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): October 30, 1997
(October 24, 1997)
IRON MOUNTAIN INCORPORATED
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-27584 04-3107342
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(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
745 Atlantic Avenue
Boston, Massachusetts 02111
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(Address of principal executive offices, including zip code)
(617) 357-4455
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(Registrant's telephone number, including area code)
<PAGE>
Item 5. Other Events
Note Offering
On October 24, 1997, Iron Mountain Incorporated (the "Registrant") offered
in a private placement to qualified institutional buyers $250,000,000 in
aggregate principal amount of its 8 3/4% Senior Subordinated Notes due 2009 (the
"Notes," the offering of such Notes being hereafter referred to as the
"Offering"). The Notes were issued at a price to investors of 99.806%. The net
proceeds from the Offering will be used initially to repay outstanding bank debt
and, thereafter, to fund the cash portion of the purchase price of two pending
acquisitions and to repay assumed indebtedness related thereto. The two pending
acquisitions are (i) the acquisition of HIMSCORP, Inc. and (ii) the acquisition
of Arcus Group, Inc. The Notes will not be registered under the Securities Act
of 1933, as amended, and may not be offered or sold in the United States absent
registration or an applicable exemption from registration requirements. The
Notes have been accepted for trading in the Private Offerings, Resales and
Trading through Automated Linkages Market of the Nasdaq Stock Market, Inc. For
more information see the Registrant's press release, dated October 27, 1997,
which is attached herewith as Exhibit 99.1 and incorporated herein by reference.
Certain Additional Information about the Registrant
To insure that the public market is provided with the same disclosure as
that contained in the offering memoranda relating to the Offering, certain
information set forth in such offering memoranda, including financial
information, is set forth in Annex A and is incorporated herein by reference.
Item 7. Financial Statements and Exhibits
(c) Exhibits
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<CAPTION>
Exhibit No. Item
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<S> <C>
4.1 Indenture dated as of October 24, 1997 among the Registrant,
certain subsidiaries listed therein and the Bank of New York
pertaining to the Notes.
23.1 Consent of Ernst & Young LLP (Arcus Group, Inc.)
23.2 Consent of Ernst & Young LLP (Arcus Technology Services, Inc.)
23.3 Consent of Arthur Andersen LLP (Security Archives of Minnesota,
Wellington Financial Services, Inc., Data Securities
International, Inc., Arcus Group, Inc.)
23.4 Consent of Ernst & Young LLP (HIMSCORP, Inc.)
23.5 Consent of Abbott, Stringham and Lynch
(Records Retention/FileSafe)
23.6 Consent of Stout, Causey & Horning, P.A.
(Allegiance Business Archives, Ltd.)
23.7 Consent of Fisher, Schacht & Oliver, LLP (Concorde Group, Inc.
and Neil Tucker Trust)
99.1 Press Release, dated as of October 27, 1997, by the Registrant.
</TABLE>
<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
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Jean A. Bua
Vice President and Corporate Controller
Date: October 30, 1997
<PAGE>
ANNEX A
Certain capitalized terms used herein have the meanings assigned to them in the
Glossary included herein. As used herein, references to "Iron Mountain" and the
"Company" include Iron Mountain Incorporated (including predecessor entities)
and its consolidated subsidiaries, unless the context otherwise requires.
GLOSSARY
"Arcus" means Arcus Technology Services, Inc.
"Carton" means a measurement of volume equal to a single standard storage
carton, approximately 1.2 cubic feet. The number of cartons stored does not
include storage volumes in the Company's vital records services and data
protection services, which are described under "Business."
"Common Stock" means the Company's Voting Common Stock, par value $.01 per
share.
"Credit Agreement" means the bank credit facility dated as of September 30, 1996
among the Company, the Lenders party thereto and the Chase Manhattan Bank, as
Administrative Agent.
"Credit Agreement Amendment" means the amendment and restatement of the
Company's Credit Agreement in September 1997.
"EBITDA" means earnings before interest, taxes, depreciation, amortization and
extraordinary items.
"GAAP" means generally accepted accounting principles.
"Guarantors" means all of the Company's present and future subsidiaries that
guaranteed the Notes.
"HIMSCORP" means HIMSCORP, Inc.
"IT" mean information technology.
"Pending Acquisitions" means the acquisitions of (i) Arcus Technology Services,
Inc. and related entities and (ii) HIMSCORP, Inc.
"PRISM" means Professional Records and Information Services Management.
"Recent Acquisitions" means the acquisitions consummated since January 1, 1996.
"Recent and Pending Acquisitions" means the Recent Acquisitions and the Pending
Acquisitions, collectively.
"Safesite" means Safesite Record Management Corporation.
"Subsidiary Guarantees" means the guarantee of the Notes by the Guarantors.
"1996 Notes" means the Company's 10 1/8% Senior Subordinated Notes due 2006
issued in October 1996.
<PAGE>
RISK FACTORS
Certain statements contained under "Management's Discussion and Analysis of
Financial Condition and Results of Operations," such as those regarding the
goals, beliefs, plans or current expectations of the Company and its management
and other statements contained in this current report on Form 8-K regarding
matters that are not historical facts are forward-looking statements (as such
term is defined in the rules promulgated pursuant to the Securities Act).
Because such forward-looking statements include risks and uncertainties, actual
results may differ materially from those expressed in or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include, but are not limited to, those discussed herein under "Risk
Factors." The Company undertakes no obligation to release publicly the result of
any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Financial Leverage; Debt Service Requirements
The Company is highly leveraged due to the substantial indebtedness it has
incurred primarily to finance acquisitions and expand its operations. As of
June 30, 1997, after giving effect to the acquisitions consummated after June
30, 1997, the Pending Acquisitions, the Credit Agreement Amendment and the
Offering and the use of the net proceeds thereof, the Company had $495.0
million in total indebtedness and $218.9 million in stockholders' equity. The
Company expects to continue to borrow under the Credit Agreement and possible
future credit arrangements in order to finance possible future acquisitions and
for general corporate purposes.
The ability of the Company to repay the Notes and its other indebtedness
will depend upon future operating performance, which is subject to the success
of the Company's business strategy, prevailing economic conditions, levels of
interest rates and financial, business and other factors, many of which are
beyond the Company's control. The debt service obligations of the Company could
have important consequences, including the following: (i) the ability of the
Company to obtain additional financing for future working capital needs or for
possible future acquisitions or other purposes may be limited; (ii) a
substantial portion of the Company's cash flow from operations will be
dedicated to the payment of principal and interest on its indebtedness, thereby
reducing funds available for other purposes; (iii) the Company may be more
vulnerable to adverse economic conditions than some of its competitors and thus
may be limited in its ability to withstand competitive pressures; and (iv) the
Company may be more highly leveraged than certain of its competitors, which may
place it at a competitive disadvantage.
A substantial portion of the Company's cash flow from operations is
required for debt service. Management believes that cash flow from operations
in conjunction with borrowings from existing and possible future credit
facilities will be sufficient for the foreseeable future to meet debt service
requirements and to make possible future acquisitions and capital expenditures.
However, there can be no assurance in this regard, and the Company's leverage
could make it vulnerable to a downturn in the operating performance of its
subsidiaries, a downturn in economic conditions or, because borrowings under
the Credit Agreement bear interest at rates which fluctuate, increases in
interest rates on borrowings under the Credit Agreement. If such cash flow were
not sufficient to meet such debt service requirements or payments of principal,
the Company could be required to sell additional equity securities, refinance
its obligations or dispose of assets in order to make such scheduled payments.
There can be no assurance that the Company would be able to effect any of such
transactions or do so on favorable terms.
