SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 25, 1997
IRON MOUNTAIN INCORPORATED
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-27584 04-3107342
-------- ------- ----------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
745 Atlantic Avenue
Boston, Massachusetts 02111
-------------------------------------------------------------
(Address of principal executive offices, including zip code)
(617) 357-4455
-------------------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE>
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired
Records Retention/FileSafe
Balance Sheets as of December 31, 1996 and 1995
Balance Sheet as of September 30, 1997 (unaudited)
Statements of Operations for the years ended December 31, 1996 and 1995
Statements of Operations for the nine months ended September 30, 1997
and 1996 (unaudited)
Statements of Changes in Partners' Equity for the years ended December
31, 1996 and 1995
Statement of Changes in Partners' Equity for the nine months ended
September 30, 1997 (unaudited)
Statements of Cash Flows for the years ended December 31, 1996 and 1995
Statements of Cash Flows for the nine months ended September 30, 1997
and 1996 (unaudited)
Allegiance Business Archives, Ltd.
Balance Sheet as of December 31, 1996
Balance Sheet as of September 30, 1997 (unaudited)
Statement of Operations and Retained Earnings for the nine months ended
December 31, 1996
Statements of Operations and Retained Earnings for the nine months
ended September 30, 1997 and 1996 (unaudited)
Statement of Cash Flows for the nine months ended December 31, 1996
Statements of Cash Flows for the nine months ended September 30, 1997
and 1996 (unaudited)
HIMSCORP, Inc. and Subsidiaries
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Balance Sheet as of September 30, 1997 (unaudited)
Consolidated Statements of Income for the year ended December 31, 1996
and for the period February 1, 1995 to December 31, 1995
Consolidated Statements of Income for the nine months ended September
30, 1997 and 1996 (unaudited)
Consolidated Statements of Stockholders' Equity for the year ended
December 31, 1996 and for the period February 1, 1995 to December 31,
1995
Consolidated Statement of Stockholders' Equity for the nine months
ended September 30, 1997 (unaudited)
2
<PAGE>
Consolidated Statements of Cash Flows for the year ended December 31,
1996 and for the period February 1, 1995 to December 31, 1995
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996 (unaudited)
Arcus Technology Services, Inc.
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Balance Sheet as of September 30, 1997 (unaudited)
Consolidated Statements of Income for the year ended December 31, 1996
(successor), for the five months ended December 31, 1995
(successor), for the seven months ended July 31, 1995 (predecessor)
and for the year ended December 31, 1994 (predecessor)
Consolidated Statements of Income for the nine months ended
September 30, 1997 and 1996 (unaudited)
Consolidated Statements of Stockholders' Equity for the year ended
December 31, 1996 (successor), for the five months ended December 31,
1995 (successor), for the seven months ended July 31, 1995
(predecessor), and for the year ended December 31, 1994 (predecessor)
Consolidated Statement of Stockholders' Equity for the nine months
ended September 30, 1997 (unaudited)
Consolidated Statements of Cash Flows for the year ended December 31,
1996 (successor), for the five months ended December 31, 1995
(successor), for the seven months ended July 31, 1995 (predecessor)
and for the year ended December 31, 1994 (predecessor)
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996 (unaudited)
Arcus Group, Inc.
Consolidated Balance Sheets of December 31, 1996 and 1995
Consolidated Balance Sheet as of September 30, 1997 (unaudited)
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Operations for the nine months ended
September 30, 1997 and 1996 (unaudited)
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statement of Stockholders' Equity for the nine months
ended September 30, 1997 (unaudited)
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996 (unaudited)
3
<PAGE>
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Item
- ---------- ----
<S> <C>
23.1 Consent of Ernst & Young LLP (Arcus Group, Inc. and Arcus Technology Services, Inc.)
23.2 Consent of Arthur Andersen LLP (Arcus Group, Inc.)
23.3 Consent of Ernst & Young LLP (HIMSCORP, Inc. and Subsidiaries)
23.4 Consent of Abbott, Stringham and Lynch (Records Retention/FileSafe)
23.5 Consent of Stout, Causey & Horning, P.A. (Allegiance Business
Archives, Ltd.)
</TABLE>
4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
IRON MOUNTAIN INCORPORATED
(Registrant)
By: /s/ Jean A. Bua
---------------------------------------
Jean A. Bua
Vice President and Corporate Controller
Date: November 25, 1997
5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Iron Mountain Incorporated:
We have audited the accompanying balance sheets of Records Retention/FileSafe,
a California Limited Partnership as of December 31, 1995 and 1996, and the
related statements of operations, changes in partners' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Records Retention/FileSafe, a
California Limited Partnership, as of December 31, 1995 and 1996, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
ABBOTT, STRINGHAM & LYNCH
Campbell, California
August 7, 1997
F-1
<PAGE>
RECORDS RETENTION/FILESAFE
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------- September 30,
1995 1996 1997
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash ................................................... $ 1,370 $ 447,285 $1,095,628
Accounts receivable, less allowance for doubtful
accounts of $206,000 in 1996 and $100,000 in 1997 ...... 1,930,670 1,701,096 1,718,037
Inventories ............................................. 41,357 27,675 13,231
Prepaid expenses and other .............................. 75,909 64,288 112,489
----------- ----------- -----------
Total Current Assets ................................. 2,049,306 2,240,344 2,939,385
Property, Equipment and Improvements, net ............... 5,586,680 5,518,217 5,434,407
Due From Partner ....................................... 50,000 50,000 --
Other Assets ............................................. 80,151 78,331 74,499
----------- ----------- -----------
$7,766,137 $7,886,892 $8,448,291
=========== =========== ===========
LIABILITIES AND PARTNERS' EQUITY
Current Liabilities:
Revolving line of credit .............................. $ 272,300 $ -- $ --
Current portion of notes payable ........................ 144,930 169,480 193,304
Current portion of capital leases ..................... 16,228 30,492 38,130
Accounts payable ....................................... 85,524 89,403 64,878
Accrued expenses ....................................... 168,800 90,747 84,981
Deferred income ....................................... 986,600 1,117,076 1,122,929
----------- ----------- -----------
Total Current Liabilities ........................... 1,674,382 1,497,198 1,504,222
Notes Payable, Net of Current Portion .................. 3,351,648 3,202,989 3,049,236
Capital Leases, Net of Current Portion .................. 57,998 82,160 51,148
----------- ----------- -----------
Total Liabilities .................................... 5,084,028 4,782,347 4,604,606
Commitments (Notes 4 and 5)
Partners' Equity ....................................... 2,682,109 3,104,545 3,843,685
----------- ----------- -----------
$7,766,137 $7,886,892 $8,448,291
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
RECORDS RETENTION/FILESAFE
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
----------------------------- ----------------------------
1995 1996 1996 1997
------------- ------------- ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Storage .................................... $ 5,901,579 $ 6,662,020 $4,967,122 $ 5,254,175
Service and storage material sales ......... 3,301,360 4,147,064 3,174,053 3,418,965
------------ ------------ ----------- ------------
Total Revenues ........................... 9,202,939 10,809,084 8,141,175 8,673,140
Operating Expenses:
Cost of sales (excluding depreciation) ...... 4,467,005 4,206,687 3,086,834 3,019,008
Selling, general and administrative ......... 1,712,969 2,268,967 1,442,708 1,497,070
Depreciation and amortization ............... 489,865 564,572 423,429 288,569
------------ ------------ ----------- ------------
Total Operating Expenses .................. 6,669,839 7,040,226 4,952,971 4,804,647
------------ ------------ ----------- ------------
Operating Income .............................. 2,533,100 3,768,858 3,188,204 3,868,493
Interest Expense .............................. 67,298 249,498 189,623 142,052
------------ ------------ ----------- ------------
Net Income .................................... $ 2,465,802 $ 3,519,360 $2,998,581 $ 3,726,441
============ ============ =========== ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
RECORDS RETENTION/FILESAFE
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
FileSafe Records 15%
Limited Retention, Limited
Partnership FileSafe Inc. Inc. Partner Total
------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Balances,
December 31, 1994 ...... $ 282,058 $ 1,048,957 $ 1,225,578 $ -- $ 2,556,593
Net Income ............... 141,884 925,151 1,103,331 295,436 2,465,802
Partners' Draws ......... (135,453) (881,395) (1,046,539) (276,899) (2,340,286)
---------- ----------- ------------ ---------- ------------
Balances,
December 31, 1995 ...... 288,489 1,092,713 1,282,370 18,537 2,682,109
Net Income ............... 135,414 922,323 2,015,104 446,519 3,519,360
Partners' Draws ......... (113,285) (771,759) (1,829,146) (382,734) (3,096,924)
---------- ---------- ------------ ---------- ------------
Balances,
December 31, 1996 ...... $ 310,618 $ 1,243,277 $ 1,468,328 $ 82,322 $ 3,104,545
Net Income (Unaudited) .... 193,920 1,319,428 1,654,127 558,966 3,726,441
Partners' Draws (Unaudited) (157,079) (1,059,286) (1,327,020) (443,916) (2,987,301)
---------- ----------- ------------ ---------- ------------
Balances,
September 30, 1997
(Unaudited) .............. $ 347,459 $ 1,503,419 $ 1,795,435 $ 197,372 $ 3,843,685
========== =========== ============ ========== ============
</TABLE>
Notes 1 and 8 to the financial statements contain additional information
on partners' percentage ownership and allocation interests.
See accompanying notes to financial statements.
F-4
<PAGE>
RECORDS RETENTION/FILESAFE
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------------- --------------------------------
1995 1996 1996 1997
--------------- --------------- -------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income .................................... $ 2,465,802 $ 3,519,360 $ 2,998,581 $ 3,726,441
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision (credit) for doubtful accounts ...... -- 206,000 -- --
Depreciation and amortization .................. 489,865 564,572 423,429 288,569
Loss (gain) on disposal of property and
equipment .................................... 47,420 (1,001) (1,001) --
Increase (decrease) in cash attributable
to changes in assets and liabilities:
Accounts receivable ........................... (497,825) 23,574 (185,939) (16,941)
Inventories ................................. (29,907) 13,682 19,373 14,444
Prepaid expenses and other .................. 6,507 11,621 (7,702) (48,201)
Accounts payable .............................. (30,627) 3,879 (5,667) (24,525)
Accrued expenses .............................. 20,052 (78,053) (72,296) (5,766)
Deferred income .............................. 111,154 130,476 (76,955) 5,853
------------ ------------ ------------ ------------
Net Cash Provided by Operating Activities ...... 2,582,441 4,394,110 3,091,823 3,939,874
------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Acquisitions of property and equipment ......... (3,962,891) (434,045) (338,334) (193,889)
Proceeds from sale of property and
equipment .................................... -- 6,417 6,417 --
Change in other assets ........................ 254,940 (1,683) 48,335 42,962
------------ ------------ ------------ ------------
Net Cash Used in Investing Activities ............ (3,707,951) (429,311) (283,582) (150,927)
------------ ------------ ------------ ------------
Cash Flows from Financing Activities:
Net increase (decrease) in revolving line
of credit .................................... 272,300 (272,300) (272,300) --
Proceeds from notes payable ..................... 3,460,000 31,552 45,609 --
Repayment of long-term debt ..................... (457,741) (181,212) (83,693) (153,303)
Distributions to partners ..................... (2,340,286) (3,096,924) (1,881,159) (2,987,301)
------------ ------------ ------------ ------------
Net Cash Provided by/(Used in) Financing
Activities .................................... 934,273 (3,518,884) (2,191,543) (3,140,604)
------------ ------------ ------------ ------------
Increase (Decrease) in Cash ..................... (191,237) 445,915 616,698 648,343
Cash, Beginning of Period ........................ 192,607 1,370 1,370 447,285
------------ ------------ ------------ ------------
Cash, End of Period .............................. $ 1,370 $ 447,285 $ 618,068 $ 1,095,628
============ ============ ============ ============
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for interest ......... $ 137,859 $ 269,347 $ 201,340 $ 172,578
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
RECORDS RETENTION/FILESAFE
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. Business
Records Retention/FileSafe, a California Limited Partnership (the
"Partnership"), was formed January 6, 1988 to operate as a full service records
storage and retrieval business operating primarily in the San Francisco Bay and
Los Angeles areas of California. The Partnership was formed by combining the
businesses of Records Retention, Inc., and FileSafe, Inc., which are 44.39% and
35.41% general partners, respectively. The remaining interest in the
Partnership is owned by an individual and the FileSafe Limited Partnership
which are 15% and 5.2% limited partners, respectively. (See Note 8)
The Partnership's financial statements do not include any assets,
liabilities or the results of operations of one of its divisions, known as
Sourcefile, which operates in the escrow business for software code.
Sourcefile's assets of approximately $150,000 were distributed to the partners
on January 1, 1997, and the results of Sourcefile's operations through that
date were not significant to the Partnership's operations.
2. Significant Accounting Policies
Fair value of financial instruments
The fair value of the Company's assets and liabilities which qualify as
financial instruments under Statement of Financial Accounting Standards (SFAS)
No. 107, "Disclosures about Fair Value of Financial Instruments", approximates
the carrying amounts presented in the balance sheets.
Property, Equipment, Improvements and Depreciation
Property and equipment are stated at cost. Depreciation is provided by use
of declining balance, straight-line and accelerated cost recovery methods over
the estimated useful lives of the assets ranging from 19 to 40 years for real
property and real property improvements, and 5 to 7 years for shelving,
machinery, warehouse equipment, computer equipment, office equipment and
vehicles.
Revenue and Cost Recognition
Revenue and related costs are recognized using the accrual method of
accounting. The Partnership enters into storage agreements with its customers,
primarily for periods from one to five years.
Deferred Revenues
Deferred revenues consist of advance billings for quarterly and annual
storage fees. Amounts are recognized as revenue, when earned, on a monthly
basis.
Income Taxes
Businesses operating as partnerships do not pay federal income or state
franchise taxes. Instead, partners of the Partnership are taxed at their own
applicable tax rates on Partnership income even though such income may not be
distributed to them.
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 at year
end and revenues and expenses during the related year then ended. Actual
results could differ from those estimates.
Unaudited Financial Statements
The unaudited financial statements included herein have been prepared in
accordance with generally accepted accounting principles. In the opinion of
management, the unaudited financial statements include all adjustments of a
normal and recurring nature which are necessary for a fair presentation. The
results of operations for the nine months ended September 30, 1996 and 1997 are
not necessarily indicative of the results expected for the full year.
F-6
<PAGE>
RECORDS RETENTION/FILESAFE
NOTES TO FINANCIAL STATEMENTS -- (Continued)
3. Property, Equipment and Improvements
Property, equipment and improvements consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------- September 30,
1995 1996 1997
---------- ---------- ------------
(Unaudited)
<S> <C> <C> <C>
Land and building .............................. $3,558,640 $3,558,640 $ 3,558,640
Shelving ....................................... 2,765,931 2,891,370 2,914,156
Real property improvements ..................... 1,394,707 1,433,386 1,456,148
Computer equipment .............................. 426,483 500,704 488,565
Machinery and equipment ........................ 346,176 399,038 477,887
Vehicles ....................................... 166,449 213,302 264,458
Property under capital lease .................. 106,836 170,813 170,813
Office equipment .............................. 100,669 140,174 122,167
----------- ----------- -----------
Total property and equipment .................. 8,865,891 9,307,427 9,452,834
Accumulated depreciation and amortization ...... 3,279,211 3,789,210 (4,018,427)
----------- ----------- -----------
Net property, equipment and improvements ...... $5,586,680 $5,518,217 $ 5,434,407
=========== =========== ===========
</TABLE>
4. Notes Payable
Notes payable consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------- September 30,
1995 1996 1997
------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Notes payable to a bank, secured by real property, due $31,147 per
month including interest at the 6-month T-bill rate plus 2.25%
maturing through 2005 .......................................... $ 3,423,960 $ 3,306,124 $ 3,222,711
Note payable to a business due in $2,940 monthly installments
including interest at 7.5%
maturing 1998 ................................................... 72,618 41,737 19,829
Note payable to a bank due in $1,035 monthly installments including
interest at 10.85%
maturing 1999 ................................................... -- 24,608 --
------------ ------------ -----------
Total notes payable .......................................... 3,496,578 3,372,469 3,242,540
Less current portion .......................................... 144,930 169,480 (193,304)
------------ ------------ -----------
$ 3,351,648 $ 3,202,989 $ 3,049,236
============ ============ ===========
</TABLE>
F-7
<PAGE>
RECORDS RETENTION/FILESAFE
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Future principal maturities on the above notes payable are as follows:
Year ended December 31
- ------------------------
1997 ............ $ 169,480
1998 ............ 193,304
1999 ............ 197,375
2000 ............ 208,637
2001 ............ 225,113
Thereafter ...... 2,378,560
-----------
$3,372,469
===========
5. Lease Commitments
The Partnership conducts its San Francisco, Santa Clara and Los Angeles
operations from facilities that are subject to operating leases. The San
Francisco lease expires August 2005, and the Partnership has one ten year lease
option to renew upon nine months written notice. Leases for other facilities
expire through 2002. Rent expense for the years ended December 31, 1995 and
1996, including common area charges of $31,968 and $19,270, was $1,109,028 and
$849,740, respectively.
The Partnership leases seven trucks under long-term capital leases. As of
December 31, 1996, future net minimum lease payments under capital leases, and
future minimum rental payments required under operating leases that have
initial or remaining noncancelable terms in excess of one year are as follows:
<TABLE>
<CAPTION>
Year ended December 31 Capital leases Operating leases
- ------------------------------------------------------- ---------------- -----------------
<S> <C> <C>
1997 .......................................... $ 38,130 $ 761,809
1998 .......................................... 41,875 780,038
1999 .......................................... 30,792 664,762
2000 .......................................... 13,662 697,799
2001 .......................................... 4,649 716,407
Thereafter .................................... -- 1,986,735
--------- -----------
Total minimum lease payments ..................... 129,108 $5,607,550
===========
Less amount representing interest ............... 16,456
---------
Net present value of minimum lease payments ...... 112,652
Current portion ................................. 30,492
---------
Long-term portion ................................. $ 82,160
=========
</TABLE>
Following is a schedule of leased equipment under capital leases:
<TABLE>
<CAPTION>
December 31,
---------------------- September 30,
1995 1996 1997
---------- --------- ------------
(Unaudited)
<S> <C> <C> <C>
Equipment at cost .................................... $106,836 $170,813 $170,813
Less accumulated depreciation and amortization ...... 36,537 52,125 (78,598)
--------- --------- ------------
$ 70,299 $118,688 $ 92,215
========= ========= ============
</TABLE>
F-8
<PAGE>
RECORDS RETENTION/FILESAFE
NOTES TO FINANCIAL STATEMENTS -- (Continued)
6. 401(k) Employee Benefit Plan
The Partnership sponsors a 401(k) plan. Under the plan, employees may
elect to make contributions pursuant to a salary reduction agreement upon
meeting age and length-of-service requirements. The Partnership's contributions
to the plan are discretionary and amounted to approximately $50,000 and $41,000
for the plan years ended December 31, 1995 and 1996.
7. Line of Credit
The Partnership maintained a $400,000 revolving line of credit with a bank
that expired in 1997 and was not renewed.
8. Allocation of Profits, Losses and Distributions to Partners
The Partnership is subject to the terms of its partnership agreement (the
"Agreement"). Partnership income from operations is allocated based on a series
of calculations starting with a predefined cumulative allocation for specific
partners, then distributions made during the taxable year to a specific
partner. Next, income is allocated in proportion to changes in partners'
respective capital accounts, then it is allocated based on distributions made
during the taxable year to other specific partners. Any remainder is then
allocated according to percentage interests.
