING CREDIT FACILITY The Existing 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 Company incurred debt issuance costs of approximately $14,375,000 in connection with the Existing 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 Existing 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, 1999 were 8.47%, 8.71% and 8.96% for term loan A, term loan B, and the revolving loans, respectively. The Existing 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. Additionally, Holdings has pledged the assets of substantially all of its subsidiaries as collateral security for the Existing Credit Facility. During the third quarter of fiscal 1998, the Company sought and obtained amendments to the Existing Credit Facility. The amendments revised certain financial performance measure- F-44 92 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ments 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 Existing Credit Facility as of June 30, 1999. The estimated fair value of the Existing Credit Facility was approximately $235.4 million and is based on quoted market prices, as of June 30, 1999. SENIOR SUBORDINATED NOTES (9 3/4% 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, 1999 was approximately $6.7 million and is based on quoted market prices. The senior subordinated notes are subordinate to the Existing Credit Facility and the senior unsecured notes. SENIOR UNSECURED NOTES (14% NOTES) On January 27, 1999, the Company's principal shareholder, DLJMB and certain of its affiliates, purchased $7,300,000 of unsecured 14% senior notes due 2006 in DecisionOne Corporation. The proceeds of the 14% senior notes were used for general corporate purposes. The senior unsecured notes are subordinate only to the Existing Credit Facility. The estimated fair value of the senior unsecured notes as of June 30, 1999, was approximately $0.3 million based on indicative quoted market rates. SELLER NOTES PAYABLE In connection with certain acquisitions (see Note 6), 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 The Company had a revolving credit facility of $300,000,000, which was repaid in connection with the Company's merger in August, 1997 (see Note 4). INTEREST RATE RISK MANAGEMENT The use of interest rate risk management instruments, such as Swaps and Collars, is required under the terms of the Existing 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. F-45 93 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, 1999:
NOTIONAL AMOUNT MATURITIES AVERAGE INTEREST RATE ESTIMATED FAIR VALUE --------------- ----------- --------------------- -------------------- Variable to Fixed Swaps.............. $ 75,000,000 2000 5.9% $(115,000) Collars.............. $100,000,000 2000 - 2001 5.7% - 6.7% $(237,000)
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, 1999 was not significant. 11. INCOME TAXES The provision (benefit) for income taxes consists of the following:
YEARS ENDED JUNE 30, ------------------------------ 1999 1998 1997 ------- -------- ------- (IN THOUSANDS) Current: Federal.............................................. $ 653 $ (8,209) $10,909 State.............................................. 100 3,616 Foreign............................................ (372) 1,080 Deferred: Federal............................................ 21,240 (6,315) 6,460 State.............................................. 3,130 (603) 16 Foreign............................................ 612 (113) ------- -------- ------- Provision (benefit) for income taxes................. $25,023 $(14,787) $21,968 ======= ======== =======
The tax effects of temporary differences consisted of the following:
JUNE 30, --------------------- 1999 1998 --------- -------- (IN THOUSANDS) Gross deferred tax assets: Accounts receivable......................................... $ 6,139 $ 7,869 Inventory................................................. 4,038 2,819 Accrued expenses.......................................... 34,971 6,348 Unused leases............................................. (133) (277) Fixed assets.............................................. 1,964 1,714 Intangibles............................................... 21,781 17,049 Other..................................................... 2,447 1,298 Operating loss carryforwards.............................. 59,929 52,278 Tax credit carryforwards.................................. 2,969 2,969 --------- --------
F-46 94 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, --------------------- 1999 1998 --------- -------- (IN THOUSANDS) Gross deferred tax assets................................... 134,105 92,067 Valuation allowance......................................... (134,105) (53,804) --------- -------- Gross deferred tax assets less valuation allowance.......... $ -- $ 38,263 Gross deferred tax liabilities -- repairable spare parts.................................................. (13,893) --------- -------- Net deferred tax asset...................................... $ -- $ 24,370 ========= ========
Net operating loss and minimum tax credit carryforwards available at June 30, 1999 expire in the following years:
YEAR OF AMOUNT EXPIRATION -------- ---------- (IN THOUSANDS) Federal operating losses.................................. $145,036 2006 - 2019 State operating losses.................................... 147,728 2000 - 2019 Foreign operating losses.................................. 10,148 2000 - 2006 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 1999, 1998 and 1997 to income before income taxes, and the actual provision (benefit) for income taxes follows:
1999 1998 1997 ----- ----- ----- Federal income tax provision at statutory tax rate.......... (35.0)% (35.0)% 35.0% State income taxes, net of federal income tax provision..... (5.2) (3.8) 5.0 Foreign income taxes........................................ 0.7 (0.4) 0.4 Change in valuation allowance............................... 58.2 30.0 Other....................................................... (0.6) 2.4 1.0 ----- ----- ----- Actual income tax provision (benefit) effective tax rate.... 18.1% (6.8)% 41.4% ===== ===== =====
As a result of the Company's merger with Quaker on August 7, 1997 (see Note 4), 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 2019. The Company recorded an increase in the valuation allowance of $80,301,000 during the year ended June 30, 1999, from $53,804,000 as of June 30, 1998 to $134,105,000 as of June 30, 1999. 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. F-47 95 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. OTHER LIABILITIES Other (noncurrent) liabilities consisted of the following:
JUNE 30, ---------------- 1999 1998 ------ ------ (IN THOUSANDS) Accrued severance........................................... $3,847 $2,973 Other noncurrent liabilities................................ 2,305 2,823 ------ ------ $6,152 $5,796 ====== ======
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 unutilized lease losses. 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 2009. 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, 1999 and thereafter are as follows (in thousands): 2000............................................... $20,092 2001............................................... 17,194 2002............................................... 12,188 2003............................................... 9,749 2004............................................... 7,661 Thereafter......................................... 7,623 ------- $74,507 =======
Rental expense amounted to approximately $23,405,000, $19,379,000, and $17,367,000, for the fiscal years ended 1999, 1998 and 1997, respectively. 14. 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 1999, 1998, and 1997 were $1,070,000, $1,013,000 and $0, respectively. A similar plan exists for former employees of an acquired company for which eligibility and additional contributions were frozen in September 1988. In addition, the Company assumed the liability of the defined benefit pension plan applicable to employees of a company acquired in 1986. The eligibility and benefits were frozen as of the date of the acquisition. F-48 96 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Periodic (income) cost, and related financial information with respect to the defined benefit pension plan is as follows:
1999 1998 ------ ------- (IN THOUSANDS) CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year..................... $9,156 $ 7,290 Service cost................................................ -- -- Interest cost............................................... 610 611 Plan amendments............................................. -- -- Actuarial (gain) loss....................................... 70 1,613 Benefits paid............................................... (929) (358) ------ ------- Benefit obligation at end of year........................... $8,907 $ 9,156 ====== ======= CHANGE IN PLAN ASSETS: Fair Value of plan assets at beginning of year.............. $7,858 $ 6,128 Actual return on plan assets................................ 747 1,506 Employer contributions...................................... 284 582 Benefits paid............................................... (928) (358) ------ ------- Fair Value of plan assets at end of year.................... $7,961 $ 7,858 ====== ======= RECONCILIATION OF FUNDED STATUS: Funded status............................................... $ (947) $(1,298) Unrecognized transition asset............................... 405 438 Unrecognized prior service cost............................. -- -- Unrecognized (gain) loss.................................... 2,255 2,390 ------ ------- Net amount recognized....................................... $1,713 $ 1,530 ====== ======= AMOUNTS RECOGNIZED ON THE CONSOLIDATED BALANCE SHEETS CONSIST OF: Intangible asset............................................ $ 405 $ 438 Accrued benefit liability................................... (947) (1,298) Accumulated other comprehensive income...................... 2,255 2,390 ------ ------- Accrued benefit cost........................................ $1,713 $ 1,530 ====== =======
1999 1998 1997 ----- ----- ----- PERIOD (INCOME) COST: Service Cost............................................... -- -- -- Interest Cost.............................................. $ 610 $ 611 $ 521 Expected return on plan assets............................. (631) (525) (409) Amortization of transition asset........................... 33 33 33 Amortization of prior service costs........................ Amortization of (gain) loss................................ 88 115 (23) ----- ----- ----- Total Net periodic benefit (income) cost................... $ 100 $ 234 $ 122 ===== ===== =====
The discount rate used in determining the actuarial present value of the projected benefit obligation was 7.25% for 1999, 7.0% for 1998, and 7.5% for 1997. The expected long-term rate of return on assets was 8.5% F-49 97 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) for 1999, 1998 and 1997. The mortality table used for 1999 and 1998 was the 1983 Group Annuity Mortality Table for Males and Females and the mortality table used for 1997 was the UP-1984 Unisex Mortality Table. 15. 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. During the year ended June 30, 1999, the Company recorded charges of $4.5 million, included in selling, general and administrative expenses, for estimated future severance costs in accordance with SFAS No. 112, which reflects the actuarially determined benefit costs for the separation of employees who are entitled to benefits under pre-existing separation pay plans, including employees separated under the Operating Plan (see Note 2). See Note 12 for further information regarding accrued severance and unutilized lease losses. 16. COMMITMENTS AND CONTINGENT LIABILITIES The Company, or certain businesses as to which it is alleged that the Company is a successor, have been identified as potentially responsible parties in respect to four waste disposal sites that have been identified by the United States Environmental Protection Agency as Superfund sites. In addition, the Company received a notice several years ago that it may be a potentially responsible party with respect to a fifth, related site, but 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 initially estimated that its share of the costs of the clean-up of one of these sites was approximately $500,000, of which $372,000 and $460,000 remained unpaid and accrued in the accompanying consolidated balance sheets as of June 30, 1999 and 1998. Complete information as to the scope of required clean-up at these sites is not yet available and, therefore, management's evaluation may be affected as further information becomes available. However, in light of information currently available to management, including information regarding assessments of the sites to date and the nature of involvement of the Company's predecessor at the sites, it is management's opinion that the Company's potential additional liability, if any, for the cost of clean-up of these sites will not be material to the consolidated financial position, results of operations or liquidity of the Company. The Company is also party to various legal proceedings incidental to its business. Certain claims, suits and complaints arising in the ordinary course of business have been filed or are pending against the Company. In the opinion of management, these actions can be successfully defended or resolved without a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. During the fourth quarter of fiscal 1997, the Company received $2.0 million in full settlement of a claim against its former insurance carrier, related to unreimbursed losses. This settlement was reflected as a reduction of selling, general and administrative costs in the accompanying statement of operations. 17. RELATED PARTY TRANSACTIONS In connection with the Quaker Merger (See Note 4), DecisionOne Corporation made a loan to DecisionOne Holdings Corp. for $59,100,000 and a $10,800,000 subordinated promissory note, each due 2010, F-50 98 DECISIONONE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) which were used to finance the merger. The subordinated promissory notes accrue 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 was approximately $4,323,000 and $5,236,000 in fiscal 1999 and 1998, respectively. As more-fully described in Note 2, the Company's proposed plan for Indebtedness Restructuring will result in a reorganization of the Company and Holdings, and raises substantial doubt as to the ultimate collectibility of the aforementioned subordinated promissory notes between Holdings and the Company. Accordingly, these amounts have been fully reserved in the Company's financial statements as of June 30, 1999, resulting in a charge of $72.5 million for the year ended June 30, 1999. These transactions and related fiscal 1999 charge have no impact on the consolidated financial statements of Decision One Holdings Corp. and Subsidiaries, as these are eliminated in consolidation. During the years ended June 30, 1999 and 1998, respectively, the Company incurred costs of approximately $528,000 and $500,000 for financial advisory services to the DLJ Group. Of these amounts, approximately $528,000 and $0 remained unpaid at June 30, 1999 and 1998, respectively. As more fully described in Note 10, on January 27, 1999, DLJMB purchased $7,300,000 of unsecured 14% senior notes due 2006 by DecisionOne Corporation. Interest expense of approximately $430,000 remained unpaid at June 30, 1999, with respect to these obligations. 18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of the unaudited quarterly financial information for the fiscal years ended 1999 and 1998:
QUARTER ENDED ------------------------------------------------- SEPT. 30, DEC. 31, MARCH 31, JUNE 30(1), --------- -------- --------- ----------- (DOLLARS IN THOUSANDS) 1999 Revenues............................... $196,044 $185,017 $176,005 $ 168,877 Gross profit........................... 47,565 34,235 32,534 36,546 Net loss............................... (6,997) (21,622) (20,352) (113,947)
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)
- --------------- (1) Net loss for the fourth quarter of 1999 includes a charge of $25.0 million to reduce deferred tax assets to the level where management believes it is more likely than not that such tax benefits will be realized (see Note 11). Additionally, the Company has recorded a charge of $72.5 million to reflect a provision for amounts deemed by management to be uncollectable at June 30, 1999 (see Note 17). (2) Net loss for the first quarter of 1998 includes $69.0 million of pre-tax merger expenses (See Note 4). (3) 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 5). F-51 99 SCHEDULE I DECISIONONE HOLDINGS CORP. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, JUNE 30, 1999 1998 --------- --------- ASSETS Current assets.............................................. $ 1,188 $ 1,519 Other assets.............................................. 2,988 3,896 --------- --------- Total assets...................................... $ 4,176 $ 5,415 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) Investment in deficiency of subsidiaries.................. $ 294,790 $ 204,468 Senior discount debentures................................ 103,496 92,246 Intercompany loan and payables............................ 73,987 69,867 Other liabilities......................................... 500 440 Preferred stock, no par value; authorized 15,000,000; none outstanding............................................ -- -- Common stock, $.01 par value; authorized 30,000,000; 12,564,485 issued and outstanding shares in 1999 and 12,584,219 shares in 1998.............................. 126 126 Additional paid-in capital................................ 242,181 242,181 Accumulated deficiency.................................... (708,236) (601,195) Accumulated other comprehensive income (loss)............. (2,668) (2,718) --------- --------- Total shareholders' equity (deficiency)........... (468,597) (361,606) --------- --------- Total liabilities and shareholders' equity (deficiency).................................... $ 4,176 $ 5,415 ========= =========
See notes to condensed financial information. S-1 100 SCHEDULE I DECISIONONE HOLDINGS CORP. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF OPERATIONS (PARENT COMPANY ONLY) (IN THOUSANDS)
YEARS ENDED JUNE 30, --------------------------------- 1999 1998 1997 --------- --------- ------- Equity in net income (loss) of subsidiaries............... $ (90,372) $(171,641) $31,084 Interest expense, net of interest income of $42 in 1999 and $1,210 in 1998........................................ 16,332 12,479 -- --------- --------- ------- Income (loss) before provision (benefit) for income taxes................................................... (106,704) (184,120) 31,084 Provision (benefit) for income taxes...................... 337 (990) -- --------- --------- ------- Net income (loss)......................................... $(107,041) $(183,130) $31,084 ========= ========= =======
See notes to condensed financial information. S-2 101 SCHEDULE I DECISIONONE HOLDINGS CORP. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY) (IN THOUSANDS)
YEARS ENDED JUNE 30, ---------------------------------- 1999 1998 1997 --------- --------- -------- Operating Activities: Net income (loss)........................................ $(107,041) $(171,641) $ 31,084 Adjustments to reconcile net income (loss) to net cash provided by operating activities.................... 107,019 172,851 (31,084) --------- --------- -------- Net cash provided by (used in) operating activities..................................... (22) 1,210 -- --------- --------- -------- Investing Activities -- contribution to capital of subsidiaries........................................... -- -- (439) --------- --------- -------- Financing Activities: Proceeds from issuance of common stock................. -- 226,583 -- Proceeds from issuance of senior discount debentures... -- 79,723 -- Proceeds from related party loan....................... -- 69,617 -- Issuance of common stock and warrants.................. -- 1,880 439 Cash paid to redeem common stock....................... -- (621,803) -- Dividends received from subsidiary..................... -- 244,000 -- Issuance of preferred stock............................ -- -- -- Preferred stock dividends.............................. -- -- -- --------- --------- -------- Net cash provided by financing activities......... -- -- 439 --------- --------- -------- Net change in cash..................................... (22) 1,210 -- Cash, beginning of year................................ 1,210 -- -- --------- --------- -------- Cash, end of year...................................... $ 1,188 $ 1,210 $ -- ========= ========= ========
S-3 102 SCHEDULE 1 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. INDEBTEDNESS RESTRUCTURING The Company has continued to experience declining trends in revenues, and earnings throughout fiscal 1999. The declining trends principally result from lower sales of new service contracts, erosion of contract base and minimal growth from acquisitions. As previously announced, on January 28, 1999, the Company initiated a corporate operating plan ("Operating Plan") intended to restore revenue growth and improve financial performance. The Restructuring Plan included the following key components: (i) focusing on all aspects of the Company's operations -- from sales through service delivery -- on providing information technology support services to three customer groups: large corporate customers (also known as "enterprise accounts"), medium sized accounts (also known as "middle market"), and alliance customers (including OEMs, software publishers, systems integrators, distributors and resellers, etc.); (ii) a cost-reduction program designed to reduce the Company's cost structure by $40 million annually upon full implementation, including a reduction in force of more than 500 employees; and (iii) financial structure changes, including an additional $7.3 million investment in the form of 14% Senior Unsecured Notes due 2006 (the "14% Notes") in DecisionOne Corporation by an affiliate of DLJ Merchant Banking Partners II, L.P. ("DLJMB"). DLJMB, and the Company's agreement with its lenders to waive certain financial covenants in the Company's credit agreement through July 29, 1999 (the "Waiver"). On July 14, 1999, the Company's common stock was delisted from the NASDAQ national market System. Since that date, the Company's common stock has been quoted on the OTC Bulletin Board. On August 2, 1999, the Company announced an agreement in principle with the bank lending group and the holders of the 14% Notes on the restructuring of its indebtedness (the "Indebtedness Restructuring"). Under the terms of the final agreement, the bank lending group would exchange approximately $523 million in existing indebtedness for approximately 94.6 percent of the reorganized Company's equity and $250 million in new senior secured bank debt (the "New Credit Agreement"). The agreement further provides that the holders of the 14% Notes would exchange their notes for (a) warrants equal to approximately 4.2 percent of the reorganized Company's fully diluted equity, at an exercise price based on an enterprise value of $350 million and (b) warrants equal to approximately 2.0 percent of the reorganized Company's equity, at an exercise price based on an equity valuation of $280 million. The holders of the 9 3/4% Senior Subordinated Notes due 2007 (the "9 3/4% Notes") would exchange their notes for (a) approximately 5.0 percent of the reorganized Company's equity; (b) warrants equal to approximately 2.8 percent of the reorganized Company's fully diluted equity, at an exercise price based on an enterprise value of $350 million; (c) warrants equal to approximately 5.0 percent of the reorganized Company's equity, at an exercise price based on an equity valuation of $200 million; and (d) warrants equal to approximately 3.0 percent of the reorganized Company's equity, at an exercise price based on an equity valuation of $280 million. In addition, the holders of the 11 1/2% Senior Discount Debentures due 2008 (the "11 1/2% Notes") and the holder of unsecured claims of Holdings would receive a total of approximately 0.4 percent of the reorganized Company's equity. S-4 103 The Company did not make the $7.3 million interest payment on its 9 3/4% Notes, which was due on August 2, 1999 nor the interest payment due to the holders of the 14% Notes. The Waiver, pursuant to which the bank lending group agreed to waive certain financial covenants under its Existing Credit Facility expired on July 29, 1999. The holders of the 9 3/4% Notes, the holders of the 11 1/2% Notes, the holders of the 14% Notes and the bank lending group have the right to declare the respective outstanding loan amounts immediately due and payable and seek to exercise remedies, including, in the case of the Existing Credit Facility, foreclosure on the collateral securing such amounts. As such, the Company has reflected all such loan amounts as current liabilities as of June 30, 1999. See note 10 to the Company's consolidated financial statements for further information. The Company's proposed Indebtedness Restructuring will be subject to the approval of a United States Bankruptcy Court (the "Bankruptcy Court") pursuant to Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"). The Indebtedness Restructuring will be accomplished through a plan of reorganization (the "Plan") in a prepackaged case under Chapter 11 of the Bankruptcy Code. The Plan along with a related disclosure statement will be delivered to the bank lending group and the holders of the 14% Notes in connection with the Company's prepetition solicitation of acceptances of the proposed Plan. If, by the end of the solicitation period, the requisite acceptances have been received from the bank lending group and the holders of the 14% Notes, the Company intends to file a petition under Chapter 11 and to use the acceptances received pursuant to the solicitation to seek confirmation of the Plan. With respect to all the other creditors and equity holders of the Company that are impaired under the Plan, the Company intends to seek confirmation of the Plan under the "cram down" provisions of the Bankruptcy Code. The Plan will only be confirmed if the Bankruptcy Court determines that all the requirements of the Bankruptcy Code have been met, including, without limitation, that the Plan is (i) accepted by all impaired classes of claims and equity interests or, if rejected by an impaired class, that the Plan does not "discriminate unfairly" and is "fair and equitable" as to such class, (ii) feasible and (iii) in the "best interests" of creditors and equity holders impaired under the Plan. The accompanying consolidated financial statements have been prepared on a going concern basis of accounting and do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company's recent losses from operations, significant shareholders' deficiency, default under the terms of its credit agreement, and the related Indebtedness Restructuring and planned Bankruptcy Court filings raise substantial doubt about the Company's ability to operate as a going concern. The appropriateness of using the going concern basis is dependent upon, among other things, (i) the Company's ability to reverse its declining revenue trends; (ii) the Company's ability to generate sufficient cash from operations and/or obtain additional financing to meets its obligations prior to confirmation of a plan of reorganization; (iii) confirmation of the Company's plan of reorganization under the Bankruptcy Code, and (iv) the Company's ability to achieve profitable operations and generate sufficient cash from operations and/or obtain additional financing after such confirmation. 3. SENIOR DISCOUNT DEBENTURES The Parent 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 Parent 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. See Note 4 to the Company's consolidated financial statements for further information. S-5 104 4. RELATED PARTY TRANSACTIONS In connection with the Quaker Merger (See Note 4 to the Company's consolidated financial statements), DecisionOne Corporation made a loan to DecisionOne Holdings Corp. for $59,100,000 and a $10,800,000 subordinated promissory note, each due 2010, which were used to finance the merger. The subordinated promissory notes accrue interest at an annual interest rate of 8 1/4%. Interest and principal are both due upon maturity in August 2010. Interest expense recorded by DecisionOne Holdings Corp. was approximately $5,764,000 and $5,236,000 in fiscal 1999 and 1998, respectively. 5. 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 as if the Parent was filing separate tax returns. S-6 EX-10.6 2 LEASE FOR HAYWARD, CALIFORNIA DEPOT 1 Exhibit 10.6 MODIFIED TRIPLE NET LEASE Lease Preparation Date: July 16, 1999 ------------------------------------------------------- Lessor: PS Business Parks, LP ----------------------------------------------------------------- Lessee: DecisionOne Corporation, A Delaware Corporation ----------------------------------------------------------------- Guarantor: ----------------------------------------------------------------- 1. LEASE TERMS 1.01 Premises: The leased Premises located within the Project as indicated on Exhibit "A1" contains Approximately 91,112 rentable square feet. The address of the leased Premises is: 2323/2335 and 2345 Industrial Parkway West, Hayward, CA 94545 ------------------------------------------------------------------------------ 1.02 Building: The Premises is located in the Building indicated on Exhibit "A-2" and contains 91,112 rentable square feet and is part of the Project. 1.03 Project: The Project, as indicated on Exhibit A-3, which consists of all buildings on the Property, of which the Premises is a part is commonly referred to as: PS Business Park 2323 - 2365 Industrial Parkway West, Hayward,CA 94545 and contains approximately 226,792 Rentable square feet - ------------------------------------------------------------------------------ 1.04 Property: The Premises, the Project, and all Lessor's land thereunder or appurtenant thereto as described in Exhibit "A" represent the Property. 1.05 Lessee's Notice Address: Lessee's Notice Address is the address of the leased Premises as stated in Paragraph 1.01 above unless otherwise specified here: 50 East Swedesford Road, Frazer, PA 19355 - ------------------------------------------------------------------------------- 1.06 Lessor's Notice Address: Lessor's Notice Address is: 2551 San Ramon Valley Blvd., Suite 204 San Ramon, CA 94583 - ------------------------------------------------------------------------------- 1.07 Lessee's Permitted Use: Lessee and Lessor agree that Lessee may only use the Premises for the following purpose(s): Assembly, repairs, distribution of electronic components, light industrial and office use. - ------------------------------------------------------------------------------- 1.08 Lease Term: The Lease Term commences on October 1, 1999 and ends and ends on September 30, 2002 (36 months, and 0 days). 1.09 Base Rent: During the original term of this Lease, Base Rent shall be paid monthly, in lawful money of the United States of America in the amounts specified below, during the applicable periods noted:
Base Rent Applicable Period $ $61,348.63 Beginning October 1, 1999 Ending September 30, 2002 -------------- -------------------- -------------------- $ Beginning Ending -------------- -------------------- -------------------- $ Beginning Ending -------------- -------------------- -------------------- $ Beginning Ending -------------- -------------------- --------------------
1.10 Security Deposit: $ 137,274.00 payable in lawful money of the United States of America. 1.11 Lease Documentation Fee: $ Waived ----------------------------------------- California modified Triple Net June 1999: Version One 1 2
1.12 Initial Monthly Rent Charges: Base Rent (1.09) $ 61,348.63 . CAM (1.13) $ 3,100.52 . Taxes (1.13) $ 279.58 . Insurance (1.13) $ 3,670.65 . Total initial monthly payment $ 68,399.38 .