<PAGE>
Risks Associated with Acquisition Strategy
The Company has pursued and intends to continue to pursue acquisitions of
records management businesses as a key component of its growth strategy. Since
mid-1994, the Company has acquired 40 records management businesses for
aggregate consideration of $312.2 million, including $62.5 million of Common
Stock and options to purchase Common Stock (but not contingent payments of up to
$4.0 million based upon the achievement of certain targets in 1997 and 1998). In
addition, the Company has entered into definitive agreements to acquire Arcus
and HIMSCORP for estimated purchase prices aggregating approximately $259
million (not including contingent payments of up to $1.1 million based upon the
achievement of certain targets from 1997 through 1998). See "Business--Growth
Strategy--Growth from Existing Customers" and "Recent and Pending Acquisitions."
Certain risks are inherent in an acquisition strategy, such as increasing
leverage and debt service requirements and combining disparate company cultures
and facilities, which could adversely affect the Company's operating results.
The success of any completed acquisition will depend in part on the Company's
ability to integrate effectively the acquired records management business into
the Company. The process of integrating such acquired businesses may involve
unforeseen difficulties and may require a disproportionate amount of
management's attention and the Company's financial and other resources. No
assurance can be given that the Pending Acquisitions will be completed, that
additional suitable acquisition candidates will be identified, financed and
purchased on acceptable terms, or that recent acquisitions or future
acquisitions, if completed, will be successful. See "Business--Growth
Strategy--Growth through Acquisitions."
Under the terms of the Credit Agreement Amendment, acquisitions by the
Company involving: (i) $350 million in the aggregate or $250 million in cash
for the fourth quarter of 1997 (provided that $175 million of such aggregate
amount and $125 million of such cash amount may be carried over to the first
quarter of 1998 if the Arcus acquisition occurs in such quarter); (ii) in
excess of $65 million (other than the acquisitions of Arcus and HIMSCORP) for
any one acquisition; and (iii) $150 million in the aggregate or $100 million in
cash for 1998 or any subsequent year require the approval of lenders holding
51% or more of the commitments under the Credit Agreement. No assurance can be
given that the lenders will consent to any acquisitions that the Company
proposes to make in excess of such limits.
The size, timing and integration of possible future acquisitions may cause
substantial fluctuations in operating results from quarter to quarter. As a
result, operating results for any quarter may not be indicative of the results
that may be achieved for any subsequent fiscal quarter or for a full fiscal
year.
Competition; Alternative Technology
The Company has one or more competitors in all geographic areas where it
operates. The Company believes that competition for customers is based on
price, reputation for reliability, quality of service and scope and scale of
technology, and believes that it generally competes effectively based on these
factors. As a result of this competition, the records management industry has
for the past several years experienced downward pricing pressures. While Iron
Mountain believes that this pricing climate has stabilized, there can be no
assurance that prices will not decline further, as competitors seek to gain or
preserve market share. Should a further downward trend in pricing occur or
continue for an extended period of time, it could have a material adverse
effect on the Company's results of operations. The Company also competes for
acquisition candidates. Some of the Company's competitors may possess greater
financial and other resources than the Company. If any such competitor were to
devote additional resources to the records management business and such
acquisition candidates or to focus its strategy on the Company's markets, the
Company's results of operations could be adversely affected. In addition, the
Company faces competition from the internal document handling capability of its
current and potential customers. There can be no assurance that these
organizations will outsource more of their document management needs or that
they will not bring in-house some or all of the functions they currently
outsource. See "Business--The Records Management Industry" and
"Business--Competition."
The substantial majority of the Company's revenues have been derived from
the storage of paper documents and from related services. Such storage requires
significant physical space. Alternative technologies for generating,
<PAGE>
capturing, managing, transmitting and storing information have been developed,
many of which require significantly less space than paper. Such technologies
include computer media, microforms, audio/video tape, film, CD-ROM and optical
disk. None of these technologies has replaced paper as the principal means for
storing information. However, there can be no assurance that one or more
non-paper-based technologies (whether existing or developed in the future) may
not in the future reduce or supplant the use of paper as a preferred medium,
which could in turn adversely affect the Company's business.
Reliance on Executive Officers
The Company's success is partially dependent upon the performance and
continued availability of its current executive officers. The Company does not
have employment contracts with any of its current executive officers. There can
be no assurance that the Company will be able to retain its executive officers,
the loss of any of whom could have a material adverse effect upon the Company.
See "Management."
Casualty
The Company currently maintains and intends to continue to maintain, to
the extent such insurance is available on commercially reasonable terms,
comprehensive liability, fire, flood and earthquake (where appropriate) and
extended coverage insurance with respect to the properties that it now owns or
leases or that it may in the future own or lease, with customary limits and
deductibles. Certain types of loss, however, may not be fully insurable on a
cost-effective basis, such as losses from earthquakes, or may be altogether
uninsurable, such as losses from riots. In addition, as of September 30, 1997,
28 of the Company's 156 records management facilities were located in
California and the Company derived approximately 23% of its revenues for the
six months ended June 30, 1997 from its operations in California. Giving effect
to the Recent and Pending Acquisitions, as of September 30, 1997, 44 of the
Company's 217 records management facilities were located in California. The
Company derived approximately 24% of its revenues for the six months ended June
30, 1997 from these 44 facilities. The Company has in the past suffered damages
and losses from an earthquake and a riot in California, which damages and
losses were substantially covered by insurance. In March 1997, the Company
experienced three fires, two of which authorities have determined were caused
by arson and which resulted in extensive damage to two of its records
management facilities in South Brunswick, New Jersey. The Company has filed
several insurance claims related to the South Brunswick fires, including a
significant claim under its business interruption insurance policy. In the
future, should uninsured losses or damages occur, the Company could lose both
its investment in and anticipated profits and cash flow from the affected
property and may continue to be obligated on any leasehold obligations,
mortgage indebtedness or other obligations related to such property. As a
result, any such loss could materially adversely affect the Company. See
"Business--Insurance" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<PAGE>
Environmental Matters
As of September 30, 1997, the Company owned or leased approximately 8.9
million square feet of record management facilities. Under various federal,
state and local environmental laws, ordinances and regulations ("environmental
laws"), an owner of real estate or a lessee conducting operations thereon may
become liable for the costs of investigation, removal or remediation of soil
and groundwater contaminated by certain hazardous substances or wastes or
petroleum products. Certain such laws impose cleanup responsibility and
liability without regard to whether the owner or operator of the real estate or
operations thereon knew of or was responsible for the contamination, and
whether or not operations at the property have been discontinued or title to
the property has been transferred. In addition, the presence of such
substances, or the failure to properly remediate such property, may adversely
affect the current property owner's or operator's ability to sell or rent such
property or to borrow using such property as collateral. The owner or operator
of contaminated real estate also may be subject to common law claims by third
parties based on damages and costs resulting from off-site migration of the
contamination.
Certain environmental laws govern the removal, encapsulation or
disturbance of asbestos-containing materials ("ACMs"). Such laws may impose
liability for release of ACMs and may enable third parties to seek recovery
from owners or operators of real estate for personal injury associated with
exposure to such substances.
Certain facilities operated by the Company contain or may contain ACMs. In
addition, certain of the properties formerly or currently owned or operated by
the Company were previously used for industrial or other purposes that involved
the use or storage of hazardous substances or petroleum products or the
generation and disposal of hazardous wastes, and in some instances, included
the operation of underground storage tanks ("USTs"). In connection with its
former and current ownership or operation of certain properties, the Company
may be potentially liable for environmental costs such as those discussed above
and as more specifically described under "Business--Environmental Matters." The
Company has from time to time conducted certain environmental investigations
and remedial activities at certain of its former and current facilities, but an
in-depth environmental review of all properties has not been conducted by or on
behalf of the Company.