Partnership losses are allocated first to partners in proportion to and to
the extent of the positive balances in their respective capital accounts, then
in accordance with their percentage interest in predefined distributions during
each taxable year.
The Agreement sets out various preferences as to distributions of cash to
the partners from the Partnership and provides that allocations shall be in
compliance with relevant provisions of the Internal Revenue Code. The Agreement
also contains a negative capital restoration clause that applies to all
partners who are not individuals.
9. Supplemental Cash Flow Information
Cash in the statement of cash flows consists of cash on hand and deposits
in banks. At various times during the years ended December 31, 1995 and 1996,
the Partnership had cash deposits in a single bank which exceeded the federally
insured limit of $100,000. During 1996, $63,977 of equipment was acquired using
a capital lease in a noncash financing transaction.
10. Related Party Transactions
Related party transactions not otherwise reflected on the accompanying
financial statements and related footnotes include payments for insurance and
legal service reimbursed to a business that owns Filesafe, Inc. Payments to the
above business amounted to $76,799 during 1995 and $78,101 during 1996. During
1995, the Partnership loaned $50,000 to one of its partners.
11. Subsequent Event
On October 1, 1997, the Partnership sold substantially all of the
Partnership's assets and certain liabilities to Iron Mountain Incorporated for
approximately $42,000,000.
F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Iron Mountain Incorporated:
We have audited the balance sheet of Allegiance Business Archives, Ltd. (a New
Jersey corporation), as of December 31, 1996, and the related statements of
operations and retained earnings and cash flows for the nine months then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Allegiance Business Archives,
Ltd., as of December 31, 1996, and the results of its operations and its cash
flows for the nine months then ended in conformity with generally accepted
accounting principles.
Stout, Causey & Horning, P.A.
Cockeysville, Maryland
March 4, 1997,
except for Note 11,
as to which the date is
October 1, 1997
F-10
<PAGE>
ALLEGIANCE BUSINESS ARCHIVES, LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 587,262 $ 989,097
Accounts receivable, net .................................... 571,698 588,748
Inventories ................................................ 17,989 19,152
Deferred taxes ............................................. 1,266 1,266
Prepaid expenses and other ................................. 18,092 22,786
----------- -----------
Total current assets ....................................... 1,196,307 1,621,049
Equipment and improvements, net of accumulated depreciation of
$939,491 in 1996 and $1,088,100 in 1997........................ 534,422 424,562
Security deposits ............................................. 60,019 60,019
----------- -----------
Total assets ............................................. $1,790,748 $2,105,630
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 47,360 $ 39,379
Accrued expenses ............................................. 93,374 78,807
Deferred income ............................................. 266,190 280,273
----------- -----------
Total current liabilities ................................. 406,924 398,459
Deferred taxes ................................................ 2,923 2,923
Deferred rent ................................................ 85,919 106,805
----------- -----------
Total liabilities .......................................... 495,766 508,187
Commitments (Note 6)
Stockholders' equity:
Class A common stock; 100,000 shares authorized, 4,813 shares
issued and outstanding .................................... 48,130 48,130
Class B common stock; 100,000 shares authorized, 5,187 shares
issued and outstanding .................................... 51,870 51,870
Retained earnings .......................................... 1,194,982 1,497,443
----------- -----------
Total stockholders' equity ................................. 1,294,982 1,597,443
----------- -----------
Total liabilities and stockholders' equity .................. $1,790,748 $2,105,630
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-11
<PAGE>
ALLEGIANCE BUSINESS ARCHIVES, LTD.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Nine Months Nine Months Ended
Ended September 30,
December 31, -----------------------------
1996 1996 1997
------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenues:
Storage .......................................... $1,505,724 $ 1,480,687 $ 1,625,095
Service and storage material sales ............... 1,046,340 1,082,302 1,132,316
----------- ----------- -----------
Total revenues ................................. 2,552,064 2,562,989 2,757,411
Operating expenses:
Cost of sales (excluding depreciation) ............ 1,207,751 1,240,502 1,378,342
Selling, general and administrative expenses ...... 574,518 629,307 597,074
Depreciation and amortization ..................... 151,431 152,366 148,610
----------- ----------- -----------
Total operating expenses ........................ 1,933,700 2,022,175 2,124,026
----------- ----------- -----------
Operating income ................................. 618,364 540,814 633,385
Interest expense ................................. (11,543) (11,847) --
Other income (expense), net ........................ 28,924 (1,736) 47,965
----------- ----------- -----------
Income before provision for income taxes ......... 635,745 527,231 681,350
Provision for income taxes ........................ 4,647 24,699 28,029
----------- ----------- -----------
Net income ....................................... 631,098 502,532 653,321
Retained earnings:
Beginning of period .............................. 863,224 817,046 1,194,982
Distributions .................................... (299,340) (199,507) (350,860)
----------- ----------- -----------
End of period .................................... $1,194,982 $ 1,120,071 $ 1,497,443
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-12
<PAGE>
ALLEGIANCE BUSINESS ARCHIVES, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Nine Months Ended
Ended September 30,
December ----------------------------
1996 1996 1997
------------ ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .......................................... $ 631,098 $ 502,532 $ 653,321
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................... 151,431 152,366 148,610
Deferred income taxes .............................. (20,809) -- --
Increase (decrease) in cash attributable to changes in
assets and liabilities:
Accounts receivable .............................. (41,503) (12,627) (17,050)
Inventories ....................................... 16,050 20,240 (1,163)
Prepaid expenses and other ........................ 9,318 30,607 (4,694)
Accounts payable ................................. 17,315 (8,904) (7,981)
Accrued expenses ................................. (29,292) 25,479 (14,567)
Deferred income .................................... 18,697 (17,860) 14,083
Income taxes payable .............................. (127,379) (151,607) --
Deferred rent .................................... (12,862) (2,052) 20,886
---------- --------- ----------
Net cash provided by operating activities ...... 612,064 538,174 791,445
Cash flows from investing activities:
Acquisitions of property and equipment .............. (20,000) (69,801) (38,750)
---------- --------- ----------
Net cash used in investing activities ............ (20,000) (69,801) (38,750)
Cash flows from financing activities:
Shareholder distributions ........................... (299,340) (199,507) (350,860)
Repayment of long-term debt ........................ (166,230) (88,801) --
---------- --------- ----------
Net cash used in financing activities ............ (465,570) (288,308) (350,860)
---------- --------- ----------
Net increase in cash and cash equivalents ............ 126,494 180,065 401,835
Cash and cash equivalents, beginning of period ...... 460,768 293,278 587,262
---------- --------- ----------
Cash and cash equivalents, end of period ............ $ 587,262 $ 473,343 $ 989,097
========== ========= ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest .............................. $ 8,708 $ 11,847 $ --
Cash paid for income taxes ........................... $ 164,082 $ 183,836 $ 16,050
Non-cash transaction--Elimination of Federal deferred
income taxes ....................................... $ 22,466 $ 22,466 $ --
</TABLE>
The accompanying notes are an integral part of these statements.
F-13
<PAGE>
ALLEGIANCE BUSINESS ARCHIVES, LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. Business Activity and Summary of Significant Accounting Policies
Business Activity
Allegiance Business Archives, Ltd. (the Company) is primarily an archive
storage and related service business. The Company is located in New Jersey and
services customers in the New York metropolitan area. The Company was
incorporated under the laws of the State of New Jersey on April 2, 1990.
Unaudited Financial Statements
The unaudited financial statements included herein have been prepared in
accordance with generally accepted accounting principles. In the opinion of
management, the unaudited financial statements include all adjustments of a
normal and recurring nature which are necessary for a fair presentation. The
results of operations for the nine months ended September 30, 1996 and 1997 are
not necessarily indicative of the results for the full year.
Revenue Recognition
The policy of the Company is to have customers prepay for archive storage.
Revenue is recognized on the straight-line method over the term of the
contract, resulting in deferred income to be realized in a future period. Sales
of container boxes are recorded as revenue upon shipment and as deferred income
for future committed shipments. Income from providing services to the customers
is recorded as services are performed.
Cash and Cash Equivalents
Cash and cash equivalents include overnight investments in repurchase
agreements.
Inventory
Inventory, which consists of container boxes, is stated at lower of cost
or market. Cost is determined using the first-in, first-out method.
Equipment and Improvements
Equipment is recorded at cost. Expenditures for maintenance and repairs
are charged to expense as incurred; improvements which increase the value or
materially extend the life of the related assets are capitalized. Depreciation
and amortization is provided over the estimated useful lives of the respective
assets using a straight-line method for the financial statements over the
following estimated useful lives:
<TABLE>
<S> <C>
Warehouse equipment ...... 7 years
Office equipment ......... 3-5 years
Computer software ......... 5 years
Vehicles .................. 5 years
Leasehold improvements ... Shorter of lease term or 15 years
</TABLE>
Amortization expense related to capitalized computer software was $17,825
for the nine months ended December 31, 1996.
Rental Expense
In general, rent expense is recorded when payments are due under the terms
of the lease. The straight-line basis is used to recognized rent expense under
leases which provide for varying rents over their terms.
F-14
<PAGE>
ALLEGIANCE BUSINESS ARCHIVES, LTD.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Income Taxes
Deferred income taxes arise from temporary differences when income and
expense items are reported for financial statements and tax purposes in
different periods. These temporary differences primarily relate to accrued
rent, nondeductible accruals and depreciation. Deferred taxes are classified as
current or non-current depending on the classification of the assets and
liabilities to which they relate.
The Company elected S corporation status effective April 1, 1996. Earnings
and losses after that date are included in the personal income tax returns of
the stockholders. Accordingly, the Company no longer incurs additional income
tax obligations, with the exception of certain state income tax obligations.
Accordingly, the financial statements for the nine months ended December 31,
1996 do not include a provision for federal income taxes. Deferred tax assets
and liabilities totaling $32,860 and $55,326, respectively, related to Federal
income taxes were eliminated and recorded as a reduction to the provision for
income taxes as of the date of the S corporation election.
In conjunction with the S corporation election, the Company changed its
fiscal year to a calendar year, effective December 31, 1996.
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 could differ from those estimates.
2. Equipment and Improvements
As of December 31, 1996, major categories of property and equipment were
as follows:
<TABLE>
<S> <C>
Warehouse equipment ................................. $1,127,110
Office equipment .................................... 148,365
Computer software .................................... 53,919
Vehicles ............................................. 52,547
Leasehold improvements .............................. 91,972
----------
1,473,913
Less accumulated depreciation and amortization ...... (939,491)
----------
Equipment and improvements, net ..................... $ 534,422
==========
</TABLE>
Depreciation and amortization related to property and equipment totaled
$151,431 during the nine months ended December 31, 1996.
3. Revolving Credit Loan
The Company maintains a receivable financing agreement with a bank. The
amount of available borrowings under the agreement is limited to the lesser of
$300,000 or 80% of certain trade accounts receivable. Interest, which has a
floor of 6%, is payable and adjusted monthly based upon the bank's prime rate.
The terms of the receivable financing agreement include certain financial
covenants and ratios and are collateralized by substantially all the Company's
tangible and intangible assets.
F-15
<PAGE>
ALLEGIANCE BUSINESS ARCHIVES, LTD.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
4. Income Taxes
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities include differences between
book and tax depreciation and rent expense, and certain nondeductible accruals.
As of December 31, 1996, the Company has provided deferred taxes only for
certain state income taxes due to the election of S Corporation status
effective April 1, 1996.
The net deferred tax assets and net deferred tax liabilities as of
December 31, 1996 include the following components:
<TABLE>
<S> <C>
Current Portion:
Deferred tax assets ............ $ 1,266
========
Non-Current Portion:
Deferred tax liabilities ......... $ 6,360
Deferred tax assets ............ (3,437)
--------
Net deferred tax liability ...... $ 2,923
========
</TABLE>
The provision for income taxes for the nine months ended December 31,
1996, consists of the following:
<TABLE>
<S> <C>
State income taxes .................. $ 27,113
Elimination of deferred taxes ...... (22,466)
---------
Total .............................. $ 4,647
=========
</TABLE>
6. Lease Commitments
The Company is obligated under noncancellable long-term operating leases
for office, warehouse facilities and equipment. The leases for office and
warehouse facilities provide for renewals for various periods and require the
Company to pay their proportionate share of operating expenses. The leases have
various expiration dates through December 31, 2004, and certain options
allowing for extended terms with various expiration dates through December,
2014. As of December 31, 1996, approximate future minimum rental payments
required under these leases are:
<TABLE>
<S> <C>
1997 ..................... $ 558,253
1998 ..................... 553,733
1999 ..................... 564,526
2000 ..................... 572,643
2001 ..................... 587,094
2002 and thereafter ...... 1,251,625
-----------
$4,087,874
===========
</TABLE>
Total rent expense was $453,804 for the nine months ended December 31,
1996.
7. Revenues and Accounts Receivable
For the nine months ended December 31, 1996, the Company received
approximately $988,329 of its revenues from three customers. At December 31,
1996, the amounts included in trade accounts receivable from these customers
totaled $140,397.
The Company primarily services customers in the New York metropolitan area
and, as such, the majority of its accounts receivable are from customers
located in this geographic area.
F-16
<PAGE>
ALLEGIANCE BUSINESS ARCHIVES, LTD.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
8. Notes Payable and Related Party Transactions
In March 1995, the Company financed the purchase of a vehicle through a
company which is owned by two stockholders of the Company. The face value of
this note was $23,000 and was payable monthly until March 1997. The note bore
interest at a rate of 12%. This note was repaid in December, 1996.
In September, 1995 the Company received $200,000 in exchange for a
promissory note to a company which is owned by two stockholders of the Company.
The note was fully payable in October, 1997. The interest rate on the
outstanding and unpaid principal balance was equal to the prime rate of
interest in effect on the first day of each respective month. This note was
repaid in December, 1996.
The Company purchases the container boxes for sale to customers from a
company which is owned by two stockholders of the Company. Purchases for the
nine months ended December 31, 1996 were approximately $109,989, and the amount
included in accounts payable was $16,410 at December 31, 1996. This company
also provided the Company with certain administrative and accounting services
for a fee of $1,000 per month.
9. Defined Contribution Plan
The Company has a retirement plan established through another employer to
provide employees with a defined contribution retirement income plan.
Generally, employees who have completed at least one year of service, as
defined in the Plan document, are eligible to participate in the plan.
Profit sharing contributions are made at the sole discretion of the
Company based upon provisions of the Plan. The Plan allows participants to make
pre-tax contributions of 5% to 10% of compensation through salary reduction
agreements with the Company. The Plan provides for matching contributions by
the Company equal to 25% of pre-tax contributions made by the participants
during each Plan year, up to a maximum of 4% of each participants deferred
compensation. In addition, the Company may make a discretionary matching
contribution.
During the nine months ended December 31, 1996, the Company incurred costs
of $8,291 related to the Plan.
10. Common Stock
The Company has entered into an agreement with its stockholders to
purchase, at a price determined by a formula provided in the agreement,
outstanding shares of its common stock upon their death, disability or
retirement. The agreement also restricts the stockholders' ability to transfer
shares to third-parties.
The Class A voting common stock and Class B non-voting common stock have
identical preferences, dividend rights, distribution rights and liquidation
rights and differ only with respect to voting rights.
11. Subsequent Event
On October 1, 1997, all of the outstanding capital stock of the Company
was sold to Iron Mountain Records Management Inc., a wholly-owned subsidiary of
Iron Mountain Incorporated.
F-17
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
HIMSCORP, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of HIMSCORP, Inc.
and Subsidiaries as of December 31, 1995 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for the period from
February 1, 1995 (commencement of operations) to December 31, 1995 and for the
year ended December 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of HIMSCORP, Inc.