1.13 Proportionate Share: Lessee's Proportionate share of the Project, which represents the approximate Proportionate Share of the Premises to the Project is .4017 (CAM&Ins) *Tax Addendum -42 Lessee's Proportionate Share of the Building within which it is located, which represents the approximate proportionate share of the Premises to the Building is 2323/2335 equals 100% of building; 2345 Industrial Pkwy. West = .2643 of building Proportionate Share may be adjusted during the Lease Term if the size of the Project, Premises or Building changes. 1.14 Operating Expense Estimate: Lessee's Operating Expense Estimate is $7,050.75 ($.08 per square foot) 1.15 Broker(s): Colliers International, Grubb & Ellis (Landlord); Equis Corporation (Tenant) - ------------------------------------------------------------------------------- 1.16 Additional Attachments: ------------------------------------------ California Modified Triple Net June 1999: Version One 2 3 2. LETTING; CONDITION; POSSESSION 2.01 Lessor leases to Lessee, and Lessee leases from Lessor, the Premises, as indicated in Paragraph 1.01 in consideration of Lessee's payment of Base Rent and other payments hereunder subject to all of the terms, covenants and conditions of this Lease and all recorded matters, laws, ordinances and governmental regulations and orders. Lessee's possession and occupancy of the Premises constitutes Lessee's acknowledgment that it has satisfied itself with respect to the overall condition of the Premises, the present and future suitability of the Premises for Lessee's intended use and the substantial completion of Lessor constructed Lessee Improvements, if any, consistent with Paragraph 10 below and specifically set forth in Exhibit "B". 2.02 Lessee shall only use the Premises for its permitted use. Lessee shall not occupy or use the Premises or any part thereof for other than its permitted use and not for any use or purpose which is unlawful or deemed by Lessor to be disreputable in any manner or dangerous to life, limb or property. 2.03 Unless otherwise provided herein, any statement of square footage set forth in this Lease is an approximation which Lessor and Lessee agree is reasonable for all purposes and shall be the basis for this Lease. Lessor reserves the right to change Lessee's proportionate share to reflect any increase or decrease in the common area. Any use of the terms "rentable" and "usable" is for convenience only, and such descriptions represent Lessor's interpretation of such terms. If there are no Tenant Improvements or Exhibit B is not attached hereto, then Lessee accepts the Premises in "AS-IS" condition and Lessor shall have no obligation to provide or pay for any repair or other work therein, except as stated in this Lease; and Lessee shall obtain and deliver to Lessor a certificate of occupancy for the Premises from the appropriate governmental authority. 2.04 Lessor will deliver, where applicable, all systems in the Premises to Lessee with existing plumbing, electrical, fire sprinkler, lighting, air conditioning, heating and mechanical, if any, in good working condition. Lessee has thirty (30) days after the Lease Term commences, or Lessee's occupancy, whichever is sooner, to notify Lessor, in writing, of any non-operative items, and Lessor will promptly rectify same at Lessor's sole cost. However, if Lessee does not give Lessor written notice of any non-operative items within this notification period, all repairs to the Premises which are Lessee's responsibility per Paragraph 11.01 of this Lease will become the obligation of Lessee at Lessee's sole cost and expense. 2.05 On the date Lessee takes possession of the Premises, to Lessor's best knowledge, all Lessor-constructed Lessee Improvements on or in the Premises as set forth in Exhibit "B", if any, will comply with all then applicable governmental agency laws, codes, regulations, ordinances, covenants and restrictions. However, Lessor makes no warranty nor accepts any responsibility for specifically meeting such compliance presently or in the future with respect to any Lessee activity, including but not limited to: a.) any Lessee Improvements or Lessee Alterations, as defined in Paragraph 10.02 below, made or to be made by Lessee or at Lessee's direction; b.) Lessee's Permitted Use; c.) Lessee's occupancy of the Premises and/or the Property; and d.) the presence of Lessee's employees, agents, contractors, suppliers, invitees or licensees on or about the Property. 2.06 If for any reason Lessor cannot deliver possession of the Premises on the Commencement Date of the Lease Term, Lessor will not be subject to any liability nor will the validity of this Lease be affected in any manner. However, if Lessee has not caused such delay, there will be a proportionate adjustment of rent to cover the period between the Commencement Date of the Lease Term and the actual date when possession is delivered, and based on the actual date possession is delivered, both the commencement and ending dates of the Lease Term, and the Beginning and Ending dates of each Applicable Period, shall be adjusted accordingly, while the lengths of the Lease Term and each Applicable Period shall remain constant. If for any reason possession of the Premises is not delivered within ninety (90) days of the date the Lease Term commences, Lessor or Lessee, (provided Lessee is not the cause of such delay), may cancel this Lease with written notification. If for any reason Lessee fails to take possession of the Premises within fifteen (15) days after Lessor notifies Lessee in writing that the Premises is ready for Lessee's occupancy, Lessee will be in Breach, as defined in Paragraph 20.02 below, of this Lease. 2.07 Subject to Paragraph 10.05 and Lessor's right to retain improvements, upon termination of this Lease, Lessee agrees to return the Premises to Lessor in the same condition as received by Lessee as of the original date Lessor delivers the Premises to Lessee, normal wear and tear excepted. 2.08 If Lessee, with Lessor's prior written consent, occupies the Premises prior to the Commencement Date, Lessee's occupancy of the Premises shall be subject to all the provisions of the Lease. Early occupancy of the Premises shall not advance the expiration date of the Lease. Lessee shall not pay Base Rent during the early occupancy period but all other charges shall begin to accrue on the date of such early occupancy. Lessee shall, however, provide Lessor with evidence of Insurance coverage pursuant to Paragraph 12, prior to such early occupancy. California modified Triple Net June 1999: Version One 3 4 3. BASE RENT 3.01 On or before the first day of each calendar month of the Lease Term, Lessee will pay to Lessor in lawful monies of the United States of America, without deduction or offset, prior notice or demand, Base Rent at the place Lessor designates. However, the first month's Base Rent and the Security Deposit will be due and payable concurrently with Lessee's execution of this Lease. 3.02 If indicated in Exhibit "B", Base Rent includes an amortized estimation of Lessor's cost of making Lessee Improvements on Lessee's behalf which, subject to the terms and conditions of this Lease, shall be paid in equal installments as part of Base Rent by Lessee over the Lease Term. Subject to the provisions of Exhibit "B", should Lessor and Lessee agree to any additional Lessee Improvements not included in this estimate or if actual Lessee Improvement costs and expenses exceed this estimate, Lessor may increase Base Rent according to the terms and conditions outlined in Exhibit "B". 4. ADDITIONAL RENT 4.01 Unless otherwise specifically stated, any charge payable by Lessee under this Lease other than Base Rent is called "Additional Rent". Additional Rent is to be paid concurrently with and subject to the same terms and conditions of Base Rent. The term "rent" whenever used in this Lease means Base Rent, Additional Rent and/or any other monies payable by Lessee under the terms of this Lease. In the event any rent payable under this Lease commences or ends on a day other than the first day of a calendar month, the actual number of days in the prorated month will be used as the basis for the calculation. 4.02 "Operating Expenses" as used herein shall include all costs and expenses, operation, maintenance, and repair of the Premises, Building, Project and Property, or any part thereof, incurred by Lessor including but not limited to: (1) Property supplies, materials, labor, equipment, and tools; (2) Lessor-incurred utility and service costs and expenses (as further described in Paragraph 4.03B below), security, janitorial, and all applicable service and maintenance agreements; (3) Property related legal, accounting, and consulting fees, costs and expenses; (4) insurance premiums for all policies deemed necessary by Lessor and/or its lenders, and all deductible amounts under such policies (as further described in Paragraph 4.03C below); (5) costs and expenses of operating, maintaining, and repairing common areas of the Property, including but not limited to, hallways, restrooms, conference rooms, exercise rooms, equipment and telephone rooms, driving, parking and other paved or unpaved areas (including but not limited to, resurfacing and striping), landscaped areas (including but not limited to, tree trimming), walkways, building exteriors (including but not limited to, painting and roof repairs), signs and directories, and elevators and stairways; (6) capital improvements and replacements which have been made to improve the operating efficiency of the Property; (7) capital improvements and replacements (including but not limited to, all financing costs and interest charges) required by any governmental authority or law including but not limited to, compliance required under the Americans with Disabilities Act of 1990; (8) compensation (including but not limited to, any payroll taxes, worker's compensation for employees, and customary employee benefits) of all persons, including independent contractors, who perform duties, or render services on behalf of, or in connection with the Property, or any part thereof, including but not limited to, Property operations, maintenance, repair, and rehabilitation; (9) Property management fees; (10) Real Property Taxes (as further described in Paragraph 4.03, below), provided, however, wherever the Lessee and/or any other lessee of space within the Property has agreed in its lease or otherwise to provide any item of such services partially or entirely at its own expense, or wherever in the Lessor's judgment any such significant item of expense is not incurred with respect to or for the benefit of all of the space within the Property, in allocating the Operating Expenses pursuant to the foregoing provisions of this subsection the Lessor shall make an appropriate adjustment, as aforesaid, so as to avoid allocating to the Lessee or to such other lessee (as the case may be) those Operating Expenses covering such services already being provided by the Lessee or by such other lessee at its own expense, or to avoid allocating to all of the net rentable space within the Property those Operating Costs incurred only with respect to a portion thereof, as aforesaid. Expense recovery to cover costs associated solely with Lessor's corporate or business existence. Operating expenses to exclude commissions and leasing fees. 4.03A "Real Property Taxes" as used herein shall include any fee, license, tax, late fee, levy, charge, assessment, penalty (if a result of Lessee's delinquency or negligence), or surcharge (hereinafter individually and/or collectively referred to as "Tax") imposed by any authority (including but not limited to, any federal, state, county, or local government, or any school, agricultural, lighting, drainage, or other improvement district, or public or private association) having the direct or indirect power to tax and where such Tax is imposed against the Property, or any part thereof, or Lessor in connection with its ownership or operation of the Property, including but not limited to: (1) any Tax on Lessor's right to receive, or the receipt of, rent or income from the Property, or any part thereof, or Tax against Lessor's business of leasing the Property; (2) any Tax by any authority for services or maintenance provided to the Property, or any part thereof, including but not limited to, fire protection, streets, sidewalks, and utilities; (3) any Tax on real estate or personal property levied with respect to the Property, or any part thereof, and any fixtures California modified Triple Net June 1999: Version One 4 5 and equipment and other property of Lessor or the Property used in connection with the operation, maintenance or repair of the Property; (4) any Tax imposed on this transaction, or based upon a reassessment of the Property, or any part thereof, due to a change in ownership or transfer of all or part of Lessor's interest in the Property, or any part thereof and, (5) any Tax replacing, substituting for, or in addition to any Tax previously included with this definition. Real Property Taxes do not include: (1) Lessor's federal or state income, franchise, inheritance, or estate taxes; or (2) Lessee's personal property taxes (taxes charged against Lessee's trade fixtures, furnishings, equipment, or other personal property) which are the sole responsibility of Lessee, and shall be billed directly to, and paid in a timely manner by Lessee. 4.03B "Utility and Service Costs" as used herein shall include all Lessor incurred utility and service costs and expenses including, but not limited to water, electricity, gas, heating, lighting, steam sewer, waste disposal, air conditioning, heating and ventilation. 4.03C "Insurance" as used herein shall include all insurance premiums for all policies deemed necessary by Lessor and/or its lenders, including but not limited to, worker's compensation, liability, commercial general liability, automobile, rental interruption insurance and any and all additional endorsements, extended coverage, riders under or attached to such policies. 4.04 Throughout the Lease Term, Lessee will pay as Additional Rent its proportionate share (of the Project and/or building, as applicable) of Operating Expenses which will be equal to each calendar year's total Operating Expenses multiplied by Lessee's Proportionate Share. In the event Lessee is only responsible for a portion of a given calendar year, Lessee's share will be based on the actual number of elapsed applicable days. All Operating Expenses will be adjusted to reflect an average Project occupancy level of eighty percent (80%) during any calendar year in which the Project is not at least eighty percent (80%) occupied. Operating Expense Estimates and actualized Operating expenses will be determined as outlined in 4.05A, 4.05B below and subject to the provisions of 4.07. 4.05 Lessee's Operating Expense estimates shall be determined as follows: 4.05A. Lessee's Operating Expense estimates: On or about April 1st of each calendar year, Lessor will provide Lessee with a statement of: (1) Lessee's annual share of estimated Operating Expenses for the then current calendar year; (2) Lessee's new monthly Operating Expense estimate for the then current year; and, (3) Lessee's retroactive estimate correction billing (for the period of January 1st through the date immediately prior to the commencement date of Lessee's new monthly Operating Expense estimate) for the difference between Lessee's new and previously billed monthly Operating Expense estimates for the then current year. 4.05A(1). Annual estimate share: Lessee's annual share of estimated Operating Expenses for the then current calendar year shall be determined by multiplying Lessor's estimated total Operating Expenses for the then current calendar year, by Lessee's Proportionate Share (of the Project or Building, as applicable) identified in Paragraph 1.13. 4.05A(2). Monthly Operating Expense estimate: Lessee's new monthly Operating Expense estimate for the then current calendar year shall be calculated by dividing Lessee's annual share of estimated Operating Expenses, as determined in 4.05A, above, by 12. 4.05A(3). Retroactive estimate correction: Lessee's share of the change in Operating Expense estimates retroactive to January 1st of each year shall be determined as follows: For the then current calendar year, the total of Lessee monthly Operating Expense estimates billed prior to the commencement of Lessee's new monthly Operating Expense estimate shall be subtracted from Lessee's new monthly Operating Expense estimate multiplied by the number of elapsed months within the same period. 4.05B. Lessee's share of actualized annual Operating Expenses: On or about April 1st of each year, Lessor will provide Lessee with a statement reflecting the total Operating Expenses for the calendar year just ended. If the total of Lessee's Operating Expense estimates billed for the calendar year just ended are less than Lessee's share of the actualized Operating Expenses for the calendar year just ended, the statement will indicate the payment amount and date due. If Lessee has paid more than its share of Operating Expenses for the preceding calendar year, Lessor will credit the overpayment towards Lessee's future Operating Expense obligations. 4.06 Under this Lease, monthly Operating Expense estimates, retroactive estimate corrections, and Lessee's share of actualized annual Operating Expenses are considered Additional Rent. Monthly Operating Expense estimates are due on the 1st of each month and shall commence in the month specified by Lessor. Lessee's retroactive estimate correction, and actualized annual Operating Expense charges, if any, shall be due, in full, on the date(s) specified by Lessor. California modified Triple Net June 1999: Version One 5 6 4.07 Lessee will not be entitled to any reduction, refund, offset, allowance or rebate should any Real Property Taxes be retroactively reduced, credited, abated or exempted by any direct or indirect taxing authority for any prior taxation or assessment period except to the extent that a reconciliation of the previous year's operating expenses shall include such credit or refund which shall be credited to Lessee in the coarse of reconciling such operating expenses. If Lessor fails to provide Lessee with an Operating Expense statement by April 1st of any calendar year, or elects not to bill Lessee its share of actualized Operating Expenses, and/or Operating Expenses estimate(s), or estimate increase(s) for any period of time, Lessor's right to bill and collect these charges from Lessee at a later time is not waived. 4.08 Whether now in force or hereafter in force, Lessee will pay as Additional Rent its share of any duties, levies or fees resulting from any statutes or regulations, or interpretations thereof, enacted by any governing authority which pertains to Lessor's or Lessee's use, ownership, occupancy or alteration of the Premises, Project, or Property, or any part thereof. Lessee's share of such duties or fees will be based on Lessee's Proportionate Share as indicated in Paragraph 1.13, or other equitable method determined by Lessor in its sole discretion. In the event the Property, or any part thereof, shares common Operating Expenses, commonly used areas, land or other items not exclusive to the Property, Lessor shall allocate and bill Lessee its share of any costs and expenses attributable to such sharing on an equitable basis, as determined by Lessor in its sole discretion. 4.09 In the event Lessee wishes to audit any Lessee rent charge, such a review shall be performed only at a time and location designated solely by Lessor, and only if Lessee is not in Default, as defined in Paragraph 20.02 below at the time of the audit request and/or at any time during the course of the audit. Lessor and Lessee agree that any Lessee audit must be conducted within twelve (12) months of the date the rent charge becomes due, and if this audit is not conducted within this period of time, Lessee's right to audit is waived, and the rent charge, as originally billed, including all calculations used as the basis for the Base Year or expense stop shall be deemed conclusive and final for all purposes under this Lease. 5. LATE CHARGES Any installment, including any partial installment, of Base Rent, Additional Rent, rent or any other rent charge payable which is not received by Lessor within five (5) days after it becomes due, shall be considered past due, and shall constitute a default per paragraph 20.02 below and Lessee shall, without the necessity of notification from Lessor, pay Lessor a late charge equal to fifty dollars ($50.00) or ten percent (10%) of the then delinquent amount, whichever is greater. Additionally, a fifty dollar ($50.00) handling fee will be paid to Lessor by Lessee for each bank returned check which return shall constitute a Default, and Lessee will be required to make all future payments to Lessor by money order or cashier's check. The acceptance of late charges and returned check charges by Lessor will in no way constitute a waiver of Lessee's Default with respect to any overdue amount nor prevent Lessor from exercising any of its rights or remedies resulting from such late payment. 6. SECURITY DEPOSIT 6.01 Upon Lessee's execution of this Lease, Lessee will deposit with Lessor an initial Security Deposit in the amount specified in Paragraph 1.10 as security for Lessee's full and faithful performance of every provision under this Lease. Lessor will not be required to keep the Security Deposit separate from its general funds and has no obligation or liability for payment of interest thereon (except when required by law). Any time the Base Rent increases during the Lease Term, Lessee will deposit additional monies with Lessor as an addition to the Security Deposit so that the total amount of the Security Deposit will at all times at a minimum bear the same proportion to the then current Base Rent as the initial Security Deposit bears to the initial Base Rent set forth in Paragraph 1.09. Such additional Security Deposit monies will be due and payable concurrently with the next payment of Base Rent, after receipt of written notice from Lessor of the need to increase this Security Deposit as required by this Paragraph. 6.02 In no event will Lessee have the right to apply any part of the Security Deposit to any amounts payable under the terms of this Lease nor is it a measure of Lessor's damages in event of a Default or Breach by Lessee. If Lessee fails to pay any rent due herein, or otherwise is in Default or in Breach of any provision of this Lease, Lessor may use, apply or retain all or any portion of the Security Deposit for the payment of any amount due Lessor, or to compensate Lessor, for any loss or damage suffered by Lessee's Default or Breach. Within five (5) days after written notification by Lessor, Lessee will pay monies to Lessor sufficient to restore the Security Deposit to the full amount required under this Lease. 6.03 Within sixty (60) days (or as otherwise prescribed by law) after the expiration or earlier termination of the Lease Term and after Lessee has vacated the Premises, Lessor will return to Lessee that portion of the Security Deposit not used or applied by Lessor to fulfill any and all of Lessee's obligations under this Lease. California modified Triple Net June 1999: Version One 6 7 6.04 At any time during the Lease Term, within ten (10) days after written request from Lessor, Lessee shall deliver to Lessor such financial statements as Lessor reasonably requires to verify the net worth of Lessee or any assignee, subtenant, or guarantor of Lessee. In addition, Lessee shall deliver to any lender designated by Lessor any financial statements required by such lender to facilitate the financing or refinancing of the Property. Lessee represents and warrants to Lessor that each financial statement is a true and accurate statement as of the date of such statement. All financial statements shall be confidential and shall be used only for the purposes set forth in this Lease. As long as Lessee is a publicly traded company, Lessor will accept financial reports available to the public. However, if such reports/statements are unavailable for any reason, Lessee must provide Lessor the most current financial statements available. 7. USE OF PREMISES; QUIET ENJOYMENT; TRASH 7.01 The Premises will be used and occupied only for Lessee's Permitted Use, as described in Paragraph 1.07. Lessee agrees it has negotiated its Permitted Use in a fair and reasonable manner and, as so written, the Permitted Use is enforceable for all purposes under this Lease. Further, Lessee expressly waives the right to challenge the validity of its Permitted Use, including but not limited to, as defined in Paragraph 20. below, challenges which pertain to Default or Breach of this Lease, mitigation of damages, and any and all Transfers under this Lease. 7.02 Lessee will comply with all conditions and covenants of this Lease, and all applicable governmental agency laws, codes, regulations, ordinances, covenants and restrictions affecting the Property or any part thereof. Lessee will not use or permit the use of the Premises, the Property or any part thereof, in a manner that is unlawful, diminishes the appearance or aesthetic quality of any part of the Property, creates waste or a nuisance, disturbs Lessor, other lessees or any neighboring property occupants, or causes damage to the Property, or any part thereof, or to any neighboring property, personal property or person. Any animals, excepting guide dogs, on or about the Property or any part thereof are expressly prohibited. 7.03 Lessor agrees that so long as Lessee performs all of its obligations under the Lease, Lessee's possession, quiet enjoyment and use of the Premises for the term of the Lease will not be disturbed by Lessor, subject only to the provisions of the Lease. 7.04 Lessee shall be responsible for providing all trash receptacles and pickup for its premises. In the event of any excessive trash in our outside Lessee's premises, as determined by Lessor in its sole discretion, Lessor will have the right to remove such excess trash, charge all costs and expenses attributable to its removal to Lessee, and require Lessee to obtain, at its sole cost and expense, additional trash receptacles, to be placed in a location designated by Lessor for Lessee's specific use. Under no circumstances may any "Hazardous Materials", as defined in Paragraph 14 below, any materials not permitted by law, any materials improperly or illegally handled, stored, contained or released, or any materials which are not permitted by Lessor, as determined in its sole discretion, be disposed of in any trash receptacles located in or about the Property. Lessee will not cause, maintain or permit any outside storage on or about the Property without prior written consent by Lessor, which consent, if given, may be revoked at any time. In the event of any unauthorized outside storage by Lessee, Lessor will have the right, without notice, in addition to such other rights and remedies it may have, to remove any such storage and charge all direct and associated costs and expenses to Lessee. 8. PARKING All parking will comply with the terms and conditions of this Lease and the parking criteria set forth in Exhibit "D". Unless otherwise stated, Lessee, its employees, agents, contractors, suppliers, invitees and licensees will have a non-exclusive privilege, in conjunction with Lessor, other lessees of the Property, and such other persons as Lessor may designate, to use those parking spaces designated by Lessor for public parking. Vehicles parked in public parking areas will be no larger than full-sized passenger automobiles or pick-up trucks. Larger vehicles, if permitted in writing by Lessor, will be parked, loaded and unloaded in locations designated by Lessor. Lessor reserves the right, without notice to Lessee, to tow away at Lessee's sole cost and expense any vehicles parked in any parking area for any continuous period of 24 hours or more, or earlier if Lessor, in its sole discretion, determines such parking to be a hazard or inconvenience to other lessees or Lessor, upon written notice to Lessee, or violates any rules or regulations or posted notices related to parking. Lessor shall not be responsible for enforcing Lessee's parking rights against third parties. From time to time, Lessor reserves the right, upon written notice to Lessee, to change the location, the availability and nature of parking spaces, establish reasonable time limits on parking, and, on an equitable basis, assign specific spaces without charge to Lessee. 9. UTILITIES 9.01 Lessor agrees to provide at its cost water and electric service connections (and gas where applicable) to the Premises and telephone service connections to the Building, but Lessee agrees California modified Triple Net June 1999: Version One 7 8 to make all arrangements for and pay directly to the appropriate utility company all costs and expenses of utility services supplied to, and for the use of, Lessee in or about the Premises, including but not limited to, water, gas, heat, light, power, telephone, sewer, sprinkler charges, usage costs and expenses, service fees, connection charges, deposits and any duties or taxes for such utilities. 9.02 If for any reason, Lessor incurs any utility costs and expenses which are attributed to Lessee, as determined by Lessor, Lessee, upon notification from Lessor, shall immediately reimburse Lessor for all such costs and expenses. 9.03 In the event it is not possible for Lessee to pay directly for any utility service, the utility service may, at Lessor's discretion, be obtained in Lessor's name, and Lessee will pay Lessor, as Additional Rent, Lessor's best estimate of Lessee's share of such utility costs and expenses. Lessor's best estimate will be determined by Lessor in its sole discretion and will be subject to change as Lessor deems necessary. Periodically during the Lease Term, Lessor will compare Lessee's utility estimates to actual utility costs and expenses incurred, and bill or credit, whichever is applicable, Lessee for any difference. Lessor reserves the right to separately meter any such service not so separately metered at Lessee's sole cost and expense at any time during the Lease Term, at which time Lessee shall be directly responsible for payment of such expense directly to the utility service provider, if possible. 9.04 Lessor will not be liable or deemed in Default or Breach, nor will there be any abatement of rent, for any interruption or reduction of utilities, utility services or telecommunication services. Additionally, Lessee agrees to comply with any energy conservation programs implemented by Lessor by reason of enacted laws or ordinances, or otherwise. 9.05 By execution of this Lease, Lessee acknowledges it has satisfied itself as to the adequacy of any Lessor owned telephone equipment, if any, and the quantity of telephone lines and service connections to the Building available for Lessee's use. Should Lessee require additional equipment, lines or wiring, beyond the initial installation of the outside line to the building itself, any and all associated costs and expense will be borne directly by Lessee and be subject to the provisions of this Lease and Lessor's written approval. Additionally prior to termination of this Lease, Lessee at its sole cost and expense, will remove all equipment, including but not limited to, all lines, wiring and all telephone boards belonging to Lessee and restore the Premises to the same condition as before such installation. 9.06 Lessee acknowledges and agrees that the number and installation of telephone lines to its Premises, including any telephone, telecommunication or other communication equipment (specifically including any antennas, towers {microwave or otherwise} or other exterior equipment of any nature) which either utilizes telephone or telecommunications equipment or technology or in any other manner affects Lessor's ability to provide telephone or communications facilities to the Project is subject to Lessor's approval, which will not be unreasonably withheld. Additionally, in the event that Lessee wishes additional telephone, telecommunication or other communication lines or access after the date of Lessee's execution of this Lease, no such additional lines or access shall be permitted nor other telephone, telecommunication or communication related equipment installed without first securing the prior written consent of Lessor, which will not be unreasonably withheld. Any telecommunications installation shall be subject to the following: (1) Lessor shall incur no expense whatsoever with respect to any aspect of Lessee's need for additional access or equipment, including without limitation, the costs of installation, consultants, materials, permits, service, etc.. (2) Prior to the commencement of any work in or about the Building to install such additional access, lines or equipment, Lessee shall agree to abide by such rules and regulations, as reasonably determined by Lessor. (3) Lessor reasonably determines that there is sufficient space in the Building for the placement of all of the lines, access and equipment. (4) Lessee agrees to compensate Lessor the reasonable amount determined by Lessor for space used in the Building for the storage and maintenance of the equipment, if any lies outside the leased Premises, and for all costs that may be incurred by Lessor in arranging for access by the Lessee's personnel, security for Lessee's equipment, and any other such costs as Lessor may expect to incur. (5) Any other reasonable requirements Lessor may require The refusal of Lessor to consent to any request shall not be deemed a Default or Breach by Lessor of its obligation under this Lease nor be grounds for any termination or offset by Lessee. Lessee agrees that to the extent service by any telephone or communication equipment is interrupted, curtailed, or discontinued, Lessor shall have no obligation or liability with respect thereto and it shall be the sole obligation of Lessee at its expense to obtain substitute service, but only with Lessor's prior written permission, which shall not be unreasonably withheld. Lessor's consent under this section shall not be deemed a warranty or California modified Triple Net June 1999: Version One 8 9 representation by Lessor as to the availability or suitability of the present or future telephone or communications equipment, connections, compatibility or space available for any additional equipment, lines or access. The provisions of this clause may be enforced solely by the Lessee and Lessor, and are not for the benefit of another party, specifically, without limitation, no telephone or telecommunications provider shall be deemed a third party beneficiary of the Lease. 