The Company believes that it is in substantial compliance with all
applicable material environmental laws. The Company has not received any written
notice from any governmental authority or third party asserting, and is not
otherwise aware of, any material environmental noncompliance, liability or claim
relating to hazardous substances or wastes, petroleum products or material
environmental laws applicable to Company operations in connection with any of
its present or former properties. However, no assurance can be given that there
are, or as a result of possible future acquisitions there will be, no
environmental conditions for which the Company might be liable in the future or
that future regulatory action, as well as compliance with future environmental
laws, will not require the Company to incur costs for or at its properties that
could have a material adverse effect on the Company's financial condition and
results of operations.
<PAGE>
RECENT AND PENDING ACQUISITIONS
As part of its growth strategy, since mid-1994, Iron Mountain has acquired
40 records management businesses, including the 33 Recent Acquisitions. In
addition, Iron Mountain has entered into definitive agreements for two pending
acquisitions.
The total purchase price of the Recent Acquisitions was $275.7 million
(not including contingent payments of up to $4.0 million based upon the
achievement of certain targets during 1997 and 1998), including the issuance of
shares of Common Stock and options to purchase Common Stock, which at the time
of issuance, was valued at $62.5 million. The Recent Acquisitions represent in
the aggregate total annual revenues of approximately $94 million (calculated in
each case by reference to the revenues of each such acquired business during
the year ended December 31, 1996, which calculation includes an estimate of
total revenues for the portion of 1996, if any, during which any such acquired
business was included in Iron Mountain's results of operations). The aggregate
purchase price for the Pending Acquisitions is approximately $259 million,
including the issuance of shares of Common Stock and options to purchase Common
Stock valued at approximately $106 million (assuming that vested options are
not exercised in connection with the acquisition of Arcus). Giving effect to
the Pending Acquisitions, as of September 30, 1997, Iron Mountain operated 217
record centers in 52 markets, servicing over 50,000 customer accounts. Among
the Recent and Pending Acquisitions, the acquisition of Safesite completed in
June 1997 and the Pending Acquisitions are the largest.
Safesite Acquisition
On June 12, 1997, Safesite merged with and into a subsidiary of the
Company for total consideration of $70.6 million consisting of 1,769,712 shares
of Common Stock and options to acquire Common Stock having an aggregate market
value of $53.6 million as of the closing date and cash payments of $17.0
million (which includes the purchase of certain real estate interests from
affiliates of Safesite). Safesite has a significant presence in both data
protection services and paper records storage, including medical records
management. At the time of acquisition, Safesite had over 7,000 customer
accounts with 26 facilities in 14 markets, including four markets in which the
Company previously had no operations. With the acquisition of Safesite, Iron
Mountain added 27 new sales people, an increase of 75% to its then existing
sales force. Safesite's revenue was $19.0 million for the year ended December
31, 1996 and approximately $11 million for the six months ended June 30, 1997
(including approximately $1 million in revenue for the period from the closing
of the acquisition through June 30, 1997).
Pending HIMSCORP Acquisition
On September 17, 1997, the Company entered into an Agreement and Plan of
Merger (the "HIMSCORP Merger Agreement") with HIMSCORP, as a result of which
HIMSCORP will be merged with and into a wholly owned subsidiary of the Company
(the "HIMSCORP Merger"). The Company will pay aggregate consideration equal to
approximately $94 million in connection with the HIMSCORP Merger, which amount
consists of the assumption of indebtedness and payments in the form of cash and
Common Stock to be paid to HIMSCORP's stockholders. The closing of the HIMSCORP
Merger is subject to customary conditions and is expected to close in the
fourth quarter of 1997, although no assurance can be given that the HIMSCORP
Merger will be completed. The Offering is not conditioned upon completion of
the HIMSCORP Merger, and the HIMSCORP Merger is not conditioned upon the
completion of the Offering.
Management believes that HIMSCORP is the leading provider of medical
records management services. In addition to storage, HIMSCORP also provides
multiple related services including release of information, temporary staffing,
contract coding, facilities management and imaging. HIMSCORP acquired three
companies in each of 1996 and 1997. As of June 30, 1997, HIMSCORP operated 20
facilities in 12 markets, and had over 700 customer accounts. In combination
with HIMSCORP, the Company will have a significant presence in the medical
records management business in 19 markets (including three in which the Company
does not have operations). HIMSCORP's revenue was $15.7 million for the year
ended December 31, 1996 and $13.1 million for the six months ended June 30,
1997 and for the same periods, giving pro forma effect to HIMSCORP's
acquisitions, $23.8 million and $14.0 million, respectively.
<PAGE>
Pending Arcus Acquisition
On September 26, 1997, the Company entered into an Agreement and Plan of
Merger with Arcus Group, Inc. ("AGI") and certain of its subsidiaries to acquire
all the business and assets of Arcus through a merger of AGI into the Company
(the "Arcus Merger"). The Company will pay aggregate consideration equal to
approximately $160 million, consisting of approximately $63 million in value in
Common Stock and options to acquire Common Stock (assuming that vested options
are not exercised prior to closing) and the balance in cash and assumption of
debt. If such options were exercised prior to closing, the value of Common Stock
and options to be issued by Iron Mountain in the transaction would decrease by
approximately $5 million and the amount of cash to be paid would increase by
approximately $5 million. In addition to the stated purchase price of $160
million, the Company will record approximately $3 million in capitalized
transaction costs and approximately $2 million in additional equity resulting
from a higher financial valuation of the options to acquire shares of the Common
Stock for accounting purposes. The closing of the Arcus Merger is subject to
customary conditions and is expected to close early in the first quarter of
1998, although no assurance can be given that the Arcus Merger will be
completed. The Offering is not conditioned upon the closing of the Arcus Merger,
and the Arcus Merger is not conditioned upon closing the Offering.
In 1996, Arcus acquired eight companies and, in 1997, one company. Arcus
had revenue of $66.0 million for the year ended December 31, 1996 and $44.9
million for the six months ended June 30, 1997 and for the same periods, giving
pro forma effect to Arcus's acquisitions, $89.2 million and $49.5 million,
respectively.
Management believes that Arcus is the largest provider of off-site data
protection services in the United States. Arcus's data protection services
consist primarily of storage and off-site rotation of back-up copies of
magnetic media, as well as disaster recovery support and testing, media library
moves and product sales. In addition to data protection services, Arcus
provides IT staffing services, which represented approximately 35% of Arcus's
revenues and approximately 7% of Arcus's operating income before depreciation,
amortization and corporate expenses in the six months ended June 30, 1997. As
of September 30, 1997, Arcus operated 31 data storage facilities in 25 markets
in the U.S. and one in the United Kingdom (including five in which the Company
does not have operations), and had over 6,000 customer accounts.
The following table presents certain information for the Recent and
Pending Acquisitions.