and Subsidiaries at December 31, 1995 and 1996, and the consolidated results of
their operations and their cash flows for the period from February 1, 1995
(commencement of operations) to December 31, 1995 and for the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
February 21, 1997
F-18
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------- September 30,
1995 1996 1997
------------- ------------- ------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .................................... $ 87,314 $ 103,617 $ 228,535
Accounts receivable, net of allowance of $2,500 in 1995,
$64,394 in 1996 and $111,500 in 1997 ........................ 2,100,106 2,709,549 4,448,779
Prepaid expenses and deposits .............................. 133,415 182,568 590,125
Restricted certificates of deposit ........................... -- 3,000,000 3,500,000
------------ ------------ ------------
Total Current Assets .................................... 2,320,835 5,995,734 8,767,439
Equipment and Leasehold Improvements:
Warehouse machinery and equipment ........................... 995,435 1,694,632 2,865,972
Office machinery and equipment .............................. 389,028 715,896 1,177,409
Vehicles ................................................... 277,207 488,637 1,001,490
Leasehold improvements ....................................... 133,827 243,575 517,412
Furniture and fixtures ....................................... 45,719 42,943 79,776
------------ ------------ ------------
1,841,216 3,185,683 5,642,059
Less: accumulated depreciation .............................. 394,027 979,729 1,665,115
------------ ------------ ------------
Net Equipment and Leasehold Improvements .................. 1,447,189 2,205,954 3,976,944
Other Assets:
Goodwill, net of accumulated amortization of $455,073
in 1995, $1,110,921 in 1996 and $1,952,639 in 1997 ......... 13,187,687 18,049,189 27,351,923
Deferred financing costs, net of accumulated amortization
of $43,725 in 1995, $123,876 in 1996 and $223,716
in 1997 ................................................... 271,017 483,174 631,391
Organization costs, net of accumulated amortization
of $49,227 in 1995, $122,304 in 1996 and $199,423
in 1997 ................................................... 252,526 309,460 330,677
Other ...................................................... 600 800 1,000
------------ ------------ ------------
Total Other Assets .................................... 13,711,830 18,842,623 28,314,991
------------ ------------ ------------
Total Assets .......................................... $17,479,854 $27,044,311 $41,059,374
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ........................ $ 212,902 $ 3,092,805 $ 2,877,000
Accounts payable ............................................. 411,899 328,054 241,553
Accrued payroll and related expenses ........................ 249,327 497,117 862,079
Accrued expenses ............................................. 65,685 306,204 463,029
Income taxes payable ....................................... 114,757 149,174 --
Deferred revenue ............................................. 494,558 775,176 1,049,804
Deferred income taxes ....................................... 113,000 19,000 19,000
Other ...................................................... -- 400,000 300,000
------------ ------------ ------------
Total Current Liabilities .............................. 1,662,128 5,567,530 5,812,465
Long-Term Debt, Less Current Maturities ..................... 11,184,010 15,210,011 27,409,497
Deferred Income Taxes ....................................... 122,000 300,000 523,000
Other ......................................................... -- 300,000 --
Stockholders' Equity:
Preferred stock, $1.00 par value; authorized 5,000 shares; no
issued and outstanding shares .............................. -- -- --
Class A voting common stock, $0.01 par value; authorized
10,000 shares; issued and outstanding 8,050 shares ......... 81 81 81
Class B voting common stock, $0.01 par value; authorized
15,000 shares; issued and outstanding 12,522 shares in
1995, 13,155 shares in 1996 and 13,323 shares in 1997 ...... 125 132 133
Additional paid-in capital ................................. 3,866,468 4,056,461 5,308,760
Retained earnings .......................................... 645,042 1,610,096 2,005,438
------------ ------------ ------------
Total Stockholders' Equity .............................. 4,511,716 5,666,770 7,314,412
------------ ------------ ------------
Total Liabilities and Stockholders' Equity ............... $17,479,854 $27,044,311 $41,059,374
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Period from
February 1, 1995 Nine months ended
(commencement September 30,
of operations) Year ended ------------------------------
to December 31, December 31,
1995 1996 1996 1997
----------------- ------------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Storage revenue ........................... $9,043,414 $14,066,875 $10,278,500 $16,913,361
Service revenue ........................... 469,791 1,584,744 625,552 3,558,620
----------- ----------- ----------- -----------
Total Revenues ........................... 9,513,205 15,651,619 10,904,052 20,471,981
Operating Expenses:
Cost of services ........................... 4,825,935 7,859,723 5,479,857 10,423,752
Selling, general, and administrative ...... 1,671,018 3,207,340 2,284,093 5,073,803
Depreciation and amortization ............ 942,052 1,474,846 998,981 1,798,398
----------- ----------- ----------- ------------
Total Operating Expenses ............... 7,439,005 12,541,909 8,762,931 17,295,953
----------- ----------- ----------- ------------
Operating Income ........................... 2,074,200 3,109,710 2,141,121 3,176,028
Other (Income) Expense:
Interest income ........................... -- (40,633) -- (185,500)
Interest expense ........................... 995,688 1,318,994 904,322 1,976,953
----------- ----------- ----------- ------------
Total Other Expense ..................... 995,688 1,278,361 904,322 1,791,453
----------- ----------- ----------- ------------
Income Before Provision for Income Taxes 1,078,512 1,831,349 1,236,799 1,384,575
Provision for Income Taxes .................. 433,470 866,295 508,174 989,233
----------- ----------- ----------- ------------
Net Income ................................. $ 645,042 $ 965,054 $ 728,625 $ 395,342
=========== =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
----------------------------------- Additional
Class A Class B
----------------- ----------------- Paid-in Retained
Description Shares Amount Shares Amount Capital Earnings Total
- -------------------------------------- -------- -------- -------- -------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Class A common stock
on February 1, 1995 at $415.16
per share ........................ 8,050 $81 -- $ -- $3,341,957 $ -- $3,342,038
Issuance of Class B common stock
on February 1, 1995 at $42.56
per share ........................ -- -- 1,950 20 82,980 -- 83,000
Issuance of Class B common stock
on June 30, 1995 at $42.56 per
share, net of issuance costs ...... -- -- 10,572 105 441,531 -- 441,636
Net Income for the period ended
December 31, 1995 .................. -- -- -- -- -- 645,042 645,042
------ ---- ------- ----- ----------- ----------- -----------
Balance as of December 31, 1995 ... 8,050 81 12,522 125 3,866,468 645,042 4,511,716
Issuance of Class B common stock
on September 30, 1996 at $300
per share ........................ -- -- 633 7 189,993 -- 190,000
Net Income for the year ended
December 31, 1996 .................. -- -- -- -- -- 965,054 965,054
------ ---- ------- ----- ----------- ----------- -----------
Balance as of December 31, 1996 ... 8,050 81 13,155 132 4,056,461 1,610,096 5,666,770
Issuance of Class B common stock
on May 14, 1997 at $650 per share
(unaudited) ........................ -- -- 174 1 113,299 -- 113,300
Redemption, Class B Common Stock at
$300 per share (unaudited) .......... -- -- (83) (1) (24,999) -- (25,000)
Issuance of Class B Common Stock at
$670 per share (unaudited) .......... -- -- 77 1 51,999 -- 52,000
Stock compensation (unaudited) ...... -- -- -- -- 1,112,000 -- 1,112,000
Net Income for the period ended
September 30, 1997 (unaudited) ...... -- -- -- -- -- 395,342 395,342
------ ---- ------- ----- ----------- ----------- -----------
Balance at September 30, 1997
(unaudited) ......................... 8,050 $81 13,323 $133 $5,308,760 $2,005,438 $7,314,412
====== ==== ======= ===== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
February 1, 1995 Nine months ended
(commencement September 30,
of operations) Year ended -------------------------------
to December 31, December 31,
1995 1996 1996 1997
----------------- -------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
Operating Activities:
Net Income .................................... $ 645,042 $ 965,054 $ 728,625 $ 395,342
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation .............................. 394,027 665,773 429,055 777,963
Amortization .............................. 548,025 809,073 569,926 1,020,435
Deferred income taxes ........................ 235,000 84,700 31,000 223,000
Stock compensation expense .................. -- -- -- 1,112,000
Changes in operating assets and
liabilities:
Accounts receivable ..................... (583,888) (84,462) (249,321) (1,166,173)
Prepaid expenses and deposits ............ (39,559) (31,053) (9,693) (298,112)
Accounts payable ........................ (203,849) (88,545) (236,707) (695,836)
Other current liabilities ............... 341,715 301,009 222,625 223,584
------------- ------------ ------------ ------------
Net Cash Provided by Operating Activities ...... 1,336,513 2,621,549 1,485,510 1,592,203
Investing Activities:
Acquisitions, net of cash acquired ............ (13,387,245) (2,433,000) (2,433,000) (7,540,277)
Purchases of equipment and leasehold
improvements ................................. (501,401) (990,087) (756,935) (1,462,843)
Purchases of certificates of deposits ......... -- (3,000,000) (3,000,000) (3,500,000)
Proceeds from maturities of certificate of
deposit ....................................... -- -- -- 3,000,000
------------- ------------ ------------ ------------
Net Cash Used in Investing Activities ......... (13,888,646) (6,423,087) (6,189,935) (9,503,120)
Financing Activities:
Proceeds from borrowings of long-term
debt ....................................... 12,295,773 10,314,224 9,324,187 10,987,234
Payments of long-term debt ..................... (3,440,000) (6,686,383) (4,504,059) (3,066,699)
Repurchase of common stock -- -- -- (25,000)
Issuance of common stock, net of issuance
costs ....................................... 3,783,674 190,000 -- 140,300
------------- ------------ ------------ ------------
Net Cash Provided by Financing Activities ...... 12,639,447 3,817,841 4,820,128 8,035,835
------------- ------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash
Equivalents .................................... 87,314 16,303 115,703 124,918
Cash and Cash Equivalents at Beginning
of Period .................................... -- 87,314 87,314 103,617
------------- ------------ ------------ ------------
Cash and Cash Equivalents at End of Period . $ 87,314 $ 103,617 $ 203,017 $ 228,535
============= ============ ============ ============
Noncash Investing and Financing Activities:
Subordinated notes payable issued in
acquisitions ................................. $ 2,259,010 $ 3,000,000 $ 3,000,000 $ 3,500,000
Common stock issued in acquisitions ............ 83,000 -- -- --
Earn-out obligations in connection with
acquisition ................................. -- 700,000 700,000 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997
(Information with respect to the nine-month periods ended September 30, 1996
and 1997 is unaudited)
1. Description of Business
HIMSCORP, Inc. (the Company) was formed on December 22, 1994 (operations
commenced February 1, 1995) to act as a holding company for acquired health
information management services companies (Note 3). The Company provides
off-site record storage, retrieval, and management services primarily to
hospitals in the Detroit, Los Angeles, New Orleans, Philadelphia, Pittsburgh,
San Diego, Cleveland, Houston, St. Louis, Baltimore, Portland and Milwaukee
markets.
Basis of Presentation
The financial statements of the Company as of September 30, 1997 and for
the nine-month periods ended September 30, 1996 and 1997 and all information
subsequent to December 31, 1996 are unaudited. All adjustments and accruals
(consisting of normal recurring adjustments) have been made which, in the
opinion of management, are necessary for a fair presentation of the financial
position and operating results of the interim period presented. Interim results
are not necessarily indicative of results for a full year.
The interim financial statements are condensed and do not include all the
information and disclosures necessary for a full interim financial statement
presentation.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Investments
Restricted certificates of deposit (Note 4) are classified as
held-to-maturity as the Company has the positive intent and ability to hold the
securities to maturity. The certificate outstanding at December 31, 1996
matured January 2, 1997. The certificates outstanding at September 30, 1997
mature on October 1, 1997 ($500,000) and January 2, 1998 ($3,000,000).
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Expenditures for
normal repairs and maintenance are charged to expense as incurred. Depreciation
on equipment is computed by accelerated methods based on the estimated useful
lives of assets (5 to 15 years). Amortization of leasehold improvements is
included in depreciation and amortized over the shorter of the estimated useful
life or the lease term.
Intangibles
Goodwill is amortized on a straight-line basis over 25 years. Organization
costs are amortized using the straight-line method over five years.
The Company assesses intangibles for impairment under FASB Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. Under those rules, the intangibles
F-23
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
associated with assets acquired in a purchase business combination are included
in impairment evaluations when events or circumstances exist that indicate the
carrying amount of those assets may not be recoverable.
Deferred Financing Costs
Deferred financing costs are amortized using the straight-line method over
the life of the related loan.
Stock-Based Compensation
Stock-based compensation awards are accounted for under APB Opinion No. 25
Accounting for Stock Issued to Employees.
Revenue Recognition
Revenue is recognized when the services are performed. Certain services
are billed in advance, and the related revenue is deferred until the related
services are performed.
Income Taxes
Income taxes are accounted for under the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and income tax bases of assets and liabilities
and are measured using the enacted tax rates and laws in effect when the
differences are expected to reverse.
Fair Value of Financial Instruments
The Company's financial instruments include accounts receivable, accounts
payable, accrued liabilities and notes payable. The fair value of all financial
instruments were not materially different than their carrying values.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. Business Acquisitions
On February 1, 1995, the Company purchased all of the outstanding common
stock of Record Management of Louisiana, Inc., Century Medical, Inc., DLS,
Inc., and INFORR Corp., Inc. for $12,527,755, consisting of $10,485,745 in
cash, $1,959,010 in subordinated notes payable, and $83,000 in the Company's
common stock (1,950 Class B common shares). The Company also assumed
liabilities of $770,334. In conjunction with the acquisition, the Company
recorded $10,885,502 in goodwill.
On June 30, 1995, the Company purchased all of the outstanding common
stock of JAD Interests, Inc., and substantially all of the assets of Record
Care for $3,201,500, consisting of $2,901,500 in cash and $300,000 in
subordinated notes payable. The Company also assumed liabilities of $54,681 in
connection with the acquisition. In conjunction with the acquisition, the
Company recorded $2,757,258 in goodwill.
On March 31, 1996, the Company purchased all of the outstanding common
stock of C.N.S. Records Management, Inc. and Stendy Corp. for $2,358,000 in
cash and a minimum of $700,000 in future earn-out payments, of which $400,000
and $300,000 are due on March 31, 1997 and 1998, respectively. The Company
projects the actual earn-out payments will be $700,000 and has recorded the
liability and additional goodwill at December 31, 1996. The Company assumed
liabilities of $308,131 in connection with the acquisitions. In conjunction
with the acquisitions, the Company recorded $2,703,223 in goodwill.
F-24
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On September 30, 1996, the Company purchased all of the outstanding common
stock of Copyright, Inc. for $3,075,000, consisting of $75,000 in cash and
$3,000,000 in subordinated notes payable and assumed liabilities of $198,900.
In conjunction with the acquisition, the Company recorded $2,814,127 in
goodwill.
On January 2, 1997, the Company purchased all of the common stock of
Recordkeepers, Inc. and Record Tech, Inc. for $7,879,000, consisting of
$4,879,000 in cash and $3,000,000 in subordinated notes payable. The Company
also assumed liabilities of $853,305. In conjunction with the acquisitions, the
Company recorded $7,840,328 in goodwill.
On June 1, 1997, the Company purchased all of the outstanding stock of
MKC, Inc. for $3,200,000 consisting of $2,700,000 in cash and $500,000 in
subordinated notes payable. The Company also assumed liabilities of $179,687 in
connection with this acquisition. In conjunction with the acquisition, the
Company recorded $2,347,002 in goodwill.
In addition, the Company entered into certain employment, noncompete, and
consulting agreements with the principal shareholders and certain ongoing
senior management of the acquired companies.
The acquisitions have been accounted for as purchases and, accordingly,
the consolidated statements of income include the results of operations of the
acquired businesses from their respective dates of acquisition.
Based on unaudited data, the following table presents selected financial
information for the company on a pro forma basis, assuming the companies had
been combined since February 1, 1995.
Period from
February 1, 1995 Year ended Nine-months ended
to December 31, December 31, September 30,
1995 1996 1997
------------------ -------------- -----------------
Revenues ......... $18,439 $23,801 $21,390
Net income ...... 1,281 2,135 472
The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had the acquisitions been made
as of February 1, 1995.
4. Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1996
------------- ------------
<S> <C> <C>
Working capital loan, plus interest at the prime rate (8.25% at
December 31, 1996) plus 1.5% ................................. $ -- $ 1,000
Revolving loan, payable in varying quarterly installments
through July 1, 2002, plus interest payable monthly at varying
LIBOR interest rates (ranging from 5.50% to 6.50% at
December 31,1996) plus 3.50% ................................. 9,137,902 13,042,806
Subordinated notes payable to sellers (including shareholders) in
varying annual installments from 1997 through 2002, plus
interest at varying rates up to 7.75%, payable semiannually
through 2002 ................................................ 2,259,010 5,259,010
------------ ------------
11,396,912 18,302,816
Less: Current maturities ....................................... 212,902 3,092,805
------------ ------------
$11,184,010 $15,210,011
============ ============
</TABLE>
F-25
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's subsidiaries have an agreement with a bank which provides
for a credit facility which expires October 1, 2000 and includes a revolving
loan of up to $14,000,000 and a working capital loan of up to $1,300,000. In
1997, the agreement was amended to increase the revolving loan to $23,500,000
and the working capital loan to $2,000,000.
A facility fee of .50% per annum is payable on a quarterly basis on the
available credit under the credit facility. The credit facility requires the
subsidiaries of the Company to collectively maintain a specified amount of
consolidated adjusted net worth, working capital, current ratio, interest
coverage ratio, payment of dividends, and certain other financial covenants,
all as defined within the agreement.
The credit facility is collateralized by substantially all assets and
common stock of the Company. In addition, the Company is required to maintain a
life insurance policy covering the principal stockholder of the Company which
also collateralizes the borrowings under the agreement. The agreement also
provides that the principal stockholder may not pledge or permit a security
interest or lien to exist on his common stock in connection with any other
debt.
The subordinated notes are subordinated to amounts outstanding under the
credit facility. In addition, at December 31, 1996, $3,000,000 of the
subordinated notes are secured by a letter of credit which is collateralized by
a certificate of deposit; the remaining subordinated notes are unsecured.
Principal maturities on long-term debt for each of the five years
succeeding 1996 and thereafter are as follows: 1997--$3,092,805,
1998--$1,900,000, 1999--$2,883,333; 2000--$3,283,333; 2001--$4,342,345; and
thereafter--$2,801,000.
5. Capital Stock
The holders of Class A common stock are entitled to receive cumulative
cash dividends at 8% per annum. Dividends began to accumulate on the date of
first issuance of the Class A shares and will be paid to Class A shareholders
of record only in the event of a distribution to common shareholders.
Accumulated dividends total $532,049 at December 31, 1996.
1,950 shares of the Class B common stock have vesting provisions based on
either time (1,000 shares) or performance (950 shares) criteria. The time
shares are considered a fixed plan and the performance shares are considered a
variable plan under APB Opinion No. 25. At December 31, 1996, 500 and 550
shares remain unvested under the fixed and variable plans, respectively. The
Company has recorded compensation expense of $1,112,000 in the nine months
ended September 30, 1997 for the performance shares based on their estimated
fair value at September 30, 1997.
6. Leases
The Company and its subsidiaries lease warehouse and office facilities and
certain other equipment under operating leases that expire at various dates
through 2001. In most cases, management expects that leases will be renewed or
replaced by other similar leases in the normal course of business.
Future minimum rental payments required under operating leases that have
initial or remaining noncancelable terms in excess of one year are as follows:
F-26
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1997 .............................. $1,489,620
1998 .............................. 1,339,826
1999 .............................. 1,113,214
2000 .............................. 357,272
2001 .............................. 128,061
-----------
Total minimum lease payments ...... $4,427,993
===========
Rental expense for operating leases was $813,325 and $1,562,913 in 1995
and 1996, respectively.
7. Income Taxes
Significant components of the provision for income taxes are as follows:
Period from
February 1, 1995 Year ended
to December 31, December 31,
1995 1996
------------------ -------------
Current:
Federal ...... $127,145 $651,680
State ......... 71,325 129,915
--------- ---------
198,470 781,595
Deferred:
Federal ...... 205,000 73,800
State ......... 30,000 10,900
--------- ---------
235,000 84,700
--------- ---------
$433,470 $866,295
========= =========
A reconciliation between the provision for income taxes computed at
statutory rates and the amount reflected in the accompanying consolidated
statements of income is as follows:
<TABLE>
<CAPTION>
Period from
February 1, 1995 Year ended
to December 31, December 31,
1995 1996
------------------ -------------
<S> <C> <C>
Computed federal tax provision at statutory rates ......... $366,694 $622,659
Increase in taxes resulting from:
State and local income taxes, net of federal benefit ...... 37,316 136,562
Other ...................................................... 29,460 107,074
--------- ---------
$433,470 $866,295
========= =========
Included in the income tax provision for the nine months ended
September 30, 1997 is approximately $434,000 related to the non-deductible
compensation recorded in connection with the variable stock plan (Note 5).
</TABLE>
F-27
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant components of the Company's deferred income tax liabilities are
as follows:
December 31,
----------------------
1995 1996
---------- ---------
Deferred income tax liabilities:
Excess tax amortization ............ $118,000 $288,000
Excess tax depreciation ............ 4,000 12,000
Prepaid insurance .................. 19,000 19,000
Other .............................. 94,000 --
--------- ---------
Total deferred tax liabilities ...... $235,000 $319,000
========= =========
The Company paid income taxes of approximately $290,000 and $541,000 in
1995 and 1996, respectively.
8. Employee Benefits
Effective February 1, 1996, the Company established a 401(k)
profit-sharing plan. Substantially all full-time employees who meet age and
service requirements are eligible to participate. Employees may contribute up
to 15% of their compensation, with matching contributions of up to 25% of 4% of
compensation at the discretion of the Company. Company contributions to the
401(k) plan were $19,400 in 1996.
9. Related Party Transactions
Keystone Capital, Inc., wholly owned by the principal stockholder of the
Company, has responsibility for corporate operations and is paid an advisory
fee by the Company for services provided. Such fees approximated $101,000 and
$176,000 in 1995 and 1996, respectively.
10. Subsequent Events
On October 31, 1997, Iron Mountain Incorporated acquired all outstanding
stock of the Company. The transaction became effective November 1, 1997.
F-28
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Arcus Technology Services, Inc.
We have audited the consolidated balance sheets of Arcus Technology Services,
Inc. (Successor Company) as of December 31, 1995 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
five month period ended December 31, 1995 and the year ended December 31, 1996.