10. LESSEE IMPROVEMENTS; LESSEE ALTERATIONS AND MECHANIC'S LIENS 10.01 Any improvements constructed under this Lease on behalf of Lessee or at Lessee's expense prior to Lessor's initial delivery of the Premises are referred to throughout this Lease as "Lessee Improvements". All Lessee Improvements will be performed in accordance with the terms and conditions outlined in Exhibit "B". Upon substantial completion, as determined by Lessor, of the Lessee Improvements outlined in Exhibit "B", Lessor will be relieved of any further obligation to alter, change, decorate or improve the Premises, or any part thereof. 10.02 Lessor's prior written consent is required for any: (a) Lessee constructed Lessee Improvements; and (b) any alterations, utility installations, additions, or other improvements made by Lessee, at its sole cost and expense, after Lessor's initial delivery of the Premises (hereafter collectively referred to as Lessee Alterations). Lessor's consent will be conditioned upon its approval of: (i) detailed plans and work specifications of Lessee Alterations; and (ii) certificates of insurance from Lessee's contractor(s) for commercial general liability, automobile liability and property damage insurance with limits not less than $2,000,000 / $250,000 / $500,000 respectively endorsed to show Lessor as an additional insured evidencing Lessor's requirement to be notified at least thirty (30) days in advance of any change, expiration or cancellation of any such policies along with proof of a current worker's compensation policy. In addition, Lessee must obtain all approvals and permits required by any and all governmental authorities and provide same to Lessor prior to commencement of any work, and after work commences must comply with all conditions of such approvals and permits and perform work in a prompt and expeditious manner with good and sufficient materials. Lessor also retains the right, as a condition of its consent, to require Lessee to provide Lessor with a lien and completion bond in a form acceptable to Lessor in an amount equal to one and one-half times the estimated cost of Lessee constructed Lessee Improvements and Lessee Alterations and/or require the inclusion of Lessor's non-responsibility language in all contracts in a form approved by Lessor. Lessee will give Lessor a minimum of fifteen (15) days prior written notice to the commencement of any Lessee constructed Lessee Improvements and Lessee Alterations to allow Lessor sufficient time in which to post notices of non-responsibility or no liability for work then in progress in, on, or about the Premises as provided by law. Upon completion of any improvements, all alterations or additions, Lessee shall deliver upon request to Lessor accurate, reproducible as-built plans of such construction. 10.03 Lessor's approval of any Lessee constructed Lessee Improvements and Lessee Alterations will not create any liability whatsoever on the part of Lessor. By way of example and without limitation, Lessor's approval of Lessee's plans and work specifications will not create any responsibility or liability on the part of Lessor for their sufficiency, completeness or compliance with any and all governmental laws, codes, regulations, ordinances, covenants and restrictions (including without reservation any and all provisions of the Americans with Disabilities Act of 1990 applicable to the Property, or any part thereof). 10.04 Lessee will pay when due, all claims for services, labor and materials furnished by, or at the request of Lessee, including any claims which are secured by any mechanic's or materialmen's or other lien against the Property, or any interest therein. Lessee agrees that should any lien be posted on the Property due to work performed, materials furnished, or obligations incurred by Lessee, or its employees, agents, contractors, suppliers, invitees or licensees, Lessee will immediately notify Lessor and proceed to remove such lien. Lessee further acknowledges that it will remain liable to Lessor and indemnify Lessor for any costs and expenses or damages to Lessor or the Property or any interest therein as a result of such lien(s). If Lessee, in good faith, contests the validity of any such lien, claim or demand, Lessee will, at its sole expense, defend and protect itself, Lessor and the Property, or any part thereof. To ensure such protection of Lessor and the Property and any part thereof, Lessor may, at its sole option, require Lessee to provide Lessor with a surety bond satisfactory to Lessor in an amount deemed appropriate by Lessor which will indemnify Lessor against any liability and ensure the Property, or any part thereof, is free from the effect of such a lien or claim. In addition, Lessor may require Lessee to pay all legal fees of Lessor's attorney(s) of choice and any other associated costs and expenses should Lessor decide it is in its best interest to participate in such an action. If Lessee fails to keep the Property, or any part thereof, free from any lien or provide a Lessor approved surety bond, then, in addition to any other rights and remedies available to Lessor, Lessor may take any action necessary to discharge such a lien, including but not limited to, payment to the claimant on whose behalf the lien was filed, and regardless of the corrective action taken by Lessor, Lessee will be liable to Lessor for all costs and expenses of such action to discharge the lien, including, but not limited to, any legal fees and costs. 10.05 All Lessee Improvements and Lessee Alterations are part of the realty and belong to Lessor. As a condition of Lessor consenting to any Lessee Improvements or Lessee Alterations, Lessor reserves the right, at any time to: (i) require Lessee to pay an amount determined by Lessor to cover the costs of California modified Triple Net June 1999: Version One 9 10 demolishing part or all of any Lessee Improvements or Lessee Alterations and or the cost of returning the Premises to their condition before any such work commenced (normal wear and tear excepted); or (ii) elect to make Lessee the owner of all or any specified part and, upon termination of this Lease, require Lessee to remove same at its sole cost and expense. The provisions of this Paragraph shall survive the termination of this Lease. 10.06 Lessee may, without prior written consent of Lessor, make non-structural installations within the Premises of its trade fixtures, equipment, and machinery in conformance with all applicable governing agency laws, codes, regulations, ordinances, covenants and restrictions, and they may be removed upon termination of this Lease provided the Premises are restored to its condition at the commencement of this Lease and no material damage to the Premises will occur. All such installations shall be made by a licensed and bonded contractor, approved by Lessor, which approval will not be unreasonably withheld, with all permits obtained when required by law. 10.07 Lessor retains the right to construct or permit construction of improvements, and/or Lessee Alterations, for new and existing lessees and to alter any commonly used areas in or about the Property. Notwithstanding anything which may be contained in this Lease, Lessee understands this right of Lessor and agrees that such construction will not be deemed to constitute a Default or a Breach of this Lease by Lessor. Lessee waives any such claims which it might have arising from such construction. 11. REPAIRS 11.01 This is a net lease. Lessee will, at all times and at its sole cost and expense, keep all parts of the Premises, interior and exterior, in good order, condition and repair, and all equipment and facilities within or serving the Premises, including but not limited to: windows, glass and plate glass, doors and office entry(s), walls and finish work, floors and floor coverings, heating and air conditioning systems, electrical systems, dock boards, truck doors, chain link gates installed by lessee and dock bumpers, life safety-sprinkler systems, plumbing work and fixtures, termite and pest extermination, regular removal of trash and debris keeping the parking areas, driveways, alleys and whole of the Premises in a clean and sanitary condition to prevent deterioration and to maintain aesthetic standards. The cost of maintenance and repair of any common party wall (any wall, divider, partition or other structure separating the premises from any adjacent premises occupied by other Lessees) shall be shared equally by Lessee and the lessee occupying the adjacent premises. Lessee shall not damage any party wall or disturb the integrity and support provided by any party wall and shall, at its sole cost and expense, promptly repair any damage or injury to any party wall caused by Lessee or its employees, agents or invitees. Lessee will keep the Premises and every part thereof in good order, condition and repair regardless of whether any portion of the Premises requiring repairs, or the means of repairing same are reasonably or readily accessible. Additionally, Lessee shall be obligated to maintain and repair the Premises whether the need for such repairs or maintenance occurs as a result of Lessee's use, any prior use, vandalism, acts of third parties, Force Majeure or the age of the Premises. The standard for comparison of condition will be the condition of the Premises as of the original date of Lessor's delivery of the Premises and failure to meet such standard shall create the need to repair. All Lessee repairs will be made by a licensed and bonded contractor, approved by Lessor, with permits and any other governmental agency approvals and requirements obtained and observed, and conform to all requirements of Paragraph 10.02 herein. Lessor's maintenance and repair obligations are limited to air-conditioning and other equipment, facilities and areas used in common with other lessees, exterior walls, foundations and exterior roofs which Lessor agrees to repair and maintain on behalf of Lessee unless such repairs are due to negligent or intentional acts of Lessee or its employees, agents, contractors, suppliers, invitees or licensee 11.02 Lessee expressly waives the benefit of any statute or other legal right now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense, whether by deduction of rent or otherwise, or to terminate this Lease because of Lessor's failure to keep the Property, or any part thereof in good order, condition and repair. If Lessee does not keep the Premises in good order, condition, conforming to and consistent with Lessor-specified standard colors, materials and quality, or fails to make any Lessor required maintenance or repairs, Lessor reserves the right to perform such obligations of Lessee on Lessee's behalf, and Lessee will reimburse Lessor for any direct costs and expenses incurred immediately upon demand. Failure by Lessee to pay for such costs and expenses within five (5) days of written notification by Lessor is a Breach of this Lease. 11.03 In the event the Premises constitute a portion of a multiple occupancy building, Lessor shall perform the roof, paving, and landscape maintenance, exterior painting and common sewage line plumbing which are otherwise Lessee's obligation under Subsection 11.01 above, and Lessee shall, in lieu of the obligations set forth under Section 11.01 above with respect to such items, be liable for its Proportionate Share of the Building (as defined in Section 1.13 above) of the costs and expense of Building maintenance and the care for the grounds around the Building, including but not limited to, the mowing of grass, care of shrubs, general landscaping, maintenance of parking areas, driveways and alleys, roof maintenance, exterior repainting and common sewage line; plumbing; provided, however, that Lessor shall have the right to require Lessee to pay such other reasonable proportion for said mowing, California modified Triple Net June 1999: Version One 10 11 shrub care and general landscaping costs as may be determined by Lessor in its sole discretion, and further provided that if Lessee or any other particular lessee of the Building can be clearly identified as being responsible for obstruction or stoppage of the common sanitary sewage line, then Lessee, if Lessee is responsible, or such other responsible lessee, shall pay the entire cost thereof, upon demand, as Additional Rent. 12. INSURANCE 12.01 Except as expressly provided as Lessee's Permitted Use, or as otherwise consented to by Lessor in writing, Lessee will not do or permit anything to be done within or about the Premises or the Property which will increase the existing rate of any insurance on any portion of the Property or cause the cancellation of any insurance policy covering any portion of the Property. Lessee will not keep, use or sell, or permit anyone to keep, use or sell, anything in or about the Premises, which may be prohibited by the standard form of fire and other insurance policies. Lessee will, at its sole cost and expense, comply with any requirements of any insurer of Lessor and of Lessee. 12.02 Lessee agrees to maintain in full force and effect at all times during the Lease Term, at its sole cost and expense, for the protection of Lessee and Lessor, policies of insurance which afford the following coverage: (a) Worker's Compensation Statutory Requirements Employer's Liability Not less than $1,000,000.00 (b) Commercial General Liability Not less than $1,000,000.00 per occurrence Not less than $2,000,000.00 aggregate this location Commercial policies shall insure on an occurrence and not a claims-made basis and cover the premises, project and property. The policy shall cover liability arising from premises, operations, independent contractors, products-completed operations, personal injury, advertising injury and liability assumed under an insured contract and not be excess, nor exclude pollution or employment-related practices. (c) Automobile Liability Not less than $300,000.00 combined single limit including property damage (d) "All Risk" coverage including fire and extended coverage, vandalism, malicious mischief and any other perils normally covered therein. This insurance coverage must be upon the Premises and all property owned by Lessee, for which Lessee is legally liable, or which is made at the expense of or at the request of Lessee, including but not limited to, any Lessee Improvements, Lessee Alterations, furniture, fixtures, equipment, installations and any other personal property of Lessee, in an amount not less than their full replacement value. The limits of the insurance coverage required under this Lease will not limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee will be primary to, and non-contributory with Lessor's insurance, and contain cross-liability endorsements and will in addition to the above coverage specifically insure Lessor against any damage or loss that may result either directly or indirectly from any breach or default of Lessee under Paragraph 14 (Hazardous Materials) herein. Any similar insurance carried by Lessor will be considered excess insurance only. 12.03 Lessee will name Lessor (and, at Lessor's request, any Mortgagee) and each of its officers, subsidiaries, partners, officers, directors, and employees as additional insureds on all insurance policies required of Lessee under this Lease, other than Worker's Compensation and Fire and Extended coverage (except on improvements or alterations to Lessees' Premises for which Lessor shall be named an additional insured). Such insurance policies carried by Lessee will include an express waiver of subrogation by the insurer in favor of Lessor, permit the insured, prior to any loss, to agree with a third party to waive any claim it might have against said third party without invalidating the coverage under the insurance policy, and will release Lessor and any of its agents and employees from any claims for damage to any person, to the Property of which the Premises are a part, any existing improvements, etc., Lessee Improvements and Lessee Alterations to the Premises, and to any furniture, fixtures, equipment, installations and any other personal property of Lessee caused by or resulting from, risks which are to be insured against by Lessee under this Lease, regardless of cause, except for grossly negligent or intentional acts by Lessor. Lessee's failure to provide evidence of this required insurance coverage to Lessor shall constitute a Default under this Lease, and Lessee's failure, at any time during the Lease Term, to maintain, in full force and effect, this coverage, as required, shall constitute a Breach under this Lease. Notwithstanding anything in this lease to the contrary, each party shall look first to the proceeds of insurance for any damages suffered, regardless of cause of damage and shall recover from the other party only to the extent that such proceeds are insufficient to compensate for such damage. 12.04 Lessee will deliver to Lessor, (and, at Lessor's request any Mortgagee, Assignee or Receiver) simultaneously with its execution of this Lease, (and thereafter at least thirty (30) days prior to expiration, cancellation or change in any Lessor required certificates of insurance), certificates of insurance evidencing, at a minimum, the coverage specified in Paragraph 12.02. All insurance required hereunder will be with companies licensed and authorized to do business in the state in which the Property is located and holding a "General Policyholders Rating" of "A -, VII" or better, as set forth in the most current Best's ------- California modified Triple Net June 1999: Version One 11 12 Insurance Guide. - ---------------- 12.05 Lessor will secure and maintain, at Lessee's expense, insurance coverage in such limits as Lessor may deem reasonable in its sole judgment to afford Lessor adequate protection. Lessor's coverage, where applicable, will contain an express waiver of subrogation. 12.06 Lessor makes no representation that the insurance policies and coverage amounts specified to be carried by Lessee or Lessor under the terms of this Lease are adequate to protect Lessee, and in the event Lessee believes that such insurance is insufficient, Lessee will provide, at its own expense, such additional insurance as Lessee deems adequate. 12.07 As to any insurance proceeds received by Lessor, such proceeds shall for all purposes be deemed Lessor's sole property, free from any claims of Lessee, and unless otherwise stated, available for Lessor's exclusive use as it may alone determine in the exercise of its sole discretion. 13. INDEMNIFICATION AND WAIVER OF CLAIMS Lessee waives all claims against Lessor for any damage to any property in or about the Property and for injury to any persons, including death resulting therefrom, regardless of cause or time of occurrence. Lessee will indemnify, protect, defend and hold harmless Lessor from and against all claims, losses, damages, costs, expenses and liabilities, including reasonable legal fees, arising out of, involving, or in connection with Lessee's occupancy of the Premises, presence on the Property, the conducting of Lessee's business and any act, omission or neglect of Lessee, its agents, contractors, employees, suppliers, licensees or invitees except for any damage or injury which is the direct result of the gross or intentional acts by Lessor, its agents, contractors, employees, suppliers, licensees or invitees. In the event any action or proceeding is brought against Lessor, its agents, contractors, employees, suppliers, licensees or invitees, by reason of the foregoing, Lessee, upon notice by Lessor, will defend Lessor, its agents, contractors, employees, suppliers, licensees or invitees, at Lessee's sole cost and expense, and by counsel reasonably satisfactory to Lessor. 14. HAZARDOUS MATERIALS 14.01 For purposes of this Lease, "Hazardous Materials" will mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Property, now or in the future, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Property, or any part thereof; (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability of Lessor to any governmental authority or third party. Hazardous Materials does not include: solvents and other materials commonly used in office buildings for everyday cleaning uses. Hazardous Materials will include, but not be limited to, solvents, petrochemical products, flammable materials, explosives, asbestos, urea formaldehyde, PCB's, chlorofluorocarbons, freon or radioactive materials. Lessor, however, grants Lessee permission to keep small amounts of materials or substances in the Premises which are necessary for Lessee's normal business operations. Lessee agrees to provide Lessor, prior to its occupancy of the Premises, a list of all materials and substances, their locations within the Premises, and methods of storage. Lessee further agrees to comply with all future requests for information by Lessor including but not limited to copies of all applicable Material Safety Data Sheets (MSDS sheets). 14.02 Lessee will not cause or permit any Hazardous Materials to be brought upon, kept, stored, discharged, released or used in, under or about any portion of the Property by itself, its agents, employees, contractors, subcontractors, licensees or invitees, without the prior written consent of Lessor, and Lessor's consent will be in its sole discretion. Should Lessor grant such consent, Lessee shall: (1) use such Hazardous Material only as is reasonably necessary to Lessee's business, in small, properly labeled quantities; 2) handle, use, keep, store, and dispose of such Hazardous Material using the highest accepted industry standards and in compliance with all applicable regulatory agencies and governmental Hazardous Materials requirements; (3) maintain at all times with Lessor a copy of the most current MSDS sheet for each such Hazardous Material; and (4) comply with such other rules and requirements Lessor may from time to time impose. 14.03 Should Lessor give Lessee its consent to bring on or about the Property any Hazardous Materials, Lessee will comply with all federal, state and local laws, ordinances, and rules and regulations relating to Hazardous Materials, including but not limited to, current rules and regulations or levels and standards as set from time to time by the Environmental Protection Agency, the U. S. Occupational Safety and Health Administration, or any other governmental agency. It is not necessary that any presence or contamination of the Premises reflect any government mandated threshold or quantity in order for Lessor to take any action under this paragraph 14. California modified Triple Net June 1999: Version One 12 13 14.04 Upon expiration or earlier termination of this Lease, Lessee will, at Lessee's sole cost and expense, cause all Hazardous Materials brought on the Property by Lessee, its agents, contractors, employees, suppliers, licensees or invitees, to be removed from the Property in compliance with any and all applicable Hazardous Material disposal laws. If Lessee or its agents, contractors, employees, suppliers, licensees or invitees, violates the provisions of this Section 14, or performs any act or omission, or contaminates, or expands the scope of contamination of the Premises, the Property, or any part thereof, the underlying groundwater, or any property adjacent to Lessor's Property, then Lessee will promptly, at Lessee's expense, take all investigatory and/or remedial action (collectively called "Remediation") that is necessary to clean up, remove and dispose of such Hazardous Materials and any contamination so caused in compliance with any applicable Hazardous Material laws and regulations. Lessee will also repair any damage to the Premises and any other affected portion(s) of the Property caused by such Hazardous Material presence, investigation and Remediation. 14.05 With respect to any Remediation of the Premises, the Property or any portion thereof, Lessee will provide Lessor with written notice of Lessee's intended Remediation, including Lessee's method, time and procedure of Remediation, and Lessor will have the right to require reasonable changes in such method, time or procedure before Lessee commences any such work. Lessee will not commence any Remediation of Hazardous Materials in any way connected with the Property, or any portion thereof, without first notifying Lessor, in writing, of Lessee's intention to do so and affording Lessor ample opportunity to appear, intervene or otherwise appropriately assert and protect Lessor's interest. 14.06 Lessee will immediately notify Lessor in writing of any governmental or regulatory action threatened, any claim, demand, or complaint made or threatened by any person against Lessee or any portion of the Property relating to damage, contribution, cost recovery compensation, or loss or injury resulting from any Hazardous Materials, and any report made to any governmental authority arising out of any Hazardous Materials on, or removed from, the Property or any portion thereof. Lessor retains the right to join and participate, as a party, in any legal actions affecting the Property or any portion thereof initiated in connection with Hazardous Materials laws. 14.07 Lessee will indemnify, protect, defend and forever hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, the Property, or any portion thereof, harmless from any and all damages, losses, liabilities, judgments, penalties, claims, obligations, attorneys' and consultants' fees and any other costs and expenses arising out of any failure of Lessee, its agents, contractors, employees, suppliers, licensees or invitees to observe any covenants of this Section 14 of this Lease. Non-compliance by Lessee with any provisions of this Section 14 shall constitute a Breach under this Lease, and all provisions of this Section 14 shall survive any termination of this Lease. 15. AUCTIONS AND SIGNS 15.01 Lessee will not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction on or about the Property, without having the express written consent of Lessor, and Lessor will not be obligated to exercise any standard of reasonableness in determining whether or not to grant such consent. Should Lessor grant such consent, Lessee will comply with any requirements of Lessor and any applicable laws governing such an auction. 15.02 Lessee will not place any Signage on or about the Property, or on any part thereof, without the prior written consent of Lessor, which Lessor may withhold in its sole discretion. All approved Lessee Signage will comply with the terms and conditions of this Lease and the sign criteria set forth in Exhibit "C" and Exhibit "D", Rules and Regulations, or other criteria which Lessor may establish from time to time. Non-compliance with any of the provisions of this Paragraph 15, Exhibit "C" or Exhibit "D" shall constitute a Default under this Lease. 16. LESSOR'S ACCESS 16.01 Lessor, its agents, contractors, consultants, servants and employees, will have the right to enter the Premises at any time in the case of an emergency, and otherwise at reasonable times upon prior notice to (a) examine the Premises; (b) perform any obligation to or exercise any right or remedy of Lessor under this Lease; (c) make repairs, alterations, improvements or additions to the Premises or to other portions of the Property as Lessor deems necessary or desirable; (d) perform work necessary to comply with laws, ordinances, rules or regulations of any governing authority or insurance underwriter; (e) serve, post or keep posted any notices required or allowed under the provisions of this Lease or by law; (f) show, at reasonable times during last 180 days, Lessee's Premises to prospective lessees; (g) post on or about the Premises any ordinary "For Lease" signs during the last sixty (60) days of the Lease Term; and (h) perform work at Lessee's sole cost that Lessor deems necessary to prevent waste or deterioration of the Premises should Lessee fail to commence to make, and diligently pursue to completion, its required repairs. California modified Triple Net June 1999: Version One 13 14 16.02 For each of the purposes described in Paragraph 16.01 above, Lessor will at all times have and retain any necessary keys with which to unlock all doors in, upon and about the Premises, excluding Lessee's vaults and safes. Lessee will not alter any lock or install new or additional locks or bolts on any door in or about the Premises without obtaining Lessor's prior written approval and will, in each event, furnish Lessor with a new key. All access activities of Lessor will be without abatement of rent or liability on the part of Lessor. 17. ABANDONMENT Lessee will not vacate or abandon the Premises, or permit the Premises to remain unoccupied for any period longer than fifteen (15) consecutive days any time during the Lease Term. If Lessee abandons without payment of rent, vacates or surrenders the Premises, or is dispossessed by process of law, or otherwise, any personal property belonging to Lessee left in or about the Premises will, at the option of Lessor, be deemed abandoned and may be disposed of by Lessor. In the event Lessee abandons premises and continues to pay rent, Lessor shall have immediate right of entry to monitor premises at lessee's expense. 18. DAMAGE OR DESTRUCTION 18.01 If the Premises, or any portion of the Property, is damaged or destroyed by fire or other casualty, Lessee will immediately give written notice to Lessor of the casualty and Lessor will promptly repair the damage as set forth in Paragraph 18.03 unless Lessor has the right to terminate this Lease as provided in Paragraphs 18.02 and 18.04, and Lessor elects to so terminate. 18.02 If Lessee, or its agents, contractors, employees, suppliers, licensees or invitees is not the cause of the casualty, Lessor will have the right, but not the obligation, to terminate this Lease following a casualty if any of the following occurs: (i) insurance proceeds (excluding Lessor's deductible and including Lessee's deductible) together with any additional monies Lessee elects, at its option, to contribute are not available to Lessor to pay one hundred percent (100%) of the cost to fully repair the damage; (ii) Lessor determines that the Premises cannot, with reasonable diligence, within six (6) months after Lessor obtains knowledge of the casualty, be fully repaired by Lessor or cannot be safely repaired because of the presence of hazardous factors and conditions, including but not limited to, Hazardous Materials, earthquakes, utility outages and any other similar dangers; (iii) the Premises are damaged or destroyed within the last twelve (12) months of the Lease Term; (iv) the building within which the Premises is located, or any other portion of the Property, is damaged or destroyed and Lessor (as determined in its sole discretion) cannot reasonably complete such repair within six (6) months of Lessor obtaining knowledge of the casualty; (v) Lessee is in Default or Breach of this Lease at the time of the casualty; or (vi) Lessor would be required under Paragraph 18.05 to abate or reduce Lessee's rent for a period in excess of six (6) months if the repairs were undertaken. If Lessor elects to terminate this Lease pursuant to this Paragraph 18.02, Lessor will give Lessee written notice of this election, and fifteen (15) days after Lessee's receipt of such notice, this Lease will terminate. If Lessor elects to terminate this Lease, subject to the rights of any mortgagee, Lessor will be entitled to retain all applicable Lessee insurance proceeds excepting those attributable to Lessee's furniture, fixtures, equipment, installations, and any other personal property. 18.03 If Lessee, or its agents, contractors, employees, suppliers, licensees or invitees is not the cause of the casualty, and Lessor elects not to terminate this Lease, this Lease will remain in full force and effect, and Lessor will, within ten (10) days after receipt of all applicable insurance proceeds and monies required to fully repair 100% of the Premises, begin the process of obtaining all necessary permits and approvals, and upon receipt thereof, diligently pursue the repair through completion. 18.04 Subject to Paragraph 12.03, if Lessee, or its agents, contractors, employees, suppliers, licensees or invitees is the cause of the casualty, or any portion thereof, Lessor may elect any of the following: (i) to continue this Lease in full force and effect; (ii) to make Lessor or Lessee, as determined in Lessor's sole discretion, responsible for the completion of all, or any portion, of the repairs necessitated by the casualty, and all such repairs shall be at Lessee's sole cost and expense; and/or (iii) terminate this Lease with fifteen (15) days written notice and retain all applicable Lessee insurance proceeds excepting those specifically attributable to Lessee's furniture, fixtures, equipment, installations, and other personal property. No election by Lessor of any remedy hereunder shall be deemed a limitation on Lessee's liability. 