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Principal State(s)
Recent Acquisitions of Operation Completion Date
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Nashville Vault Company, Ltd. ........................ Tennessee January 1996
Florida Data Bank, Inc. .............................. Florida January 1996
DataVault Corporation ................................. Massachusetts February 1996
Data Storage Systems, Inc. ........................... California March 1996
Brambles CRC, Inc. .................................... Ohio April 1996
Records management business of Output Technologies
Central Region, Inc. ................................. Missouri May 1996
Records management business of The Fortress Florida and
Corporation .......................................... Massachusetts July 1996
Data Archive Services, Inc. and Data Archive Services
of Miami, Inc. ....................................... Florida August 1996
DKA Industries, Inc. (d/b/a/ Systems Record Storage) . Florida August 1996
International Record Storage and Retrieval Service,
Inc. ................................................ New Jersey September 1996
Security Archives Corporation ........................ California September 1996
Data Storage Company, Inc. (d/b/a DataSafe) ......... Tennessee October 1996
Dial-A-File Storage, Inc. ........................... Florida October 1996
Mohawk Business Record Storage, Inc. .................. Minnesota November 1996
Magnetic Archives, Inc. .............................. Colorado November 1996
Deliverex of Broward ................................. Florida November 1996
Security Archives II, Inc. and Security Archives of
MSP, Inc. .......................................... Minnesota January 1997
Records management business of Wellington Financial
Services, Inc. (d/b/a Michigan Data Storage) ......... Michigan February 1997
Data Recovery Services, Inc. ........................ Florida February 1997
</TABLE>
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<TABLE>
<CAPTION>
Principal State(s)
Recent Acquisitions of Operation Completion Date
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<S> <C> <C>
CBD Security Archives, Inc. ..................... Louisiana and Texas March 1997
Chicago Data Destruction Corporation (d/b/a Chicago
Data Storage Systems) ........................... Illinois April 1997
Critical Files Security, Inc. .................. Florida April 1997
Business Records Center, Inc. .................. Wisconsin May 1997
Willamette Archives, Inc. ........................ Oregon May 1997
Safesite Records Management Corporation ......... Various (1) June 1997
Data Archives, Ltd. .............................. Texas July 1997
File Pro L.C. .................................... Texas July 1997
Archives Express, Inc. ........................... California and Utah July 1997
Concorde Group, Inc. ........................... New York August 1997
Data Securities International, Inc. ............ California September 1997
Records Retention/FileSafe, L.P. ............... California October 1997
Record Management Systems, Inc. .................. New York October 1997
Allegiance Business Archives, Ltd. ............... New Jersey October 1997
Principal State(s)
Pending Acquisitions of Operation Status
- -------------------- ----------------- --------------
HIMSCORP, Inc. ................................. Various (2) Definitive Agreement
Arcus Technology Services, Inc. .................. Various (3) Definitive Agreement
</TABLE>
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(1) Arizona, California, Colorado, Georgia, Illinois, Massachusetts, Michigan,
New York, North Carolina, Ohio, Virginia, and Washington.
(2) California, Louisiana, Maryland, Michigan, Missouri, New Jersey, Ohio,
Oregon, Pennsylvania and Texas.
(3) Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois,
Nevada, New Jersey, New York, North Carolina, Ohio, Oklahoma,
Pennsylvania, Texas, Washington and the United Kingdom.
The closing of each Pending Acquisition is subject to various customary
conditions and no assurance can be given that any Pending Acquisition will be
completed. See "Risk Factors--Risks Associated with Acquisition Strategy." The
Offering is not conditioned upon the completion of any of the Pending
Acquisitions, and none of the Pending Acquisitions is conditioned upon
completion of the Offering.
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited Pro Forma Condensed Consolidated Balance Sheet has
been prepared based upon the unaudited historical condensed consolidated
balance sheet of Iron Mountain as of June 30, 1997 and the balance sheets as of
June 30, 1997 of the acquisitions consummated after June 30, 1997 and the
Pending Acquisitions, and gives effect to: (i) the acquisitions consummated
after June 30, 1997; (ii) the Pending Acquisitions; (iii) the Credit Agreement
Amendment; and (iv) the Offering, as if each had occurred as of June 30, 1997.
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations for the six months ended June 30, 1997 and for the year ended
December 31, 1996 give effect to each of the above transactions and to: (v) the
Recent Acquisitions consummated prior to June 30, 1997; (vi) the Company's
initial public offering of Common Stock, which closed on February 6, 1996 (the
"Initial Public Offering"), and the application of the net proceeds therefrom;
(vii) the Credit Agreement; and (viii) the 1996 Notes, as if each had occurred
as of January 1, 1996. The transactions described in clauses (i) through (viii)
above are collectively referred to herein as the "Transactions." Pro forma
adjustments are described in the accompanying notes.
The Pro Forma As Adjusted results of operations for the six months ended
June 30, 1997 give effect to the Transactions and to integration adjustments
related to certain identified cost savings that management believes would have
been realized had the acquisitions completed in 1997 and the Pending
Acquisitions been fully integrated as of January 1, 1996.
The pro forma statements of operations do not include results of
operations prior to the date of acquisition, or pro forma adjustments for,
seven of the Company's acquisitions (the "Excluded Acquisitions") because the
impact of the Excluded Acquisitions is, in the aggregate, immaterial to such
statements. The pro forma statements of operations also do not include results
of operations prior to the date of acquisition, or pro forma adjustments for,
acquisitions completed by Arcus and HIMSCORP in 1996 and 1997, which
represented aggregate revenues of $31.4 million for the year ended December 31,
1996 and $5.5 million for the six months ended June 30, 1997. In addition, the
pro forma statements of operations do not reflect one disposition by Arcus in
June 1997, which is immaterial to such statements. See Notes to Unaudited
Condensed Pro Forma Financial Statements--Overview.
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations are not necessarily indicative of the actual results of operations
that would have been reported if the events described above had occurred as of
January 1, 1996, nor do they purport to indicate the results of the Company's
future operations. Furthermore, the pro forma results do not give effect to all
cost savings or incremental costs that may occur as a result of the integration
and consolidation of the Acquisitions. In the opinion of management, all
adjustments necessary to present fairly such pro forma financial statements
have been made.
The pro forma condensed consolidated financial information should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and with the Financial Statements and the Notes
thereto included elsewhere in this current report on Form 8-K.
21
<PAGE>
IRON MOUNTAIN INCORPORATED
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Historical Recent and Pro Forma
Iron Pending Pro Forma Iron
Mountain Acquisitions(1) Adjustments Mountain
------------ ----------------- ----------------------- ----------
<S> <C> <C> <C> <C>
Assets
Current Assets .............................. $ 39,525 $ 34,428 $ (6,162)(A) $ 67,791
Property, Plant and Equipment, net ......... 140,396 30,776 16,355 (A) 187,527
Goodwill, net .............................. 193,114 83,441 224,804 (A) 501,359
Other Long-term Assets ..................... 22,612 1,898 7,714 (A) 32,224
--------- --------- --------------- ---------
Total Assets .............................. $395,647 $150,543 $ 242,711 $788,901
========= ========= =============== =========
Liabilities and Stockholders' Equity
Current Liabilities ........................ $ 32,156 $ 34,046 $ (10,284)(B) $ 55,918
Long-term Debt, net of Current Portion ...... 241,592 72,156 180,924 (B) 494,672
Deferred Rent .............................. 8,216 108 (8)(B) 8,316
Deferred Income Taxes ........................ 2,693 1,140 (648)(B) 3,185
Other Long-term Liabilities .................. 6,568 372 1,000 (B) 7,940
Stockholders' Equity ........................ 104,422 42,721 71,727 (B) 218,870
--------- --------- --------------- ---------
Total Liabilities and Stockholders' Equity $395,647 $150,543 $ 242,711 $788,901
========= ========= =============== =========
</TABLE>
- --------
(1) See Schedule A for detail of the Recent and Pending Acquisitions.
The accompanying Notes are an integral part of these pro forma
financial statements.