We have also audited the consolidated statements of income, stockholders'
equity, and cash flows of Arcus, Inc. (Predecessor Company) for the year ended
December 31, 1994 and the seven month period ended July 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Arcus Technology
Services, Inc. (Successor Company) at December 31, 1995 and 1996, and the
consolidated results of its operations and cash flows for the five month period
ended December 31, 1995 and the year ended December 31, 1996, and the
consolidated results of Arcus, Inc.'s (Predecessor Company) operations and cash
flows for the year ended December 31, 1994 and the seven month period ended
July 31, 1995, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Ernst & Young LLP
Dallas, Texas
February 28, 1997, except for
Note 12, as to which the date is
September 26, 1997
F-29
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
(Successor Company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
September 30,
1995 1996 1997
------------- ------------- --------------
(Unaudited)
<S> <C> <C> <C>
ASSETS (Note 4)
Current Assets:
Cash ................................................ $ 712,818 $ 1,687,101 $ 803,024
Accounts receivable, less allowance for doubtful
accounts of $123,055, $156,227 and $68,000,
respectively ....................................... 8,846,628 14,008,613 17,058,766
Inventory .......................................... 293,393 371,715 342,230
Prepaid expenses and other current assets ............ 721,558 1,018,281 1,052,835
----------- ------------ ------------
Total Current Assets ........................... 10,574,397 17,085,710 19,256,855
Property and Equipment, at Cost:
Land, buildings, and leasehold improvements ......... 5,395,640 6,266,886 6,756,226
Vault equipment and vehicles ........................ 6,628,169 8,819,780 10,097,416
Furniture and other equipment ........................ 1,275,251 3,958,006 4,766,392
----------- ------------ ------------
13,299,060 19,044,672 21,620,034
Less accumulated depreciation .................. 892,339 3,649,357 5,888,313
----------- ------------ ------------
Property and Equipment, Net ........................... 12,406,721 15,395,315 15,731,721
Cost In Excess of Net Assets Acquired, Net of
Accumulated Amortization of $594,377, $2,310,903
and $4,053,320, respectively ........................ 35,093,200 55,367,074 57,451,478
Other Assets .......................................... 2,056,056 609,649 524,171
----------- ------------ ------------
Total Assets ................................. $60,130,374 $88,457,748 $92,964,225
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................... $ 3,309,324 $ 5,796,844 $ 3,536,622
Accrued payroll ....................................... 2,186,478 2,441,433 3,568,184
Other accrued liabilities ........................... 926,069 1,344,001 949,369
Deferred revenue .................................... 2,856,621 3,469,265 3,525,806
Due to parent (Note 2) .............................. 13,500 1,335,702 2,382,199
Current portion of long-term debt ..................... 2,272,237 3,218,794 3,905,822
----------- ------------ ------------
Total Current Liabilities ..................... 11,564,229 17,606,039 17,868,002
Long-Term Debt (Note 4) .............................. 29,724,941 39,513,473 40,160,602
Deferred Income Taxes (Note 6) ........................ 1,000 501,000 676,000
Other Liabilities .................................... 266,540 226,700 296,491
Commitments and Contingencies (Notes 3 and 9)
Stockholders' Equity:
Common stock, $.01 par value:
Authorized shares--5,000,000
Issued and outstanding shares--2,191,150,
3,205,263 and 3,325,229, respectively ............ 21,911 32,052 33,252
Capital in excess of par value ..................... 17,507,289 26,918,088 28,115,156
Retained earnings .................................... 1,057,416 3,619,939 5,803,717
Translation adjustment .............................. (12,952) 40,457 11,005
----------- ------------ ------------
Total Stockholders' Equity ..................... 18,573,664 30,610,536 33,963,130
----------- ------------ ------------
Total Liabilities and Stockholders' Equity ...... $60,130,374 $88,457,748 $92,964,225
=========== ============ ============
</TABLE>
See accompanying notes.
F-30
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine Months Ended
Seven Five September 30,
Year Ended Months Ended Months Ended Year Ended --------------------------
December 31, July 31, December 31, December 31,
1994 1995 1995 1996 1996 1997
--------------- --------------- -------------- ------------- ------------- ------------
(Predecessor) (Predecessor) (Successor) (Successor) (Successor) (Successor)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Storage and transport ...... $34,493,858 $21,401,465 $16,158,490 $43,671,062 $31,853,307 $38,173,659
Other ..................... 6,339,489 4,276,499 4,519,868 22,310,314 13,315,113 30,795,249
----------- ----------- ------------ ------------ ------------ ------------
Total Revenues ...... 40,833,347 25,677,964 20,678,358 65,981,376 45,168,420 68,968,908
Operating Expenses:
Cost of services rendered . 18,034,862 11,345,153 9,450,781 32,737,753 21,803,502 37,725,824
Selling and administrative
expenses ............... 14,027,645 8,730,900 6,632,234 21,591,852 14,642,683 20,279,524
Depreciation and
amortization ............ 2,850,154 1,532,211 1,601,464 4,436,529 3,205,404 4,538,429
----------- ----------- ------------ ------------ ------------ ------------
Total Operating
Expenses ............ 34,912,661 21,608,264 17,684,479 58,766,134 39,651,589 62,543,777
----------- ----------- ------------ ------------ ------------ ------------
Operating Income ............ 5,920,686 4,069,700 2,993,879 7,215,242 5,516,831 6,425,131
Interest (Income) Expense,
Net ........................ (264,788) (336,556) 1,128,963 2,668,719 1,932,303 2,454,353
----------- ----------- ------------ ------------ ------------ ------------
Income Before Income
Taxes ..................... 6,185,474 4,406,256 1,864,916 4,546,523 3,584,528 3,970,778
Provision for Income Taxes
(Note 6) .................. 2,601,000 1,852,000 807,500 1,984,000 1,563,000 1,787,000
----------- ----------- ------------ ------------ ------------ ------------
Net Income .................. $ 3,584,474 $ 2,554,256 $ 1,057,416 $ 2,562,523 $ 2,021,528 $ 2,183,778
=========== =========== ============ ============ ============ ============
Earnings per share ......... $ 0.46 $ 0.32 $ 0.48 $ 0.99 $ 0.83 $ 0.66
=========== =========== ============ ============ ============ ============
Weighted average shares
outstanding ............... 7,848,632 7,885,252 2,191,150 2,583,642 2,446,351 3,293,364
=========== =========== ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-31
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
--------------------- Capital in
Excess of Retained Translation
Shares Amount Par Value Earnings Adjustment Total
----------- --------- ------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Predecessor:
Balances at December 31, 1993 ... 7,770,697 $77,707 $ 2,025,519 $11,166,241 $(512,953) $12,756,514
Currency translation
adjustment ..................... -- -- -- -- 25,786 25,786
Net income ..................... -- -- -- 3,584,474 -- 3,584,474
---------- -------- ------------ ------------ ---------- -----------
Balances at December 31, 1994 ... 7,770,697 77,707 2,025,519 14,750,715 (487,167) 16,366,774
Currency translation
adjustment ..................... -- -- -- -- 9,440 9,440
Exercise of stock options ...... 10,000 100 42,400 -- -- 42,500
Net income ..................... -- -- -- 2,554,256 -- 2,554,256
---------- -------- ------------ ------------ ---------- -----------
Balances at July 31, 1995 ......... 7,780,697 $77,807 $ 2,067,919 $17,304,971 $(477,727) $18,972,970
========== ======== ============ ============ ========== ===========
Successor:
Issue Successor equity at
August 1, 1995 .................. 2,191,150 $21,911 $17,507,289 $ -- $ -- $17,529,200
Currency translation
adjustment ..................... -- -- -- -- (12,952) (12,952)
Net income ..................... -- -- -- 1,057,416 -- 1,057,416
---------- -------- ------------ ------------ ---------- -----------
Balances at December 31, 1995 ... 2,191,150 21,911 17,507,289 1,057,416 (12,952) 18,573,664
Issuances of common stock in
connection with acquisitions
(Note 3) ..................... 333,007 3,330 2,299,282 -- -- 2,302,612
Sales of common stock to
Parent (Note 3) ............... 681,106 6,811 7,111,517 -- -- 7,118,328
Currency translation
adjustment ..................... -- -- -- -- 53,409 53,409
Net income ..................... -- -- -- 2,562,523 -- 2,562,523
---------- -------- ------------ ------------ ---------- -----------
Balances at December 31, 1996 ... 3,205,263 32,052 26,918,088 3,619,939 40,457 30,610,536
Issuances of common stock
(unaudited) .................. 4,038 41 9,963 -- -- 10,004
Sales of common stock to
Parent (Note 3) (unaudited) . 115,928 1,159 1,187,105 -- -- 1,188,264
Currency translation
adjustment (unaudited) ......... -- -- -- -- (29,452) (29,452)
Net income (unaudited) ......... -- -- -- 2,183,778 -- 2,183,778
---------- -------- ------------ ------------ ---------- -----------
Balances at September 30, 1997
(unaudited) ..................... 3,325,229 $33,252 $28,115,156 $ 5,803,717 $ 11,005 $33,963,130
========== ======== ============ ============ ========== ===========
</TABLE>
See accompanying notes.
F-32
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Five Nine Months Ended
Year Ended Seven Months Months Ended Year Ended September 30,
December 31, Ended July 31, December 31, December 31, --------------------------
1994 1995 1995 1996 1996 1997
--------------- -------------- ---------------- ---------------- ---------- ------------
(Predecessor) (Predecessor) (Successor) (Successor) (Successor) (Successor
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating Activities:
Net income ........................ $ 3,584,474 $ 2,554,256 $ 1,057,416 $ 2,562,523 $ 2,021,528 $ 2,183,778
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization .................. 2,850,154 1,532,211 1,601,464 4,436,529 3,205,404 4,538,429
Deferred tax provision
(benefit) ..................... (183,912) (124,000) (47,000) 237,000 181,000 156,000
Provision for losses on
accounts receivable ......... 24,000 21,000 15,000 56,000 32,000 (78,314)
(Gain) loss on disposal
of assets ..................... 105,613 3,961 185 (18,110) (13,106) 802
Changes in operating
assets and liabilities, net
of acquisitions:
Accounts receivable ......... (626,622) (138,515) (1,614,511) (2,988,055) (1,623,541) (1,567,953)
Inventory .................. (84,287) (64,996) (18,239) (65,232) 1,160 28,324
Prepaid expenses ............ 99,233 42,197 (341,081) (72,961) 152,268 (18,136)
Other assets ............... 42,084 11,773 (7,315) (96,822) 9,217 715
Accounts payable ............ 161,186 41,491 1,388,888 1,970,283 (838,538) (2,470,452)
Accrued and other
liabilities ............... 75,320 332,906 719,665 (330,112) (569,269) 521,943
Deferred revenue ............ 159,545 87,259 48,263 254,460 333,019 56,541
------------ ----------- ------------- -------------- ------------- -------------
Net Cash Provided by
Operating Activities ............ 6,206,788 4,299,543 2,802,735 5,945,503 2,891,142 3,351,677
Investing Activities:
Acquisitions, net of cash
acquired ........................ -- -- (48,751,173) (15,128,889) (7,646,245) (6,911,046)
Purchase of property and
equipment ..................... (1,840,880) (1,831,165) (2,290,595) (5,280,173) (3,228,803) (2,833,894)
Funds invested with Parent ...... (3,987,731) (1,515,060) -- -- -- --
Sales of property and
equipment ..................... -- 13,087 -- 1,808,959 1,808,959 --
Other investing activities ...... 64,447 293 (8,085) (68,568) 8,626 (98,941)
------------ ----------- ------------- -------------- ------------- -------------
Net Cash Used for Investing
Activities ........................ (5,764,164) (3,332,845) (51,049,853) (18,668,671) (9,057,463) (9,843,881)
Financing Activities:
Proceeds from sales of
common stock .................. -- 42,500 17,529,200 7,118,328 3,813,829 1,198,268
Proceeds from issuances of
long-term debt .................. (458,889) -- 30,000,000 9,883,000 5,857,000 7,919,152
Payments on long-term debt ...... -- (131,071) (1,580,544) (3,540,918) (2,075,585) (2,649,021)
Increase (decrease) in due
to parent ........................ (18,530) -- 13,500 1,322,202 1,041,407 1,046,497
Net increase (decrease) in
revolving line of credit ...... -- -- 3,000,000 (1,100,000) (2,100,000) (1,900,000)
------------ ----------- ------------- -------------- ------------- -------------
Net Cash Provided by (Used
for) Financing Activities ...... (477,419) (88,571) 48,962,156 13,682,612 6,536,651 5,614,896
Effect of Exchange Rate
Changes on Cash .................. 2,432 1,093 (2,220) 14,839 884 (6,769)
------------ ----------- ------------- -------------- ------------- -------------
Net Increase (Decrease) in
Cash ........................... (32,363) 879,220 712,818 974,283 371,214 (884,077)
Cash at Beginning of Period ...... 88,999 56,636 -- 712,818 712,818 1,687,101
------------ ----------- ------------- -------------- ------------- -------------
Cash at End of Period ............ $ 56,636 $ 935,856 $ 712,818 $ 1,687,101 $ 1,084,032 $ 803,024
============ =========== ============= ============== ============= =============
</TABLE>
See accompanying notes.
F-33
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the nine months ended September 30, 1996
and the nine months ended September 30, 1997 is unaudited)
1. Organization and Business
Arcus Technology Services, Inc. (ATSI or Successor) is an 81% owned
subsidiary of United Acquisition Company (UAC or the Parent) which is an 80%
owned subsidiary of Arcus Group, Inc. (AGI), formerly United Gas Holding
Corporation. ATSI was formed in June 1995 to acquire all of the outstanding
stock of Arcus, Inc. (Arcus or Predecessor), effective after the close of
business on July 31, 1995. The consideration given was cash and the acquisition
was accounted for using the purchase method in the Successor financial
statements. The Predecessor financial statements have been prepared using the
historical cost of its assets and have not been adjusted to reflect the
purchase by ATSI. During 1996, through its wholly-owned subsidiaries Arcus Data
Security, Inc. (ADSI), and Arcus Staffing Resources, Inc. (ASRI), ATSI made
eight acquisitions for a combined purchase price of approximately $23.3
million, net of cash acquired (see Note 3).
The Successor financial statements include the accounts of ATSI and its
subsidiaries, Arcus, ADSI, ASRI, TPI Holding Corporation, Wolf Advisory
International, Ltd., Wolf Advisory International, Inc., and Towler Data
Services, Inc. and ADSI's U.K. subsidiary, Arcus Data Security Limited (ADSL).
All intercompany transactions between ATSI and its subsidiaries have been
eliminated. The term "Company" includes ATSI, Arcus, ADSI, ADSL, ASRI, TPI
Holding Corporation, Wolf Advisory International, Ltd., Wolf Advisory
International, Inc., and Towler Data Services, Inc. taken together, except
where otherwise indicated. The Predecessor financial statements include the
accounts of Arcus, and its wholly owned subsidiaries, ADSI and ADSL.
The Company provides data security and technical staffing services to
information technology departments of its business customers. Data security
services involve the secure transport, handling and storage of duplicate or
back-up computer data. Recognizing that customers' data centers are vulnerable
to natural disasters as well as other types of disasters, including terrorism
and employee sabotage, ATSI provides services that enable businesses to recover
successfully from such disasters. To protect against loss of information in
such a disaster, the Company provides secure off-site storage of duplicate data
processing records whereby computer tapes and cartridges are transported on a
regular basis by specially equipped vehicles and stored in climate controlled,
concrete, steel-reinforced vaults. If a disaster occurs, the Company delivers
the duplicate data quickly to a specified location, often a hot site (an
alternate data processing site for use by businesses when their normal
processing center is not available because of a disaster). The Company's
disaster recovery services also include assisting its customers in the testing
of their disaster recovery plans. As part of its data security services, the
Company also performs media library relocations. In addition, the Company sells
a variety of brand name data products to its customers. Through its staffing
services, the Company helps customers meet their personnel needs by supplying
information technology professionals on either a contract or temporary basis.
The Company also recruits information technology professionals for permanent
placement with its customers. Approximately 100%, 97%, 96%, 81%, 86% and 65% of
the Company's revenue during the year ended December 31, 1994, the seven month
period ended July 31, 1995, the five month period ended December 31, 1995, the
year ended December 31, 1996, and the nine month periods ended September 30,
1996 and 1997, respectively, came from data security services. The Company
serves customers from 45 locations in the United States and one location in the
United Kingdom.
The Company provides services, generally on a contract basis, to a
diversified customer base, with no single customer accounting for more than 5%
of revenue. A majority of the Company's data security revenue is billed monthly
in advance and trade accounts receivable are due within 30 days. Accounts
receivable are not collateralized.
In management's opinion, the accompanying interim consolidated financial
statements for the nine month periods ended September 30, 1996 and 1997 contain
all adjustments (consisting solely of normal recurring accruals) necessary to
present fairly the consolidated financial position of the Company as of
September 30, 1997, and the consolidated results of operations and cash flows
of the Company for the nine month periods ended September 30, 1996 and 1997.
The consolidated results of operations for the nine month period ended
September 30, 1997, are not necessarily indicative of the results expected for
the full year.
F-34
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996
and the nine months ended September 30, 1997 is unaudited)
2. Summary of Significant Accounting Policies
Inventory
Data products inventory purchased for resale are carried at the lower of
cost, which approximates first-in, first-out, or market. However, items are
generally purchased for a specific customer and shipped directly to the
customer by the supplier.
Property and Equipment
Property and equipment consisting primarily of land, buildings, vault
equipment, and leasehold improvements are carried at cost and are depreciated
using the straight-line method over their estimated useful lives. The estimated
useful lives for the Predecessor are: buildings-20 years, vault equipment 5-20
years, vehicles 3-5 years, furniture and other equipment 3-7 years. The
estimated useful lives for the Successor are: buildings-40 years, vault
equipment 4-20 years, vehicles 3-7 years, furniture and other equipment 3-10
years. Leasehold improvements are amortized over the shorter of their useful
lives or the applicable lease term. The Company expenses repair and maintenance
costs as incurred unless they significantly extend the remaining life of the
asset, in which case they are capitalized. Repair and maintenance expense for
facilities and equipment, including vehicles, was $1,020,000, $588,000,
$495,000, $1,228,000, $859,000 and $971,000 for the year ended December 31,
1994, the seven month period ended July 31, 1995, the five month period ended
December 31, 1995, the year ended December 31, 1996, and the nine month periods
ended September 30, 1996 and 1997, respectively.
Costs in Excess of Net Assets Acquired
Costs in excess of net assets acquired arose from ATSI's acquisition of
Arcus in 1995 and ATSI's eight acquisitions in 1996 (see Note 3). These costs
are being amortized over 25 years on a straight-line basis.
Other Assets
Other assets are comprised of long-term deposits, intangible assets,
deferred organization costs, and, in 1995, certain property and improvements
being held for sale. Intangible assets, consisting mainly of covenants not-to-
compete, are amortized over three to five years on a straight-line basis.
Related amortization expense was $205,000, $75,000, $96,000, $212,000,
$174,000, and $84,000 for the year ended December 31, 1994, the seven month
period ended July 31, 1995, the five month period ended December 31, 1995, the
year ended December 31, 1996, and the nine month periods ended September 30,
1996 and 1997, respectively.
Foreign Currency Translation
The Company's only international operation is in the United Kingdom. The
functional currency of that operation is the Pound Sterling. The translation of
this currency into U.S. Dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for revenue and
expense accounts using an average exchange rate during the period.
Revenues
Storage and transport revenues include monthly billings to customers for
basic data security services. Other revenues include specialized data security
services, data product sales and staffing services revenues. Certain storage
and transport services are billed in advance of the delivery of service. These
billings are accounted for as deferred revenue on the Company's balance sheet
until the service is delivered, at which time the revenue is recognized. See
Note 10 for revenues by business segment.
Included in other revenues are product sales, net of product costs,
totaling $1,252,000, $834,000, $665,000, $1,800,000, $1,226,000, and $1,640,000
for the year ended December 31, 1994, the seven month period ended
F-35
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996
and the nine months ended September 30, 1997 is unaudited)
July 31, 1995, the five month period ended December 31, 1995, the year ended
December 31, 1996, and the nine month periods ended September 30, 1996 and
1997, respectively. Product sales are presented on a net basis since the
Company generally functions as a sales representative of the product
manufacturers and the Company seldom receives or takes title to the products.
Gross product sales were $6,600,000, $4,502,000, $4,367,000, $10,465,000,
$6,811,000, and $9,370,000 for the year ended December 31, 1994, the seven
month period ended July 31, 1995, the five month period ended December 31,
1995, the year ended December 31, 1996, and the nine month periods ended
September 30, 1996 and 1997, respectively.