18.05 If Lessor elects not to terminate this Lease, during the period of repair, Lessee's rent will be temporarily abated or reduced in proportion to the degree to which Lessee's use of the Premises is impaired, as determined by Lessor in its sole discretion, beginning the date Lessor obtains knowledge of the casualty and ending on the date all repairs affecting Lessee's use of the Premises are substantially completed, as determined by Lessor in its sole discretion. However, the total amount of such rent abatement or reduction shall not exceed the total amount of insurance proceeds, directly attributable to Lessee's Premises, Lessor may receive from any rental loss insurance coverage it may carry free from any claim of Lessee. Except for the abatement of rent as herein described, Lessee will not be entitled to any compensation or damages for California modified Triple Net June 1999: Version One 14 15 the loss of or interference with Lessee's personal property (including but not limited to, furniture, fixtures, equipment, and installations), or existing improvements of the Premises, Lessee Improvements, Lessee Alterations or any other improvements on or about any portion of the Property, or business, or use, or access to all or any part of the Premises or the Property resulting from such damage, destruction or repair, including but not limited to, any consequential damages, opportunity costs or lost profits incurred or suffered by Lessee. In no event, however, will Lessor be responsible for any abatement of rent if Lessee, or its agents, contractors, employees, suppliers, licensees or invitees is the cause of the casualty, or any part thereof. 19. TRANSFER (ASSIGNMENT/SUBLETTING) 19.01 Lessee will not assign, sell, mortgage, encumber, convey, pledge, sublet or otherwise transfer all or any part of Lessee's right or interest in this Lease, or allow any other person or entity to occupy or use all or any part of the Premises (collectively called "Transfer") without first obtaining the written consent of Lessor, which shall not be unreasonably withheld or delayed. The following shall be deemed a "Transfer" for purposes of this section: (i) a grant of a license, concession, or other right of occupancy of any portion of the Premises, or (ii) the use of the Premises by any party other than Lessee. Should Lessee desire a Transfer, Lessee will notify Lessor in writing of: (i) Lessee's intent to Transfer; (ii) the name of the proposed transferee; (iii) the nature of the proposed transferee's business to be conducted on the Premises; (iv) the terms and provisions of the proposed Transfer, and (v) any other information Lessor may reasonably request concerning the proposed Transfer; including but not limited to, a statement of net worth, financial statements covering a specified period of time, environmental reports and a completed environmental questionnaire supplied by Lessor. 19.02 Lessee agrees, by way of example and without limitation, that Lessor may withhold its consent to a proposed Transfer if Lessor in its reasonable judgment determines that the proposed transferee: (a) is of a character or is engaged in a business which is not in keeping with Lessor's standards for the Property, as determined reasonably by Lessor; (b) has a use which conflicts with a provision of this Lease or proposes an unacceptable risk to health or safety, as determined by Lessor; (c) does not meet the then current financial standards required by Lessor; (d) has been required by any prior lessor, lender or governmental authority to take a remedial action in connection with Hazardous Materials contaminating a property; (e) is unacceptable because Lessee is in Default or Breach under this Lease at the time of the request for Transfer or as of the effective date of the Transfer. Notwithstanding the foregoing, Lessee's right to a Transfer is subject to Lessor's approval of Lessee's financial condition at the time the Transfer is requested by Lessee. 19.03 In the event Lessor consents to a Transfer, the Transfer will not be effective until Lessor is in receipt of a fully executed agreement to Transfer, in a form and of substance acceptable to Lessor, and a Transfer fee of two hundred and fifty dollars ($250.00) which shall represent Lessee's minimum liability for such service. The receipt and cashing of any check by Lessor wherein such check is in a name other than that of Lessee will not constitute a Transfer. Lessor also reserves the right to collect any rents due under this Lease directly from the transferee, and such direct collection will not constitute recognition of the transferee as Lessee or release Lessee or any guarantor of Lessee from any of its obligations under this Lease. Any consideration received by Lessee in excess of Lessee's Base Rent (including additional rent) as a result of a Lessor approved transfer shall be due and payable to Lessor and any rights of first refusal, options or expansions under the original lease shall be null and void. 19.04 Lessor may, within thirty (30) days after submission of Lessee's written request for Lessor's consent to an assignment or subletting, cancel this Lease (or, as to a subletting or assignment, cancel as to the portion of the Premises proposed to be sublet or assigned) as of the date the proposed Transfer was to be effective. If Lessor cancels this Lease as to any portion of the Premises, then this Lease shall cease for such portion of the Premises, and Lessee shall pay to Lessor all Base Rent and other amounts accrued through the cancellation date relating to the portion of the Premises covered by the proposed Transfer and all brokerage commissions paid or payable by Lessor in connection with this Lease that are allocable to such portion of the Premises. Thereafter, Lessor may lease such portion of the Premises to the prospective transferee (or to any other person) without liability to Lessee. 19.05 If Lessor has not agreed in writing to a Transfer within thirty (30) days of Lessee's request hereunder, Lessor will be deemed to have rejected Lessee's request. 20. DEFAULT AND BREACH 20.01 Lessee's performance of each of Lessee's obligations under this Lease is a condition as well as a covenant. Lessee's right to continue in possession of the Premises is conditioned upon such performance. Time is of the essence in the performance of all covenants and conditions. Lessee's failure to perform any of its obligations shall put it in Default or Breach under this Lease. California modified Triple Net June 1999: Version One 15 16 20.02 A "Default" is a failure to fulfill any terms, conditions, covenants or rules under this Lease. A "Breach" is a Default which has no cure period, stated or otherwise, or a Default which is not cured within the stated cure period provided under this Lease. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach, $250.00 is a reasonable minimum sum to charge Lessee as Additional Rent to cover Lessor's legal preparation and service costs. Unless otherwise stated in this Lease, Lessee will be in Breach if at any time during the Lease Term: (a) Lessee fails to make any payment of Base Rent, Additional Rent, or any other monetary payment required to be made by Lessee herein and Lessee does not cure such failure within three (3) days after receipt of Lessor's written notice to Lessee. (b) Lessee fails to provide Lessor with proof of insurance or performance or surety bond as required under this Lease; and Lessee does not cure such failure within three (3) days after Lessor's written notice to Lessee. (c) Lessee, at any time during the Lease Term, fails to maintain, in full force and effect, its required insurance coverage. (d) If Lessee's conduct creates an imminent threat to health or safety which is not susceptible to cure without occurrence of such harm. (e) Lessee vacates the Premises without the intention to reoccupy same, or abandons the Premises as further described in Paragraph 17. (f) Lessee fails to observe, perform or comply with any of the non-monetary terms, covenants, conditions, provisions or rules and regulations applicable to Lessee under this Lease and such failure is curable, in the sole opinion of Lessor, and then is not cured within ten (30) days after Lessor's written notice to Lessee; provided, however, that if the nature of Lessee's obligation is such that more than ten (30) days are required for performance, then Lessee will not be in Breach if Lessee commences performance within such ten (30) day period and thereafter diligently, in Lessor's sole opinion, pursues such cure to completion. (g) Lessor discovers that any financial statement of Lessee or of any guarantor of this Lease given to Lessor, was materially false. (h) Lessee makes any general arrangement or assignment for the benefit of creditors, becomes a "debtor" as defined in 11 U. S. Code Section 101 or any successor statute, has substantially all its assets located at the Premises or its interest in this Lease appointed to a receiver or trustee, indicates in Lessor's reasonable opinion an inability to pay its debts or obligations as they occur, has an attachment, or execution or other judicial seizure of substantially all of its assets located at the Property or its interest in this Lease. (i) Lessee is in Breach of any other term or condition of this Lease. 21. REMEDIES OF LESSOR 21.01 If Lessee fails to perform any duty or obligation of Lessee under this Lease, Lessor may at its option perform any such duty or obligation on Lessee's behalf. The costs and expenses of any such performance by Lessor will be immediately due and payable by Lessee upon receipt from Lessor of the reimbursement amount required. In the event of a Breach of this Lease by Lessee as defined in Paragraph 20.02, with or without notice or demand, and without limiting any other of Lessor's rights or remedies, Lessor may: (a) Terminate Lessee's right to possession of the Premises, in which case this Lease will terminate and Lessee will immediately surrender possession of the Premises to Lessor. Lessor reserves all right and remedies available to it pursuant to the terms and conditions of this Lease as well as under state law. Lessee hereby grants Lessor the full and free right, to enter the Premises with process of law. Lessee releases Lessor of any liability for any damage resulting therefrom and waives any right to claim damage for such re-entry. Lessee also agrees that Lessor's right to re-lease or any other right given to Lessor as a consequence of Lessee's breach hereunder or by operation of law is not relinquished. On such termination, Lessor will be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of the termination; (ii) the worth at the time of the award of the amount by which the unpaid rents which would have been earned after termination until the time of award exceeds the amount of such rental loss that Lessee proves could have been avoided; (iii) the worth at the time of the award of the amount by which the unpaid rents for the balance of the Lease Term after the time of award California modified Triple Net June 1999: Version One 16 17 exceeds the amount of such rental loss for such period that Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the damage proximately caused by Lessee's failure to perform its obligations under this Lease or which in the ordinary course of events would likely result therefrom, including but not limited to, all costs and expenses attributable to recovering possession of the Premises, reletting expenses (including the costs and expenses of any necessary repairs, renovations and alterations to the Premises), costs of carrying the Premises (including but not limited to, Lessor's payment of real property taxes and insurance premiums), actual legal fees and associated costs and expenses, any unearned brokerage commissions paid in connection with this Lease, any unamortized Lessee Improvements, and reimbursement of any deferred rent or other Lease execution inducement. (b) Continue the Lease and Lessee's right to possession and recover rent as it becomes due. Acts of maintenance or preservation, efforts to relet the Premises, removal or storage of Lessee's personal property or the appointment of a receiver to protect Lessor's interest under this Lease, will not constitute a termination of Lessee's right to possession. Lessor agrees to make reasonable efforts to mitigate its damages provided however, Lessor shall not be required to relet any or all of the Premises prior to leasing other vacant space on the Project, nor shall Lessor be required to accept a tenant of lesser financial quality than Lessee was as of the commencement date of this Lease. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. 21.02 In the event of bankruptcy of Lessee, or if Lessee becomes a debtor as defined under the Bankruptcy Code, Lessee assigns to Lessor all its rights, title and interest in the Premises as security for its obligations under this Lease. The expiration or termination of this Lease, and/or the termination of Lessee's right to possession, will not relieve Lessee from any liability accruing during Lessee's Lease Term or by reason of Lessee's occupancy of the Premises. Any efforts by Lessor to mitigate the damages caused by Lessee's Breach of this Lease will not waive Lessor's right to recover damages. 21.03 The "worth at the time of award" referred to in 21.01(a) (i) and 21.01(a) (ii) will additionally include interest computed by allowing interest at the maximum rate allowed by law. The "worth at the time of award" referred to in 21.01(a) (iii) will be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco in effect at the time of award, plus one percent (1%). 21.04 No right or remedy conferred upon or reserved to Lessor in this Lease is intended to be exclusive of any right or remedy granted to Lessor by statute or common law, and each and every such right and remedy will be cumulative. 22. ARBITRATION In the event any dispute arises regarding matters occurring before, during or after the term of this agreement, the parties agree that in lieu of judicial proceedings, the matter shall be submitted to arbitration, and if not otherwise resolved, arbitrated in accordance with the rules of the American Arbitration Association, in a venue nearest to the location of the Leased Premises. The Lessor and Lessee further agree that such requirement of arbitration shall not be limited to contractual disputes alone, but shall pertain to any dispute between Lessor and Lessee, whether arising from contract, tort, in equity, under statute or administrative resolution, or any other legal basis. This agreement to arbitrate shall not, however, prohibit Lessor from exercising its statutory and/or common law rights to proceed against Lessee for possession of the Premises and damages related thereto, in the nature of unlawful detainer, ejectment, or any other similar summary proceeding. 23. SURRENDER OF LEASE NOT MERGER Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation of this Lease, or the termination of this Lease by Lessor due to a Breach by Lessee, will not work as a merger, and will, at the option of Lessor, terminate all or any Transfer of the Premises or operate as a Transfer to Lessor of any or all such Transfers. 24. PROFESSIONAL FEES, COSTS AND EXPENSES 24.01 In the event that any party to this Lease initiates an action or proceeding to enforce the terms of this Lease or to declare the rights of a party to this Lease, the prevailing party will be entitled to all actual costs and expenses, including but not limited to, all fees and costs and expenses of appraisers, experts, accountants and attorneys, which obligations shall be deemed to have accrued as of the California modified Triple Net June 1999: Version One 17 18 commencement date of such action or proceeding. Should Lessor be named as a defendant in any legal action or proceeding brought against Lessee in connection with, or arising out of, Lessee's occupancy within the Property, Lessee will pay to Lessor all of Lessor's actual costs and expenses incurred, including its legal fees. Attorneys' fees will not be computed in accordance with any court fee schedule, but will be the actual amount of any fees incurred. 24.02 If Lessor utilizes the services of any attorney with regard to Lessee's occupancy or tenancy under this Lease, Lessor will be entitled to reimbursement by Lessee of its legal fees, and all other costs and expenses, whether or not a legal action is commenced by Lessor. 25. CONDEMNATION If any portion of the Premises or any portion of the Building in which the Premises is located, or any portion of the Property which would substantially interfere with Lessor's ownership, or Lessor's or Lessee's ability to conduct business is taken for any public or quasi-public purpose by any governmental authority, including but not limited to, by exercise of the right of appropriation, inverse condemnation, condemnation or eminent domain, or sold to prevent such taking, Lessor, at its option, may terminate this Lease without recourse by Lessee. Any award for such taking or payment made under such threat of exercise of such power will be the property of Lessor, whether such award be made as compensation for diminution of value of the leasehold or for the taking of the fee, or as severance damages; however, Lessee will be entitled to any compensation, separately awarded to Lessee for Lessee's relocation expenses. If this Lease is not terminated, Lessor will promptly proceed to restore the Premises and/or any portion of the Property used in common by all lessees to substantially the same condition as prior to such taking allowing for any reasonable effects of such taking. Should a partial taking directly affect a portion of Lessee's Premises and Lessor does not exercise its right to terminate this Lease, Lessor will make an appropriate allowance to Lessee for the rent corresponding to the term during which, and to the part of the Premises which, Lessee is deprived on account of such taking and restoration. 26. RULES AND REGULATIONS Lessee agrees to abide by, keep and observe all rules and regulations Lessor has set forth in Exhibit "D". Lessor reserves the right to modify and amend them, upon prior notice to Lessee, as it deems necessary and will not be responsible to Lessee for any nonperformance by any other lessee, occupant or invitee of the Property of any said rules and regulations. Violation by Lessee, its employees, agents, contractors, suppliers, invitees or licensees will be deemed a Default under this Lease. 27. ESTOPPEL CERTIFICATE Lessee will execute and deliver, in a form prepared by Lessor, to Lessor within ten (10) days after written receipt of notice from Lessor, a written statement certifying: (i) that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification); (ii) the date to which rent and any other charges are paid in advance, if any; (iii) acknowledgment that there are not, to Lessee's knowledge, any uncured Defaults on the part of Lessor, or stating the nature of any uncured Defaults; (iv) the current Base Rent amount and the amount and form of the Security Deposit on deposit with Lessor; and (v) any other information as Lessor, Lessor's agents, mortgagees and prospective purchasers may reasonably request, including but not limited to, any requested information regarding Hazardous Materials. Lessee's failure to deliver such statement within ten (10) days of its receipt will be deemed as Lessee's conclusive confirmation that: (1) this Lease (including specifically the Base Rent, Additional Rent and Lease Term) is in full force and effect and without modification except as may be represented by Lessor; (2) neither Lessor nor Lessee are in Default under the Lease; and (3) not more than one (1) month's rent charges, if any, are paid in advance. Such failure shall be deemed, at Lessor's option, a Breach of this Lease. 28. SALE BY LESSOR Upon the sale or any other conveyance by Lessor of the Property, or any portion thereof, Lessor will be relieved of all liability under any and all of its covenants and obligations contained in or derived from this Lease or arising out of any act, encumbrance, occurrence or omission occurring after the date of such conveyance. 29. NOTICES All written communications and notices required under this Lease shall be considered sufficiently given and served if sent to: 1) Lessee by U.S. mail (First Class, postage prepaid), personal delivery or by other reasonable method (including posting on or about the Premises), unless otherwise required by law, to California modified Triple Net June 1999: Version One 18 19 the address indicated in Paragraph 1.05 and shall be deemed received three (3) days after such mailing, personal delivery or posting; 2) Lessor by U.S. mail (First Class, postage prepaid), registered or certified (unless otherwise required by law) to the address indicated in Paragraph 1.06 and shall be deemed received five (5) days after such mailing; and 3) either party by facsimile or overnight delivery and shall be deemed received twenty-four (24) hours after transmission of such facsimile or placement in an overnight depository. At any time during the Lease Term, Lessor or Lessee may specify a different Notice Address by providing written notification to the other. 30. WAIVER No waiver by Lessor of a Default or Breach of any term, covenant or condition of this Lease by Lessee, will be deemed a waiver of any other term, covenant or condition of this Lease, or of any subsequent Default or Breach of Lessee of the same or any other term, covenant or condition of this Lease, nor will any delay or omission by Lessor to seek a remedy for any Lessee Default or Breach of this Lease be deemed a waiver by Lessor of its remedies or rights with respect to such Default or Breach. Additionally, regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor whether on account of monies or damages due Lessor, or otherwise, will not constitute a waiver by Lessor of any Default or Breach by Lessee. 31. LESSEE'S INTENT; HOLDOVER Unless otherwise specified in this Lease, Lessee will give Lessor, not less than ninety (90) days prior to the expiration date of this Lease Term, written notice of its intent to remain or vacate the Premises on the expiration date of this Lease. If Lessee remains in possession of all or any part of the Premises with Lessor's written consent after the expiration of the Lease Term, such possession will constitute a month-to-month tenancy, which may be terminated by either Lessor or Lessee with thirty (30) days written notice and will not constitute a renewal or extension of the Lease Term. If Lessee remains in possession after the Lease Term without Lessor's written permission, such possession will constitute a tenancy-at-will terminable upon forty-eight (48) hour notice by either Lessee or Lessor. In the event of a month-to-month tenancy or tenancy-at-will, Lessee's Base Rent will be one hundred fifty percent (150%) of the Base Rent payable during the last month of the Lease Term, and any other sums due under this Lease will be payable in the amounts and at the times specified in this Lease and all options, rights of refusal, expansions and/or renewals shall be null and void. Such tenancy will be subject to every other term, condition and covenant contained in this Lease. 32. DEFAULT BY LESSOR; LIMITATION OF LIABILITY; REAL ESTATE INVESTMENT TRUST 32.01 In the event Lessor is deemed in Default or Breach in the performance of any obligation required to be performed under this Lease, Lessee will notify Lessor in writing, pursuant to the provisions of Paragraph 29, of Lessor's Default or Breach at Lessor's Notice Address as specified in Paragraph 1.06, and within thirty (30) days of receipt of such notice, Lessor will commence to make a good faith effort to cure the Default or Breach and in a diligent and prudent manner continue to do so until completion. 32.02 The obligations of Lessor under this Lease shall be binding only on Lessor and not upon any of the individual partners, investors, trustees, directors, officers, employees, agents, shareholders, advisors or managers of Lessor in their individual capacities, and with respect to any obligations of Lessor to Lessee, Lessee's sole and exclusive remedy shall be against Lessor. 32.03 In consideration of the benefits accruing hereunder, Lessee on behalf of itself and all of its Transferees covenants and agrees that, in the event of any actual or alleged failure, Default or Breach of this Lease by Lessor, Lessee's recourse against Lessor for any monetary damages will be limited to the lesser of Lessor's interest in the Property including, subject to the prior rights of any mortgagee, Lessor's interest in the rents of the Property, or Lessor's equity interest in the Property if the Property were encumbered by debt in an amount equal to eighty percent (80%) of its value of the Property as of the initial date Lessee notifies Lessor of the actual or alleged failure, Default or Breach, and any insurance proceeds payable to Lessor. Any action by Lessee will be limited to actual damages only and will not, under any circumstances, include future profits or consequential damages. 32.04 If Lessor is a real estate investment trust, and if Lessor in good faith determines that its status as a real estate investment trust under the applicable provisions of the Internal Revenue Code of 1986, as heretofore or hereafter amended, will be jeopardized because of any provision of this Lease, Lessor may require reasonable amendments to this Lease and Lessee shall not unreasonably withhold or delay its consent thereto, provided that such modifications do not in any way, (i) increase the obligations of Lessee under this Lease or (ii) adversely affect any rights or benefits to Lessee under this Lease. Lessor shall pay all reasonable costs incurred by Lessee, including without limitation, legal fees incurred for reviewing any such proposed modifications. California modified Triple Net June 1999: Version One 19 20 33. SUBORDINATION Without the necessity of any additional document being executed by Lessee for the purposes of effecting a subordination, and at the election of Lessor or any mortgagee or any ground lessor with respect to the land of which the Premises are a part, this Lease will be subject and subordinate at all times to: (i) all ground leases or underlying leases which may now exist or hereafter be executed affecting the Property and (ii) the lien of any mortgage or deed of trust which may now exist or hereafter be executed in any amount for which the Property, ground leases or underlying leases, or Lessor's interest or estate in any of said items is specified as security. Lessor or any mortgagee or ground lessor will have the right, at its election, to subordinate or cause to be subordinated any ground lessee or underlying leases or any such liens to this Lease. If Lessor's interest in the Premises is acquired by any ground lessor or mortgagee, or in the event any proceedings are brought for the foreclosure of, or in the event of exercise of power of sale under, any mortgage or deed of trust made by Lessor covering the Premises, or in the event a conveyance in lieu of foreclosure is made for any reason, Lessee will, notwithstanding any subordination and upon the request of such successor in interest to Lessor, attorn to and become the Lessee of the successor in interest to Lessor and recognize such successor in interest as the Lessor under this Lease. Lessee acknowledges that although this Paragraph 34 is self-executing, Lessee covenants and agrees to execute and deliver, upon demand by Lessor and in the form requested by Lessor, or any other mortgagee or ground lessor, any additional documents evidencing the priority or subordination of this Lease with respect to any such ground leases or underlying leases or the lien of any such mortgage or deed of trust. Lessee's failure to timely execute and deliver such additional documents will, at Lessor's option, constitute a Breach of this Lease. 34. FORCE MAJEURE Lessor will have no liability to Lessee, nor will Lessee have any right to terminate this Lease or abate rent or assert a claim of partial or constructive eviction, because of Lessor's failure to perform any of its obligations under this Lease if the failure is due in part or in full to reasons beyond Lessor's reasonable control; Provided however, that Lessor's liability shall be reduced in proportion to the extent that its failure to perform is beyond its reasonable control. Such reasons will include but not be limited to: strike, other labor trouble, fuel, labor or supply shortages, utility failure or defect, the inability to obtain any necessary governmental permit or approval (including building permits and certificates of occupancy), war, riot, mandatory or prohibitive injunction issued in connection with the enforcement of the Americans with Disabilities Act of 1990, civil insurrection, accidents, acts of God, any governmental preemption in connection with a national emergency or any other cause, whether similar or dissimilar, which is beyond the reasonable control of Lessor. If this Lease specifies a time period for performance of an obligation by Lessor, that time period will be extended by the period of any delay in Lessor's performance caused by such events as described herein. 35. MISCELLANEOUS PROVISIONS 35.01 Whenever the context of this Lease requires, the neuter, the masculine and the feminine gender shall include the other, and the word person shall include partnership or corporation or joint venture, and the singular shall include the plural and the plural shall include the singular. 35.02 If more than one person or entity is Lessee, the obligations imposed on each such person or entity will be joint and several. 35.03 The captions and headings of this Lease are used for the purpose of convenience only and shall not be construed to interpret, limit or extend the meaning of any part of this Lease. 35.04 This Lease contains all of the agreements and conditions made between Lessor and Lessee and may not be modified in any manner other than by a written agreement signed by both Lessor and Lessee. Any statements, promises, agreements, warranties or representations, whether oral or written, not expressly contained herein will in no way bind either Lessor or Lessee, and Lessor and Lessee expressly waive all claims for damages by reason of any statements, promises, agreements, warranties or representations, if any, not contained in this Lease. No provision of this Lease shall be deemed to have been waived by Lessor unless such waiver is in writing signed by a regional vice president or higher of Lessor or the management company, and no custom or practice which may develop between the parties during the Lease Term shall waive or diminish the Lessor's right to enforce strict performance by Lessee of any terms of the Lease. 35.05 Time is of the essence for the performance of each term, condition and covenant of this Lease. 35.06 Except as otherwise expressly noted, each payment required to be made by Lessee is in addition to and not in substitution for other payments to be made by Lessee. California modified Triple Net June 1999: Version One 20 21 35.07 Subject to Section 19, the terms, conditions and provisions of this Lease will apply to and bind the heirs, successors, executors, administrators and assigns of Lessor and Lessee. 35.08 If any provision contained herein is determined to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability will not affect any other provision of this Lease. 35.09 In consideration of Lessor's covenants and agreements hereunder, Lessee hereby agrees not to disclose any terms, covenants or conditions of this Lease to any non-related party other than its officers, directors, attorneys or accountants without the prior written consent of Lessor. Additionally, Lessee shall not record this Lease or any short form memorandum hereof without the prior written consent of Lessor, which Lessor may withhold in its sole discretion. 35.10 The rights and obligations of the parties under this Lease shall survive its termination. 35.11 The duties and warranties of Lessor are limited to those expressly stated in this Lease and does not and shall not include any implied duties or implied warranties, now or in the future. No representations or warranties have been made by Lessor other than those contained in this Lease. 35.12 Lessee promises and it is a condition to the continuance of this Lease that there will be no discrimination against or segregation of any person or group of persons on the basis of race, color, sex, creed, national origin or ancestry in the leasing, subleasing, transferring occupancy, tenure, or use of the Property, the Premises, or any portion thereof. 35.13 Lessor and Lessee each warrant to the other that it has not dealt with any broker or agent in connection with this Lease, other than the person(s) listed in Paragraph 1.15 above. Except for any broker(s) who shall be compensated in accordance with the provisions of a separate agreement, Lessor and Lessee each agree to indemnify the other against all costs, expenses, legal fees and other liability for commissions or other compensation claimed by any other broker or agent. 36. EXAMINATION OF LEASE; GOOD FAITH DEPOSITS Submission of this document for examination and signature by Lessee does not create a reservation or option to lease. Lessee hereby agrees that Lessor will be entitled to immediately endorse and cash any good faith check(s) forwarded by Lessee along with this document. It is further agreed that such cashing of good faith checks by Lessor will not guarantee acceptance of this document by Lessor, but, in the event Lessor does not accept or execute this document, the amount of such good faith check(s) will be refunded to Lessee. This document will become this "Lease" and be effective and binding only upon full execution by authorized representatives of both Lessee and Lessor as defined in this Lease. Thereafter, a fully executed copy of this Lease will be deemed an original for all purposes. 