22
<PAGE>
IRON MOUNTAIN INCORPORATED
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX-MONTHS ENDED JUNE 30, 1997
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Historical Recent and
Iron Pending
Mountain Acquisitions(1)
------------ -----------------
<S> <C> <C>
Revenues:
Storage ..................... $ 53,810 $50,986
Service and Storage Material
Sales ........................ 34,929 34,012
-------- --------
Total Revenues ............ 88,739 84,998
Operating Expenses:
Cost of Sales (Excluding
Depreciation) ............... 45,872 41,964
Selling, General and
Administrative ............... 21,503 25,264
Depreciation and
Amortization ............... 11,965 5,601
-------- --------
Total Operating
Expenses .................. 79,340 72,829
-------- --------
Operating Income ............... 9,399 12,169
Interest Expense ............... 11,080 3,370
-------- --------
Income (Loss) Before Provision
(Credit) for Income Taxes ...... (1,681) 8,799
Provision (Credit) for Income
Taxes ........................... (196) 1,899
-------- --------
Net Income (Loss) ............... $ (1,485) $ 6,900
======== ========
Net Loss per Common and
Common Equivalent Share ......... $ (0.14)
========
Weighted Average Common and
Common Equivalent Shares
Outstanding ..................... 10,326
========
EBITDA ........................... $ 21,364 $17,770
<CAPTION>
Pro Forma
Pro Forma As Adjusted
Pro Forma Iron Integration Iron
Adjustments Mountain(2) Adjustments(3) Mountain(2)(3)
---------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Storage ..................... $ -- $104,796 $ -- $104,796
Service and Storage Material
Sales ........................ -- 68,941 -- 68,941
------------ -------- ------------ --------
Total Revenues ............ -- 173,737 -- 173,737
Operating Expenses:
Cost of Sales (Excluding
Depreciation) ............... (419)(C) 87,417 (815)(I) 86,602
Selling, General and
Administrative ............... (400)(D) 46,367 (3,068)(J) 43,299
Depreciation and
Amortization ............... 4,014 (E) 21,580 -- 21,580
------------ -------- ------------ --------
Total Operating
Expenses .................. 3,195 155,364 (3,883) 151,481
------------ -------- ------------ --------
Operating Income ............... (3,195) 18,373 3,883 22,256
Interest Expense ............... 8,554 (F) 23,004 -- 23,004
------------ -------- ------------ --------
Income (Loss) Before Provision
(Credit) for Income Taxes ...... (11,749) (4,631) 3,883 (748)
Provision (Credit) for Income
Taxes ........................... (1,080)(G) 623 1,285(K) 1,908
------------ -------- ------------ --------
Net Income (Loss) ............... $ (10,669) $ (5,254) $ 2,598 $ (2,656)
============ ======== ============ ========
Net Loss per Common and
Common Equivalent Share ......... $ (0.35) $ (0.18)
======== ========
Weighted Average Common and
Common Equivalent Shares
Outstanding ..................... 4,565 (H) 14,891 14,891
============ ======== ========
EBITDA ........................... $ 819 $ 39,953 $ 3,883 $ 43,836
</TABLE>
- --------
(1) See Schedule B for detail of the Recent and Pending Acquisitions.
(2) Does not include results of operations prior to the date of acquisition, or
pro forma adjustments for, acquisitions completed by Arcus and HIMSCORP
during 1997. Giving effect to such acquisitions, revenues would increase
$5.5 million to $179.2 million.
(3) Gives effect to certain identified cost savings that the Company believes
would have been realized had the Recent and Pending Acquisitions occurred
and been fully integrated as of January 1, 1996 relating primarily to: (i)
termination of specific employees and related net reductions in
compensation expense; (ii) closure of identified redundant facilities and
related net reductions in occupancy costs; and (iii) the elimination of
related party and management fees in excess of amounts that would have
been incurred by the Company.
The accompanying Notes are an integral part of these pro forma
financial statements.
23
<PAGE>
IRON MOUNTAIN INCORPORATED
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Historical Recent and Pro Forma
Iron Pending Pro Forma Iron
Mountain Acquisitions(1) Adjustments Mountain(2)
------------ ----------------- ----------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Storage .................................... $ 85,826 $100,614 $ -- $ 186,440
Service and Storage Material Sales ......... 52,892 55,611 -- 108,503
--------- --------- ----------- ---------
Total Revenues ........................... 138,718 156,225 -- 294,943
Operating Expenses:
Cost of Sales (Excluding Depreciation) ...... 70,747 72,972 (959)(C) 142,760
Selling, General and Administrative ......... 34,342 51,370 (500)(D) 85,212
Depreciation and Amortization ............... 16,936 10,898 11,021 (E) 38,855
--------- --------- ----------- ---------
Total Operating Expenses .................. 122,025 135,240 9,562 266,827
--------- --------- ----------- ---------
Operating Income .............................. 16,693 20,985 (9,562) 28,116
Interest Expense .............................. 14,901 6,038 25,298 (F) 46,237
--------- --------- ----------- ---------
Income (Loss) Before Provision (Credit) for
Income Taxes ................................. 1,792 14,947 (34,860) (18,121)
Provision (Credit) for Income Taxes ............ 1,435 3,652 (7,936)(G) (2,849)
--------- --------- ----------- ---------
Income (Loss) Before Extraordinary Charge ...... $ 357 $ 11,295 $ (26,924) $ (15,272)
========= ========= =========== =========
Income (Loss) Before Extraordinary Charge
per Common and Common Equivalent
Share .......................................... $ 0.01(3) $ (1.03)
========= =========
Weighted Average Common and Common
Equivalent Shares Outstanding .................. 10,137 4,743 (H) 14,880
========= =========== =========
EBITDA .......................................... $ 33,629 $ 31,883 $ 1,459 $ 66,971
</TABLE>
- --------
(1) See Schedule C for detail of the Recent and Pending Acquisitions.
(2) Does not include results of operations prior to the date of acquisition, or
pro forma adjustments for, acquisitions completed by Arcus and HIMSCORP in
1996 and 1997. Giving effect to such acquisitions, revenues would increase
$31.4 million to $326.3 million.
(3) After accretion of $0.03 per Common and Common Equivalent Share related to
a warrant. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The accompanying Notes are an integral part of these pro forma
financial statements.
24
<PAGE>
Schedule A
IRON MOUNTAIN INCORPORATED
SCHEDULE OF RECENT AND PENDING ACQUISITIONS
AS OF JUNE 30, 1997
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Recent Acquisitions Pending Acquisitions Total
-------------------------------------------- ---------------------- Recent and
Pending
DSI FileSafe Allegiance Other Arcus (1) HIMSCORP Acquisitions
----------- ---------- ------------ -------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Current Assets .................. $ 1,424 $3,215 $1,541 $2,092 $18,002 $ 8,154 $ 34,428
Property, Plant and Equipment,
net ........................... 148 5,445 480 5,530 15,347 3,826 30,776
Goodwill, net .................. 1,731 -- -- -- 54,048 27,662 83,441
Other Long-term Assets ......... 18 84 60 155 555 1,026 1,898
-------- ------- ------- ------- -------- --------- ---------
Total Assets .................. $ 3,321 $8,744 $2,081 $7,777 $87,952 $ 40,668 $150,543
======== ======= ======= ======= ======== ========= =========
Liabilities and Stockholders'
Equity
Current Liabilities ............ $ 8,126 $1,520 $ 415 $1,478 $16,987 $ 5,520 $ 34,046
Long-term Debt, net of Current
Portion ........................ -- 3,133 -- 4,226 36,888 27,909 72,156
Deferred Rent .................. 8 -- 100 -- -- -- 108
Deferred Income Taxes ......... -- -- 3 43 648 446 1,140
Other Long-term Liabilities ... 159 -- -- -- 213 -- 372
Stockholders' Equity (Deficit) (4,972) 4,091 1,563 2,030 33,216 6,793 42,721
-------- ------- ------- ------- -------- --------- ---------
Total Liabilities and
Stockholders' Equity ......... $ 3,321 $8,744 $2,081 $7,777 $87,952 $ 40,668 $150,543
======== ======= ======= ======= ======== ========= =========
</TABLE>
- --------
(1) Represents the historical balance sheet of Arcus as of June 30, 1997 and
does not give pro forma effect to the acquisition completed by Arcus
subsequent to that date. See "Overview--Pending Acquisitions" in Notes to
Unaudited Condensed Consolidated Pro Forma Financial Statements. See
Schedule D for a reconciliation of AGI to Arcus.
The accompanying Notes are an integral part of these pro forma
financial statements.