Interest Rate Cap Agreement
The Company entered into an interest rate cap agreement to effectively
limit the interest rate which it pays on a portion of its long-term debt. The
interest rate differential to be received, if any, is accrued as a reduction in
interest expense. The fair value of the cap is not recognized in the financial
statements.
Income Taxes
For tax return purposes, the Company is included in AGI's consolidated
federal income tax return. The Company's tax expense and payable is determined
on a separate return basis at maximum tax rates without regard to graduated
rates. Accordingly, the Company's federal income taxes payable represents an
intercompany payable to Parent at December 31, 1995 and 1996, and September 30,
1997, and is shown as Due to Parent on the Consolidated Balance Sheets.
Deferred income taxes recorded using the liability method reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes.
Earnings Per Share
Earnings (loss) per common and common equivalent share data is calculated
based on the weighted average common and common equivalent shares outstanding
for the respective period. Common equivalent shares assume the exercise of all
dilutive stock options using the treasury stock method. Primary and fully
diluted earnings per share are not materially different in the years presented.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and restate all prior
periods. Under the new requirements for calculating earnings per share, the
dilutive effect of stock options will be excluded. The change is expected to
have no effect on earnings per share for the five month period ended December
31, 1995, the year ended December 31, 1996 and the nine month periods ended
September 30, 1996 and 1997. The change is expected to result in an increase in
basic earnings per share for the year ended December 31, 1994 and the seven
month period ended July 31, 1995 to $0.47 and $0.33, respectively.
Stock Options
The Company has elected to follow APB No. 25, "Accounting for Stock Issued
to Employees" and related Interpretations in the primary financial statements
and provide the supplementary disclosures required by SFAS No. 123, "Accounting
for Stock-Based Compensation" (see Note 5).
F-36
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996
and the nine months ended September 30, 1997 is unaudited)
Reclassifications
Certain 1994 and 1995 amounts have been reclassified in order to conform
to the 1996 presentation.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. Acquisitions
During 1996, the Company completed eight acquisitions in the data security
and information technology staffing industries. Each acquisition was accounted
for using the purchase method. For each acquisition, results of operations and
cash flows of the acquired company are included in the Company's income
statement and statement of cash flows for the period from the purchase date
through December 31, 1996. In connection with certain of the acquisitions, the
Company issued shares of its common stock to the sellers as partial
consideration and sold shares of its common stock to its Parent to assist in
financing the cash portion of the acquisitions. The fair value of the Company's
stock issued or sold in connection with the acquisitions was determined by the
Board of Directors of the Company based on formulas used in similar
transactions.
On June 19, 1996, the Company acquired the stock of Wolf Advisory
International, Inc. and Wolf Advisory International, Ltd. and acquired
substantially all of the operating assets and assumed certain liabilities of
Computer Plus Temporaries, Inc. (collectively Wolf), a provider of contract and
temporary information technology staffing services in eastern Pennsylvania and
northern Florida, for approximately $10,931,000, net of cash acquired. At
December 31, 1996, the purchase price was comprised of approximately $6,240,000
of net cash payments, 228,242 shares of the Company's common stock, and a
$3,156,000 obligation to the seller. Cash payment of the obligation to the
seller was made in March 1997.
On October 30, 1996, the Company acquired the stock of Trinity Partners,
Inc. (Trinity), a provider of contract information technology staffing services
in northern California, for approximately $2,510,000, net of cash acquired. The
purchase price was comprised of net cash payments of approximately $2,330,000,
a subordinated note payable to the seller for $180,000, and immediately vested
five-year options to purchase 15,000 shares of the Company's common stock at
$16.55 per share (see Note 5). In addition, should Trinity meet certain
predefined profitability targets for the twelve months ended March 31, 1997,
the former owner will be entitled to a contingent amount based upon a multiple
of increased earnings, as defined. The contingent purchase price, if any, will
be paid in a combination of cash (80%), a subordinated note payable (20%), and
immediately vested five-year options to purchase additional shares of the
Company's common stock. The contingent purchase price, if any, will increase
costs in excess of net assets acquired. See Note 12--"Subsequent Events."
On November 5, 1996, the Company acquired substantially all of the
operating assets of the data security business of Zurich Data Corporation, a
two-facility provider of such services in northern New Jersey and the New York
City metropolitan area, for approximately $5,146,000. The purchase price was
comprised of approximately $3,570,000 in cash, 100,000 shares of the Company's
common stock, a 10-year warrant for the purchase of 10,000 additional shares of
the Company's common stock at $8.00 per share, and ten annual payments having a
net present value of approximately $859,000.
During 1996, the Company made five additional acquisitions, primarily in
the data security industry, for a combined purchase price of $4,703,000. The
combined purchase price was comprised of cash payments of $2,989,000, notes
payable and other obligations to sellers totaling $1,665,000, 7,896 shares of
the Company's common stock, and assumption of specific liabilities.
F-37
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996
and the nine months ended September 30, 1997 is unaudited)
4. Long-Term Debt
In connection with the acquisition of Arcus, the Company entered into a
$52 million credit facility (the Facility). Under the Facility, the Company
received $18 million under a five-year term loan agreement (Term A Loan), $12
million under a seven year term loan agreement (Term B Loan), a commitment for
a five-year $7.5 million revolving line of credit (the Revolver), a seven-year
$12.5 million acquisition loan facility (the Acquisition Facility) and a
five-year $2 million additional line of credit (the Swingline Loan). In
December 1996, the Company amended the Facility. As a result, the total
acquisition loan commitment was increased by $20 million and the maturity date
of this commitment was extended by one year. See Note 12--"Subsequent Events."
Under the Facility, the Company may, at its option and subject to certain
restrictions, designate certain borrowings as either "Base Rate" or
"Eurodollar" borrowings. This designation determines the interest rates which
ATSI pays under the agreement. The Base Rate is defined as the higher of the
bank's prime rate (8.25% at December 31, 1996) or 1/2% over the US Federal
Funds Rate (5% at December 31, 1996) plus an applicable margin interest rate.
The Eurodollar rate is defined as the London Interbank Offering Rate (LIBOR)
(5.7% at December 31, 1996) plus an applicable margin spread. Base Rate
borrowings bear interest at the Base Rate plus 1% to 1.5% and Eurodollar
borrowings bear interest at LIBOR plus 2.5% to 3%.
The Facility requires mandatory repayments of term borrowings from the
proceeds that result from specified types of transactions. Additionally, excess
cash flow, as defined, is to be applied to reduce borrowings. Voluntary
prepayments of principal are also allowed under the Facility, with $750,000 of
such prepayments made during 1996. Both mandatory and voluntary payments reduce
the outstanding balances and future repayments under the Term A Loan, Term B
Loan and Acquisition Facility on a pro rata basis.
The Facility subjects the Company to financial covenants including
restrictions on mergers and acquisitions of businesses; limitations on lease
and rental expenses incurred, intercompany indebtedness, loans to employees,
and capital expenditures; and maintenance of specified levels of profitability
and cash flows, both in absolute terms and in relation to interest and other
fixed charges. The Facility is collateralized by substantially all of the
assets of the Company.
In connection with five of the acquisitions completed by ATSI during 1996
(see Note 3), the Company issued notes payable and incurred other long-term
obligations (including contingent purchase price obligations) of which
approximately $5,485,000 and $1,954,000 remains outstanding at December 31,
1996 and September 30, 1997, respectively. Of this amount, $4,405,000 and
$1,053,000 is due to individuals who are shareholders, employees, or
consultants of the Company at December 31, 1996 and September 30, 1997,
respectively. These obligations bear interest annually at rates ranging from 5%
to 9%. An obligation for $1,040,000 and $900,000 at December 31, 1996 and
September 30, 1997, respectively, is a demand obligation, guaranteed by a bank
letter of credit for the same amount expiring on February 3, 1998, which the
Company plans to refinance, if required, using the Revolver and, therefore, has
been classified as a long-term liability. In 1997, $3,156,000 of acquisition
obligations were financed through the Acquisition Facility and the sale of
common stock to the Parent.
On August 17, 1995, the Company paid $20,250 to enter into an interest
rate cap agreement with a commercial bank having a notional principal of $15
million. This agreement effectively entitles the Company to receive from the
bank the amount, if any, by which the Company's interest payments on $15
million of its long-term debt exceeds 8.9375% plus the related premium (2.5% to
3.0%). The interest rate cap agreement expired on September 5, 1997.
F-38
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996
and the nine months ended September 30, 1997 is unaudited)
Long-term debt is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
September 30,
1995 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
Term A Loan, increasing quarterly principal payments
over a four-year period beginning March 31, 1996 ...... $17,082,000 $14,316,000 $12,271,000
Term B Loan, nominal quarterly principal payments for
the five year period beginning September 30, 1995
with the balance due in equal quarterly installments for
the following two years .............................. 11,364,000 10,839,000 10,805,000
Acquisition Facility, increasing quarterly principal
payments over a four year period starting September
30, 1999 ............................................. -- 9,725,000 16,144,000
Revolver, principal due five years from July 31, 1995,
with the Company having the option to extend for an
additional three years with bank approval ............ 3,000,000 1,900,000 --
Acquisition notes and obligations ..................... -- 5,485,000 2,954,000
Note payable to Parent ................................. -- -- $ 1,500,000
7% mortgage note payable in quarterly principal and
interest installments, maturing April 2001 ............ 521,000 441,000 376,000
Capital lease obligations .............................. 30,000 26,000 16,000
------------ ------------ ------------
31,997,000 42,732,000 44,066,000
Less current portion .................................... 2,272,000 3,219,000 3,906,000
------------ ------------ ------------
$29,725,000 $39,513,000 $40,160,000
============ ============ ============
</TABLE>
Scheduled payments based on long-term debt outstanding at December 31,
1996 are as follows:
<TABLE>
<S> <C>
1997 ............ $ 3,219,000
1998 ............ 4,028,000
1999 ............ 4,499,000
2000 ............ 8,557,000
2001 ............ 8,632,000
Thereafter ...... 13,797,000
------------
$42,732,000
============
</TABLE>
Cash payments for interest during the year ended December 31, 1994, the
seven month period ended July 31, 1995, the five month period ended December
31, 1995, the year ended December 31, 1996, and the nine month periods ended
September 30, 1996 and 1997 were $79,000, $35,000, $913,000, $3,131,000,
$2,284,000 and $2,670,000, respectively.
At December 31, 1995 and 1996 and September 30, 1997, the fair value of
the Company's revolving line of credit and long-term debt approximated its
carrying value.
F-39
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996
and the nine months ended September 30, 1997 is unaudited)
5. Stock Option Plans
The Company's 1995 Stock Option Plan reserves 340,000 and 455,000 shares
at December 31, 1996 and September 30, 1997, respectively, of authorized but
unissued common stock for sale or award to directors, officers, and key
employees as stock options, stock appreciation rights, restricted stock awards
or performance share awards. Both nonqualified and incentive stock options
(ISO's) can be granted and in the case of an ISO, the purchase price cannot be
less than the fair market value at grant date.
Options expire on the date set by the Plan Administration Committee of the
Company's Board of Directors (the Committee), but in no case later than ten
years from the grant date and, in some cases, no later than five years from the
grant date for ISO's.
During 1995 and 1996, the Company granted nonqualified stock options to
certain directors and key members of management. In general, the options
granted are 20% vested at the grant date with the remaining options becoming
vested semi-annually over a four year period. At December 31, 1996, 101,060
shares were vested.
Vested options only become exercisable if either UAC's ownership of ATSI
or AGI's ownership of UAC falls below 80%. No options were exercisable at
December 31, 1995, December 31, 1996 or September 30, 1997. As of December 31,
1996, no shares had been exercised or canceled and 53,000 shares remain
available for grant.
The following is a summary of employee stock option transactions under the
1995 Stock Option Plan:
<TABLE>
<CAPTION>
Weighted
Number of Option Price Average Option
Shares Per Share Price per Share
----------- ---------------- ----------------
<S> <C> <C> <C>
Granted after July 31, 1995 ............ 198,100 $8.00 $ 8.00
--------
Outstanding at December 31, 1995 ...... 198,100 $8.00 $ 8.00
Granted in 1996 ........................ 88,900 $10.24--$11.03 $10.71
--------
Outstanding at December 31, 1996 ...... 287,000 $ 8.00--$11.03 $ 8.84
========
</TABLE>
The weighted average remaining contractual life for ATSI options
outstanding at December 31, 1996 was approximately 9 years.
A total of 365,000 and 465,000 shares of common stock were reserved for
issuance under the 1995 Stock Option Plan, the acquisition options (see Note 3)
and the acquisition warrant (see Note 3) at December 31, 1996 and September 30,
1997, respectively. At December 31, 1996, ATSI had 3,205,263 shares of common
stock outstanding and the net book value per share of ATSI common stock was
$9.55.
Pro forma information regarding net income is required by SFAS No. 123,
and has been determined as if the Company had accounted for its employee share
options under the fair value method. The fair value for options granted ($0 for
1995 and 1996) was estimated at the date of grant using a minimum value option
pricing model with the following assumptions for 1996 and 1995: a risk-free
interest rate of 5.6%; no dividends expected to be declared; volatility factor
of zero for the expected price of the Company's common stock as it is not
publicly traded; and a weighted-average expected life of the options of 2.3
years.
F-40
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996
and the nine months ended September 30, 1997 is unaudited)
6. Income Taxes
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
September 30,
1995 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
Deferred tax assets:
Property and equipment ........................ $ 122,000 $ -- $ 4,000
Accrued liabilities ........................... 43,000 166,000 187,000
Other .......................................... 5,000 14,000 8,000
---------- ---------- ----------
170,000 180,000 199,000
Deferred tax liabilities:
Costs in excess of net assets acquired in stock
purchase transactions and other assets ...... (123,000) (455,000) (676,000)
Property and equipment ........................ -- (46,000) --
---------- ---------- ----------
(123,000) (501,000) --
---------- ---------- ----------
Net deferred tax assets (liabilities) ......... $ 47,000 $ (321,000) $ (477,000)
========== ========== ==========
</TABLE>
Deferred tax assets totaling $48,000, $180,000 and $199,000 as of December
31, 1995 and 1996 and September 30, 1997, respectively, are included in prepaid
expenses and other current assets on the Consolidated Balance Sheets.
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
Seven Five September 30,
Year Ended Months Ended Months Ended Year Ended ------------------------
December 31, July 31, December 31, December 31,
1994 1995 1995 1996 1996 1997
-------------- -------------- -------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Current:
Federal ...... $2,176,000 $1,532,000 $ 678,500 $1,337,000 $1,059,000 $1,274,000
State ......... 609,000 444,000 176,000 410,000 323,000 357,000
---------- ---------- --------- ----------- ----------- -----------
2,785,000 1,976,000 854,500 1,747,000 1,382,000 1,631,000
Deferred ...... (184,000) (124,000) (47,000) 237,000 181,000 156,000
---------- ---------- --------- ----------- ----------- -----------
$2,601,000 $1,852,000 $ 807,500 $1,984,000 $1,563,000 $1,787,000
========== ========== ========= =========== =========== ===========
</TABLE>
The effective tax rates differ from the federal statutory rates primarily
as a result of the following:
<TABLE>
<CAPTION>
Nine Months Ended
Seven Five September 30,
Year Ended Months Ended Months Ended Year Ended ---------------------
December 31, July 31, December 31, December 31,
1994 1995 1995 1996 1996 1997
-------------- -------------- -------------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Federal tax at statutory rate 34.0% 34.0% 34.0% 34.0% 34.0% 34.0%
State tax provision ......... 6.3 6.6 6.2 6.0 6.0 6.0
Other ........................ 1.8 1.4 3.1 3.6 3.6 5.0
------ ------ ------ ------ ------ ------
42.1% 42.0% 43.3% 43.6% 43.6% 45.0%
====== ====== ====== ====== ====== ======
</TABLE>
Cash payments for income taxes during the year ended December 31, 1994,
the seven month period ended July 31, 1995, the five-month period ended
December 31, 1995, the year ended December 31, 1996 and the nine month periods
ended September 30, 1996 and 1997, were $2,785,000, $1,961,000, $720,000,
$609,000, $499,000 and $619,000, respectively.
F-41
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996
and the nine months ended September 30, 1997 is unaudited)
7. Retirement Plans
On August 1, 1995, the Company adopted the Arcus, Inc. 401(k) Profit
Sharing Plan (the Plan). Employees of the Company and its subsidiaries who
satisfy a six month service requirement as of open enrollment each January 1st
and July 1st participate in the Plan. Participants in the Plan may contribute
from 1% to 15% of their annual compensation. The Company matches one half of
employee contributions up to a total of 1.5% of their annual compensation.
Company matching expense, net of forfeitures, was $52,000, $132,000, $115,000
and $145,000, for the five month period ended December 31, 1995 and the year
ended December 31, 1996 and the nine month periods ended September 30, 1996 and
1997, respectively. Company matching expense relating to a similar plan of the
Predecessor's former parent was $109,000 and $75,000 for the year ended
December 31, 1994 and the seven month period ended July 31, 1995. The Company
may also make an annual voluntary contribution for all eligible employees,
whether or not they elect a salary deferral. The Company provided for a
voluntary contribution in 1995 and 1996, to be funded in the following year,
based upon a percentage of participant compensation. Voluntary contribution
expense, net of forfeitures, for the five month period ended December 31, 1995,
the year ended December 31, 1996 and the nine month periods ended September 30,
1996 and 1997 was $147,000, $427,000, $338,000 and $371,000, respectively. The
Predecessor had voluntary contribution expense for the year ended December 31,
1994 and the seven month period ended July 31, 1995, of $329,000 and $212,000,
respectively.
8. Related Party Transactions
During the year ended December 31, 1994 and the seven month period ended
July 31, 1995, the Predecessor's parent provided management, accounting and
other administrative services to the Company. The cost of such services was
based upon standard charges for the Company's relative use of the underlying
services compared to the parent's other operating companies. Charges for these
services were $334,000 and $255,000 for the year ended December 31, 1994 and
the seven month period ended July 31, 1995, respectively.
The Company leases twelve of its facilities from its former parent (Note
9). The Predecessor paid rental expense to its former parent of $1,209,000 and
$766,000 for the year ended December 31, 1994 and the seven month period ended
July 31, 1995, respectively.
During the year ended December 31, 1994 and the seven month period ended
July 31, 1995, insurance was purchased by the Predecessor's parent for the
parent's consolidated group. Policy premiums were charged to each company based
upon relative payroll, revenue, vehicles, property values or losses, depending
on the type of insurance coverage. In 1994, group health insurance was
purchased from an independent health maintenance organization by the parent on
behalf of the Company.
9. Commitments and Contingencies
As of September 30, 1997, the Company leased 29 vault facilities, 14
staffing offices and certain equipment under noncancelable operating lease
agreements. Twelve of the Company's vault facilities are leased from a single
landlord of which nine have fifteen-year terms beginning January 1, 1995, with
two five-year renewal options, providing for cost of living increases every
three years based upon the Consumer Price Index, with a 3.33% ceiling per year.
The remaining vault facilities are leased under leases which commenced June
1989 or later, and have primary lease terms ranging from four to twenty years,
generally with one or two five-year renewal options. During 1996, the Company
signed leases in regard to two vault facilities that were under construction at
December 31, 1996. These two leases each have fifteen-year terms that will
commence during 1997. With respect to vault facilities, the Company generally
is required to pay property tax, insurance, and facility maintenance expenses.