37. GOVERNING LAW This Lease is governed by and construed in accordance with the laws of the state in which the Premises are located, and venue of any legal action will be in the county where the Premises are located. 38. LESSOR'S LIEN LESSOR HEREUNDER WILL HAVE THE BENEFIT OF, AND THE RIGHT TO, ANY AND ALL LESSOR'S LIENS PROVIDED UNDER THE LAW BY WHICH THIS LEASE IS GOVERNED. California modified Triple Net June 1999: Version One 21 22 39. SPECIAL PROVISIONS AND EXHIBITS Special provisions of this Lease number 40 through 42 are attached hereto and made a part hereof. The following Exhibits are attached to this Lease and by this reference made a part hereof: "A", "A1", "A2", "B", "C", and "D". IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease as of the day and year indicated by Lessor's execution date as written below. If Lessee is a corporation, each person signing this Lease on behalf of Lessee represents and warrants that he or she has full authority to do so and that this Lease binds the corporation. Prior to the execution of this Lease, Lessee shall deliver to Lessor a certified copy of a resolution of Lessee's Board of Directors authorizing the execution of this Lease or other evidence of such authority reasonably acceptable to Lessor. If Lessee is a partnership or limited liability company, each person or entity signing this Lease for Lessee represents and warrants that he, she or it is a general partner of the partnership or limited liability company, as applicable. Lessee shall give written notice to Lessor of any general partner's or member's withdrawal or addition. Simultaneous with the delivery of Lessee's signed lease, Lessee shall deliver to Lessor a copy of Lessee's recorded statement of partnership or certificate of limited partnership or articles of organization, as applicable. THIS LEASE, WHETHER OR NOT EXECUTED BY LESSEE, IS SUBJECT TO ACCEPTANCE BY LESSOR, ACTING BY ITSELF OR BY ITS AGENT BY THE SIGNATURE ON THIS LEASE OF ITS SENIOR VICE PRESIDENT, VICE PRESIDENT, REGIONAL MANAGER OR DIRECTOR OF LEASING. LESSOR: LESSEE: PS BUSINESS PARKS, L.P. DECISIONONE CORPORATION A Delaware Corporation PS Business Parks, Inc. By: ______________________________________ OWNER ENTITY By: _______________________________________ By:____________________ LISA FREITAS - ASSISTANT VICE PRESIDENT THOMAS J. FITZPATRICK Date: _______________________________________ EXECUTIVE VP, COO, CFO _______________________ LEASE EXECUTION DATE TITLE Lessor Fed. ID # 95-4661839 ____________________________ California modified Triple Net June 1999: Version One 22 EX-10.14 3 LEASE FOR DEVON, PA OFFICE AND WAREHOUSE 1 Exhibit 10.14 LEASE AMENDMENT THIS LEASE AMENDMENT is made this day of 1998, by and between VICTOR J. MAGGITTI, JR. ("LESSOR") and DECISIONONE CORPORATION ("LESSEE") against the following background. BACKGROUND On or about October, 1994, LESSOR leased to General Diagnostics, Inc. approximately 45,000 square feet of space in the Maggitti Building located at 400 Devon Park Drive, Wayne, Pennsylvania through December 31, 1999. Subsequent thereto, LESSEE, through a Lease Assignment and Assumption Agreement with General Diagnostics, Inc. dated March 3, 1998, assumed the rights and obligations of General Diagnostics, Inc. under said Lease. A clause within said Lease allows LESSEE a Right of Renewal for an additional five year period with fixed rental rates upon the Lease termination date of December 31, 1999. LESSEE has proposed a reconfiguration of their existing space while extending the term of the Lease through the aforementioned renewal period. NOW THEREFORE, in order to amend that certain Lease Agreement dated October, 1994 as amended ("LEASE") and intending to be legally bound hereby, the parties hereto agree as follows: 1 The term of the LEASE, is hereby amended to be for a term of seven years and four months commencing September 1, 1998 and ending December 31, 2005. 2 2 LESSOR and LESSEE hereby confirm and agree that the rentable area of the Demised Premises equals 45,000 square feet as marked on the drawing attached as SCHEDULE "A" hereto and incorporated herein by reference. LESSOR and LESSEE hereby further confirm and agree that the rentable area of the Maggitti Building of which the Demised Premises are a part equals 130,998 square feet. 3 From and after September 1, 1998, LESSEE shall pay minimum annual rent as set forth on the Schedule of Rents attached hereto and marked SCHEDULE "B" and incorporated herein by reference. In addition, LESSEE shall pay, as additional rent, LESSEE'S proportionate share of the service charges incurred by LESSOR for the Maggitti Building, also based on 45,000 square feet or 34.35% of the total service charges for the building. For the months of October, November and December 1998, LESSOR agrees to abate the minimum rent by a total of $36,562.50 or $12,187.50 for each month. During the abatement period, LESSEE will continue to pay operating costs for the entire 45,000 square feet as set forth in SCHEDULE "B". Said operating costs shall contain an allowance for management of the premises which shall equal 5% of the "BASE RENTAL" for the Demised Premises. 4 LESSOR will provide up to $750,000.00 for a Leasehold Incentive Fund for the purposes hereinafter set forth in this Lease Amendment. The sums expended from the Leasehold Incentive Fund will be repaid to LESSOR in the form of additional rent payable in monthly installments as an additional part of the monthly rent in an amount equal to the sum necessary to amortize the entire Leasehold Incentive Fund over the entire LEASE term including interest at an annual rate of 9%. 2 3 5 LESSEE is currently entitled to use 70 parking spaces as part of their allotted parking ratio. LESSOR shall provide LESSEE full use of an additional 35 parking spaces which shall be so designated and reserved bringing the total parking spaces allotted to LESSEE to 105 spaces. 6 LESSOR will provide from the above described Leasehold Incentive Fund for any/all of the following costs which may be associated with the existing space including both hard and soft costs associated with construction and tenant finishes (tenant improvements) to existing space, including voice and data cabling, voice and data equipment, fixtures, moving, leasing commissions, project management, and the like. The following items shall be paid for from the Leasehold Incentive Fund but the total costs of such items shall be limited so that the maximum allowance (including sales taxes and delivery charges, if any) for all of these items shall be $365,000.00 which was arrived at using the amounts set forth below. Any excess costs above $365,000.00 for all of these items shall be paid by LESSEE. Allowance for Voice and Data Cable $ 35,000.00 Allowance for Furniture $170,000.00 Allowance for Telecom Equipment $ 50,000.00 Allowance for Security $ 20,000.00 Allowance for Commissions $ 45,000.00 Allowance for Moving $ 20,000.00 Allowance for Project Management $ 25,000.00
LESSEE, shall arrange the purchase of each of the above items and submit the final bills to LESSOR for payment. The remaining portion of the $750,000.00 Leasehold Incentive Fund or $385,000.00 shall be applied towards the total construction costs, estimated to be $625,000.00, necessary to "turnkey" the facility for business as presented in the plans and specifications hereafter 3 4 described. The portion of the construction costs which exceeds the LESSEE'S portion of the construction allowance shall be the responsibility of the LESSOR, and not passed on to the LESSEE. 7 LESSEE has provided plans and specifications covering the desired modifications to the premises to be funded from the Leasehold Incentive Fund. Said plans and specifications have been approved by the parties and are incorporated herein by reference as if they were set forth herein at length. 8 LESSOR shall provide for the construction and improvements to the demised premises in accordance with said plans and specifications. LESSOR shall use his best efforts to complete said construction and improvements within sixty (60) days from the date of execution of this Lease Amendment. LESSEE shall have the right to approve the selection of any and all contractors, subcontractors, architects or engineers associated with the construction or acquisition of improvements to be paid from the Leasehold Incentive Fund. LESSEE's approval shall not be unreasonably withheld. Any delays caused by this approval process shall be added to the aforesaid sixty (60) day period. 9 LESSOR agrees that if at any time during the term of the LEASE, as amended, LESSOR wishes to lease all or any portion of the space not occupied by LESSEE within the Maggitti Building but contiguous to the Demised Premises to third party tenants (other than tenants presently in the Maggitti Building), then LESSOR shall offer in writing ("OFFER") to lease such space to LESSEE which OFFER shall identify the portion of the Maggitti Building subject to the OFFER ("OFFERED SPACE") and the date on which the OFFERED SPACE will become available. If any space in the Maggitti Building is currently subject to existing 4 5 options or rights of first refusal, this present right shall accrue only after the lapse of such pre-existing option or right. After delivery of an OFFER, LESSEE shall have ten business days to respond to such OFFER. Rent and other terms and conditions for LESSEE's leasing of the OFFERED SPACE shall be the same rent and the same terms and conditions as then applicable to the Demised Premises under the LEASE, as amended. If LESSEE shall accept the OFFER, the OFFERED SPACE shall become part of the Demised Premises at the same rate and upon the same terms and conditions as then applicable to the remainder of the Demised Premises under the LEASE, as amended. If LESSEE shall reject the offer, or shall fail to accept it in writing within ten business days after the receipt thereof, then LESSOR shall be free to lease the OFFERED SPACE to third parties free and clear of LESSEE's option and rights under this Paragraph 12. The fact that LESSEE rejects an offer or fails to accept it in a timely fashion shall have no affect on LESSEE's ongoing right of first offer for any subsequently available space in the Maggitti Building which is contiguous to the Demised Premises. 10 LESSEE agrees that simultaneously with the execution of this LEASE AMENDMENT, it will execute and deliver to LESSOR a "SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT" and "LESSEE'S ESTOPPEL CERTIFICATE" in the form attached hereto and marked SCHEDULE "C". 11 The terms and conditions set forth on the attached and marked up "RIDER TO LEASE BETWEEN DECISIONONE CORPORATION AND VICTOR J. MAGGITTI, JR. DATED - September 1998" (marked "SCHEDULE D") are hereby incorporated herein by reference as fully as if they were expressly set forth at length. 5 6 12 LESSEE is hereby given the option to extend the term of this Lease for an additional term of five (5) years (RENEWAL TERM) upon the same terms and conditions as set forth in this Lease, except for the adjustment for "ADDITIONAL RENTAL" set forth on SCHEDULE B. LESSEE agrees to give LESSOR written notice of election to exercise this option not less than six months prior to the expiration of the then current term hereof. If the LESSEE exercises its option to so renew the Term, then the annual rent for the RENEWAL TERM shall be as set forth on the Remittance Schedule attached hereto as SCHEDULE B for the years set forth thereon. 13 Except as modified hereby, all other terms and conditions of the LEASE, as amended, shall continue in full force and effect. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals the day and the year first above written. WITNESS:__________________________ _____________________________(SEAL) VICTOR J. MAGGITTI, JR. DECISIONONE CORPORATION ATTEST:___________________________ BY:__________________________(SEAL) Name: Name: Title: Title: 6 7 SCHEDULE A DRAWING OF DEMISED PREMISES FOR DECISIONONE CORPORATION 8 SCHEDULE C SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT LESSEE'S ESTOPPEL CERTIFICATE 9 SCHEDULE D RIDER TO LEASE BETWEEN DECISIONONE CORPORATION AND VICTOR J. MAGGITTI, JR. DATED - September 1998 10 LEASE AMENDMENT THIS LEASE AMENDMENT is made this day of May, 1999, by and between VICTOR J. MAGGITTI, JR. ("LESSOR") and DECISIONONE CORPORATION ("LESSEE") against the following background. BACKGROUND On or about October, 1994, LESSOR leased to General Diagnostics, Inc. approximately 45,000 square feet of space in the Maggitti Building located at 400 Devon Park Drive, Wayne, Pennsylvania through December 31, 1999. Subsequent thereto, LESSEE, through a Lease Assignment and Assumption Agreement with General Diagnostics, Inc. dated March 3, 1998, assumed the rights and obligations of General Diagnostics, Inc. under said Lease. A clause within said Lease allows LESSEE a Right of Renewal for an additional five year period with fixed rental rates upon the Lease termination date of December 31, 1999. On or about September 25, 1998, the parties reconfigured the leased space while extending the term of the Lease to December 31, 2005. The LESSEE has now requested additional space in the building and certain renovations to the new and existing leased space and the LESSOR has agreed to amend the Lease. NOW THEREFORE, in order to amend that certain Lease Agreement dated October, 1994 as amended ("LEASE") and intending to be legally bound hereby, the parties hereto agree as follows: 11 1 Beginning July 1, 1999 and extending through December 31, 2005, LESSOR will lease to LESSEE an additional fifty-four hundred (5,400) square feet of space in the Maggitti Building and LESSOR and LESSEE hereby confirm and agree that the rentable area of the Demised Premises now equals 50,400 square feet as marked on the drawing attached hereto as "EXHIBIT 99-A" and incorporated herein by reference. LESSOR and LESSEE hereby further confirm and agree that the rentable area of the Maggitti Building of which the Demised Premises are a part equals 130,998 square feet. 2 From and after July 1, 1999, LESSEE shall pay minimum annual rent as set forth on the Schedule of Rents attached hereto and marked "EXHIBIT 99-B" and incorporated herein by reference. In addition, LESSEE shall pay, as additional rent, LESSEE'S proportionate share of the service charges incurred by LESSOR for the Maggitti Building, also based on 50,400 square feet or 38.474% of the total service charges for the building. Said operating costs shall contain an allowance for management of the premises which shall equal 6% of the "BASE RENTAL" for the Demised Premises. 3 LESSOR will make the necessary renovations called for in the plans and specifications quoted upon by Veneesa Construction Co., Inc. by written quote dated May 5, 1999, a copy of which is attached hereto as "EXHIBIT 99-C". The sums expended by LESSOR will be repaid to LESSOR in the form of additional rent payable in monthly installments as an additional part of the monthly rent as set forth on EXHIBIT 99-B. 4 LESSEE is currently entitled to use 105 parking spaces as part of their allotted parking ratio. LESSOR shall provide LESSEE full use of an additional 15 parking spaces including 4 2 12 handicapped spaces which shall be so designated and reserved bringing the total parking spaces allotted to LESSEE to 120 spaces. 5 In addition to the "fit out" costs referred to above, LESSOR will provide LESSEE allowances for any/all of the following costs which may be associated with either the new space or the existing space including both hard and soft costs associated with construction and tenant finishes (tenant improvements) to existing space. These additional costs or allowances which LESSOR shall provide shall include voice and data cabling, voice and data equipment, fixtures, moving, leasing commissions, project management, and the like to a maximum cost of $150,000.00. LESSEE, shall arrange the purchase of each of the above items and submit the final bills to LESSOR for payment. It is not contemplated that the construction cost shall exceed the above described quotation. The cost of any change orders to the construction "fit-out" agreed to herein which are requested after the date of this Amendment shall be the responsibility of LESSEE. 6 LESSEE has provided plans and specifications covering the desired modifications to the premises to be funded by LESSOR. Said plans and specifications have been approved by the parties and are incorporated herein by reference as if they were set forth herein at length. 7 LESSOR shall provide for the construction and improvements to the demised premises in accordance with said plans and specifications. LESSOR shall use his best efforts to complete said construction and improvements within sixty (60) days from the date of execution of this Lease Amendment. If construction is not complete by July 1, 1999, the rental schedule set forth herein shall never-the-less be paid. 3 13 8 LESSEE agrees that simultaneously with the execution of this LEASE AMENDMENT, it will execute and deliver to LESSOR a "SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT" and "LESSEE'S ESTOPPEL CERTIFICATE" in the form attached hereto and marked "EXHIBIT 99-D". 9 LESSEE'S option, set forth in the previous Lease Amendment, to extend the term of this Lease for an additional term of five (5) years (RENEWAL TERM) upon the same terms and conditions as set forth in this Lease, except for the adjustment for "ADDITIONAL RENTAL" set forth on "EXHIBIT 99-B", is hereby extended to include the additional space. LESSEE agrees to give LESSOR written notice of election to exercise this option not less than six months prior to the expiration of the then current term hereof. If the LESSEE exercises its option to so renew the Term, then the annual rent for the RENEWAL TERM shall be as set forth on the Remittance Schedule attached hereto as "EXHIBIT 99-B" for the years set forth thereon. 10 Except as modified hereby, all other terms and conditions of the LEASE, as amended, shall continue in full force and effect. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals the day and the year first above written. WITNESS:__________________________ ____________________(SEAL) VICTOR J. MAGGITTI, JR. DECISIONONE CORPORATION ATTEST:___________________________ BY:__________________(SEAL) Name: Name: 4 14 Title: Title: 5 15 EXHIBIT 99-A DRAWING OF DEMISED PREMISES FOR DECISIONONE CORPORATION 16 EXHIBIT 99-D SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT LESSEE'S ESTOPPEL CERTIFICATE EX-10.15 4 LEASE FOR COLLEGE STATION, TX CALL CENTER 1 Exhibit 10.15 LEASE AGREEMENT THIS LEASE AGREEMENT, made this ______day of ______________, 1999, by and between the BRYAN-COLLEGE STATION ECONOMIC DEVELOPMENT CORPORATION, a Texas non-profit corporation (hereinafter referred to as "LANDLORD"), and DECISIONONE CORPORATION , a Delaware Corporation (hereinafter referred to as "TENANT"). WHEREAS, the LANDLORD owns or will own certain real property located in Brazos County, Texas; and WHEREAS, the LANDLORD wishes to lease to TENANT and TENANT wishes to lease from LANDLORD, the premises more particularly described herein for economic development purposes. NOW, THEREFORE, in consideration of the covenants and agreements herein contained, the LANDLORD, and TENANT agree as follows: 1. Definitions: As used herein, the terms defined in this Section shall have the meanings set forth herein. a. Land: Being a 9.999 acre tract of land lying and being situated in the Richard Carter Survey, Abstract No. 8, Bryan, Texas, and being more particularly described on Exhibit "A" attached hereto and made a part hereof for all purposes, together with all the rights of way, privileges and appurtenances thereunto belonging or in anywise appertaining thereto. b. Improvements: All buildings, parking facilities and other improvements on the above mentioned land and containing approximately 50,096 square feet. c. Premises: The land and the Improvements as defined herein. 2.Term of Lease: The original term of this Lease shall be for a period of 10 years, commencing on the date specified at the beginning of the Lease with two (2) five (5) year options to renew at TENANT's discretion on the same terms and conditions described herein. Thereafter beginning with the twenty-first (21st) year of this Lease at TENANT's sole discretion, the Lease term shall automatically be renewed on a year-to-year basis on the same terms and conditions described herein; provided however, the rental rate shall be equal to fifty percent (50%) of the then current commercial rental rate in Bryan-College Station. Beginning with the twenty-first (21st) year of this Lease the Lease structure will become a triple net lease rather than an absolute net lease and the LANDLORD shall assume full responsibility for all cost of structural repairs and replacements including but not limited to the roof and roof membrane, 2 building structure, including loading dock, foundation and concrete slab, parking lot and driveways, HVAC and exterior glass. 3. Rent: TENANT agrees to pay to LANDLORD, in lawful money of the United States of America throughout the term of this Lease a lease payment of One Dollar ($1.00) per year payable in advance. 4. Alternative Performance Payment: TENANT agrees to employ the following number of employees at a payroll amount listed below (the "Performance Standards"):
LEASE TERM EMPLOYEES ANNUAL PAYROLL ---------- --------- -------------- Commencing at the 12th month 200 employees $ 4,800,000.00 to the 24th month of occupancy 25th month to 36th month 350 employees $ 8,400,000.00 37th month to end of Lease Term 500 employees $12,000,000.00
Should TENANT fall below these Performance Standards in any one quarter, TENANT shall pay that percentage of Alternative Performance Payment (as defined below) which is in effect in the quarter wherein said payments are due, which equals the percentage of TENANT's performance which falls below the Performance Standards. Alternative Performance Payment shall equal the value, on the execution date of the Lease, agreed by the parties to be $12.00 per square foot per year, payable in monthly installments of $1.00 / SF, increased, after year five (5) of the Lease Term, on an annual basis by three percent (3%); provided, however, such Alternative Performance Payment shall never exceed two and no/100 dollars ($2.00) per square foot per month. BY WAY OF EXAMPLE ONLY: Assume Alternative Performance Payment is required in the first quarter of year eight (8) of Lease Term. Alternative Performance Payment shall be calculated as follows:
Quarterly Payroll Commitment: $3,000,000.00 = $12,000,000.00 / 4 quarters Year 8 - 1st Quarter Actual Payroll: $2,000,000.00
$3,000,000.00 - $2,000,000.00 = $1,000,000.00 $1,000,000.00 / $3,000,000.00 = 33% Alternative Performance Payment calculation: Year 8 Monthly Rental = $1.0927 / SF per month $1.0927 / SF per month x 50,096 SF = $54,739.90 per month 2 3 33% x $54,739.90 per month = $18,064,17 per month for the 1st quarter of year 8 of the lease term TENANT's payroll portion of the Performance Standards is to be calculated on a quarterly basis based upon the last day of the month of the quarter following twelve (12) months from the date of occupancy of the Premises by TENANT. TENANT agrees, upon written request from Landlord, to provide to LANDLORD all employment records reasonably necessary to verify TENANT's compliance with the provisions of this paragraph. Notwithstanding anything herein to the contrary, should TENANT fail to achieve, or having achieved fail to maintain, employee numbers and payroll amounts at a level equal to or greater than thirty-three percent (33%) of the Performance Standards described above in any quarter, LANDLORD may notify TENANT in writing of a default under this provision. Upon receipt of said written notice TENANT shall have 30 days in which to cure said default. In the absence of a cure, LANDLORD in its sole discretion may terminate this Lease and TENANT shall surrender the Premises on ninety (90) days written notice by the LANDLORD given as required by paragraph 35 hereof. TENANT's correction of this failure during the ninety (90) day notice provision described above shall not entitle it to reinstatement of the Lease, unless LANDLORD agrees to such reinstatement, in its sole discretion. 5. Insurance: Throughout the term of this Lease Agreement, TENANT shall, at its sole cost and expense, keep the Improvements insured against loss or damage by fire and against all loss or damage by other risks now or hereafter embraced by the standard form of extended coverage endorsement regularly available from major insurers of fire and other hazards, in an amount not less than one hundred percent (100%) of the then full replacement cost, subject to a deductible not greater than Fifty Thousand Dollars ($50,000.00) throughout the term of this Lease. LANDLORD and TENANT shall be named as the insured on the above described policy. TENANT, at its sole cost and expense, shall maintain personal injury and property damage liability insurance against claims for personal injury, death or property damage occurring in or about the Premises providing protection during the term of this Lease for not less than One Million Dollars ($1,000,000.00) per occurrence. Such policies issued hereunder shall name the LANDLORD as an additional insured. TENANT shall, at all times during the Term of this Lease at its sole cost and expense, obtain and keep in force Worker's Compensation and Employer Liability Insurance. All fire and extended coverage insurance and other insurance carried by TENANT covering losses arising out of destruction or damage to the Premises or its contents and all insurance carried covering liability arising from personal injury, death or property damage shall provide for a waiver of rights and subrogation against LANDLORD and TENANT on the part of the insurance carrier. 3 4 6. Quiet Enjoyment: So long as the TENANT shall pay the rent, and an Alternative Performance Payment if applicable, provided for in this Lease, and shall not have breached any of its material obligations under this Lease, the LANDLORD covenants that the TENANT may peaceably and quietly have, hold, and enjoy the Premises for the entire term without hindrance, interruption or disruption by LANDLORD, LANDLORD's creditors, or any other person having claims against the LANDLORD or the Premises as a result of LANDLORD's actions. LANDLORD shall do everything necessary, including taking appropriate legal measures, to remove any impediment to TENANT's quiet and peaceable enjoyment, so long as such impediment is the result of LANDLORD's actions and not TENANT's, or any other person or persons claiming by, through, or under LANDLORD, subject, nevertheless, to the terms of this Lease. 7. No Guarantees or Warranties: LANDLORD makes no implied or express warranty of any kind including but not limited to the warranty of fitness for a particular purpose, warranty of habitability, warranty of merchantability or warranty of commercial suitability. 8. Taxes and Assessments: In addition to rent, TENANT agrees to pay, as they become due and payable, and before they become delinquent, all ad valorem taxes, both general and special assessments and governmental charges lawfully levied or assessed against the Premises or any part thereof, including improvements, during the term of this Lease and dues and assessments by means of deed restrictions and/or owners' associations. TENANT shall pay, in addition to the amount set forth in the preceding sentence, all taxes and assessments which are not presently in effect but which may hereinafter be enacted and which would be chargeable to TENANT as a consequence of the ownership of the Premises if in fact TENANT were the owner thereof in fee simple at the time of such assessment of levy. Any exemptions from taxation that the Premises may qualify for shall be for the TENANT's account. In the event TENANT fails to pay any taxes and assessments as required by this section, LANDLORD may, at its option, pay such taxes and assessments, and the amount of such taxes and assessments shall be charged to TENANT as additional rent and shall become due and payable by TENANT within thirty days from receipt of LANDLORD's invoice. 9. Triple Net Lease : It is the purpose and intent of LANDLORD and TENANT that the rent provided in this Lease shall be absolutely net to LANDLORD, and that TENANT shall pay, without notice or demand, and without abatement, deduction or setoff and save LANDLORD harmless from and against all costs, taxes (ad valorem and personal), insurance (including the cost of the insurance set forth in paragraph 5), expenses of maintenance, repair and replacement, and other charges and expenses and obligations of every kind and nature whatsoever relating to the Premises which may arise or become due during the term of this Lease. If TENANT is required to make any payment or incur any expense as provided in this Lease and fails to do so, then LANDLORD, at its option, may make the payment or incur the expense on TENANT's behalf, and the cost thereof shall be charged to TENANT as additional rent and shall be due and payable by TENANT within thirty days from receipt of LANDLORD's invoice. 4 5 10. Use: TENANT warrants and represents to LANDLORD that the Premises shall be used and occupied only for the purpose of a computer hardware and software technical service support center. Specifically, TENANT will employ managers, supervisors, and trained service support technicians in the computer hardware and software field to provide "help desk" functions. These functions will occur in an "inbound call center environment." The purpose for which the Premises may be used may be altered, expanded or restricted, provided the Performance Standards are met, with the prior written consent of the LANDLORD. TENANT shall occupy the Premises, conduct its business and control its agents, employees, invitees and visitors in such a manner as is lawful, reputable and will not create a nuisance. TENANT's use of the Premises shall comply with all laws, ordinances and regulations applicable thereto. TENANT shall obtain all governmental licenses and permits necessary to utilize the Premises for its intended use. 11. Inspection: LANDLORD or its authorized agents shall be allowed reasonable access to the building, for legitimate purposes, with forty-eight (48) hours prior notice. LANDLORD shall have the right to use any and all means which LANDLORD may deem proper to open any door in an emergency . 12. Building Services: TENANT shall pay the cost of all utility services, including, but not limited to, initial connection charges, all charges for gas, electricity, water, sanitary and storm sewer service, refuse or garbage collection and for all electric lights. LANDLORD shall not be required to pay for any utility services, supplies or upkeep in connection with the Premises. 13. LANDLORD Repairs: LANDLORD shall not be required to maintain or make any improvements, replacements or repairs of any kind or character to the Premises during the first twenty years of the term of this Lease. LANDLORD shall in all instances pursue all remedies for warranty repairs of any nature and if necessary file appropriate legal action to effectuate said remedies. 14. TENANT Repairs: TENANT shall, for the first twenty years of the term of this Lease, at its sole cost and expense, maintain, repair and replace all parts of the Premises and keep the same in good repair and condition, including, but not limited to, roof, foundation, parking areas, structural soundness of exterior walls, windows, plate glass, doors, heating, ventilating and air conditioning systems, down spouts, fire sprinkler system, dock bumpers, lawn maintenance, pest control and extermination, trash pick-up and removal, and painting the building and exterior doors. 15. LANDLORD Improvements: Prior to TENANT's occupancy, TENANT will manage as LANDLORD's agent the construction of all Improvements as set forth in the Preliminary Plans approved by LANDLORD and TENANT simultaneously with the execution of this Lease. Within thirty (30) days from the date of this Lease, TENANT shall have architect prepare and deliver to LANDLORD final plans and specifications for the construction of the Improvements described in the preliminary plans. Within five (5) days from receipt by LANDLORD of the final plans and specifications, LANDLORD shall execute a copy of the final 5 6 plans and specifications and any change orders, if applicable. LANDLORD's total contribution shall be Four Million Dollars ($4,000,000.00) and shall be available to pay any fees and hard and soft costs associated with the construction of the Project, but excluding by way of example such costs as marketing, promotion, transportation costs and any employee salaries or benefits. The TENANT agrees to deposit Three Hundred Thousand Dollars ($300,000.00) into LANDLORD's construction escrow fund to be utilized by LANDLORD to fund items associated with the construction of the Project, as described in the preceding sentence. Any expenses over and above $4,000,000.00 due to change orders requested by the TENANT, cost overruns, or original design costs, shall be at TENANT's cost. Any changes or modifications to the final plans and specifications after they have been bid shall be made and accepted only by written change order or agreement signed by LANDLORD and TENANT and shall constitute an amendment to this Lease. The preliminary plans and the final plans and specifications (when approved by LANDLORD and TENANT) are incorporated in this Lease by reference. TENANT, as LANDLORD'S agent, agrees that the construction of the improvements will be substantially in accordance with the final plans and specifications. TENANT will make reasonable efforts to assure that contractor performs its work, in a good and workmanlike manner and in full compliance with all provisions of federal, state and local authorities having jurisdiction over the Premises. 