25
<PAGE>
Schedule B
IRON MOUNTAIN INCORPORATED
SCHEDULE OF RECENT AND PENDING ACQUISITIONS
FOR THE SIX-MONTHS ENDED JUNE 30, 1997
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Recent Acquisitions (1) Pending Acquisitions Total
---------------------------------------------------- -------------------------- Recent and
Pending
Safesite DSI FileSafe Allegiance Other Arcus (2) HIMSCORP (3) Acquisitions
---------- -------- ---------- ------------ -------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Storage .................. $ 4,198 $2,127 $3,548 $1,073 $4,146 $ 25,147 $ 10,747 $50,986
Service and Storage
Material Sales ......... 6,034 438 2,218 773 2,468 19,756 2,325 34,012
-------- ------- ------- ------ ------- --------- --------- --------
Total Revenues ......... 10,232 2,565 5,766 1,846 6,614 44,903 13,072 84,998
Operating Expenses:
Cost of Sales (Excluding
Depreciation) ............ 5,111 -- 2,234 915 2,978 24,182 6,544 41,964
Selling, General and
Administrative ......... 4,460 1,432 793 362 2,098 13,488 2,631 25,264
Depreciation and
Amortization ............ 397 279 205 93 428 3,077 1,122 5,601
-------- ------- ------- ------ ------- --------- --------- --------
Total Operating
Expenses ............... 9,968 1,711 3,232 1,370 5,504 40,747 10,297 72,829
-------- ------- ------- ------ ------- --------- --------- --------
Operating Income ............ 264 854 2,534 476 1,110 4,156 2,775 12,169
Interest (Income) Expense ... 26 242 111 (22) 256 1,614 1,143 3,370
-------- ------- ------- ------ ------- --------- --------- --------
Income Before Provision for
Income Taxes ............... 238 612 2,423 498 854 2,542 1,632 8,799
Provision for Income Taxes 77 9 -- 16 3 1,118 676 1,899
-------- ------- ------- ------ ------- --------- --------- --------
Net Income .................. $ 161 $ 603 $2,423 $ 482 $ 851 $ 1,424 $ 956 $ 6,900
======== ======= ======= ====== ======= ========= ========= ========
EBITDA ..................... $ 661 $1,133 $2,739 $ 569 $1,538 $ 7,233 $ 3,897 $17,770
</TABLE>
- --------
(1) Represents historical results of operations for each Recent Acquisition for
the period in 1997 prior to acquisition by the Company. See
"Overview--Pending Acquisitions" in Notes to Condensed Consolidated Pro
Forma Financial Statements.
(2) Does not include results of operations prior to the date of acquisition, or
pro forma adjustments for, the acquisition completed by Arcus during 1997.
Giving effect to such acquisition, revenues would have increased $4.6
million to $49.5 million. See "Overview--Pending Acquisitions" in Notes to
Unaudited Condensed Consolidated Pro Forma Financial Statements. See
Schedule E for a reconciliation of AGI to Arcus.
(3) Does not include results of operations prior to the date of acquisition, or
pro forma adjustments for, the acquisitions completed by HIMSCORP during
1997. Giving effect to such acquisitions, revenues would have increased
$0.9 million to $14.0 million. See "Overview--Pending Acquisitions" in
Notes to Unaudited Condensed Consolidated Pro Forma Financial Statements.
The accompanying Notes are an integral part of these pro forma
financial statements.
26
<PAGE>
Schedule C
IRON MOUNTAIN INCORPORATED
SCHEDULE OF RECENT AND PENDING ACQUISITIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Recent Acquisitions(1) Pending Acquisitions Total
----------------------------------------------------------------- ------------------------ Recent and
Pending
Mohawk Safesite DSI FileSafe Allegiance Other Arcus(2) HIMSCORP(3) Acquisitions
-------- ---------- ----------- ---------- ------------ --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Storage ............ $4,429 $ 8,300 $ 3,367 $ 6,662 $ 2,008 $18,110 $ 43,671 $14,067 $100,614
Service and Storage
Material Sales ... 3,436 10,709 851 4,147 1,395 11,178 22,310 1,585 55,611
------- -------- ------- -------- -------- -------- --------- -------- ---------
Total Revenues 7,865 19,009 4,218 10,809 3,403 29,288 65,981 15,652 156,225
Operating Expenses:
Cost of Sales
(Excluding
Depreciation) ...... 3,945 9,464 -- 4,207 1,610 13,148 32,738 7,860 72,972
Selling, General and
Administrative ... 2,647 7,587 2,997 2,269 749 10,322 21,592 3,207 51,370
Depreciation and
Amortization ...... 608 799 608 565 202 2,205 4,436 1,475 10,898
------- -------- ------- -------- -------- -------- --------- -------- ---------
Total Operating
Expenses ......... 7,200 17,850 3,605 7,041 2,561 25,675 58,766 12,542 135,240
------- -------- ------- -------- -------- -------- --------- -------- ---------
Operating Income ...... 665 1,159 613 3,768 842 3,613 7,215 3,110 20,985
Interest (Income)
Expense ............ 201 34 548 249 (6) 1,065 2,669 1,278 6,038
------- -------- ------- -------- -------- -------- --------- -------- ---------
Income Before Provision
for Income Taxes ... 464 1,125 65 3,519 848 2,548 4,546 1,832 14,947
Provision for Income
Taxes ............... -- 125 460 -- 6 211 1,984 866 3,652
------- -------- ------- -------- -------- -------- --------- -------- ---------
Net Income (Loss) ... $ 464 $ 1,000 $ (395) $ 3,519 $ 842 $ 2,337 $ 2,562 $ 966 $ 11,295
======= ======== ======= ======== ======== ======== ========= ======== =========
EBITDA ............... $1,273 $ 1,958 $ 1,221 $ 4,333 $ 1,044 $ 5,818 $ 11,651 $ 4,585 $ 31,883
</TABLE>
- --------
(1) Represents historical results of operations for each Recent Acquisition for
the period in 1996 prior to acquisition by the Company. See "Overview" in
the accompanying Notes.
(2) Does not include results of operations prior to the date of acquisition, or
pro forma adjustments for, the acquisitions by Arcus completed in 1996 and
1997. Giving effect to such acquisitions, revenues would have increased
$23.2 million to $89.2 million. See "Overview--Pending Acquisitions" in
Notes to Unaudited Condensed Consolidated Pro Forma Financial Statements.
Represents the condensed consolidated statement of operations of Arcus for
the year ended December 31, 1996. See Schedule E for a reconciliation of AGI
to Arcus.
(3) Does not include results of operations prior to the date of acquisition, or
pro forma adjustments for, acquisitions completed in 1996 and 1997. Giving
effect to such acquisitions, revenues would have increased $8.1 million to
$23.8 million.
The accompanying Notes are an integral part of these pro forma
financial statements.
27
<PAGE>
Schedule D
IRON MOUNTAIN INCORPORATED
RECONCILIATION OF THE BALANCE SHEET OF
ARCUS GROUP, INC. TO ARCUS TECHNOLOGY SERVICES, INC.