Staffing offices, located in multi-tenant commercial office buildings, have
primary lease terms ranging from one to five years, generally with no renewal
options. The Company has an irrevocable letter of credit for $50,000 expiring
on April 9, 1998 that supports an office lease obligation. Other operating
leases are for equipment and vehicles. Rental expense under operating leases,
including month-to-month rentals, was $3,488,000, $2,293,000, $1,578,000 and
$4,409,000
F-42
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996
and the nine months ended September 30, 1997 is unaudited)
for the year ended December 31, 1994, the seven month period ended July 31,
1995, the five month period ended December 31, 1995 and the year ended December
31, 1996, respectively. Included in these amounts are $1,209,000, $766,000,
$554,000 and $1,361,000, respectively, of operating lease expense related to
facilities leased from shareholders.
Future minimum rentals required under operating leases having an initial
or remaining noncancelable lease term in excess of one year as of December 31,
1996 are as follows:
<TABLE>
<S> <C>
1997 .............................. $ 5,153,000
1998 .............................. 4,808,000
1999 .............................. 4,363,000
2000 .............................. 3,871,000
2001 .............................. 3,106,000
Thereafter ........................ 19,441,000
------------
Total minimum lease payments ...... $40,742,000
============
</TABLE>
The Company has a $250,000 standby letter of credit payable to its bank to
secure its operating cash accounts.
10. Business Segments
The following tables present data relating to the Company's revenues, cost
of services rendered, depreciation, operating income, identifiable assets and
capital expenditures by business segment.
<TABLE>
<CAPTION>
Nine Months Ended
Seven Five September 30,
Year Ended Months Ended Months Ended Year Ended -------------------------------
December 31, July 31, December 31, December 31,
1994 1995 1995 1996 1996 1997
--------------- --------------- -------------- --------------- --------------- ---------------
(Predecessor) (Predecessor) (Successor) (Successor) (Successor) (Successor)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Data security ............ $40,833,347 $24,964,319 $19,867,759 $53,145,334 $38,553,505 $44,573,634
Technical staffing ...... -- 713,645 810,599 12,997,907 6,711,491 24,717,499
Intercompany
eliminations ............ -- -- -- (161,865) (96,576) (322,225)
------------ ------------ ------------ ----------- ----------- -----------
Total operating
revenues ............... $40,833,347 $25,677,964 $20,678,358 $65,981,376 $45,168,420 $68,968,908
============ ============ ============ =========== =========== ===========
Cost of Services
Rendered
Data security ............ $18,034,862 $10,874,499 $ 8,929,784 $23,554,642 $17,063,800 $19,831,627
Technical staffing ...... -- 470,654 520,997 9,344,976 4,836,278 18,216,422
Intercompany
eliminations ............ -- -- -- (161,865) (96,576) (322,225)
------------ ------------ ------------ ----------- ----------- -----------
Total costs of services
rendered ............... $18,034,862 $11,345,153 $ 9,450,781 $32,737,753 $21,803,502 $37,725,824
============ ============ ============ =========== =========== ===========
</TABLE>
F-43
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996
and the nine months ended September 30, 1997 is unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
Seven Five September 30,
Year Ended Months Ended Months Ended Year Ended ------------------------------
December 31, July 31, December 31, December 31,
1994 1995 1995 1996 1996 1997
--------------- --------------- -------------- -------------- -------------- ---------------
(Predecessor) (Predecessor) (Successor) (Successor) (Successor) (Successor)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Depreciation and
Amortization
Data security .................. $ 2,693,533 $ 1,431,684 $ 1,488,093 $ 3,907,825 $ 2,881,767 $ 3,310,817
Technical staffing ............ -- -- 1,575 219,586 103,694 929,076
Corporate ..................... 156,621 100,527 111,796 309,118 219,943 298,536
------------ ------------ ------------ ------------ ------------ ------------
Total depreciation and
amortization ............... $ 2,850,154 $ 1,532,211 $ 1,601,464 $ 4,436,529 3,205,404 $ 4,538,429
============ ============ ============ ============ ============ ============
Operating Income
Data security .................. $ 9,321,434 $ 5,958,390 $ 4,629,540 $12,149,565 $ 9,040,836 $ 9,888,168
Technical staffing ............ -- 242,991 114,709 442,812 233,283 257,714
Corporate ..................... (3,400,748) (2,131,681) (1,750,370) (5,377,135) (3,757,288) (3,720,751)
------------ ------------ ------------ ------------ ------------ ------------
Total operating income . $ 5,920,686 $ 4,069,700 $ 2,993,879 $ 7,215,242 $ 5,516,831 $ 6,425,131
============ ============ ============ ============ ============ ============
Capital Expenditures
Data security .................. $ 1,666,190 $ 1,785,025 $ 2,115,127 $ 4,363,670 $ 2,752,349 $ 2,054,901
Technical staffing ............ -- -- 43,662 317,302 157,238 634,484
Corporate ..................... 174,690 46,140 131,806 599,201 319,216 144,509
------------ ------------ ------------ ------------ ------------ ------------
Total capital
expenditures .................. $ 1,840,880 $ 1,831,165 $ 2,290,595 $ 5,280,173 $ 3,228,803 $ 2,833,894
============ ============ ============ ============ ============ ============
Identifiable Assets
Data security .................. $59,657,300 $85,687,540 $ 88,429,038
Technical staffing ............ 152,260 2,041,337 3,835,987
Corporate ..................... 320,814 728,871 699,200
------------ ------------ ------------
Total identifiable assets . $60,130,374 $88,457,748 $ 92,964,225
============ ============ ============
</TABLE>
11. Supplemental Pro Forma Acquisition Information (Unaudited)
The following supplemental pro forma information has been presented as if
the acquisition of ATSI described in Note 1 and the acquisitions discussed in
Note 3 occurred on January 1, 1995 and as if the acquisition described in Note
12 occurred on January 1, 1996.
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months
----------------------------- Ended
September 30,
1995 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
Revenues ............... $64,512,369 $89,208,750 $74,630,285
============ ============ ============
Operating income ......... $ 6,426,829 $ 9,524,802 $ 6,918,575
============ ============ ============
Net income ............... $ 1,757,474 $ 3,377,656 $ 2,402,834
============ ============ ============
Earnings per share ...... $ 0.53 $ 1.02 $ 0.72
============ ============ ============
</TABLE>
F-44
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996
and the nine months ended September 30, 1997 is unaudited)
12. Subsequent Events
In June 1997, the Company sold the operating assets of the non-staffing
portion of Trinity's business. The assets were sold to the former owner of
Trinity and other former Trinity employees for a $400,000 five year note,
bearing interest at 12% with all principal due at maturity. In conjunction with
the sale, and in consideration of a cash payment of $250,000 to the former
owner, the former owner and the Company signed a mutual release. Among the
Company's obligations released were any contingent consideration due to the
former owner under the original agreement to acquire Trinity, the $180,000
subordinated note payable to the former owner, certain stock options held by
the former owner and certain other agreements signed with the former owner.
On June 11, 1997, the Company amended its Credit Agreement to increase the
size of the Revolving Facility from $7.5 million to $11 million and reduced the
size of the Acquisition Facility by $3.5 million.
On August 20, 1997, the Company acquired substantially all of the assets
and assumed certain liabilities of a company operating in the contract
information technology staffing services business in northern California,
Oregon and Washington state for approximately $4,889,000, net of cash acquired.
The purchase price consisted of net cash payments of approximately $3,889,000,
a subordinated note payable to the seller for $1,000,000 and 60,000 options to
purchase the Company's common stock at $16.41. The cash payment was partially
financed by issuance of a $1.5 million subordinated convertible note payable to
UAC. Additionally, if certain profitability targets are met, the Company could
be obligated to make an additional cash payment of up to $750,000. The acquired
company had revenues and operating income for the year ended December 31, 1996
of approximately $8.4 million and $1.2 million, respectively.
On September 26, 1997, Iron Mountain Incorporated signed a definitive
agreement to acquire all of the outstanding stock of the Company with
anticipated closing in the first quarter of 1998.
F-45
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Arcus Group, Inc.
We have audited the consolidated balance sheets of Arcus Group, Inc. (the
Company), formerly United Gas Holding Corporation, as of December 31, 1995 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Arcus Group, Inc.
at December 31, 1995 and 1996, and the consolidated results of its operations
and cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Ernst & Young LLP
Dallas, Texas
April 30, 1997, except for
Note 15, as to which the date is
September 26, 1997
F-46
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Arcus Group, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Arcus Group, Inc. (formerly United Gas
Holding Corporation) (a Delaware corporation) and subsidiaries for the year
ended December 31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Arcus Group, Inc. and subsidiaries for the year ended December 31, 1994, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Houston, Texas
April 4, 1995
F-47
<PAGE>
ARCUS GROUP, INC. CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------------- September 30,
1995 1996 1997
----------------- ----------------- -----------------
(unaudited)
<S> <C> <C> <C>
ASSETS (Note 5)
Current Assets:
Cash and cash equivalents ........................... $ 24,099,950 $ 17,408,382 $ 12,169,510
Accounts receivable, less allowance for doubtful
accounts of $123,055, $156,227 and $68,000,
respectively ....................................... 8,951,495 14,008,613 17,058,766
Other receivables .................................... 493,500 828,128 828,128
Inventory .......................................... 293,393 371,715 342,230
Prepaid expenses and other current assets ............ 673,558 791,337 969,969
-------------- -------------- --------------
Total Current Assets .............................. 34,511,896 33,408,175 31,368,603
Property and Equipment, at Cost:
Land, buildings, and leasehold improvements ......... 5,395,640 6,266,886 6,756,226
Vault equipment and vehicles ........................ 6,628,169 8,819,780 10,097,416
Furniture and other equipment ........................ 1,288,251 3,994,497 4,808,522
-------------- -------------- --------------
13,312,060 19,081,163 21,662,164
Less accumulated depreciation ........................ 895,589 3,661,338 5,909,813
-------------- -------------- --------------
Property and Equipment, Net ........................ 12,416,471 15,419,825 15,752,351
Cost in Excess of Net Assets Acquired, Net of Accumulated
Amortization of $594,377, $2,310,903 and $4,053,320,
respectively .......................................... 35,093,200 55,235,881 57,320,285
Investments (Note 4) .................................... 821,908 817,629 866,662
Other Assets .......................................... 2,067,351 581,375 513,538
-------------- -------------- --------------
Total Assets ....................................... $ 84,910,826 $ 105,462,885 $ 105,821,439
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................... $ 3,334,939 $ 5,952,043 $ 3,551,279
Accrued payroll .................................... 2,186,478 2,814,509 3,588,027
Accrued liabilities ................................. 804,569 1,344,791 952,227
Deferred revenue .................................... 2,856,621 3,469,265 3,525,806
Current portion of long-term debt .................. 2,272,237 4,406,794 3,905,822
-------------- -------------- --------------
Total Current Liabilities ........................ 11,454,844 17,987,402 15,523,161
Long-Term Debt (Note 5) ................................. 29,724,941 38,325,473 38,660,602
Other Liabilities ....................................... 266,540 226,700 296,491
Commitments and Contingencies (Notes 3 and 11)
Minority Interest in Subsidiaries ..................... 4,750,185 8,007,551 8,472,488
Preferred Stock of Subsidiary, Redeemable (Note 6) ...... 23,661,526 25,556,105 27,089,471
Warrants Outstanding to Purchase Common Stock of
Subsidiary ............................................. 15,000 15,000 15,000
Stockholders' Equity (Notes 7 and 8):
Common stock, $.0001 par value:
Authorized shares--11,661,290
Issued and outstanding shares--11,426,525 ......... 1,143 1,143 1,143
Capital in excess of par value ..................... 203,644,666 203,010,935 202,983,641
Accumulated deficit ................................. (188,595,067) (187,707,881) (187,231,563)
Translation adjustment .............................. (12,952) 40,457 11,005
-------------- -------------- --------------
Total Stockholders' Equity ........................ 15,037,790 15,344,654 15,764,226
-------------- -------------- --------------
Total Liabilities and Stockholders' Equity ......... $ 84,910,826 $ 105,462,885 $ 105,821,439
============== ============== ==============
</TABLE>
See accompanying notes.
F-48
<PAGE>
ARCUS GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------------------- --------------------------------
1994 1995 1996 1996 1997
--------------- -------------- -------------- -------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Storage and transport ............... $ -- $ 16,158,490 $ 43,671,062 $ 31,853,307 $ 38,173,659
Other .............................. -- 4,519,868 22,310,314 13,315,113 30,795,249
------------ ------------ ------------ ------------ ------------
Total Revenues ..................... -- 20,678,358 65,981,376 45,168,420 68,968,908
Operating Expenses:
Cost of services rendered ............ -- 9,450,781 32,737,753 21,803,502 37,725,824
Selling and administrative
expenses ........................... -- 6,632,234 21,591,852 14,642,683 20,279,524
Holding company expenses ............ 504,291 1,122,653 1,991,115 1,039,067 1,023,538
Depreciation and amortization ...... -- 1,608,479 4,449,025 3,214,479 4,550,373
------------ ------------ ------------ ------------ ------------
Total Operating Expenses ......... 504,291 18,814,147 60,769,745 40,699,731 63,579,259
------------ ------------ ------------ ------------ ------------
Operating Income (Loss) ............... (504,291) 1,864,211 5,211,631 4,468,689 5,389,649
Other Income (Expense):
Interest income (expense), net ...... 1,165,373 612,499 (1,668,324) (1,145,742) (1,954,064)
Equity in income of/writedown
of investment in limited
partnership ........................ 49,042 53,346 34,481 -- (571,262)
Minority interest .................. 87,345 (58,329) (321,023) (310,988) (427,639)
Preferred stock dividends of
subsidiary ........................ (1,028,000) (1,754,240) (1,894,579) (1,420,934) (1,533,366)
------------ ------------ ------------ ------------ ------------
Income (Loss) Before Income
Taxes .............................. (230,531) 717,487 1,362,186 1,591,025 903,318
Provision for Income Taxes
(Note 9) ........................... -- 226,000 475,000 391,000 427,000
------------ ------------ ------------ ------------ ------------
Net Income (Loss) ..................... $ (230,531) $ 491,487 $ 887,186 $ 1,200,025 $ 476,318
============ ============ ============ ============ ============
Earnings (Loss) per share ............ $ (.02) $ 0.04 $ 0.08 $ 0.11 $ 0.04
============ ============ ============ ============ ============
Weighted average shares
outstanding ........................... 11,426,525 11,426,525 11,426,525 11,426,525 11,426,525
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-49
<PAGE>
ARCUS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital in
Common Excess of Accumulated Translation
Stock Par Value Deficit Adjustment Total
-------- -------------- ------------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993 ............ $1,143 $203,644,666 $ (188,856,023) $ -- $14,789,786
Net loss .............................. -- -- (230,531) -- (230,531)
------- ------------ -------------- --------- -----------
Balances at December 31, 1994 ............ 1,143 203,644,666 (189,086,554) -- 14,559,255
Currency translation adjustment ...... -- -- -- (12,952) (12,952)
Net income ........................... -- -- 491,487 -- 491,487
------- ------------ -------------- --------- -----------
Balances at December 31, 1995 ............ 1,143 203,644,666 (188,595,067) (12,952) 15,037,790
Subsidiary stock issuances ............ -- (633,731) -- -- (633,731)
Currency translation adjustment ...... -- -- -- 53,409 53,409
Net income ........................... -- -- 887,186 -- 887,186
------- ------------ -------------- --------- -----------
Balances at December 31, 1996 ............ 1,143 203,010,935 (187,707,881) 40,457 15,344,654
Subsidiary stock issuances
(unaudited) ........................... -- (27,294) -- -- (27,294)
Currency translation adjustment
(unaudited) ........................... -- -- -- (29,452) (29,452)
Net income (unaudited) ............... -- -- 476,318 -- 476,318
------- ------------ -------------- --------- -----------
Balances at September 30, 1997
(unaudited) ........................... $1,143 $202,983,641 $ (187,231,563) $ 11,005 $15,764,226
======= ============ ============== ========= ===========
</TABLE>
See accompanying notes.
F-50
<PAGE>
ARCUS GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------- ------------------------------
1994 1995 1996 1996 1997
-------------- --------------- ---------------- --------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income (loss) ............... $ (230,531) $ 491,487 $ 887,186 $ 1,200,025 $ 476,318
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Equity in income of/writedown
of investment in limited
partnership .................. (49,042) (53,346) (34,481) -- 571,262
Minority interest ............... (87,345) 58,329 321,023 310,988 427,639
Preferred stock dividends of
subsidiary ..................... 1,028,000 1,754,240 1,894,579 1,420,934 1,533,366
Depreciation and amortization ... 3,765 1,608,479 4,449,025 3,214,479 4,550,373
Provision for losses on accounts
receivable ..................... -- 15,000 56,000 32,000 (78,314)
(Gain) loss on disposal of assets 5,443 185 (18,110) (13,106) 802
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable ............ -- (1,642,378) (2,911,055) (1,623,541) (1,567,953)
Other receivables ............... (58,070) (719,500) (334,628) (334,628) --
Inventory ........................ -- (18,239) (65,232) 1,160 28,324
Prepaid expenses ............... -- (314,361) (26,017) 187,911 (181,214)
Other assets ..................... (19,825) (7,315) (96,821) 44,554 (19,352)
Accounts payable ............... (29,972) 1,395,537 2,099,867 (863,221) (2,610,994)
Accrued, other liabilities and
deferred revenue ............... (1,205,406) 872,428 419,907 (89,095) 227,319
------------ ------------- ------------- ------------ -------------
Net Cash Provided by
(Used in) Operating
Activities .................. (642,983) 3,440,546 6,641,243 3,488,460 3,357,576
Investing Activities:
Acquisitions, net of cash acquired -- (48,751,173) (15,128,889) (7,646,245) (6,911,046)
Purchases of property and
equipment ..................... -- (2,303,595) (5,303,665) (3,242,460) (2,839,532)
Investment purchases ............ (82,857) -- -- -- (666,662)
Distributions from limited
partnership ..................... 163,127 128,193 38,760 -- --
Sales of properties ............ -- -- 1,808,959 1,808,959 --
Other investing activities ...... 1,000 (8,085) (4,897) 113,493 (52,574)
------------ ------------- ------------- ------------ -------------
Net Cash Provided by
(Used in) Investing
Activities .................. 81,270 (50,934,660) (18,589,732) (8,966,253) (10,469,814)
</TABLE>
See accompanying notes.
F-51
<PAGE>
ARCUS GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------------------------- -----------------------------
1994 1995 1996 1996 1997
------------- --------------- --------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Financing Activities:
Proceeds from issuance of
subsidiary preferred stock,
net of issuance costs ......... 20,879,286 -- -- -- --
Proceeds from sales of
subsidiary common stock to
minority stockholders ......... 2,500,000 2,279,200 -- -- 10,004
Proceeds from issuance of
subsidiary common stock
warrants ..................... 15,000 -- -- -- --
Proceeds from issuances of
long-term debt ............... -- 30,000,000 9,883,000 5,857,000 6,419,152
Payments on long-term debt ... -- (1,580,544) (3,540,918) (2,075,585) (2,649,021)
Net increase (decrease) in
revolving line of credit ... -- 3,000,000 (1,100,000) (2,100,000) (1,900,000)
------------ ------------- ------------ ------------ ------------
Net Cash Provided by
Financing Activities ...... 23,394,286 33,698,656 5,242,082 1,681,415 1,880,135
Effect of Exchange Rate Changes on
Cash ........................... -- (2,220) 14,839 884 (6,769)
------------ ------------- ------------ ------------ ------------
Net Increase (Decrease) in Cash 22,832,573 (13,797,678) (6,691,568) (3,795,494) (5,238,872)
Cash and Cash Equivalents at
Beginning of Period ............ 15,065,055 37,897,628 24,099,950 24,099,950 17,408,382
------------ ------------- ------------ ------------ ------------
Cash and Cash Equivalents at End
of Period ..................... $37,897,628 $ 24,099,950 $ 17,408,382 $ 20,304,456 $ 12,169,510
============ ============= ============ ============ ============
</TABLE>
See accompanying notes.