16. TENANT's Commitment: The TENANT, prior to occupancy, shall install in the Premises trade fixtures and personal property valued at approximately Two Million Two Hundred Thousand and No/100 Dollars ($2,200,000.00). 17. No Transfer: No portion of the Premises or of TENANT's interest in this Lease may be acquired by any other person or entity, without the express written permission of LANDLORD, such permission shall not be unreasonably withheld. 18. LANDLORD's Assignment: LANDLORD shall have the right to sell, transfer or assign, in whole or in part, its rights and obligations under this Lease and in the Premises; provided however, TENANT shall have a right of first refusal in all such contemplated sales, transfers and assignments, except if such sale, transfer and assignment is to the City of Bryan, Texas and/or Brazos County, Texas. The LANDLORD shall give written notice to the TENANT of its intent to sell the Premises (other than to the City of Bryan or Brazos County). Such notice shall specify the price and sales terms of such contemplated sale. The TENANT shall have thirty (30) days from receipt of notice in which to exercise its option to purchase on the same sale and purchase terms. Failure by TENANT to respond within thirty (30) days of such notice shall be deemed a waiver of such right of first refusal. Any such sale, transfer or assignment shall operate to release LANDLORD from any and all liabilities arising out of any act, occurrence or omission relating to the Premises or this Lease arising after the date of such sale, assignment or transfer. Any subsequent holder of LANDLORD's estate, whether partial or complete, shall be subject to the terms and conditions of this Lease. 19. Eminent Domain and Condemnation: If the Premises is taken by condemnation or the right of eminent domain during the pendency of this Lease Agreement, either party, upon 6 7 written notice to the other, shall be entitled to terminate the Lease as of the date of the taking of possession by Condemnor. It is understood in the event of the termination of this Lease due to said condemnation, TENANT shall have no claim against LANDLORD for the value of any unexpired term of its Lease. LANDLORD shall have no claim against TENANT for any rental payments for the unexpired term of the Lease. LANDLORD shall be entitled to receive and retain the amounts awarded for the Condemnation of the Premises as the fee owner. TENANT shall have the right to claim and recover from the condemning authority, such compensation as may be separately awarded or recoverable by TENANT in TENANT's own right to compensate it for its leasehold interest. 20. Signs: LANDLORD shall permit TENANT to erect any signs designating its business or products on the Premises as long as such signs shall conform to applicable public zoning, city ordinances or other laws and covenants of record. 21. RELEASE: TENANT AND ITS ASSIGNS ASSUME FULL RESPONSIBILITY FOR THE USE OF THE PREMISES, AND HEREBY INDEMNIFIES AND HOLDS HARMLESS THE LANDLORD, ITS OFFICERS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS, AND CAUSES OF ACTION OF EVERY KIND AND CHARACTER, INCLUDING THE COST OF DEFENSE THEREOF, ATTORNEYS' FEES AND EXPENSES, FOR ANY INJURY TO OR DEATH OF ANY PERSON (WHETHER EMPLOYEES OF EITHER PARTY OR OTHER THIRD PARTIES) AND ANY LOSS OF OR DAMAGE TO PROPERTY OR BUSINESS (WHETHER PROPERTY OF EITHER OF THE PARTIES HERETO, THEIR EMPLOYEES, OR OF THIRD PARTIES) THAT IS CAUSED BY OR ALLEGED TO BE CAUSED BY, ARISING OUT OF, OR IN CONNECTION WITH AN ACT OR OMISSION OF TENANT, ITS OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS RELATIVE TO THE USE OF THE PREMISES, THE CONDITION OF THE PREMISES, WHETHER PATENT OR LATENT, OR ANY BREACH OR DEFAULT IN PERFORMANCE OF ANY OBLIGATION OF TENANT HEREUNDER. Insurance covering this indemnity requirement shall be provided by TENANT. Such insurance shall provide for bodily injury or death in the minimum amount of $1,000,000.00 per occurrence along with property damage insurance in the minimum amount of $1,000,000.00 per occurrence. LANDLORD agrees that the TENANT's obligation to indemnify the LANDLORD herein shall be limited to the insurance policy amounts stated herein. Such insurance coverage will name the LANDLORD, its officers and directors, as additional insureds. The TENANT shall present to LANDLORD a policy or certificate of such insurance with endorsements reflecting this contractual indemnity, a waiver of subrogation and additional insured/loss payee as provided for herein. There shall be no exclusion in the policy for LANDLORD having secured its own insurance. The policy shall require written notice to be given the LANDLORD at least fifteen (15) days prior to any cancellation of the policy before its expiration. 22. Partial Damage to Premises: TENANT shall notify LANDLORD in writing as soon as practicable upon the occurrence of any damage to the Premises. If the Premises are only 7 8 partially damaged, partially damaged being defined as thirty percent (30%) or less of the full insurable value of the Improvements immediately prior to the casualty, and if the proceeds received by LANDLORD from the insurance policies described in paragraph 5 are sufficient to pay for the necessary repairs to the Improvements, this Lease shall remain in effect and TENANT shall repair the damage as soon as reasonably possible. LANDLORD shall assign all insurance proceeds received as a result of such damage to TENANT to be used to rebuild the Premises. LANDLORD shall have no obligation to repair or rebuild Tenant's furniture, fixtures, equipment or personal property contained within the Premises. If the insurance proceeds received by LANDLORD are insufficient to cover the entire cost of repair of the Premises, or if the damage was due to a cause not covered by the insurance policies which TENANT maintains pursuant to paragraph 5, LANDLORD may elect either to (a) have the TENANT repair the damage with reasonable diligence in which case this Lease shall remain in full force and effect, or (b) terminate this Lease as of the date the damage occurred. LANDLORD shall notify TENANT of its election within sixty (60) days after receipt of notice of the damage. In the event that LANDLORD elects to have the damage repaired, LANDLORD shall assign the insurance proceeds to the TENANT and TENANT shall pay the difference between the actual cost of repair and any insurance proceeds received by LANDLORD. If LANDLORD elects to terminate the Lease, LANDLORD shall be entitled to any insurance proceeds paid for such damage to the Improvements. 23. Total or Substantial Destruction: In the event that the Premises are totally or substantially destroyed by any cause whatsoever, total or substantial damage being defined as in excess of thirty percent (30%) of the full insurable value of the Improvements prior to the casualty, this Lease shall terminate as of the date the destruction occurred regardless of whether LANDLORD receives any insurance proceeds. If the Premises can be rebuilt within six (6) months following the date of destruction, and TENANT desires to have the Improvements rebuilt, LANDLORD may elect to have the TENANT rebuild the Premises, to the extent of any proceeds received by LANDLORD from policies of insurance, in which case, this Lease shall remain in full force and effect. In such event, LANDLORD shall assign to TENANT any such insurance proceeds. LANDLORD shall notify TENANT of such election within thirty (30) days after the occurrence of total or substantial destruction. TENANT shall pay the difference between the actual cost of rebuilding and any insurance proceeds received by LANDLORD and assigned to TENANT. Should LANDLORD elect not to rebuild, all insurance proceeds from policies described in paragraph 5 insuring the Improvements hereof shall be paid to LANDLORD. In the event that this Lease is terminated pursuant to the provisions of paragraphs 22 and 23, the rent due by TENANT shall be abated for the unexpired portion of the Lease, effective as of the date the destruction occurred. 24. Holding Over: In the event TENANT remains in possession of the Premises after the twentieth year of the Lease term without the execution of a Lease Amendment, TENANT shall be deemed to be occupying the Premises as a tenant from month to month at a rental rate in the year of the holdover plus fifty percent (50%) of such amount and otherwise subject to all the conditions, provisions and obligations of this lease insofar as the same are applicable to a month to month tenancy. 8 9 25. Default and Remedies by TENANT: The following shall be deemed to be events of default by TENANT under this Lease: (a) TENANT shall fail to pay when due any installment of rent, an Alternative Performance Payment or any other payment required pursuant to this Lease. (b) TENANT shall vacate or abandon the Premises. (c) TENANT shall file a petition or be adjudged bankrupt or insolvent under any applicable federal or state bankruptcy or insolvency law or admit that it cannot meet its financial obligations as they become due, or a receiver or trustee shall be appointed for all or substantially all of the assets of TENANT. (d) TENANT shall make a transfer in fraud of creditors or shall make an assignment for the benefit of creditors. (e) TENANT shall do or permit to be done any act which results in a lien being filed against the Premises, which is not removed within thirty (30) days of its filing. TENANT shall immediately notify LANDLORD of any lien filing and provide a recorded Release of Lien within the time provided above. (f) The liquidation, termination or dissolution, (but not sale, merger or consolidation) of TENANT. (g) TENANT shall be in default of any other term, provision or covenant of this Lease, other than as specified in subparagraph (a) through (f) above, and if such default is not cured within thirty (30) days after written notice thereof from LANDLORD to TENANT. 26. Remedies for TENANT's Defaults: Upon the occurrence of any event of default set forth in this Lease, which is not cured within thirty days after receipt of written notice of said alleged default by TENANT from LANDLORD, providing said default can be cured within said thirty day period. LANDLORD shall have the option to pursue any one or more of the following In the event that TENANT is making reasonable efforts to cure a default which cannot be cured within a thirty day period the cure period will be extended as appropriate. : (a) LANDLORD may enter upon and take possession of the Premises and expel or remove TENANT and any other person who may be occupying all or any part of the Premises and relet the Premises on behalf of TENANT and receive the rent directly by reason of such reletting. TENANT agrees to pay LANDLORD upon demand any deficiency that 9 10 may arise by reason of any reletting of the Premises at a rental rate less than the rent in effect in the year of default; further, TENANT agrees to reimburse LANDLORD for any expenditures made by it in order to relet the Premises, including, but not limited to, repair costs Arising from occurrences other than normal wear and tear. (b) LANDLORD may enter upon the Premises and perform TENANT's obligations under the Lease. TENANT agrees to reimburse LANDLORD on demand for any expenses which LANDLORD may incur in effecting compliance with TENANT's obligations under this Lease; further, TENANT agrees that LANDLORD shall not be liable for any damages resulting to TENANT from effecting compliance with TENANT's obligations under this Lease. (c) LANDLORD may terminate this Lease, in which event TENANT shall immediately surrender the Premises to LANDLORD, and if TENANT fails to surrender the Premises, LANDLORD may, without prejudice to any other remedy which it may have for possession or arrearages in rent and/or Alternative Performance Payment, enter upon and take possession of the Premises and expel or remove TENANT and any other tenant who may be occupying all or any part of the Premises . TENANT agrees to pay on demand the amount of all loss and damage which LANDLORD may suffer due to the termination of this Lease under this paragraph 26 including, without limitation, loss and damage due to the failure of TENANT to maintain and/or repair the Premises as required hereunder and/or due to the inability of LANDLORD to relet the Premises on satisfactory terms or otherwise. (d) Provided that TENANT's default under paragraph 25 above is for failure to pay rent and/or Alternative Performance Payment, LANDLORD may, prevent TENANT from entering the Premises by changing the door locks. If LANDLORD changes the door locks, LANDLORD shall place a written notice on the front door of the Premises, stating the name and address or telephone number of an individual or company from which a new key may be obtained by TENANT; provided, however, that (i) the new key needs to be provided only during LANDLORD's regular business hours, and (ii) LANDLORD may condition delivery of the new key upon TENANT's payment of all rent then due. Costs and expenses incurred by LANDLORD in exercise of its right pursuant to this paragraph 26(d) shall be deemed to be expenditures and damages recoverable from TENANT Pursuant to (a), (b) or (c) of this paragraph 26. Notwithstanding anything contained in this Lease to the contrary, this Lease may be terminated by LANDLORD, only by written notice of such termination to TENANT given in 10 11 accordance with paragraph 35 below, and no other act or omission of LANDLORD shall be construed as a termination of this Lease. 27. Remedies Cumulative: All rights and remedies of LANDLORD and TENANT herein or existing at law or in equity are cumulative and the exercise of one or more rights or remedies shall not be taken to exclude or waive the right to the exercise of any other. 28. Mitigation of Damages: With respect to the provisions of any laws of the State of Texas or of this Lease which require that Landlord use reasonable efforts to relet the Premises, it is understood and agreed that the following shall apply in determining whether such efforts by LANDLORD to relet are reasonable: (a) LANDLORD may elect to lease other comparable, available space it may own before reletting the Premises; (b) LANDLORD may decline to incur out-of-pocket costs to relet the Premises, other than customary leasing commissions and legal fees for the negotiation of a lease with a new tenant; (c) LANDLORD may decline to relet the Premises to a prospective tenant if the nature of such prospective tenant's business is not consistent with the zoning for the area in which the Premises is situated or with the type of business in that area; (d) LANDLORD may decline to relet the Premises to a prospective tenant, the nature of whose business may have an adverse impact upon the manner in which the Premises is operated even though such prospective tenant may have a good credit rating; (e) Before reletting the Premises to a prospective tenant, LANDLORD may require the prospective tenant to demonstrate the same financial capacity that LANDLORD would require as a condition to leasing other space it may own to the prospective tenant; and (f) Listing the Premises with a broker in a manner consistent with subsections (a) through (f) above shall constitute prima facie evidence of reasonable efforts on the part of LANDLORD to relet the Premises. 29. Default by LANDLORD: The following shall be deemed events of default by the LANDLORD under this Lease: (a) LANDLORD shall fail to construct the Improvements (for a reason not the fault, in whole or in part, of TENANT); provided however, failure to complete the Improvements on the time schedule set 11 12 forth in the construction documents for a reason not the fault of the LANDLORD, shall not be deemed a default. (b) LANDLORD shall fail to perform its obligations pursuant to paragraph 6 hereof. (c) The City of Bryan, Texas and Brazos County, Texas fail to approve tax abatement for the TENANT in the following amounts:
Tax Year Percentage of Increased Value over January 1, 1999 Value to be Abated ---------------------------------- 2000 90% 2001 80% 2002 70% 2003 60% 2004 50% 2005 40% 2006 30% 2007 20% 2008 10% 2009 10%
30. Remedies of TENANT: Upon an event of default as defined in paragraph 29 above, TENANT shall have the following remedies: (a) Should LANDLORD fail to construct the Premises, for a reason not the fault, in whole or in part, of the TENANT, as outlined in paragraph 29(a) hereof, or breach its obligation under paragraph 6 hereof, TENANT shall have a right to terminate the Lease and shall be entitled to recover direct, but not incidental, consequential or special damages notwithstanding their foreseeability, from the LANDLORD. (b) If the TENANT is unable to secure tax abatement as described above, LANDLORD shall pay to the taxing authorities, during the first ten (10) years of this Lease, ad valorem taxes equal to that percentage of taxes, as indicated in paragraph 29 (c) above, that would have been abated had such tax abatement been approved. 31. Default Prior to Completion: Damages: TENANT acknowledges and agrees (1) that LANDLORD would not purchase the Premises and construct the improvements thereon except for TENANT's agreement to occupy the Premises pursuant to this Lease and to pay the rent and satisfy the Performance Standards provided herein, and (2) that the improvements to be constructed on the Premises have been designed by TENANT for its own particular and unique 12 13 use. Therefore, if TENANT breaches this Lease prior to TENANT's occupancy of the Premises, TENANT shall pay to LANDLORD monthly, the sum of one dollar ($1.00) per square foot per month calculated on the completed building size, until such time as (i) LANDLORD can relet the Premises to a tenant of financial capacity similar to TENANT that (a) can meet the Performance Standards set forth herein or (b) will enter into a long term lease at the then prevailing commercial rental rates for space in Bryan-College Station or (ii) LANDLORD sells the Premises to a third party for an amount that exceeds the then unpaid balance on the Note the EDC executed to finance the construction of the Premises. 32. LANDLORD's Lien: LANDLORD shall have at all times a valid security interest to secure payment of all rentals, Alternative Performance Payments, and other sums of money becoming due hereunder from TENANT and to secure payment of any damages or loss which LANDLORD may suffer by reason of the breach by TENANT of any covenant, agreement or condition contained herein, upon all goods, wares, equipment, fixtures, furniture, improvements and other personal property (herein the "Personalty") of TENANT presently, or which may hereafter be, situated in the Premises, and all proceeds therefrom, and such Personalty shall not be removed therefrom without the consent of LANDLORD until all arrearages in rent or Alternative Performance Payments as well as any and all other sums of money then due to LANDLORD hereunder shall first have been paid and discharged and all covenants, agreements and conditions hereof have been fully compiled with and performed by TENANT. Upon the occurrence of an event of default by TENANT, LANDLORD may, in addition to any other remedies provided herein or by law, enter upon the Premises and take possession of the Personalty situated in the Premises, without liability for trespass or conversion, and sell the same at public or private sale, with or without having the Personalty at the sale, after giving TENANT reasonable notice of the time and place of any public sale or of the time after which any private sale is to be made, at which sale LANDLORD may purchase unless otherwise prohibited by law. Unless otherwise provided by law, and without intending to exclude any other manner of giving TENANT reasonable notice, the requirement of reasonable notice shall be met if such notice is given in the manner prescribed in paragraph 35 of this Lease at least ten (10) days before the time of sale. Any public sale made pursuant to the provisions of this paragraph shall be deemed to have been a public sale conducted in a commercially reasonable manner if held in the Premises or where the Personalty is located after the time, place and method of sale and a general description of the types of property to be sold have been advertised in a daily newspaper published in Brazos County, Texas, for five (5) consecutive days before the date of the sale. The proceeds from any such disposition, less any and all expenses connected with the taking of possession, holding and selling of the Personalty (including reasonable attorney's fees and expenses), shall be applied as a credit against the indebtedness secured by the security interest granted in this paragraph. Any surplus shall be paid to TENANT or as otherwise required by law; TENANT shall pay any deficiencies forthwith. Upon request by LANDLORD, TENANT agrees to execute and deliver to LANDLORD a financing statement in form sufficient to perfect the security interest of LANDLORD in the aforementioned Personalty and proceeds thereof under the provisions of the Uniform Commercial Code in force in the State of Texas. 33. Waiver: No failure by either party to insist upon the other party's strict performance of any provision hereof or to exercise any right, power, or remedy, and no 13 14 acceptance of full or partial rent during the continuance of any such breach, shall constitute a waiver of any such breach or of the right then or thereafter to enforce such provision. No provision of this Lease, and no breach hereof, shall be waived, altered, or modified except by written instrument executed by both parties. No waiver of any breach shall affect or alter this Lease, but each and every provision hereof shall continue in full force and effect with respect to any other existing or subsequent breach thereof. 34. End of Term: TENANT shall, at the termination of this Lease, whether by lapse of time or otherwise, peaceably and quietly deliver to the LANDLORD all of the Premises in good condition less wear and tear. 35. Notices: Any notice required, under the terms of this Lease or under any legal requirement, shall be in writing and mailed by overnight or certified mail, return receipt requested, postage prepaid, addressed to the party intended to be notified at the following address (or such other address as the receiving party may notify to the sending party), and notice given as aforesaid shall be sufficient service thereof and shall be deemed given as of the date of receipt. All notices to the LANDLORD shall be sent to: President/CEO Bryan-College Station Economic Development Corporation 4001 E. 29th Street, Suite 180 Bryan, Texas 77802 All notices to the TENANT shall be sent to: DecisionOne Corporation 50 East Swedesford Road Frazer, PA 19355 Attn: Corporate Real Estate 36. Signature Corporate or Partnership Authority: Both TENANT and LANDLORD shall be required to deliver adequate assurances, such as a Certificate of Incumbency, to certify that the signatories to this Lease possess the necessary authority to bind the entity which they represent. TENANT shall deliver to LANDLORD a Certificate of the Secretary of State of the State of Texas evidencing it is licensed to do business in the State of Texas. 37. Originals: The parties hereto shall execute seven original signature copies of this Lease. 38. Governing Law: This Lease shall be construed under and in accordance with the laws of the State of Texas and the laws of the United States Of America as applicable to transactions within the State of Texas. This Lease is performable in Brazos County, Texas. 39. Amendment: This Lease may not be altered, waived, amended or extended except by an instrument in writing signed by LANDLORD and TENANT. 14 15 40. Attorneys' Fees: In the event TENANT or LANDLORD defaults in the performance of any of the terms, agreement or conditions contained in this Lease and TENANT or LANDLORD commences legal action of any kind to enforce the terms and conditions of the Lease, the prevailing party in such litigation shall be entitled to collect from the other party all costs, expenses and attorney's fees incurred in connection with such action. 41. Publication: TENANT hereby agrees that LANDLORD shall have the right, but not the obligation, at no cost to TENANT, to publicize and/or advertise the execution of this Lease and the related transaction. 42. Miscellaneous Provisions: If any provision of this Lease shall be determined to be void by any court of competent jurisdiction, then such determination shall not affect any other provision of this Lease, all of which shall remain in full force and effect. This Lease Agreement shall be binding upon and inure to the benefit of the LANDLORD and TENANT and their respective successors and assigns. BRYAN-COLLEGE STATION ECONOMIC DECISIONONE CORPORATION DEVELOPMENT CORPORATION By: - ---------------------------------- -------------------------------- Lewis N. Newman, Chairman Printed Name: ---------------------- Title: ----------------------------- 15 EX-10.16 5 LEASE FOR WILMINGTON, OH WAREHOUSE 1 EXHIBIT 10.16 LEASE ADDENDUM This Lease Addendum is made by and between WILMINGTON COMMERCE PARK PARTNERSHIP ("WCPP") as Landlord and DJ&J SOFTWARE CORPORATION ("EGGHEAD") as Tenant pursuant to a certain Lease (the "Lease") entered into by the parties in August 1995 for 83,200 square feet of space in Building 12, Airborne Commerce Park, State Route 73, Wilmington, Ohio. WCPP has agreed to construct certain additional improvements in the Leased Premises at Egghead's expense. The cost of these improvements is $226,002.00 and Egghead shall pay it as follows: Egghead shall pay the cost of the improvements as Additional Rent in monthly installments of $4,646.12 (representing the principal amount of the improvements amortized over the life of the Lease at 11% interest per annum) beginning March 1, 1996 and on the first day of each month of the Lease thereafter, in advance, without demand, at the office of WCPP until paid in full. This sum shall be in addition to the Basic Annual Rent and any and all other amounts due from Egghead to WCPP under the Lease. IN WITNESS WHEREOF, the parties hereto have set their hands to triplicates hereof, this _____ day of _______________, 1996 as to WCPP and this _____ day of _______________, 1996 as to Egghead. Signed and acknowledged LANDLORD: WILMINGTON COMMERCE in the presence of: PARK PARTNERSHIP _________________________________ By:_________________________________ Its:________________________________ _________________________________ TENANT: DJ & J SOFTWARE CORPORATION _________________________________ By:_________________________________ Terence M. Strom, President and C.E.O. _________________________________ 2 STATE OF OHIO, COUNTY OF ___________________, SS: The foregoing instrument was acknowledged before me this _____ day of _______________, 1996, by ______________________, ________________________, on behalf of WILMINGTON COMMERCE PARK PARTNERSHIP. ____________________________________ Notary Public STATE OF WASHINGTON, COUNTY OF KING, SS: The foregoing instrument was acknowledged before me this _____ day of _______________, 1996, by Terence M. Strom, President and C.E.O., on behalf of DJ & J SOFTWARE CORPORATION. ____________________________________ Notary Public 3 SECOND ADDENDUM TO LEASE This Second Addendum to Lease is entered into by Wilmington Commerce Park Partnership ("WCPP" or "Landlord") as landlord and DecisionOne Holdings Corp. ("DecisionOne" or "Tenant") as tenant. A. Pursuant to a certain lease (the "Lease") dated August 17, 1995, amended by an addendum (the "Addendum") dated April 16, 1996, DJ&J Software Corporation (Egghead") leased from WCPP certain real property consisting of 83,200 square feet of space (the "Leased Premises") in a warehouse located at 3262 State Route 73 South, Wilmington, Ohio which warehouse is sometimes referred to as Building 12 of the Airborne Commerce Park. B. By instrument dated July _____, 1996, (the "Assignment") Egghead assigned to DecisionOne all of its right, title and interest as tenant under the Lease and Addendum, and DecisionOne accepted the assignment and has succeeded to such rights, title and interest. C. Under Article 37 of the Lease, the Tenant has a right of first refusal to lease available additional space in Building 12. There is currently available 19,200 square feet of space in the building and DecisionOne wishes to rent all of such space. NOW, THEREFORE, for valuable consideration paid, receipt of which is hereby acknowledged, the parties agree as follows: 1. EXERCISE OF RIGHT. DecisionOne hereby exercises its right of first refusal to lease 19,200 square feet of space in Building 12. WCPP accepts such exercise of the right of first refusal to lease according to the terms set forth herein. 2. EFFECTIVE DATE. The effective date of this Second Addendum to Lease shall be February 1, 1998. 3. REVISED LEASE. Article 1 of the Lease is hereby amended so that the Lease Term begins February 1, 1998 and ends January 31, 2003, both dates inclusive. 4. TENANT IMPROVEMENTS. DecisionOne shall be allowed up to $50,000 for tenant improvements. It shall be responsible for all necessary permits and construction. WCPP will reimburse DecisionOne for amounts expended up to the allowed amount upon receipt of paid bills for materials or equipment installed and work completed. DecisionOne shall provide WCPP with a copy of any occupancy permit issued. 5. RENT. Article 3 of the Lease shall be revoked and the following shall be 4 substituted in its place. 5 RENT. Section 1. Tenant shall pay to the Landlord as BASIC ANNUAL RENT for the Leased Premises for each year of the period of February 1, 1998 through January 31, 2003, the sum of Four Hundred Seventy-Nine Thousand Two Hundred Thirty-Two Dollars ($479,232.00) which shall be paid in equal monthly installments of Thirty-Nine Thousand Three Hundred Thirty-Six Dollars and 00/100ths Dollars ($39,336.00), due and payable on the first day of each month, in advance. Said rent shall be paid to the Landlord, or to the duly authorized agent of the Landlord, at its office at 3800 Red Bank Road, Cincinnati, Ohio 45227. Checks should be made payable to WILMINGTON COMMERCE PARK PARTNERSHIP. Any Basic Annual Rent payment not received by the Landlord by the tenth day of the month shall be past due. If the commencement date of this Lease is other than the first day of the month, any rental adjustment or additional rents hereinafter provided for shall be prorated accordingly. The Tenant will pay the rent as herein provided, without deduction whatsoever, and without any obligation of the Landlord to make demand for it. Any installment of rent accruing hereunder and any other sum payable hereunder, if not paid within ten days of when due, shall bear interest at the rate of eighteen percent (18%) per annum until paid. Late Fee. Provided, however, that Tenant shall be entitled to two (2) written notices from Landlord in a given Lease Year that such rent, additional rent or other charge is due and payable within five (5) days of Tenant's receipt of such notice before a service charge will be assessed. After four (4) such notices have been give to Tenant during the term of this Lease then no further notices shall be give and Tenant shall pay any service charges as otherwise provided herein. The Basic Annual Rent of $479,232.00 shall be adjusted annually based on the Consumer Price Index beginning January 1, 1999, the adjustment date for that year and each year thereafter, whether during the term of this Lease or any renewal or extension thereof. Increases in the Basic Annual Rent shall be made in accordance with the following procedure: a. The index to be used for this adjustment shall be the Consumer Price Index (North Central Region, All Urban Consumers, All Items, 1982-84 equaling a base of 100, from the U.S. Department of Labor, Bureau of Labor Statistics, Washington, D.C.). b. The Consumer Price Index of 1997 for the month of December shall be the "Base Period Consumer Price Index." The Consumer Price Index for the month of December prior to each adjustment date in each adjustment year shall be the "Adjustment Period Consumer Price Index." 