AS OF JUNE 30, 1997
(Note 1)
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
AGI Adjustments Arcus
---------- ------------- --------
<S> <C> <C> <C>
Assets
Current Assets .................................... $ 31,861 $ (13,859) $18,002
Property, Plant and Equipment, net ............... 15,368 (21) 15,347
Goodwill, net .................................... 53,917 131 54,048
Investments ....................................... 1,484 (1,484) --
Other Long-term Assets ........................... 561 (6) 555
--------- ---------- --------
Total Assets .................................... $103,191 $ (15,239) $87,952
========= ========== ========
Liabilities and Stockholders' Equity
Current Liabilities .............................. $ 15,193 $ 1,794 $16,987
Long-term Debt, net of Current Portion ............ 36,888 -- 36,888
Deferred Income Taxes .............................. -- 648 648
Other Long-term Liabilities ........................ 231 (18) 213
Minority Interest in Subsidiaries .................. 8,316 (8,316) --
Preferred Stock of Subsidiary, Redeemable ......... 26,578 (26,578) --
Warrants Outstanding to Purchase Common Stock of
Subsidiary .................................... 15 (15) --
Stockholders' Equity .............................. 15,970 17,246 33,216
--------- ---------- --------
Total Liabilities and Stockholders' Equity ...... $103,191 $ (15,239) $87,952
========= ========== ========
</TABLE>
- --------
(1) The AGI balance sheet includes holding company assets and liabilities
unrelated to the business or operations of Arcus. This schedule shows the
assets and liabilities that do not relate to the business of Arcus and
reconciles AGI's balance sheet to Arcus's balance sheet.
The accompanying Notes are an integral part of these pro forma
financial statements.
28
<PAGE>
Schedule E
IRON MOUNTAIN INCORPORATED
RECONCILIATION OF STATEMENTS OF OPERATIONS OF
ARCUS GROUP, INC. TO ARCUS TECHNOLOGY SERVICES, INC.
FOR THE SIX-MONTHS ENDED JUNE 30, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
(Note 1)
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six-Months Ended June 30, 1997 Year Ended December 31, 1996
--------------------------------- --------------------------------
AGI Adjustments Arcus AGI Adjustments Arcus
--------- ------------- --------- --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Storage and Transport ............... $25,147 $ -- $25,147 $43,671 $ -- $43,671
Other .............................. 19,756 -- 19,756 22,310 -- 22,310
-------- --------- -------- ------- -------- --------
Total Revenues ..................... 44,903 -- 44,903 65,981 -- 65,981
Operating Expenses:
Cost of Sales (Excluding
Depreciation) ..................... 24,182 -- 24,182 32,738 -- 32,738
Selling, General and Administrative 13,488 -- 13,488 21,592 -- 21,592
Holding Company Expenses ............ 672 (672) -- 1,990 (1,990) --
Depreciation and Amortization ...... 3,085 (8) 3,077 4,449 (13) 4,436
-------- --------- -------- ------- -------- --------
Total Operating Expenses ............ 41,427 (680) 40,747 60,769 (2,003) 58,766
-------- --------- -------- ------- -------- --------
Operating Income ..................... 3,476 680 4,156 5,212 2,003 7,215
Interest Expense, net ............... 1,240 374 1,614 1,668 1,001 2,669
Equity in Income of Limited
Partnership ........................ -- -- -- (34) 34 --
Minority Interest ..................... 271 (271) -- 321 (321) --
Preferred Stock Dividends of
Subsidiary ........................... 1,022 (1,022) -- 1,895 (1,895) --
-------- --------- -------- ------- -------- --------
Income Before Provision for Income
Taxes .............................. 943 1,599 2,542 1,362 3,184 4,546
Provision for Income Taxes ............ 274 844 1,118 475 1,509 1,984
-------- --------- -------- ------- -------- --------
Net Income ........................... $ 669 $ 755 $ 1,424 $ 887 $ 1,675 $ 2,562
======== ========= ======== ======= ======== ========
EBITDA .............................. $ 5,268 $ 1,965 $ 7,233 $7,479 $ 4,172 $11,651
</TABLE>
- --------
(1) The AGI statements of operations include holding company expenses for
activities unrelated to the business or operations of Arcus. This schedule
shows the expenses that do not relate to the business of Arcus and
reconciles AGI's statements of operations to Arcus's statements of
operations.
The accompanying Notes are an integral part of these pro forma
financial statements.
29
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Overview
Recent Acquisitions
In January 1996, Iron Mountain acquired Nashville Vault Company, Ltd. and
Florida Data Bank, Inc. ("FDB"). In February 1996, Iron Mountain acquired
DataVault Corporation. In March 1996, Iron Mountain acquired Data Storage
Systems, Inc. In April 1996, Iron Mountain acquired Brambles CRC, Inc. ("CRC").
In May 1996, Iron Mountain acquired the records management business of Output
Technologies Central Region, Inc. In July 1996, Iron Mountain acquired the
records management business of The Fortress Corporation. In August 1996, Iron
Mountain acquired Data Archive Services, Inc. and Data Archive Services of
Miami, Inc. (collectively, "DAS") and DKA Industries, Inc. (d/b/a Systems
Record Storage). In September 1996, Iron Mountain acquired International Record
Storage and Retrieval Service, Inc. and Security Archives Corporation. In
October 1996, Iron Mountain acquired Data Storage Company, Inc. and Dial-A-File
Storage, Inc. In November 1996, Iron Mountain acquired Mohawk Business Record
Storage, Inc. ("Mohawk"), Magnetic Archives, Inc. and Deliverex of Broward. The
aggregate purchase price of the acquisitions completed in 1996 was $68.6
million (not including contingent payments of up to $4.0 million based upon the
achievement of certain targets during 1997 and 1998).
In January 1997, Iron Mountain acquired Security Archives II, Inc. and
Security Archives of MSP, Inc. In February 1997, Iron Mountain acquired the
records management business of Wellington Financial Services, Inc. (d/b/a
Michigan Data Storage) and Data Recovery Services, Inc. In March 1997, Iron
Mountain acquired CBD Security Archives, Inc. ("CBD"). In April 1997, Iron
Mountain acquired Chicago Data Destruction Corporation and Critical Files
Security, Inc. In May 1997, Iron Mountain acquired Business Records Center,
Inc. and Willamette Archives, Inc. In June 1997, Iron Mountain acquired
Safesite and certain related real estate for $70.6 million, including $53.6
million in value of Common Stock and options to acquire Common Stock and the
balance in cash. In July 1997, Iron Mountain acquired Data Archives, Ltd
("DAL"), Archives Express, Inc. ("AEI") and File Pro L.C. In August, 1997, Iron
Mountain acquired Concorde Archives. In September 1997, Iron Mountain acquired
Data Securities International, Inc. ("DSI"). In October 1997, Iron Mountain
acquired Records Retention/FileSafe ("FileSafe") for $44.6 million in cash and
assumed debt, Allegiance Business Archives, Ltd. ("Allegiance") for $8.8
million in cash and Records Management Services, Inc. The aggregate purchase
price of the businesses and certain related real estate acquired in 1997
excluding Safesite, FileSafe and Allegiance was $83.2 million including shares
of Common Stock and options to purchase Common Stock valued at $8.9 million.
The pro forma statements of operations do not include results of
operations prior to the date of acquisition, or pro forma adjustments for,
acquisitions of Data Storage Company, Inc., Dial-A-File Storage, Inc., Magnetic
Archives, Inc., Deliverex of Broward, Data Recovery Services Inc., Critical
Files Security, Inc. and Willamette Archives, Inc. (the "Excluded
Acquisitions") as the impact of such acquisitions is immaterial to the
accompanying pro forma financial statements. The Excluded Acquisitions, in the
aggregate, represent less than 2% of pro forma revenues. The pro forma
statements of operations also do not include results of operations prior to the
date of acquisition, or pro forma adjustments for, acquisitions completed by
Arcus and HIMSCORP in 1996 and 1997, which represented aggregate revenues of
$31.4 million for the year ended December 31, 1996 and $5.5 million for the six
months ended June 30, 1997. In addition, the pro forma statements of operations
do not reflect one disposition by Arcus in June 1997, which is immaterial to
such statements.