F-52
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
(Information for the nine months ended September 30, 1996 and the nine months
ended
September 30, 1997 is unaudited)
1. Organization and Business
Approximately 58% of the common stock of Arcus Group, Inc. (AGI), formerly
United Gas Holding Corporation, is owned by GKH Investments, L.P. and certain
related companies. AGI owns 80% of the outstanding common stock of United
Acquisition Company (UAC), UAC owns 81% of the outstanding common stock of
Arcus Technology Services, Inc. (ATSI) at September 30, 1997 (81% and 87% at
December 31, 1996 and 1995, respectively).
ATSI, formerly Arcus Holdings Corporation, was formed in June 1995 to
acquire all of the outstanding stock of Arcus, Inc. (Arcus), effective after
the close of business on July 31, 1995. The consideration given was cash and
the acquisition was accounted for using the purchase method. From November 1,
1992, when its previous operating subsidiaries were sold, until the acquisition
of Arcus as of July 31, 1995, neither AGI nor UAC made any acquisitions or
earned any revenue other than interest income and the equity in a limited
partnership interest. During 1996, through its wholly-owned subsidiaries Arcus
Data Security, Inc. (ADSI), and Arcus Staffing Resources, Inc. (ASRI), ATSI
made eight acquisitions for a combined purchase price of approximately $23.3
million, net of cash acquired (see Note 3).
These financial statements include the accounts of AGI and its
subsidiaries, UAC, ATSI, Arcus, ADSI, ASRI, TPI Holding Corporation, Wolf
Advisory International, Ltd., Wolf Advisory International, Inc., and Towler
Data Services, Inc. and ADSI's U.K. subsidiary, Arcus Data Security Limited
(ADSL). All intercompany transactions between AGI and its subsidiaries have
been eliminated. The term "Company" includes AGI, UAC, ATSI, Arcus, ADSI, ADSL,
ASRI, TPI Holding Corporation, Wolf Advisory International, Ltd., Wolf Advisory
International, Inc., and Towler Data Services, Inc. taken together, except
where otherwise indicated.
The Company, through ATSI and its subsidiaries, provides data security and
technical staffing services to information technology departments of its
business customers. Data security services involve the secure transport,
handling and storage of duplicate or back-up computer data. Recognizing that
customers' data centers are vulnerable to natural disasters as well as other
types of disasters, including terrorism and employee sabotage, Arcus provides
services that enable businesses to recover successfully from such disasters. To
protect against loss of information in such a disaster, the Company provides
secure off-site storage of duplicate data processing records whereby computer
tapes and cartridges are transported on a regular basis by specially equipped
vehicles and stored in climate controlled, concrete, steel-reinforced vaults.
If a disaster occurs, the Company delivers the duplicate data quickly to a
specified location, often a hot site (an alternate data processing site for use
by businesses when their normal processing center is not available because of a
disaster). The Company's disaster recovery services also include assisting its
customers in the testing of their disaster recovery plans. As part of its data
security services, the Company also performs media library relocations. In
addition, the Company sells a variety of brand name data products to its
customers. Through its staffing services, the Company helps customers meet
their personnel needs by supplying information technology professionals on
either a contract or temporary basis. The Company also recruits information
technology professionals for permanent placement with its customers.
Approximately 96%, 81%, 86% and 65% of the Company's revenue during the years
ended December 31, 1995 and 1996 and the nine month periods ended September 30,
1996 and 1997, respectively, came from data security services. The Company
serves customers from 45 locations in the United States and one location in the
United Kingdom.
The Company provides services, generally on a contract basis, to a
diversified customer base, with no single customer accounting for more than 5%
of revenue. A majority of the Company's data security revenue is billed monthly
in advance and trade accounts receivable are due within 30 days. Accounts
receivable are not collateralized.
F-53
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996 and the nine months
ended
September 30, 1997 is unaudited)
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash represents cash deposits and cash equivalents comprised of high
quality debt instruments with maturities of 60 days or less.
Inventory
Data products inventory purchased for resale are carried at the lower of
cost, which approximates first-in, first-out, or market. However, items are
generally purchased for a specific customer and shipped directly to the
customer by the supplier.
Property and Equipment
Property and equipment consisting primarily of land, buildings, vault
equipment, and leasehold improvements are carried at cost and are depreciated
using the straight-line method over their estimated useful lives: buildings--40
years, vault equipment 4-20 years, vehicles 3-7 years, furniture and other
equipment 3-10 years. Leasehold improvements are amortized over the shorter of
their useful lives or the applicable lease term. The Company expenses repair
and maintenance costs as incurred unless they significantly extend the
remaining life of the asset, in which case they are capitalized. Repair and
maintenance expense for facilities and equipment, including vehicles, was
$495,000, $1,230,000, $859,000 and $971,000 for the years ended December 31,
1995 and 1996 and the nine month periods ended September 30, 1996 and 1997,
respectively.
Costs in Excess of Net Assets Acquired
Costs in excess of net assets acquired arose from ATSI's acquisition of
Arcus in 1995 and ATSI's eight acquisitions in 1996 (see Note 3). These costs
are being amortized over 25 years on a straight-line basis.
Other Assets
Other assets are comprised of long-term deposits, intangible assets,
deferred organization costs and, in 1995, certain property and improvements
being held for sale. Intangible assets, consisting mainly of covenants not-to-
compete, are amortized over three to five years on a straight-line basis.
Deferred organization costs, incurred in conjunction with the formation of UAC,
are being amortized over 5 years. Related amortization expense was $4,000,
$100,000, $216,000, $177,000 and $87,000 for the years ended December 31, 1994,
1995 and 1996 and the nine month periods ended September 30, 1996 and 1997,
respectively.
Foreign Currency Translation
The Company's only international operation is in the United Kingdom. The
functional currency of that operation is the Pound Sterling. The translation of
this currency into U.S. Dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for revenue and
expense accounts using an average exchange rate during the period.
Revenues
Storage and transport revenues include monthly billings to customers for
basic data security services. Other revenues include specialized data security
services, data product sales and staffing services revenues. Certain storage
and transport services are billed in advance of the delivery of service. These
billings are accounted for as deferred revenue on the Company's balance sheet
until the service is delivered, at which time the revenue is recognized. See
Note 13 for revenues by business segment.
F-54
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996 and the nine months
ended
September 30, 1997 is unaudited)
Included in other revenues are product sales, net of product costs,
totaling $665,000, $1,800,000, $1,226,000, and $1,640,000 for the years ended
December 31, 1995 and 1996 and the nine month periods ended September 30, 1996
and 1997, respectively. Product sales are presented on a net basis since the
Company generally functions as a sales representative of the product
manufacturers and the Company seldom receives or takes title to the products.
Gross product sales were $4,367,000, $10,465,000, $6,811,000 and $9,370,000 for
the years ended December 31, 1995 and 1996 and the nine month periods ended
September 30, 1996 and 1997, respectively.
Holding Company Expenses
Holding company expenses include salaries and other administrative
expenses incurred by AGI and UAC which are unrelated to the ongoing operations
of ATSI and its subsidiaries.
Interest Rate Cap Agreement
The Company entered into an interest rate cap agreement to effectively
limit the interest rate which it pays on a portion of its long-term debt. The
interest rate differential to be received, if any, is accrued as a reduction in
interest expense. The fair value of the cap is not recognized in the financial
statements.
Income Taxes
Deferred income taxes are recorded using the liability method and reflect
the net effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes.
Earnings (Loss) Per Share
Earnings (loss) per common and common equivalent share data is calculated
based on the weighted average common and common equivalent shares outstanding
for the respective period, except for loss periods where the common equivalent
shares are excluded because their effect is antidilutive. Common equivalent
shares assume the exercise of all dilutive stock options using the treasury
stock method. Primary and fully diluted earnings per share are not materially
different in the years presented.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and restate all prior
periods. Under the new requirements for calculating basic earnings per share,
the dilutive effect of stock options will be excluded. The change is expected
to have no effect on earnings per share for the years ended December 31, 1994,
1995 and 1996 and the nine months ended September 30, 1996 and 1997.
Stock Options
The Company has elected to follow APB No. 25, "Accounting for Stock Issued
to Employees" and related Interpretations in the primary financial statements
and provide the supplementary disclosures required by SFAS No. 123, "Accounting
for Stock-Based Compensation" (see Note 8).
Reclassifications
Certain 1994 and 1995 amounts have been reclassified in order to conform
to the 1996 presentations.
F-55
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996 and the nine months
ended
September 30, 1997 is unaudited)
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. Acquisitions
During 1996, the Company completed eight acquisitions in the data security
and information technology staffing industries. Each acquisition was accounted
for using the purchase method. For each acquisition, results of operations and
cash flows of the acquired company are included in the Company's statement of
operations and statement of cash flows for the period from the purchase date
through December 31, 1996. In connection with certain of the acquisitions ATSI
issued shares of its common stock to the sellers as partial consideration and
UAC bought additional ATSI shares to assist in financing the cash portion of
the acquisition. The fair value of ATSI's stock issued to sellers or sold to
UAC in connection with the acquisitions was determined by the ATSI Board of
Directors based on formulas used in similar transactions.
On June 19, 1996, the Company acquired the stock of Wolf Advisory
International, Inc. and Wolf Advisory International, Ltd. and acquired
substantially all of the operating assets and assumed certain liabilities of
Computer Plus Temporaries, Inc. (collectively Wolf), a provider of contract and
temporary information technology staffing services in eastern Pennsylvania and
northern Florida, for approximately $10,931,000, net of cash acquired. At
December 31, 1996, the purchase price was comprised of approximately $6,240,000
of net cash payments, 228,242 shares of ATSI common stock, and a $3,156,000
obligation to the seller. Cash payment of the obligation to the seller was made
in March 1997.
On October 30, 1996, the Company acquired the stock of Trinity Partners,
Inc. (Trinity), a provider of contract information technology staffing services
in northern California, for approximately $2,510,000, net of cash acquired. The
purchase price was comprised of net cash payments of approximately $2,330,000,
a subordinated note payable to the seller for $180,000, and immediately vested
five-year options to purchase 15,000 shares of ATSI's common stock at $16.55
per share (see Note 5). In addition, should Trinity meet certain predefined
profitability targets for the twelve months ended March 31, 1997, the former
owner will be entitled to a contingent amount based upon a multiple of
increased earnings, as defined. The contingent purchase price, if any, will be
paid in a combination of cash (80%), a subordinated note payable (20%), and
immediately vested five-year options to purchase additional shares of the
Company's common stock. The contingent purchase price, if any, will increase
costs in excess of net assets acquired. See Note 15--"Subsequent Events".
On November 5, 1996, the Company acquired substantially all of the
operating assets of the data security business of Zurich Data Corporation, a
two-facility provider of such services in northern New Jersey and the New York
City metropolitan area, for approximately $5,146,000. The purchase price was
comprised of approximately $3,570,000 in cash, 100,000 shares of ATSI's common
stock, a 10-year warrant for the purchase of 10,000 additional shares of ATSI's
common stock at $8.00 per share, and ten annual payments having a net present
value of approximately $859,000.
During 1996, the Company made five additional acquisitions, primarily in
the data security industry, for a combined purchase price of $4,703,000. The
combined purchase price was comprised of cash payments of $2,989,000, notes
payable and other obligations to sellers totaling $1,665,000, 7,896 shares of
ATSI's common stock, and assumption of specific liabilities.
F-56
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996 and the nine months
ended
September 30, 1997 is unaudited)
4. Investments
In June 1993, the Company loaned $1 million on behalf of Damson East Texas
Partners, L.P. (DETP) to Texas Trinity River Corp. which is substantially owned
by a stockholder of the Company. In July 1993, DETP repaid $280,000 of the
above loan and the Company converted the remaining balance into a 57% limited
partnership interest in DETP. The general partner is Texas Trinity River Corp.
DETP was formed to purchase and develop oil and gas properties, including
pipelines, transportation and gathering systems and processing facilities.
Profits and losses are generally allocated based upon the ownership percentages
subject to restrictions defined in the partnership agreement. The Company has
an operating capital commitment for an additional $880,000 which could bring
total potential contributions to $1.6 million. As of December 31, 1994, the
Company had contributed approximately $250,000 of the operating capital
commitment. The Company was notified in 1994 by the operator of the properties
that DETP may not require further investment funds as they believe any
additional work can be funded from cash flow. However, the commitment remains
in place. The Company accounts for the partnership investment under the equity
method. See Note 15--"Subsequent Events" regarding the writedown of the
Company's investment in DETP as of September 30, 1997.
In June 1997, UAC purchased 158,729 shares of Convertible, Series C,
Preferred Stock of Connected, Incorporated for $667,000. If these preferred
shares were converted into common stock, UAC would own less than 20% of
Connected, Incorporated. Accordingly, UAC accounts for this investment under
the cost method.
5. Long-Term Debt
In connection with the acquisition of Arcus, ATSI entered into a $52
million credit facility (the Facility). Under the Facility, ATSI received $18
million under a five-year term loan agreement (Term A Loan), $12 million under
a seven year term loan agreement (Term B Loan), a commitment for a five-year
$7.5 million revolving line of credit (the Revolver), a seven-year $12.5
million acquisition loan facility (the Acquisition Facility) and a five-year $2
million additional line of credit (the Swingline Loan). In December 1996, ATSI
amended the Facility. As a result, the total acquisition loan commitment was
increased by $20 million and the maturity date of this commitment was extended
by one year. See Note 15--"Subsequent Events."
Under the Facility, ATSI may, at its option and subject to certain
restrictions, designate certain borrowings as either "Base Rate" or
"Eurodollar" borrowings. This designation determines the interest rates which
ATSI pays under the agreement. The Base Rate is defined as the higher of the
bank's prime rate (8.25% at December 31, 1996) or 1/2% over the U.S. Federal
Funds Rate (5% at December 31, 1996) plus an applicable margin interest rate.
The Eurodollar rate is defined as the London Interbank Offering Rate (LIBOR)
(5.7% at December 31, 1996) plus an applicable margin spread. Base Rate
borrowings bear interest at the Base Rate plus 1% to 1.5% and Eurodollar
borrowings bear interest at LIBOR plus 2.5% to 3%.
The Facility requires mandatory repayments of term borrowings from the
proceeds that result from specified types of transactions. Additionally, excess
cash flow, as defined, is to be applied to reduce borrowings. Voluntary
prepayments of principal are also allowed under the Facility, with $750,000 of
such prepayment made during 1996. Both mandatory and voluntary payments reduce
the outstanding balances and future repayments under the Term A Loan, Term B
Loan and Acquisition Facility on a pro rata basis.
The Facility subjects ATSI to financial covenants including restrictions
on mergers and acquisitions of businesses; limitations on lease and rental
expenses incurred, intercompany indebtedness, loans to employees, and capital
expenditures; and maintenance of specified levels of profitability and cash
flows, both in absolute terms and in relation to interest and other fixed
charges. The Facility is collateralized by substantially all of the assets of
ATSI and its subsidiaries.
In connection with five of the acquisitions completed by ATSI during 1996
(see Note 3), ATSI issued notes payable and incurred other long-term
obligations (including contingent purchase price obligations) of which
approximately $5,485,000 and $1,954,000 remains outstanding at December 31,
1996 and September 30, 1997,
F-57
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996 and the nine months
ended
September 30, 1997 is unaudited)
respectively. Of this amount, $4,405,000 and $1,053,000 is due to individuals
who are shareholders, employees, or consultants of the Company at December 31,
1996 and September 30, 1997, respectively. These obligations bear interest
annually at rates ranging from 5% to 9%. An obligation for $1,040,000 and
$900,000 at December 31, 1996 and September 30, 1997, respectively, is a demand
obligation, guaranteed by a bank letter of credit for the same amount expiring
February 3, 1998, which ATSI plans to refinance, if required, using the
Revolver and, therefore, has been classified as a long-term liability. In 1997,
$1,968,000 of acquisition obligations were financed through the Acquisition
Facility.
On August 17, 1995, the Company paid $20,250 to enter into an interest
rate cap agreement with a commercial bank having a notional principal of $15
million. This agreement effectively entitles the Company to receive from the
bank the amount, if any, by which the Company's interest payments on $15
million of its long-term debt exceeds 8.9375% plus the related premium (2.5% to
3.0%). The interest rate cap agreement expired on September 5, 1997.
Long-term debt is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------- September 30,
1995 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
Term A Loan, increasing quarterly principal
payments over a four-year period beginning
March 31, 1996 .................................... $17,082,000 $14,316,000 $12,271,000
Term B Loan, nominal quarterly principal payments
for the five year period beginning September 30,
1995 with balance due in equal quarterly
installments for the following two years ......... 11,364,000 10,839,000 10,805,000
Acquisition Facility, increasing quarterly principal
payments over a four year period starting
September 30, 1999 ................................. -- 9,725,000 16,144,000
Revolver, principal due five years from July 31,
1995, with ATSI having the option to extend for
an additional three years with bank approval ...... 3,000,000 1,900,000 --
Acquisition notes and obligations .................. -- 5,485,000 2,954,000
7% mortgage note payable in quarterly principal and
interest installments, maturing April 2001 ......... 521,000 441,000 376,000
Capital lease obligations ........................... 30,000 26,000 16,000
------------ ------------ ------------
31,997,000 42,732,000 42,566,000
Less current portion ................................. 2,272,000 4,407,000 3,906,000
------------ ------------ ------------
$29,725,000 $38,325,000 $38,660,000
============ ============ ============
</TABLE>
Scheduled payments based on long-term debt outstanding at December 31,
1996 are as follows:
<TABLE>
<S> <C>
1997 ............ $ 4,407,000
1998 ............ 4,028,000
1999 ............ 4,499,000
2000 ............ 8,557,000
2001 ............ 8,632,000
Thereafter ...... 12,609,000
------------
$42,732,000
============
</TABLE>
Cash payments for interest during the years ended December 31, 1995 and
1996 and the nine month periods ended September 30, 1996 and 1997 were
$913,000, $3,131,000, $2,284,000 and $2,670,000, respectively. No cash payments
for interest were made in 1994.
F-58
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996 and the nine months
ended
September 30, 1997 is unaudited)
At December 31, 1995 and 1996 and September 30, 1997, the fair value of
ATSI's revolving line of credit and long-term debt approximated its carrying
value.
6. Preferred Stock of Subsidiary
UAC has authorized 200,000 shares of undesignated preferred stock with a
par value of $0.01. No shares have been issued.
UAC has also authorized 50,000 shares of Series A preferred stock with a
par value of $0.01 per share and a liquidation value of $1,000 per share.
Holders of Series A preferred stock are entitled to receive cumulative
dividends at the rate of 8% per annum on the amount of the liquidation
preference of $1,000 per share. Dividends are to be declared quarterly,
compounded and paid annually on the last business day of December through
additional shares of Series A preferred stock. At September 30, 1997, UAC had
accrued the payment of a dividend for the years ended December 31, 1994, 1995,
1996 and the nine month period ended September 30, 1997, on its Series A
preferred stock, payable in additional shares of preferred stock.
The Series A preferred stock of UAC is redeemable, in whole, at the option
of UAC at a redemption price of $1,000 per share plus accrued and unpaid
dividends.
7. Warrants to Purchase Common Stock of UAC
UAC has issued 1.5 million warrants to purchase shares of UAC's common
stock. Each warrant entitles the holder to purchase one share of common stock
at the exercise price upon the occurrence of a capital change (as defined in
the warrant agreement) or after January 13, 2005, and on or before January 13,
2010. The exercise price is $13.75 per share, subject to adjustment as provided
in the warrant agreement.