6 c. The Base Period Consumer Price Index shall be subtracted from the Adjustment Period Consumer Price Index; the difference shall be divided by the Base Period Consumer Price Index. This quotient shall then be multiplied by the $479,232.00 (Basic Annual Rent amount) and the result shall then be added to the $479,232.00 (Basic Annual Rent amount). The resulting sum shall be the Adjusted Annual Rent for such immediately succeeding leasehold period which shall be paid in equal monthly installments. d. If the said Consumer Price Index is, at any time during the term of this Lease, discontinued by the Government, then the most nearly comparable index shall be substituted for the purpose of the aforesaid calculations. e. The rental amount shall not be increased more than five percent (5%) on any one annual adjustment and shall never be increased more than twenty percent (20%) over the initial rent during the term of this lease. Section 2. Rent Commencement Date: Base Annual Rent shall commence February 1, 1998, PROVIDED, HOWEVER, that DecisionOne shall receive a six-month Rent-Free Period on only the 19,200 square feet of additional space running from February 1, 1998 through July 31, 1998. For that period, the monthly installment of rent shall be $32,448.00 each. Section 3. The Tenant shall reimburse the Landlord for the costs of water, gas, and electricity, including electricity costs for exterior lighting, or any other utilities paid by Landlord in connection with the Leased Premises. Said reimbursement shall be additional rent due on the first day of the calendar month next following rendition of a bill therefor. If any services are separately metered, the cost shall be paid directly by the Tenant to the utility service. The heating and other utilities except water, not separately metered will be prorated on the basis of the square footage serviced by a given meter and paid to Landlord as billed. The total cost of water shall be paid by Tenant currently in occupancy and costs thereof shall be prorated on the basis of square footage occupied by each Tenant (if more than one). In the event that any occupant of the building uses a disproportionate amount of said utilities, an adjustment shall be made so that each tenant pays for their entire share but not a portion of the utilities used by other tenants of the building. Section 4. The Tenant agrees to pay any increased real estate 7 taxes over and above the real estate taxes paid by the Landlord during the first year of the term of this Lease. Said amount shall be deemed to be additional rent and shall be due and payable on the first of the month following delivery to Tenant of a receipt for Landlord's payment of said real estate taxes. The Tenant shall pay its share of expenses that the Landlord shall incur by reason of compliance with new laws, orders, special rent/use taxes, ordinances and new regulations of Federal, State, County and Municipal authorities, and with any lawful direction of any public officer or officers, which lawful direction shall be imposed upon the Landlord for the common good of the occupants of the Airborne Commerce Park. Capital improvement which are the responsibility of Landlord shall not be deemed to be prorated to be passed through to Tenant hereunder. Section 5. None of the following acts or omissions by the Landlord shall in any way affect the payment of the rent at the time specified in this Lease; if the Landlord at any time enters into a contract for any alterations, additions, repairs or improvements; if the Landlord fails to make such alterations, additions, repairs or improvements. The Landlord may discontinue all facilities and services rendered by it or its agents or contractors that are not expressly covenanted for herein; such facilities and services shall constitute no part of the consideration for this Lease. Section 6. Tenant has deposited with Landlord the sum of Six Thousand Five Hundred Sixty and no/100ths ($6,560.00), as security for its performance of its lease of part of Building 2. These funds shall continue to be held by Landlord, without interest, and may be commingled with Landlord's other funds, as security for the performance by Tenant of all the terms and conditions of this Lease. If a default should occur, Landlord, at its option, may apply the deposit, in whole or in part to cure the default. If any part of the deposit is so applied by Landlord, Tenant shall, upon Landlord's request, remit to Landlord the amount necessary to restore the full security deposit. Tenant's failure to do so within five (5) days after receipt of Landlord's demand shall be a default. If at the end of the Lease, Tenant is not in default, the security deposit shall be returned to Tenant. 6. RATIFICATION OF EXISTING LEASE TERMS. In all other respects, except as specifically modified herein all the terms and conditions of the existing Lease, Addendum, Assignment and Assumption are hereby ratified and confirmed by the parties hereto. In Witness Whereof the parties have hereunto set their hand to one or more counterparts hereof this ____ day of __________________, 1998 as to WCPP and this ____ day of __________________, 1998, as to DecisionOne. 8 Signed and acknowledged (1) WILMINGTON COMMERCE PARK in the presence of: PARTNERSHIP ____________________________________ By__________________________________ (as to 1) Its_________________________________ ____________________________________ (as to 1) 9 (2) DECISIONONE HOLDINGS CORP. ____________________________________ By__________________________________ (as to 2) Its_________________________________ ____________________________________ (as to 2) STATE OF OHIO, HAMILTON COUNTY, ss: The foregoing instrument was signed and acknowledged before me by Wilmington Commerce Park Partnership by and through ___________________________, its __________________________ who acknowledged that he did sign the foregoing instrument and the same is his free act an deed as such officer and the free act and deed of said Wilmington Commerce Park Partnership. In Testimony Whereof, I have hereunto set my hand and official seal at ______________________, Ohio, this _____ day of _________________________, 1998. ____________________________________ Notary Public STATE OF PENNSYLVANIA, ___________________________ COUNTY, ss: The foregoing instrument was signed and acknowledged before me by DecisionOne Holdings Corp. by and through __________________________________, its __________________________ who acknowledged that he did sign the foregoing instrument and the same is his free act an deed as such officer and the free act and deed of said DecisionOne Holdings Corp. In Testimony Whereof, I have hereunto set my hand and official seal at ______________________, Ohio, this _____ day of _________________________, 1998. ____________________________________ Notary Public 10 WAIVER OF FIRST RIGHT TO SUBLEASE ABX AIR, Inc. hereby waives, for this Second Addendum only, its right pursuant to Article 6, Section 1 of said Lease (as amended) to a first right to sublease the premises leased to DecisionOne by the foregoing. This waiver shall not for any purpose constitute a future waiver of its right to sublease under the Lease (as amended). Signed and acknowledged ABX AIR, INC. in the presence of: ____________________________________ By__________________________________ Joseph C. Hete Senior Vice President ____________________________________ STATE OF OHIO, CLINTON COUNTY, ss: The foregoing instrument was signed and acknowledged before me by ABX AIR, Inc. by and through Joseph C. Hete, its Senior Vice President who acknowledged that he did sign the foregoing instrument and the same is his free act an deed as such officer and the free act and deed of said ABX AIR, Inc.. In Testimony Whereof, I have hereunto set my hand and official seal at Wilmington, Ohio, this _____ day of _________________________, 1998. ____________________________________ Notary Public 11 This instrument prepared by Karen Buckley of Buckley, Miller & Wright, Attorneys at Law, Wilmington, Ohio. (comm1/lc) 12 ASSIGNMENT AND ASSUMPTION OF LEASE This ASSIGNMENT AND ASSUMPTION OF LEASE is made as of __________ __, 1996, by and between DJ&J SOFTWARE CORPORATION ("EGGHEAD") as Assignor and DECISIONONE HOLDINGS CORP. ("DECISIONONE") as Assignee under the following circumstances: A. Pursuant to a certain lease (the "Lease") dated August 17, 1995, and amended by an addendum (the "Addendum") dated April 15, 1996, Egghead leased from Wilmington Commerce Park Partnership ("WCPP") certain real property consisting of 83,200 square feet of space in a warehouse located at 3262 State Route 73 South, Wilmington, Ohio, which warehouse building is sometimes designated as Building 12 of the Airborne Commerce Park. B. Egghead wishes to assign all of its right, title and interest under the Lease and Addendum to DecisionOne and DecisionOne is willing to assume all of Egghead's liabilities and obligations under the Lease and Addendum. NOW, THEREFORE, for valuable consideration paid, receipt of which is hereby acknowledged, effective as of __________ __, 1996, the parties agree as follows: 1. Egghead assigns to DecisionOne all of its right title and interest in the Lease and Addendum, together with all rights arising under or by virtue of the Lease and Addendum. 2. Egghead represents and warrants to DecisionOne that a) the Lease and Addendum are in full force and effect and have not been further modified or amended; b) neither Egghead nor WCPP is in default under the Lease and Addendum, nor to Egghead's knowledge has any event or condition occurred which, with the giving of notice, the passage of time, or both, would constitute a default by either party; c) WCPP is holding a security deposit in the amount of $6,560.00, no amount of which has been applied by WCPP to Egghead's 13 obligations and all rights to such security deposit are hereby assigned to DecisionOne by this Assignment. 3. DecisionOne accepts this Assignment and assumes and agrees to perform all of the obligations of Egghead arising or accruing under the Lease and Addendum on or after the effective date of this Assignment. 4. Egghead shall indemnify and hold DecisionOne harmless from and against all loss, damage, cost and expense that may be claimed against, imposed upon or incurred by DecisionOne by reason of Egghead's failure to perform any of its obligations under the Lease or Addendum prior to the effective date of this Assignment. 5. DecisionOne shall indemnify and hold Egghead harmless from and against all loss, damage, cost and expense that may be claimed against, imposed upon or incurred by Egghead by reason of DecisionOne's failure to perform any of the obligations under the Lease or Addendum assumed by DecisionOne pursuant to Paragraph 3. SIGNED as of the date first written above. Signed and acknowledged DJ&J SOFTWARE in the Presence of: CORPORATION _____________________________ By______________________________ Name____________________________ _____________________________ Title___________________________ DECISIONONE HOLDINGS CORP. _____________________________ By______________________________ Name____________________________ _____________________________ Title___________________________ STATE OF WASHINGTON, COUNTY OF KING, SS: 14 The foregoing instrument was acknowledged before me this _____ day of ___________, 1996, by _______________________, ____________________, on behalf of DJ&J SOFTWARE CORPORATION, a __________________ corporation. ___________________________________ Notary Public STATE OF PENNSYLVANIA, COUNTY OF ___________________, SS: The foregoing instrument was acknowledged before me this _____ day of ____________, 1996, by ______________________, _______________________, on behalf of DECISIONONE HOLDINGS CORP., a ____________________ corporation. ___________________________________ Notary Public 15 WILMINGTON COMMERCE PARK PARTNERSHIP WAREHOUSE/DISTRIBUTION AGREEMENT OF LEASE LEASE FOR BUILDING 12 PROPERTY LOCATED AT State Route 73 South, Wilmington, Ohio 45177 16 WILMINGTON COMMERCE PARK PARTNERSHIP WAREHOUSE/DISTRIBUTION AGREEMENT OF LEASE THIS LEASE made this _____ day of __________________, 199___, by and between WILMINGTON COMMERCE PARK PARTNERSHIP hereinafter referred to as the Landlord, and DJ & J SOFTWARE CORPORATION, A WASHINGTON CORPORATION DOING BUSINESS AS EGGHEAD SOFTWARE/EGGHEAD, hereinafter referred to as the Tenant. Tenant's business enterprise is organized as a corporation and is admitted to do business in the State of Ohio. W I T N E S S E T H: The Landlord does hereby lease and let to the Tenant and the Tenant accepts from the Landlord under the terms and conditions of this Lease, the following described Premises: 83,200 square feet, more or less, located at State Route 73 South, Wilmington, Ohio 45177 and sometimes designated as Building 12, hereinafter referred to as the Leased Premises. ARTICLE 1. TERM. TO HAVE AND TO HOLD unto the Tenant for a term of Five (5) years, commencing on the 1st day of February, 1996, ("commencement date") and ending on the 31st day of January, 2001 both dates inclusive. EARLY ENTRY: Upon execution of this Lease, Landlord shall give Tenant and its agents free access to the Premises at all reasonable times upon request to the Landlord for the purpose of conducting tests and inspections, altering and constructing leasehold improvements, installing trade fixtures and equipment, and otherwise preparing the Premises for operation of Tenant's business. PERMIT DROP-DEAD: Tenant is responsible for obtaining all necessary construction, and occupancy permits for office build-out, if any. If Tenant is unable to obtain such permits, despite diligent efforts, then Tenant shall so notify Landlord in writing and Landlord shall have the option to obtain such permits, on behalf of Tenant, at Tenant's expense. If Landlord is unable to obtain said permits within 30 days from the date of Tenant's written notice, then this Lease shall terminate and Landlord shall pay to Tenant all sums previously paid by Tenant to Landlord under this Lease within ten days of such termination. ARTICLE 2. ACCEPTANCE OF LEASED PREMISES. 2 17 Section 1. The Leased Premises shall be constructed with the dimensions, ceiling heights, slab thickness, insulation, gas unit heaters, electrical services, loading docks, paved parking areas and other specifications described in Exhibit A hereto and shall be delivered to the Tenant in Shell condition which shall include a Certificate of Occupancy. Section 2. Landlord will provide, in addition to the above, one men's and one women's restroom at a total cost not to exceed $15,000. Said restrooms may be completed before or after delivery of the Leased Premises and such completion shall not delay Tenant's obligations to pay rent hereunder. Section 3. Pre-Existing Defects: Tenant's acceptance of the Premises does not extend to any defects which are not readily ascertainable during the course of Tenant's visual inspection. ARTICLE 3. RENT. Section 1. Tenant shall pay to the Landlord as BASIC ANNUAL RENT for the Leased Premises for each year of the period of February 1, 1996 through January 31, 2001, the sum of Three Hundred Forty-One Thousand One Hundred Twenty Dollars ($341,120.00) which shall be paid in equal monthly installments of Twenty-Eight Thousand Four Hundred Twenty-Six Dollars and 66/100ths Dollars ($28,426.66), due and payable on the first day of each month, in advance. Said rent shall be paid to the Landlord, or to the duly authorized agent of the Landlord, at its office at 3800 Red Bank Road, Cincinnati, Ohio 45227. Checks should be made payable to WILMINGTON COMMERCE PARK PARTNERSHIP. Any Basic Annual Rent payment not received by the Landlord by the tenth day of the month shall be past due. If the commencement date of this Lease is other than the first day of the month, any rental adjustment or additional rents hereinafter provided for shall be prorated accordingly. The Tenant will pay the rent as herein provided, without deduction whatsoever, and without any obligation of the Landlord to make demand for it. Any installment of rent accruing hereunder and any other sum payable hereunder, if not paid within ten days of when due, shall bear interest at the rate of eighteen percent (18%) per annum until paid. Late Fee. Provided, however, that Tenant shall be entitled to two (2) written notices from Landlord in a given Lease Year that such rent, additional rent or other charge is due and payable within five (5) days of Tenant's receipt of such notice before a service charge will be assessed. After four (4) such notices have been given to Tenant during the term of this Lease then no further notices shall be given and Tenant shall pay any service charges as otherwise provided herein. The Basic Annual Rent of $341,120.00 shall be adjusted annually based on the Consumer Price Index beginning February 1, 1997, the adjustment date which shall commence in the second year of lease and each year thereafter, whether during the term of this Lease or any renewal or extension thereof. Increases in the Basic Annual Rent shall be made in accordance with the following procedure: a. The index to be used for this adjustment shall be the Consumer Price Index 3 18 (North Central Region, All Urban Consumers, All Items, 1982-84 equaling a base of 100, from the U.S. Department of Labor, Bureau of Labor Statistics, Washington, D.C.). b. The Consumer Price Index of 1996 for the month of January shall be the "Base Period Consumer Price Index." The Consumer Price Index for the month of January prior to each adjustment date in each adjustment year shall be the "Adjustment Period Consumer Price Index." c. The Base Period Consumer Price Index shall be subtracted from the Adjustment Period Consumer Price Index; the difference shall be divided by the Base Period Consumer Price Index. This quotient shall then be multiplied by the $341,120.00 (Basic Annual Rent amount) and the result shall then be added to the $341,120.00 (Basic Annual Rent amount). The resulting sum shall be the Adjusted Annual Rent for such immediately succeeding leasehold period which shall be paid in equal monthly installments. d. If the said Consumer Price Index is, at any time during the term of this Lease, discontinued by the Government, then the most nearly comparable index shall be substituted for the purpose of the aforesaid calculations. e. The rental amount shall not be increased more than five percent (5%) on any one annual adjustment and shall never be increased more than twenty percent (20%) over the initial rent during the term of this lease. Section 2. Rent Commencement Date: Base Annual Rent shall commence sixty (60) days after the Commencement Date; PROVIDED, HOWEVER, that if the Leased Premises becomes operational before the expiration of the sixty day period, Base Annual Rent shall commence immediately upon such operation. Section 3. The Tenant shall reimburse the Landlord for the costs of water, gas, and electricity, including electricity costs for exterior lighting, or any other utilities paid by Landlord in connection with the Leased Premises. Said reimbursement shall be additional rent due on the first day of the calendar month next following rendition of a bill therefor. If any services are separately metered, the cost shall be paid directly by the Tenant to the utility service. The heating and other utilities except water, not separately metered will be prorated on the basis of the square footage serviced by a given meter and paid to Landlord as billed. The total cost of water shall be paid by Tenant currently in occupancy and costs thereof shall be prorated on the basis of square footage occupied by each Tenant (if more than one). In the event that any occupant of the building uses a disproportionate amount of said utilities, an adjustment shall be made so that each tenant pays for their entire share but not a portion of the utilities used by other tenants of the building. 4 19 Section 4. The Tenant agrees to pay any increased real estate taxes over and above the real estate taxes paid by the Landlord during the first year of the term of this Lease. The Tenant's proportionate share of any increase shall be a fraction thereof, the numerator of which is the number of square feet in the leased premises and the denominator of which is 121,600 square feet (the total square feet of floor area in the building or buildings located on the tax parcel for which taxes are increasing). Said amount shall be deemed to be additional rent and shall be due and payable on the first of the month following delivery to Tenant of a receipt for Landlord's payment of said real estate taxes. The Tenant shall pay its share of expenses that the Landlord shall incur by reason of compliance with new laws, orders, special rent/use taxes, ordinances and new regulations of Federal, State, County and Municipal authorities, and with any lawful direction of any public officer or officers, which lawful direction shall be imposed upon the Landlord for the common good of the occupants of the Airborne Commerce Park. Capital improvements which are the responsibility of Landlord shall not be deemed to be prorated to be passed through to Tenant hereunder. Section 5. None of the following acts or omissions by the Landlord shall in any way affect the payment of the rent at the time specified in this Lease; if the Landlord at any time enters into a contract for any alterations, additions, repairs or improvements; if the Landlord fails to make such alterations, additions, repairs or improvements. The Landlord may discontinue all facilities and services rendered by it or its agents or contractors that are not expressly covenanted for herein; such facilities and services shall constitute no part of the consideration for this Lease. Section 6. Tenant has deposited with Landlord the sum of SIX THOUSAND FIVE HUNDRED SIXTY AND NO/100THS ($6,560.00), as security for its performance of its lease of part of Building 2. Upon Lessee's relocation from Building 2, these funds shall continue to be held by Landlord, without interest, and may be commingled with Landlord's other funds, as security for the performance by Tenant of all the terms and conditions of this Lease. If a default should occur, Landlord, at its option, may apply the deposit, in whole or in part to cure the default. If any part of the deposit is so applied by Landlord, Tenant shall, upon Landlord's request, remit to Landlord the amount necessary to restore the full security deposit. Tenant's failure to do so within five (5) days after receipt of Landlord's demand shall be a default. If at the end of the Lease, Tenant is not in default, the security deposit shall be returned to Tenant. ARTICLE 4. COMMON AREA. For the purpose of this Lease, the term "common area" is defined for all purposes of this Lease as facilities that are intended for the common use of all tenants. For purposes of this definition, facilities include the parking area, driveways, private streets and alleys, landscaping, curbs, loading area, sidewalks and exterior lighting facilities intended for the common use of the tenant. Not included are spaces in existing or future buildings or vacant land designed for commercial rental purposes and exclusive to a given tenant. The Landlord may from time to time change the dimensions of the common area, provided that access by trucks to the loading docks is maintained. Tenant and its employees, customers, licensees and invitees 5 20 shall have the nonexclusive right to use the common area as constituted from time to time. The use shall be in common with the Landlord or other tenants in Landlord's buildings and other persons permitted by the Landlord to use the common area. The use shall be subject to all reasonable nondiscriminatory rules and regulations prescribed by Landlord and as amended from time to time, including the designation of specific areas within the common area for parking automobiles owned by the Tenant, its employees, licensees and invitees. If automobiles or other vehicles are parked in part of the common area not specifically designated for employee parking, Tenant shall pay Landlord, as additional rent, an amount equal to the daily or hourly charge established by Landlord for each automobile or vehicle so parked. Such parking use shall not be permitted unless approved by Landlord in writing. Tenant shall not solicit business within the common area or take any action which would interfere with the rights of other persons to use of the common area. The Tenant shall have no right to use the common area for storage of pallets or other storage purposes, and trash shall be stored only in such containers and in such place as approved by the Landlord. The Landlord shall maintain the common area and keep the same in good order and repair including lighting and landscaping. The Landlord may temporarily close any part of the common area for any period necessary to make repairs or alterations or to prevent the public from obtaining prescriptive rights. The cost of exterior lighting and ice and snow removal, general cleaning, asphalt sealing and restriping and landscape maintenance will be prorated among the Tenants in accordance with the percentage that the square footage of the Leased Premises bears to the total square footage of all buildings adjacent to the Leased Premises. The share of such cost will be deemed to be additional rent and shall be due the first of the month following the invoice thereof by Landlord to the Tenant of the amount due, whichever is later. Notwithstanding the foregoing, Tenant shall not be obligated to pay costs of parking lot restriping more frequently than every seven (7) years unless unusual weather conditions cause substantial deterioration in markings within the seven year period. LANDLORD'S ACCOUNTING: Landlord must maintain books and records for all operating expenses, utilities, insurance, taxes and other charges paid to Landlord by Tenant in accordance with generally accepted accounting principles, and provide to Tenant an accounting of such charges. Tenant has right to audit Landlord's books and records for such charges. Landlord must pay for an audit of its books and records if those charges are in error by more than three percent (3%). ARTICLE 5. USE OF LEASED PREMISES. Section 1. The Leased Premises shall be used and occupied only for direct mail and telemarketing activities, warehousing and distribution of products and related activities and for no other purposes or purposes without the written consent of the Landlord. Landlord warrants that Tenant's proposed use of the Leased Premises complies with the requirements hereof. Section 2. The Tenant shall operate its business in a safe and proper manner as is 6 21 normal, considering the uses of the Leased Premises above provided; and shall not manufacture, store, display or maintain any products or materials that will endanger the Leased Premises; shall do nothing that would increase the cost of insurance on the building or invalidate existing policies; shall not obstruct the sidewalks; shall not use the plumbing for any other purpose than for which it was constructed; shall not make or permit any unreasonable noise and/or odor objectionable to the public or adjacent occupants; shall not create a nuisance on the Leased Premises; and shall commit no waste. Section 3. The Tenant shall abide by all police and fire regulations concerning the operation of its business; shall store all trash, rubbish and debris in closed containers; and shall practice all proper procedures and methods that are common to its business enterprise. The Tenant shall maintain a minimum temperature in the Leased Premises of fifty-five (55) degrees fahrenheit. Section 4. The Tenant shall at all times keep all improvements and any equipment facilities or fixtures in good order, condition and repair and in a clean, sanitary and safe condition and in accordance with all applicable laws, ordinances and regulations of any governmental authority having jurisdiction. Tenant shall permit no waste, damage or injury to the Leased Premises. Section 5. Tenant shall forthwith at its own cost and expense replace with glass of the same kind and quality any cracked or broken glass, including plate glass or glass or other breakable materials used in structural portions, and any interior and exterior windows and doors in the Leased Premises. ARTICLE 6. ASSIGNMENT AND SUBLETTING. Section 1. Tenant shall not transfer, mortgage, or pledge this lease, or sublease the subject premises or any portion thereof, without the Landlord's prior written consent, which shall not be unreasonably withheld or delayed. Tenant shall give ABX AIR, INC., the first right to sublease any or all of the premises. The Landlord may deem any levy or sale or execution or other legal process against the Tenant, or any assignment or sale in bankruptcy or assignment or a receiver or insolvency of the Tenant, to be an assignment within the meaning of this Article. Section 2. Assignment: Notwithstanding anything contained herein to the contrary, the following shall not be considered an assignment of the Lease or other transfer for the purpose of this section: (a) any change in ownership of tenant resulting from a public offering of stock of tenant for any parent corporation of tenant; or (b) any transfer of stock or assets of tenant to an affiliate or subsidiary corporation or other entity, or as a result of a merger, consolidation or the reorganization of tenant or any parent of tenant so long as tenant's permitted use of premises is unaltered. Tenant must provide Landlord with written notice regarding any change in ownership or transfer to affiliate or subsidiary corporation and receive written consent from Landlord which consent shall not be unreasonably withheld. 7 22 RELEASE UPON ASSIGNMENT: Tenant shall be released from its obligations under this Lease if the subtenant or assignee approved by Landlord has managerial experience and a financial net worth comparable to Tenant at time of the execution of this Lease. ARTICLE 7. Repairs. Section 1. Landlord shall keep the foundations, exterior walls (except plate glass or glass) roof, and sprinklers in good repair. Section 2. Tenant shall contract for the maintenance of mechanical equipment. The Tenant shall replace any hot water heater as the need should arise with the same type and quality servicing the Leased Premises. Landlord warrants the water heater and heating and air conditioning equipment for one (1) year from the date Tenant occupies the premises. The Landlord shall replace, as needed, the heating and air conditioning equipment, provided the unit has been serviced annually and the cost of replacement shall be prorated over the useful life for such equipment. PRE-EXISTING DEFECTS: Tenant's acceptance of the Premises does not extend to any defects which are not readily ascertainable during the course of Tenant's visual inspection. Section 3. Landlord shall not be liable for failure to keep the Leased Premises in repair, unless notice of the need for repairs has been given Landlord, after the same has come to the explicit attention of Tenant, a reasonable time has elapsed and Landlord has failed to make such repairs. Landlord shall not be liable for any damage done or occasioned by or from the electrical system, the heating and/or air conditioning system, the plumbing and sewer system in, above, upon or about the Leased Premises nor for damage occasioned by water, snow or ice being upon or coming through the roof, walls, windows, doors or otherwise, unless such damages are a result of Landlord's negligence or intentional misconduct in performance or failure to perform as above provided. Section 4. Except as provided in Sections 1, 2 and 3 of this Article, Landlord shall not be obligated to make repairs, replacements or improvements or any kind upon said Leased Premises, or any equipment facilities or fixtures therein contained, which shall at all times be kept in good order, condition and repair by Tenant, and in a clean, sanitary and safe condition and in accordance with all applicable laws, ordinances and regulations of any governmental authority having jurisdiction. Tenant shall permit no waste, damage, or injury to the Leased Premises. 8 23 ARTICLE 8. INSTALLATIONS AND ALTERATIONS. Section 1. Tenant shall not make any alterations or additions to the Leased Premises which exceed in the aggregate $10,000.00 without first procuring Landlord's written consent, which consent shall not be unreasonably withheld, and delivering to Landlord the plans and specifications and copies of the proposed contracts and necessary permits, and shall furnish indemnification against liens, costs, damages and expenses as may be reasonably required by Landlord. All alterations, additions improvements and fixtures, other than trade fixtures, which may be made or installed by either of the parties hereto upon the Leased Premises and which in any manner are attached to the floors, walls or ceilings, at the termination of this Lease shall become the property of the Landlord unless Landlord requests their removal and shall remain upon and be surrendered with the Leased Premises as a part thereof, without damage or injury; and linoleum or other floor covering which may be cemented or adhesively affixed to the floor shall likewise become the property of Landlord, all without compensation or credit to Tenant. Section 2. Landlord may withhold consent reasonably to any proposed alteration, addition or installation which Landlord believes, in the Landlord's reasonable opinion and discretion, could be considered a safety hazard by the Federal Aviation Administration ("FAA") or which Landlord believes would delay compliance or increase the costs incurred by Landlord in complying with any regulation or law administered or enforced by the FAA or similar regulatory body. Section 3. The Tenant shall not erect or install any signage without first procuring Landlord's written consent, which consent shall not be unreasonably withheld or delayed. Section 4. The Tenant shall have no rights to use and shall not use the roof of the Leased Premises for any purpose without the written consent of the Landlord. The Tenant shall not use the roof for storage, for any activity that will result in traffic on the roof, for anything that will penetrate the roof, use the roof as an anchor or otherwise damage the roof. The consent of the Landlord must be in writing for each specific use and must also approve the method of installation of the permitted use. Should the Tenant break this covenant, the Tenant shall be responsible for any damages caused to the roof or other parts of the building and shall assume the cost of maintaining and repairing the roof during the term of the Lease, including any renewals. ARTICLE 9. RISK OF LOSS. Section 1. The Landlord shall not be held responsible for and is relieved from all liability by reason of, any injury or damage to any person, persons or property in the demised premises, whether belonging to the Tenant or any other person, caused by any fire or by any breakage or leakage in any part or portion of the demised premises, or in any part or portions of the building of which the demised premises are a part, unless such breakage, leakage, injury or damage is caused by or results from the negligence or intentional misconduct of the Landlord or its agents. The Tenant, in consideration of the rent, accepts and assumes such responsibility and 9 24 liability. Section 2. The Landlord shall not be held responsible for and is relieved from all liability by reason of, any injury or damage to any person, persons or property in the demised premises, whether belonging to the Tenant or any other person, from water, rain or snow that may leak into, issue, or flow from any part of the premises or of the building of which the demised premises are a part, from the pipes or plumbing work of the same or from any place or quarter, unless such damage, leak or flow is caused by or results from the negligence or intentional misconduct of the Landlord or its agents or any person or persons. The Tenant, in consideration of the rent herein specified, accepts and assumes such responsibility and liability. Section 3. The Tenant releases the Landlord from all liability, and assumes all liability, for damages which may arise from any kind of injury to person, persons or property on account of the use, misuse or abuse of all elevators, hatches, or openings of any kind that may exist or hereinafter be erected or constructed on the premises or from any kind of injury that may arise from any other cause on the premises, unless such damage, injury, use, misuse or abuse is caused by or results from the negligence or intentional misconduct of the Landlord or its agents. ARTICLE 10. INSURANCE. Section 1. Tenant shall not carry any stock of goods or do anything in or about said Leased Premises which will in any way tend to increase insurance rates on said Leased Premises or the building in which the same are located. Landlord warrants that Tenant's proposed use of the Leased Premises will not tend to increase insurance rates on the Leased Premises. If Landlord shall consent to such use, Tenant agrees to reimburse Landlord, upon demand, all increase or increases of premiums on insurance carried by the Landlord on all or part of the Leased Premises, or on the building of which the Leased Premises are a part, caused in any way by the Tenant's occupancy. If Tenant installs any electrical equipment that overloads or may overload the power lines to the building, Tenant shall make immediately, and at its own expense, whatever changes are necessary to remedy such overload or possible overload and to avoid the same in the future, and shall comply with all requirements of all governmental authorities having jurisdiction and with the requirements of any insurance underwriters and rating bureaus. Section 2. Tenant agrees to procure and maintain a policy or policies of insurance, at its own costs and expense, insuring from all claims, demands or actions for injury to or death of more than one person in any one accident and for damages to property in an aggregate amount of not less than $2,000,000.00 made by or on behalf of any person or persons, firm or corporation, arising from, related to, or connected with the conduct and operation of Tenant's business in the Leased Premises. Landlord shall be named an Additional Insured Party in said policy. Such insurance shall be primary relative to any other valid and collectible insurance. Tenant may satisfy this insurance requirement with appropriate coverage under its existing policies which may be in the form of a blanket policy and shall not be obligated to obtain a separate policy for the Leased Premises. Said insurance shall not be subject to 10 25 cancellation except after at least thirty (30) days prior written notice to Landlord, and certificates for the same, shall be deposited with Landlord at the commencement of the term and renewals of such coverage. If Tenant fails to comply with such requirement, Landlord may obtain such insurance and keep the same in effect after written notice to Tenant, and Tenant shall pay Landlord the premium cost thereof upon demand. Section 3. All property of Tenant or those claiming under Tenant which may be upon said Leased Premises during the term hereof or any renewal thereof shall be at and upon the sole risk and responsibility of the Tenant. ARTICLE 11. DAMAGE BY FIRE OR OTHER CASUALTY. Section 1. If the demised Premises are totally destroyed or so damaged by fire or other casualty not occurring through fault or negligence of the Tenant, or those employed by or acting for it, that they cannot be repaired and restored, on the basis of normal working days and hours, within 90 days, this lease shall terminate, and the rent shall abate for the balance of the term; PROVIDED, HOWEVER, that should it be determined anytime that the aforesaid fire or other casualty was caused by the negligence or willful misconduct of Tenant, its employees or agents, then this lease shall not terminate, and should it have been terminated prior to this determination, it shall be reinstated and all amounts which would have accrued but for the termination shall be immediately due to Landlord and all other duties hereunder shall be reinstated in full. Section 2. If the damage above is only partial and the premises can be restored, on the basis of normal working days and hours, to the present condition within 90 days, the Landlord shall restore them as speedily as circumstances reasonable permit, including the time necessary and required by the insurance companies to inspect the premises and to make an adjustment with the Landlord. The Landlord may enter upon the premises for the purpose of doing the restoration work. However, if such damage occurs during the final 12 months of the then current term, the Landlord or the Tenant may terminate this lease by giving written notice to the other party within 30 days after the damage occurs. If Landlord either party exercises such option the rent shall abate for the balance of the term. The Landlord also may enter upon the demised premises whenever necessary to repair damage caused by fire or other casualty to the building of which the demised premises are a part, even though the effect of such entry is to render the demised premises or a part thereof untenantable. In that event, the rent shall be prorated and suspended while the Landlord is in possession, taking into account the proportion in area of the demised premises rendered untenantable or unusable and the duration of the Landlord's possession. If a dispute arises as to the amount of rent under this clause, the Tenant shall pay the full amount claimed by the Landlord. The Tenant may, however, proceed by law to recover any excess payment. ARTICLE 12. EMINENT DOMAIN. 11 26 Section 1. If any of the Leased Premises shall be taken by a public authority under the power of eminent domain and Landlord is unable to provide substitute space within the area of the Airborne Commerce Park, then the term of this Lease shall cease as of the day possession shall be taken by such public authority, and the rent shall be paid up to that date with a proportionate refund by Landlord of such rent as shall have been paid in advance. Section 2. If less than substantially all of the floor area of the Leased Premises shall be so taken, as of the day possession shall be taken by such public authority, and the rent shall be paid up to that day with a proportionate refund by Landlord of such rent as may have been paid in advance, and thereafter the minimum rent shall be equitably abated, and Landlord shall at its own cost and expense make all necessary repairs or alterations as to constitute the remaining Leased Premises a complete architectural unit. If Tenant shall not be able to reasonably operate its business, then Tenant shall have the right to terminate this Lease on 60 days written notice. Section 3. All damages awarded for such taking under the power of eminent domain, whether for the whole or a part of the Leased Premises, shall be the property of Landlord whether such damages shall be awarded as compensation for diminution in value of the leasehold or to the fee of the Leased Premises; provided, however, that the Landlord shall not be entitled to any separate award made to Tenant for loss of business, depreciation to and cost of removal of stock and fixtures. ARTICLE 13. ACCESS TO LEASED PREMISES. Tenant shall retain all keys to the Leased Premises for security reasons. Tenant agrees to have accessible to Landlord for twenty-four (24) hours each day, a person or persons who will be able to provide reasonable access to the Leased Premises for Landlord. After 48 hours written notice, except in cases of emergency, the Landlord or its agents shall have the right to enter upon the Leased Premises at all reasonable hours for the purpose of inspecting the same or of making repairs, additions or alterations thereto or to the building in which the same are located. If Landlord must obtain access to the premises in an emergency, and Tenant has not provided access as set forth above, Landlord may use whatever reasonable means are necessary to obtain access, and any costs to repair damage caused to the Leased Premises by Landlord in obtaining access shall be paid by Tenant. During the final six months of the Lease term, the Landlord shall have the right, upon 48 hours written notice, to show the Leased premises to prospective Tenants, purchasers or others. Landlord shall not be liable to Tenant in any manner for any expense, loss or damage by reason thereof, nor shall the exercise of such right be deemed an eviction or disturbance of Tenant's use and possession. ARTICLE 14. INABILITY TO DELIVER PREMISES. If this Lease is executed and the Landlord cannot deliver possession of the Leased Premises before the commencement date (as defined in Article 1), it shall not be deemed to be in 12 27 default under the Lease, and Tenant shall accept possession of the Leased Premises provided Landlord is able to tender them within 30 days, unless the delay is caused by an act or acts of severe winter weather, in which case Landlord shall have sixty(60) days to tender possession of the Leased Premises. Landlord waives the payment of rent covering any period before possession is tendered to Tenant. ARTICLE 15. LANDLORD'S SUCCESSORS. The term "Landlord" as used in this Lease shall be limited to mean and include only the owner or owners, at the time, of the fee of the building, their successors and assigns, so that in the event of any sale or sales of the building, the previous Landlord shall be entirely released with respect to the performance of all subsequently accruing covenants and obligations on the part of Landlord. The retention of fee ownership by a Landlord of the building or of the land on which it is located under an underlying lease which is now or hereafter in effect, shall not be deemed to impose on such underlying Landlord any liability, initial or continuing, for the performance of the covenants and obligations of Landlord. ARTICLE 16. SUBORDINATION. This Lease shall be subject to and subordinate at all times to the lien of any mortgages, now or hereafter made on the Leased Premises, to all advances made or hereafter to be made thereunder, and to any easements granted to or by Landlord which benefit or burden the Leased Premises. The Tenant agrees to execute a subordination agreement should Landlord's lender request same. ARTICLE 17. ATTORNMENT. In the event the herein Leased Premises are sold due to any sale, transfer or foreclosure, by virtue of judicial proceedings or otherwise, this Lease shall continue in full force and effect, and Tenant agrees, upon request, to attorn to and acknowledge the transferee(s) or purchaser(s) at such transfer or sale as Landlord(s) hereunder; provided such transferee(s) or purchaser will recognize this Lease, unless and until it is in default. ARTICLE 18. LIMITATION ON LIABILITY. Notwithstanding any other provision of this Lease, Tenant agrees to look solely to Landlord's interest in the building (subject to any mortgage on the building) for the recovery of any judgment requiring the payment of money by Landlord; it being agreed that Landlord, and if Landlord is a partnership, its partners whether general or limited, or if Landlord is a corporation, its directors, officers, and shareholders, shall never be personally liable for any such judgment, and no other assets of the Landlord shall be subject to such levy, execution or other procedures for the satisfaction of Tenant's judgment. The provision contained in the foregoing sentence is not intended to, and shall not, limit any right that Tenant might otherwise have to obtain 13 28 injunctive relief against Landlord or Landlord's successors in interest, or to maintain any other action not involving the personal liability of Landlord, or to maintain any suit or action in connection with enforcement or collection of amounts which may become owing or payable under or on account of insurance maintained by Landlord. ARTICLE 19. TENANT'S DEFAULT. Section 1. The Tenant, ten (10) days after receipt of written notice, shall be considered in default of this Lease upon failure to pay when due the rent or any other sum required by the terms of the Lease. Tenant shall also be considered in default thirty (30) days after receipt of written notice for failure to perform any term, covenant or condition of this Lease; upon the commencement of any action or proceeding for the dissolution, liquidation or reorganization under the Bankruptcy Act, of Tenant, or for the appointment of a receiver or trustee of the Tenant's property; upon making of any assignment for the benefit of creditors by Tenant; upon suspension of business; or the abandonment of the Leased Premises by the Tenant. Any defaults other than nonpayment defaults shall have a thirty (30) day cure period. Section 2. In the event of default of this Lease by either party, then either party may pursue any and all remedies and rights available under applicable Ohio law. Should Landlord elect to reenter, as herein provided, or should it take possession pursuant to legal proceedings or pursuant to any notice provided for by law, it may either terminate this Lease, or it may without terminating this Lease relet said Leased Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Landlord may deem advisable, with the right to make alterations and repairs to said Leased Premises for the purpose of rerental. Should such rentals received from such reletting during any month be less than required to be paid by Tenant as defined above, then Tenant shall immediately pay such deficiency to Landlord. Section 3. No such reentry or taking possession of said Leased Premises by Landlord shall be construed as an election on its part to terminate this Lease, unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach or act of default. Should Landlord at any time terminate this Lease for any breach or act of default, in addition to any other remedy it may have, it may recover from Tenant all damages it may incur by reason of such breach or act of default, including the cost of recovering the Leased Premises, legal fees, and including the worth at the time of such termination of the excess, if any, of the amount of rent and charges equivalent to rent reserved in this Lease for the remainder of the stated term over the then reasonable rental value of the Leased Premises for the remainder of the stated term. ARTICLE 20. SURRENDER OF LEASED PREMISES. 14 29 Section 1. If Tenant holds possession of the Leased Premises after the termination of this Lease for any reason not authorized by the Landlord unless the parties are engaged in good faith negotiations for the leasing of this or other space in the Wilmington Commerce Park, after sixty days from the termination, Tenant shall pay Landlord one hundred fifty percent (150%) of the rent provided for herein for such period that Tenant holds over, but such payment of rent shall not create any Lease arrangement whatsoever between Landlord and Tenant, unless expressly agreed to in writing by Landlord. It is further understood that during such period that Tenant holds over, the Landlord retains all of Landlord's rights under this Lease, including damages as a result of the termination of this Lease and the right to immediate possession of the Leased Premises. This paragraph shall not be construed to grant Tenant permission to hold over. Section 2. At the expiration of the tenancy created hereunder, whether by lapse of time or otherwise, Tenant shall surrender the Leased Premises broom clean, free of tire marks, free of all debris and in good condition and repair, reasonable wear and tear and loss by fire or other unavoidable casualty excepted. Section 3. Prior to surrender of the Leased Premises, the Leased Premises will be reviewed by a representative of the Landlord and Tenant to determine if there is any deferred maintenance or unrepaired damage which is the responsibility of Tenant. Tenant shall have the option to effect such maintenance and repairs. In the event that there is deferred maintenance and/or unrepaired damage not taken care of by Tenant, then Landlord may effect such maintenance and repairs and Tenant will pay the cost thereof which cost shall not exceed 10% of the Landlord's approved initial build-out. Section 4. Upon the expiration of the tenancy hereby created, if Landlord so requests in writing, Tenant shall promptly remove any additions, signs, fixtures and installations placed in the Leased Premises by Tenant that is designated in said request, and repair any damage occasioned by such removals at its own expense, and in default thereof, Landlord may effect such removals and repairs, and Tenant shall pay Landlord the cost thereof, with interest at the rate of eight (8) percent per annum from the date of payment by Landlord. Notwithstanding the foregoing, Tenant shall be able to leave in such additions, signs, fixtures and installations in an amount up to ten (10%) of its original build-out without a duty to remove the same. ARTICLE 21. WAIVER OF SUBROGATION. The Landlord and Tenant waive all rights, each against the other, for damages caused by fire or other perils covered by insurance where such damages are sustained in connection with the occupancy of the Leased Premises. ARTICLE 22. ZONING; PERMITS. Notwithstanding anything herein elsewhere contained to the contrary, this Lease 15 30 and all the terms and conditions hereof are in all respects subject and subordinate to all zoning restrictions and restricting covenants affecting the Leased Premises, and the building in which they are located, and the Tenant shall be bound by such restrictions. Landlord represents that to the best of its knowledge and belief, the present zoning of the premises permit the activities of Tenant as such are presently carried on. In the event that the present zoning does not permit the activities of Tenant's present use then this Lease shall be void. The Landlord further does not warrant that any licenses or permits which may be required for the business to be conducted by the Tenant on the Leased Premises will be granted, or, if granted, will be continued in effect or renewed. Any failure to obtain the licenses, permits, or any revocation thereof or failure to renew them, shall not release the Tenant from the terms of this Lease. ARTICLE 23. ENVIRONMENTAL PROVISIONS. Section 1. The Landlord, to the best of its knowledge, represents to the Tenant that no toxic, explosive or other dangerous materials or hazardous substances have been concealed within, buried beneath, released on or from, or removed from and stored off-site of the Property upon which the Leased Premises is constructed. Section 2. Tenant shall at all times during the term of this Lease comply with all applicable federal, state, and local laws, regulations, administrative rulings, orders, ordinances, and the like, pertaining to the protection of the environment, including but not limited to, those regulating the handling and disposal of waste materials. Further, during the term of this Lease, neither Tenant nor any agent or party acting at the direction or with the consent of Tenant shall treat, store, or dispose of any "hazardous substance," as defined in Section 101 (14) of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") (or any analogous legislation), or petroleum (including crude oil or any fraction thereof) on or from the Property. Section 3. Tenant shall fully and promptly pay, perform, discharge, defend, indemnify and hold harmless Landlord from any and all claims, orders, demands, causes of action, proceedings, judgments, or suits and all liabilities, losses, costs or expenses (including, without limitation, technical consultant fees, court costs, expenses paid to third parties and reasonable legal fees) and damages arising out of, or as a result of, (i) any "release" as defined in Section 101 (22) of CERCLA (or any analogous legislation), of any "hazardous substance," as defined in Section 101 (14) of CERCLA (or any analogous legislation), or petroleum, (including crude oil or any fraction thereof) or placed into, on or from the Property at any time after the date of this Lease by Tenant, its agents, or employees; (ii) any contamination of the Property's soil or groundwater or damage to the environment and natural resources of the Property the result of actions occurring after the date of this Lease, whether arising under CERCLA or other statutes and regulations, or common law by Tenant, its agents, or employees; and (iii) any toxic, explosive or otherwise dangerous materials or hazardous substances which have been buried beneath, concealed within or released on or from the Property after the date of this Lease. 16 31 Section 4. Landlord agrees to indemnify and hold harmless Tenant upon the same terms and conditions set forth above for any release which is caused by any other tenant in the Airborne Commerce Park or by Landlord itself, except to the extent that Tenant is determined to be partly or wholly responsible for such release. Section 5. Landlord hereby warrants to Tenant that the Premises do not contain any asbestos. Landlord also represents and warrants that it has not received notification of any kind from any governmental agency regarding actual, potential, or threatened contamination of the Property by Hazardous Substances. Landlord agrees to indemnify and hold Tenant harmless from any and all costs of any governmentally required remedial action or cleanup suffered or incurred by Tenant arising out of or related to any use of the Premises, Shopping Center, Building or Property or presence of asbestos or Hazardous Substances in any such areas or portion thereof occurring prior to the Lease Commencement date. The term "Hazardous Substances" shall mean any and all hazardous, toxic, infectious, or radioactive substances, wastes, or materials listed or defined by any Environmental Law and specifically shall include petroleum oil and its fractions, asbestos, urea formaldehyde and radon. The term "Environmental Laws" means any and all federal, state, and local statutes, regulations, and ordinances pertaining to the protection of human health or the environment that are applicable to the Premises, including, without limitation, the Comprehensive Environmental Response, Compensation and Recover Act of 1980, as amended, the Resource Conversation and Recovery Act of 1976, and the Hazardous Materials Transportation Act; all regulations pertaining thereto; and all other statutes, laws and ordinances of the United States and of any state, county or municipality in which the Premises are located. ARTICLE 24. ESTOPPEL CERTIFICATE. The Tenant agrees to execute an Estoppel Certificate on a form to be supplied by Landlord for the benefit of Lender or any mortgage holder; that wherein the Tenant acknowledges the terms and conditions of this Lease. ARTICLE 25. ACCELERATION OF RENT. If the Tenant becomes insolvent, bankrupt, or makes an assignment for the benefit of creditors, or is levied upon or sold out by Sheriff's or Marshall's sale, or if a receiver is appointed, the Landlord may declare the rent for the balance of the term or any part thereof to be due and payable as if by the terms of the lease it were payable in advance. If the rent or any other sum payable hereunder is at any time unpaid when within 45 days after due, the Landlord may then declare the rent for the balance of the term or any part thereof to be immediately due and payable as if by the terms of the Lease it were payable in advance, and the Landlord may immediately proceed to distrain, collect, or bring action for the whole rent or any part thereof, as if it were in arrears, or may enter judgment therefor, in an amicable action as hereinabove provided in the case of rent in arrears. 17 32 ARTICLE 26. RENT DEMAND. Every demand for rent due wherever and whenever made shall have the same effect as if made at the time it falls due and at the place of payment, and after the service of any notice or commencement of any suit, or final judgment therein, Landlord may receive and collect any rent due, and such collection or receipt shall not operate as a waiver of nor affect such notice, suit or judgment. ARTICLE 27. NO REPRESENTATION BY LANDLORD. Landlord and its agent have made no representations or promises with respect to the Leased Premises or the building of which the same form a part except as herein expressly set forth. Landlord represents that all systems and Leased Premises will be in good working order and in full compliance with law and provision of the certificate of occupancy upon commencement of the Lease. ARTICLE 28. WAIVER OF BREACH. No waiver of any breach of the covenants, provisions or conditions contained in this Lease shall be construed as a waiver of the covenant itself or any subsequent breach itself, and if any breach shall occur and afterwards be compromised, settled or adjusted, this Lease shall continue in full force and effect as if no breach had occurred, unless otherwise agreed. The acceptance of rent hereunder shall neither be or construed to be a waiver of any breach of any term, covenant or condition of this Lease. ARTICLE 29. QUIET ENJOYMENT. Landlord hereby covenants and agrees that if Tenant shall perform all the covenants and agreements herein stipulated to be performed on Tenant's part, Tenant shall at all times during the continuance hereof have the peaceable and quiet enjoyment and possession of the Leased Premises without any manner of let or hindrance from Landlord or any person or persons lawfully claiming the Leased Premises except as otherwise provided for herein. ARTICLE 30. INTERPRETATION. Section 1. Wherever either the word "Landlord" or "Tenant" is used in this Lease, it shall be considered as meaning the singular and/or neuter pronouns as used herein, and the same shall be construed as including all persons and corporations designated respectively as Landlord or Tenant in the heading of this instrument wherever the context requires. ARTICLE 31. DEFINITIONS. Pro rata share. Unless otherwise indicated, "pro rata share" means the share of 18 33 any costs, fees, or expenses Tenant is required to pay to Landlord under this Agreement calculated by dividing the square footage of the Leased Premises by the total square footage of the building or buildings as the case may be of which the Leased Premises are a part. Buildings. Unless otherwise indicated, "buildings" means the buildings of which the leased premises are a part and to which any item of expense is attributable or allocable. ARTICLE 32. HEADINGS. All headings preceding the text of the several Articles and Sections hereof are inserted solely for convenience or reference and shall not constitute a part of this Lease or affect its meaning, construction, or effect. ARTICLE 33. NOTICE. All notices under this Lease may be personally delivered; sent by courier service, with receipt; or mailed to the address shown by certified mail, return receipt requested. The effective date of any mailed notice shall be three (3) days after delivery of the same to the United States Postal Service. Landlord: WILMINGTON COMMERCE PARK PARTNERSHIP Mail: Al. NEYER, INC. 3800 Red Bank Road Cincinnati, Ohio 45227 Telephone: (513) 271-6400 FAX: (513) 271-1350 Tenant: DJ & J Software Corporation Mail: Attn: Real Estate Department 22011 South East 51st Street Issaquah, WA 98027 Telephone: (206) 391-0800 ARTICLE 34. FINANCIAL STATEMENTS. The Tenant shall furnish the Landlord with Tenant's most current audited financial statements. Tenant shall furnish Landlord with Tenant's most current public information at Landlord's request during Lease term. ARTICLE 35. MEMORANDUM OF LEASE. It is agreed by both parties that this instrument is not recordable and if either party 19 34 should record the same in the office of the Recorder of Clinton County, Ohio, the recording shall have no effect. When possession of the Leased Premises has been delivered to Tenant, the parties hereto may execute, acknowledge and deliver a Memorandum of Lease in recordable form specifying the terms of this Lease and renewal periods of this Lease. In the event they differ from the dates herein, the date in the Memorandum shall control. ARTICLE 36. TIME. Time is of the essence in this Lease. ARTICLE 37. RIGHT OF FIRST REFUSAL. Tenant shall have the right of first refusal to lease additional space in the building. Landlord must deliver written notice of such offer to Tenant. Tenant shall have ten (10) days from the date such notice is received by Tenant to respond to such offer. If Tenant fails to deliver written notice to Landlord in ten (10) days, Landlord shall be free to lease the space to the third party. ARTICLE 38. AMERICANS WITH DISABILITIES ACT. Landlord warrants that prior to Tenant's occupancy the Premises will comply with the Americans with Disabilities Act of 1990 and any related rules and regulations, as amended from time to time ("AD"). To the extent applicable, Tenant shall perform and pay for compliance with the ADA affecting the Premises that is required by actions taken by Tenant to alter or remodel the Premises, and by changes to the ADA enacted or promulgated after the Lease Commencement Date. Throughout the term of this Lease, Landlord shall perform and pay for compliance with the ADA outside of the Premises, including without limitation, provision of an accessible path of travel to the Premises. ARTICLE 39. CONFIDENTIALITY. The confidentiality of all business information provided by either party to this Lease pursuant to the terms of this Lease shall be preserved and protected by the party receiving such information, unless the party providing the information has expressly stated in writing to the other party that the information provided is not confidential. ARTICLE 40. BROKERS. Tenant is not liable for the fees of any brokers or agents which were not engaged by Tenant. No broker or agent has the authority to make any representation for or obligate 20 35 Tenant in any manner. ARTICLE 41. ENTIRE AGREEMENT. This Lease contains the entire agreement between the parties; it supersedes all previous understandings and agreements between the parties, if any and no oral or implied representation of understandings shall vary its terms; and it may not be amended except by a written instrument executed by both parties hereto. IN WITNESS WHEREOF, the parties hereto set their hands to triplicates hereof, this _____ day of _____________________, 1995, as to Landlord , and this _____ day of ___________________, 1995, as to Tenant. Signed and acknowledged LANDLORD: WILMINGTON COMMERCE in the presence of: PARK PARTNERSHIP _________________________________ By:_________________________________ Its:_________________________________ _________________________________ TENANT: DJ & J SOFTWARE CORPORATION _________________________________ By:_________________________________ Terence M. Strom, President and C.E.O. _________________________________ 21 36 STATE OF OHIO, COUNTY OF ___________________, SS: The foregoing instrument was acknowledged before me this _____ day of ___________, 1995, by ______________________, ________________________, on behalf of WILMINGTON COMMERCE PARK PARTNERSHIP. ____________________________________ Notary Public STATE OF WASHINGTON, COUNTY OF KING, SS: The foregoing instrument was acknowledged before me this _____ day of ____________, 1995, by Terence M. Strom, President and C.E.O., on behalf of DJ & J SOFTWARE CORPORATION. ____________________________________ Notary Public Prepared by BUCKLEY, MILLER & WRIGHT, Attorneys at Law, Wilmington, Ohio 45177 KB/JVG.WCPP1.EGG.KB('95)(5) 22 EX-10.20 6 DECISIONONE CORP. EXECUTIVE SEVERANCE PLAN 1 EXHIBIT 10.20 DECISIONONE CORPORATION EXECUTIVE SEVERANCE PLAN EX-21 7 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF DECISIONONE CORPORATION 1. Decision Data Investment Corporation, a Delaware Corporation 2. DecisionOne Supplies, a Delaware Corporation 3. Decision Data Computer International, S.A., incorporated in Switzerland. 4. DecisionOne Corporation, incorporated in Ontario Canada 5. Properties Holding Corporation, a Delaware Corporation. 6. Properties Development Corporation, a Delaware Corporation 7. IC Properties Corporation, a Delaware Corporation. EX-23 8 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 1, 1999, appearing in the Annual Report on Form 10-K of DecisionOne Holdings Corp. and DecisionOne Corporation for the year ended June 30, 1999. Deloitte & Touche LLP Philadelphia, Pennsylvania December 6, 1999 EX-24 9 POWER OF ATTORNEY 1 EXHIBIT 24 The undersigned hereby makes, constitutes and appoints Karl R. Wyss, Thomas J. Fogarty 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, 1999 of DecisionOne Corporation and any amendments 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. /s/ KIRK B. WORTMAN* -------------------------------------- Kirk B. Wortman Dated: November ,1999 * Identical powers-of-attorney (other than the signature blocks) were executed by Karl R. Wyss, Lawrence M.v.D. Schloss, and Peter T. Grauer. EX-27 10 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. TO COME
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