8. Stock Option Plans
On July 31, 1995, UAC's Board of Directors approved the United Acquisition
Company 1995 stock option plan whereby UAC could award options to purchase up
to 260,000 shares of common stock of UAC to its officers and employees. The
options granted to date vest one third at the date of grant with the remainder
vesting in equal amounts on the first and second anniversaries of the date of
grant and expire 10 years from the date of grant with extension possible. The
options contain certain restrictions on exercise as defined in the stock option
plan. No options were granted during 1996. As of December 31, 1996, no shares
had been exercised, 144,926 shares were vested and 42,610 shares were available
for grant.
Vested options only become exercisable if AGI's ownership of UAC falls
below 80%. No options were exercisable at December 31, 1995 or 1996.
The following is a summary of employee stock option transactions under the
UAC 1995 Stock Option Plan:
<TABLE>
<CAPTION>
Number Option Price
of Shares Per Share
----------- -------------
<S> <C> <C>
Granted on July 31, 1995 ........................ 217,390 $12.50
-------
Outstanding at December 31, 1995 and 1996 ...... 217,390 $12.50
=======
</TABLE>
A total of 260,000 shares of UAC common stock were reserved for issuance
under the UAC 1995 stock option plan at December 31, 1996. At December 31,
1996, UAC had 1,000,001 shares of common stock outstanding and the net book
value per share of UAC common stock was $10.62.
The ATSI 1995 Stock Option Plan reserves 340,000 and 455,000 shares at
December 31, 1996 and September 30, 1997, respectively, of authorized but
unissued common stock of ATSI for sale or award to directors,
F-59
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996 and the nine months
ended
September 30, 1997 is unaudited)
officers, and key employees as stock options, stock appreciation rights,
restricted stock awards or performance share awards. Both nonqualified and
incentive stock options (ISO's) can be granted and in the case of an ISO, the
purchase price cannot be less than the fair market value at grant date.
Options expire on the date set by the Plan Administration Committee of the
ATSI Board of Directors (the Committee), but in no case later than ten years
from the grant date and, in some cases, no later than five years from the grant
date for ISO's.
During 1995 and 1996, ATSI granted nonqualified stock options to certain
directors and key members of management. In general, the options granted are
20% vested at the grant date with the remaining options becoming exercisable
semi-annually over a four year period. At December 31, 1996, 101,060 shares
were vested.
Vested options only become exercisable if either UAC's ownership of ATSI
or AGI's ownership of UAC falls below 80%. No options were exercisable at
December 31, 1995 or 1996. As of December 31, 1996, no shares had been
exercised or canceled and 53,000 shares remain available for grant.
The following is a summary of employee stock option transactions under
ATSI's 1995 Stock Option Plan:
<TABLE>
<CAPTION>
Weighted
Number Option Price Average Option
of Shares Per Share Price per Share
----------- --------------- ----------------
<S> <C> <C> <C>
Granted after July 31, 1995 ............ 198,100 $8.00 $ 8.00
--------
Outstanding at December 31, 1995 ...... 198,100 $8.00 $ 8.00
Granted in 1996 ........................ 88,900 $10.24-$11.03 $10.71
--------
Outstanding at December 31, 1996 ...... 287,000 $8.00-$11.03 $ 8.84
========
</TABLE>
The weighted average remaining contractual life for ATSI options
outstanding at December 31, 1996 was approximately 9 years.
A total of 365,000 and 465,000 shares of ATSI common stock were reserved
for issuance under ATSI's 1995 Stock Option Plan, the acquisition options (see
Note 3) and the acquisition warrant (see Note 3) at December 31, 1996 and
September 30, 1997, respectively. At December 31, 1996, ATSI had 3,205,263
shares of common stock outstanding and the net book value per share of ATSI
common stock was $9.55.
Pro forma information regarding net income and the net loss attributed to
common stockholders is required by SFAS No. 123, and has been determined as if
the Company had accounted for employee stock options granted by subsidiaries
under the fair value method. The fair value for options granted ($217,000 in
1995 and $0 in 1996) was estimated at the date of grant using a minimum value
option pricing model with the following weighted-average assumptions for 1995
and 1996: risk-free interest rates of 5.6%; no dividends expected to be
declared; volatility factor of zero for the expected price of the Company's
common stock as it is not publicly traded; and a weighted-average expected life
of the options of 2.3 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net income for 1995 and 1996, would be $458,000 and $820,000,
respectively.
F-60
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996 and the nine months
ended
September 30, 1997 is unaudited)
9. Income Taxes
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------- September 30,
1995 1996 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating losses ........................... $ 174,093,000 $ 173,228,000 $ 172,060,000
Tax credits .................................... 3,814,000 3,879,000 3,949,000
Property and equipment ........................ 122,000 -- 4,000
Accrued liabilities ........................... 43,000 166,000 187,000
Other .......................................... 5,000 14,000 8,000
-------------- -------------- --------------
178,077,000 177,287,000 176,208,000
Deferred tax liabilities:
Costs in excess of net assets acquired in stock
purchase transactions and other assets ...... (123,000) (455,000) (676,000)
Property and equipment ........................ -- (46,000) --
-------------- -------------- --------------
(123,000) (501,000) (676,000)
-------------- -------------- --------------
177,954,000 176,786,000 175,532,000
Valuation allowance ........................... (177,954,000) (176,786,000) (175,532,000)
-------------- -------------- --------------
Net deferred tax assets ........................ $ -- $ -- $ --
============== ============== ==============
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------ ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Current:
Federal ...... $ -- $ 50,000 $ 65,000 $ 68,000 $ 70,000
State ......... -- 176,000 410,000 323,000 357,000
--------- --------- --------- --------- ---------
-- 226,000 475,000 391,000 427,000
Deferred ...... -- -- -- -- --
--------- --------- --------- --------- ---------
$ -- $226,000 $475,000 $391,000 $427,000
========= ========= ========= ========= =========
</TABLE>
The reasons for the difference between the total tax provision and the
amount computed by applying the statutory federal income tax rate to income
(loss) before income taxes, minority interest, preferred stock dividend of
subsidiary and equity in income of limited partnership are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Federal tax at statutory rate ...... 34.0% 34.0% 34.0% 34.0% 34.0%
State tax provision .................. -- 4.7 7.6 6.4 6.9
Change in deferred tax asset valuation
allowance ........................ (34.0) (32.0) (32.9) (36.0) (36.5)
Other .............................. -- 2.4 4.7 7.4 8.0
------ ------ ------ ------ ------
0.0% 9.1% 13.4% 11.8% 12.4%
====== ====== ====== ====== ======
</TABLE>
At December 31, 1996, the Company had an approximate gross NOL
carryforward position of $494 million for regular federal income tax purposes
and approximately $266 million for federal alternative minimum tax purposes.
Future utilization of NOL carryforwards related to periods prior to October 9,
1990 is generally limited to approximately $13 million per year with any unused
portion within a particular year available for utilization in subsequent years
through December 31, 2005. Accordingly, the appropriate maximum utilization of
pre-October 9, 1990 NOLs is estimated to be $198 million. Post-October 8, 1990
NOLs of approximately $75 million and alternative minimum tax NOLs of
approximately $62 million are currently not subject to an annual limitation.
F-61
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996 and the nine months
ended
September 30, 1997 is unaudited)
Accordingly, it is estimated the maximum utilization of regular tax NOL
carryforwards is $273 million (alternative minimum tax NOLs of $260 million)
with an approximate balance of $267 million (alternative minimum tax NOLs of
$254 million) remaining at December 31, 1996. The NOL carryforwards expire
throughout the 2003-2009 time period.
Additionally, the Company has estimated alternative minimum tax credits of
$879,000 with no expiration date. Investment tax credit (ITC) carryforwards of
$3 million are also available until 1998, at which time they begin to expire.
It is unlikely these ITCs will be utilized.
Current tax laws and regulations relating to specified changes in
ownership may further limit the availability of the Company's utilization of
its NOLs and tax credit carryforwards. As of December 31, 1996, the Company was
not aware of any ownership changes which would further limit the utilization of
the NOLs and tax credit carryforwards.
Cash payments for income taxes during the years ended December 31, 1995
and 1996 and the nine month periods ended September 30, 1996 and 1997, were
$720,000, $609,000, $499,000 and $619,000, respectively. No cash payments for
income taxes were made during 1994.
10. Retirement Plans
On August 1, 1995, ATSI adopted the Arcus, Inc. 401(k) Profit Sharing Plan
(the Plan). Employees of ATSI and its subsidiaries who satisfy a six month
service requirement as of open enrollment each January 1st and July 1st
participate in the Plan. Participants in the Plan may contribute from 1% to 15%
of their annual compensation. ATSI matches one half of employee contributions
up to a total of 1.5% of their annual compensation. Company matching expense,
net of forfeitures, was $52,000, $132,000, $115,000 and $145,000 for the years
ended December 31, 1995 and 1996, and the nine month periods ended September
30, 1996 and 1997, respectively. ATSI may also make an annual voluntary
contribution for all eligible employees, whether or not they elect a salary
deferral. ATSI provided for a voluntary contribution in 1995 and 1996, to be
funded in the following year, based upon a percentage of participant
compensation. Voluntary contribution expense, net of forfeitures, for the years
ended December 31, 1995 and 1996 and the nine month periods ended September 30,
1996 and 1997 was $147,000, $430,000, $348,000 and $382,000, respectively.
11. Commitments and Contingencies
As of September 30, 1997, the Company leased 29 vault facilities, 14
staffing offices and certain equipment under noncancelable operating lease
agreements. Twelve of the Company's vault facilities are leased from a single
landlord of which nine have fifteen-year terms beginning January 1, 1995, with
two five-year renewal options, providing for cost of living increases every
three years based upon the Consumer Price Index, with a 3.33% ceiling per year.
The remaining vault facilities are leased under leases which commenced June
1989 or later, and have primary lease terms ranging from four to twenty years,
generally with one or two five-year renewal options. During 1996, the Company
signed leases in regard to two vault facilities that were under construction at
December 31, 1996. These two leases each have fifteen-year terms that will
commence during 1997. With respect to vault facilities, the Company generally
is required to pay property tax, insurance, and facility maintenance expenses.
Staffing offices, located in multi-tenant commercial office buildings, have
primary lease terms ranging from one to five years, generally with no renewal
options. Other operating leases are for equipment and vehicles. Rental expense
under operating leases, including month-to-month rentals, was $1,578,000 and
$4,500,000 for the years ended December 31, 1995 and 1996, respectively.
Included in these amounts are $554,000 and $1,361,000, respectively, of
operating lease expense related to facilities leased from ATSI shareholders.
Future minimum rentals required under operating leases having an initial
or remaining noncancelable lease term in excess of one year as of December 31,
1996 are as follows:
F-62
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996 and the nine months
ended
September 30, 1997 is unaudited)
<TABLE>
<S> <C>
1997 .............................. $ 5,153,000
1998 .............................. 4,808,000
1999 .............................. 4,363,000
2000 .............................. 3,871,000
2001 .............................. 3,106,000
Thereafter ........................ 19,441,000
------------
Total minimum lease payments ...... $40,742,000
============
</TABLE>
The Company has a $250,000 standby letter of credit payable to its bank to
secure its operating cash accounts.
12. Related Party Transactions
During the year ended December 31, 1994, 1995 and 1996 and the nine month
periods ended September 30, 1996 and 1997, UAC paid GKH Partners, a stockholder
of AGI and of UAC, investment advisory and other fees of $125,000, $125,000,
$178,000, $118,000 and $148,000 respectively. The investment advisory fee is
included in holding company expenses in the consolidated statements of
operations.
13. Business Segments
The following tables present data relating to the Company's revenues, cost
of services rendered, depreciation, operating income, identifiable assets and
capital expenditures by business segment.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
-------------------------------------------- -----------------------------
1994 1995 1996 1996 1997
------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues
Data Security ........................ $ -- $19,867,759 $ 53,145,334 $ 38,553,505 $ 44,573,634
Technical staffing .................. -- 810,599 12,997,907 6,711,491 24,717,499
Intercompany eliminations ............ -- -- (161,865) (96,576) (322,225)
---------- ------------ ------------ ------------ ------------
Total revenues ..................... $ -- $20,678,358 $ 65,981,376 $ 45,168,420 $ 68,968,908
========== ============ ============ ============ ============
Cost of Services Rendered
Data security ........................ $ -- $ 8,929,784 $ 23,554,642 $ 17,063,800 $ 19,831,627
Technical staffing .................. -- 520,997 9,344,976 4,836,278 18,216,422
Intercompany eliminations ............ -- -- (161,865) (96,576) (322,225)
---------- ------------ ------------ ------------ ------------
Total costs of services rendered ... $ -- $ 9,450,781 $ 32,737,753 $ 21,803,502 $ 37,725,824
========== ============ ============ ============ ============
Depreciation and Amortization
Data security ........................ $ -- $ 1,488,093 $ 3,907,825 $ 2,881,767 $ 3,310,817
Technical staffing .................. -- 1,575 219,586 103,694 929,076
Corporate ........................... -- 118,811 321,614 229,018 310,480
---------- ------------ ------------ ------------ ------------
Total depreciation and amortization $ -- $ 1,608,479 $ 4,449,025 $ 3,214,479 $ 4,550,373
========== =========== ============ ============ ============
Operating Income
Data security ........................ $ -- $ 4,629,540 $ 12,149,565 $ 9,040,836 $ 9,888,168
Technical staffing .................. -- 114,709 442,812 233,283 257,714
Corporate ........................... (504,291) (2,880,038) (7,380,746) (4,805,430) (4,756,233)
---------- ------------ ------------ ------------ ------------
Total operating income ............... $ (504,291) $ 1,864,211 $ 5,211,631 $ 4,468,689 $ 5,389,649
========== ============ ============ ============ ============
</TABLE>
F-63
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996 and the nine months
ended
September 30, 1997 is unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Capital Expenditures
Data security ............... $ -- $ 2,115,127 $ 4,363,670 $ 2,752,349 $ 2,054,901
Technical staffing ......... -- 43,662 317,302 157,238 634,484
Corporate .................. -- 14,806 622,693 332,873 150,147
---------- ------------ ------------- ------------ -------------
Total capital expenditures ... $ -- $ 2,303,595 $ 5,303,665 $ 3,242,460 $ 2,839,532
=========== ============ ============= ============ =============
Identifiable Assets
Data security ............... $ -- $59,657,300 $ 85,687,540 $ 88,429,038
Technical staffing ......... -- 152,260 2,041,337 3,835,987
Corporate .................. -- 25,101,266 17,734,008 13,556,414
---------- ------------ ------------- -------------
Total identifiable assets ... -- $84,910,826 $105,462,885 $105,821,439
========== ============ ============= =============
</TABLE>
14. Supplemental Pro Forma Acquisition Information (Unaudited)
The following supplemental pro forma information has been presented as if
the acquisition of ATSI described in Note 1 and the acquisitions discussed in
Note 3 occurred on January 1, 1995 and as if the acquisition discussed in Note
15 occurred on January 1, 1996.
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended
----------------------------- September 30,
1995 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
Revenues ............... $64,512,369 $89,208,750 $74,630,285
============ ============ ============
Operating income ...... $ 5,297,161 $ 7,521,191 $ 5,883,093
============ ============ ============
Net income ............... $ 1,190,579 $ 1,769,519 $ 740,941
============ ============ ============
Earnings per share ...... $ 0.10 $ 0.15 $ 0.06
============ ============ ============
</TABLE>
15. Subsequent Events
In May 1997, the Company filed a lawsuit against the United States for
refund of excess federal income taxes paid of $828,128 for the tax year ended
December 31, 1995. In September 1997, the United States filed its answer
denying the Company's request for refund with respect to its 1995 federal
income tax return. The Company believes its 1995 federal tax filing positions
have merit and expects to prevail. In the event the Company does not prevail,
its NOL carryforwards will and its 1996 and 1997 tax liability may be adversely
affected.
In June 1997, the Company sold the operating assets of the non-staffing
portion of Trinity's business. The assets were sold to the former owner of
Trinity and other former Trinity employees for a $400,000 five year note,
bearing interest at 12% with all principal due at maturity. In conjunction with
the sale, and in consideration of a cash payment of $250,000 to the former
owner, the former owner and the Company signed a mutual release. Among the
Company's obligations released were any contingent consideration due to the
former owner under the original agreement to acquire Trinity, the $180,000
subordinated note payable to the former owner, certain stock options held by
the former owner and certain other agreements signed with the former owner.
On June 11, 1997, ATSI amended its credit agreement to increase the size
of the Revolving Facility from $7.5 million to $11 million and reduced the size
of the Acquisition Facility by $3.5 million.
F-64
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the nine months ended September 30, 1996 and
the nine months ended September 30, 1997 is unaudited)
On August 20, 1997, the Company acquired substantially all of the assets
and assumed certain liabilities of a company operating in the contract
information technology staffing services business in northern California,
Oregon and Washington state for approximately $4,889,000, net of cash acquired.
The purchase price consisted of net cash payments of approximately $3,889,000,
a subordinated note payable to the seller for $1,000,000 and 60,000 options to
purchase the Company's common stock at $16.41 with various vesting dates.
Additionally, if certain profitability targets are met, the Company could be
obligated to make an additional cash payment of up to $750,000. The acquired
company had revenues and operating income for the year ended December 31, 1996
of approximately $8.4 million and $1.2 million, respectively.
Based upon an offer received to purchase AGI's interest in DETP (see Note
4), the Company wrote down its investment in the partnership by $571,000 as of
September 30, 1997.
On September 26, 1997, Iron Mountain Incorporated signed a definitive
agreement to acquire all of the outstanding stock of the Company with
anticipated closing in the first quarter of 1998.
F-65
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 333-24803 and No. 333-33191) of Iron Mountain Incorporated of
our reports dated February 28, 1997 (except for Note 12, as to which the date
is September 26, 1997) and April 30, 1997 (except for Note 15, as to which the
date is September 26, 1997), with respect to the consolidated financial
statements of Arcus Technology Services, Inc. and Arcus Group, Inc.,
respectively, included in this Form 8-K dated November 25, 1997 filed by
Iron Mountain Corporation.
Ernst & Young LLP
Dallas, Texas
November 24, 1997
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of
our report dated April 4, 1995 for Arcus Group, Inc. and to all references to
our Firm included in this Form 8-K and into Iron Mountain Inc.'s previously
filed Registration Statements on Form S-8 File No. 333-24803 and No. 333-33191.
Arthur Andersen LLP
Houston, Texas
November 24, 1997
Consent of Independent Public Accountants
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-24803 and No. 333-33191) of Iron Mountain Incorporated of our
report dated February 21, 1997, with respect to the consolidated financial
statements of HIMSCORP, Inc. and Subsidiaries included in the Current Report on
Form 8-K dated November 25, 1997 filed by Iron Mountain Incorporated with the
Securities and Exchange Commission.
Ernst & Young LLP
Chicago, Illinois
November 24, 1997
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of
our reports dated August 7, 1997 for Records Retention/FileSafe and to all
references to our Firm included in this Form 8-K and into Iron Mountain Inc.'s
previously filed Registration Statements on Form S-8 File No. 333-24803 and No.
333-33191.
Abbott, Stringham & Lynch
Campbell, California
November 24, 1997
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of
our reports dated March 4, 1997 (except for Note 11, as to which the date is
October 1, 1997) for Allegiance Business Archives, Ltd. and to all references
to our Firm included in this Form 8-K and into Iron Mountain Inc.'s previously
filed Registration Statements on Form S-8 File No. 333-24803 and No. 333-33191.
Stout, Causey & Horning, P.A.
Cockeysville, Maryland
November 24, 1997