Pending Acquisitions
On September 17, 1997, the Company entered into an agreement to acquire
all of the outstanding capital stock of HIMSCORP for approximately $94 million,
comprised of cash, Common Stock and assumed debt. The cash portion is equal to
40% of the difference between $90 million and the net debt, as defined, at the
date of closing. The Common Stock portion ("Stock Portion"), is equal to 60% of
such difference. For purposes of these pro forma statements, the net debt is
estimated to be $28.0 million (based on the balance as of June 30, 1997). The
number of shares of Common Stock to be issued is based on the Stock Portion
divided by $31.11. For purposes of these pro forma statements, the
30
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (Continued)
number of shares assumed to be issued is 1.2 million with a market value of
$41.3 million, based on the closing price of the Common Stock on September 12,
1997 of $34.50. A $0.25 change in the price of the stock will generate a change
of approximately $0.3 million in the purchase price. The amortization of
approximately $66 million of the approximately $90 million of goodwill
associated with HIMSCORP will be nondeductible for income tax purposes.
In June 1997, HIMSCORP completed the acquisition of MKC, Inc. ("MKC"), a
medical records management company. The results of operations of MKC prior to
the date of acquisition are not included in the pro forma statements of
operations. For the five months ended May 31, 1997, MKC had revenues of $0.9
million.
On September 26, 1997, the Company entered into an agreement to acquire all
of the outstanding capital stock of AGI and its subsidiaries for approximately
$160 million. The principal operating subsidiary of AGI is Arcus. The purchase
price consists of Common Stock and options to acquire Common Stock valued at
approximately $63 million (assuming that vested options are not exercised prior
to closing), the assumption of net indebtedness of approximately $31 million and
approximately $66 million in cash. The number of shares of Common Stock and
options will be based on the average market price for the 20 trading days ending
three trading days before the closing, subject to a floor of $29.00 and a
ceiling of $36.00. If such average price is less than $29.00 or greater than
$36.00, as the case may be, the number of shares of Common Stock issued as a
result of this transaction would be based on $29.00 or $36.00, respectively (or
1.7 million or 1.4 million shares, respectively). A $0.25 change above or below
the collar would result in a $0.3 million increase and a $0.4 million decrease,
respectively, in the purchase price. In addition to the stated purchase price of
$160 million, the Company will record approximately $3 million in capitalized
transaction costs and approximately $2 million in additional equity resulting
from a higher financial valuation of the options to acquire shares of the Common
Stock for accounting purposes. The amortization of approximately $100 million of
the approximately $143 million of goodwill associated with AGI will be
nondeductible for income tax purposes.
The AGI financial statements include certain assets, liabilities and
holding company expenses for activities unrelated to the business or operations
of Arcus, which will not be purchased or assumed by the Company. For
informational purposes, the schedules to the pro forma financial statements
include a reconciliation between AGI and Arcus. The Company is evaluating its
ability to utilize AGI's net operating loss carryforwards ("NOL") for federal
income tax purposes. Accordingly, for pro forma purposes, the Company has
provided a full valuation allowance for the deferred tax asset generated by
such NOL. See Note 9 of Notes to AGI's Consolidated Financial Statements.
In August 1997, Arcus completed the acquisition of an IT staffing and
computer consulting business. The assets, liabilities and results of operations
for such IT business are not reflected in the pro forma financial statements.
For the year ended December 31, 1996 and the six months ended June 30, 1997,
such IT business had unaudited revenues of $8.4 million and $4.6 million,
respectively.
The consummation of the Pending Acquisitions is subject to customary
conditions, and no assurance can be given that they will be completed. All of
the Recent Acquisitions have been, and the Pending Acquisitions, if
consummated, will be, accounted for as purchases.
The Company has issued shares of Common Stock in connection with certain
of the Recent Acquisitions and will record such shares for financial reporting
purposes at fair value. Because under the terms of the relevant acquisition
agreements a portion of such shares are subject to resale restrictions, the
Company is in the process of obtaining appraisals to determine the fair value
of such shares. Pending the appraisals, the Company initially recorded the
value of such shares based upon their market price at the time of closing. The
Company anticipates that the appraised value of the restricted shares will be
less than the initially recorded value for accounting purposes and expects to
record corresponding decreases in equity, goodwill and goodwill amortization.
The Company intends to follow the same process with respect to those shares of
Common Stock to be issued in the Pending Acquisitions that will be subject to
resale restrictions.
Balance Sheet
The aggregate consideration paid or to be paid for the Recent and Pending
Acquisitions is approximately $535 million including approximately $168 million
in Common Stock and options to purchase Common Stock and
31
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (Continued)
approximately $367 million in cash and assumed debt (not including up to $5.1
million of contingent payments based upon the achievement of certain targets
during 1997 and 1998). The excess of the purchase price over the book value of
the net assets acquired for each of the acquisitions has been allocated to
tangible and intangible assets, based on Iron Mountain's estimate of the fair
value of the net assets acquired and the Common Stock issued. The allocations
of the purchase price as illustrated below may change upon final appraisal of
the fair value of the net assets acquired and the Common Stock issued (in
millions):
<TABLE>
<CAPTION>
Recent Acquisitions Completed Prior to June 30, 1997:
Allocation of Purchase Price:
<S> <C> <C>
Current Assets ......................................................... $ 7.9
Property, Plant and Equipment .......................................... 32.9
Other Long-term Assets ................................................ 6.6
Current Liabilities ................................................... (11.0)
Deferred Income Taxes ................................................... (1.3)
Other Long-term Liabilities ............................................. (0.4)
Goodwill ............................................................... 136.1
Purchase Price of Excluded Acquisitions ................................. 4.6
-------
Purchase Price of Recent Acquisitions Completed Prior to June 30, 1997 $ 175.4
Acquisitions Completed After June 30, 1997 and the Pending Acquisitions:
Allocation of Purchase Price:
Current Assets ......................................................... $ 28.3
Property, Plant and Equipment .......................................... 47.1
Other Long-term Assets ................................................ 1.5
Current Liabilities ................................................... (23.8)
Deferred Income Taxes ................................................... (0.5)
Other Long-term Liabilities and Deferred Rent ........................... (1.5)
Goodwill ............................................................... 308.2
-------
Purchase Price of Acquisitions Completed After June 30, 1997
and the Pending Acquisitions ....................................... 359.3
--------
Total Purchase Price of the Recent and Pending Acquisitions ............... $ 534.7
========
</TABLE>
The Recent Acquisitions consummated prior to June 30, 1997 were financed with
Common Stock and options to purchase Common Stock, the Credit Agreement, the
Initial Public Offering and the 1996 Notes. The Recent and Pending Acquisitions
are assumed to be financed as follows (in millions):
<TABLE>
<CAPTION>
Recent Acquisitions Completed Prior to June 30, 1997:
<S> <C> <C>
Value of Common Stock Issued .......................................... $ 51.3
Value of Options Granted ................................................ 2.3
Cash Consideration ...................................................... 121.8
-------
Purchase Price of Recent Acquisitions Completed Prior to June 30, 1997 $ 175.4
Acquisitions Completed After June 30, 1997 and the Pending Acquisitions:
Value of Common Stock Issued .......................................... $ 98.9
Value of Options Granted ................................................ 15.5
Incremental Borrowings under the Credit Agreement ..................... 2.5
Net Proceeds from the Offering .......................................... 242.4
-------
Purchase Price of Acquisitions Completed After June 30, 1997
and the Pending Acquisitions ....................................... 359.3
--------
Total Purchase Price of the Recent and Pending Acquisitions. ............... $ 534.7
========
</TABLE>
32
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (Continued)
The accompanying pro forma balance sheet as of June 30, 1997 has been prepared
as if the Transactions had been completed as of June 30, 1997 and reflects the
following pro forma adjustments:
(A) Pro forma adjustments to Assets consist of the following (in millions):
<TABLE>
<CAPTION>
Property Other
Current Plant and Long-term
Assets Equipment Goodwill Assets
--------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Acquisition Adjustments:
Reverse assets of acquired companies not purchased ...... $ (7.7) $ (0.8) $ (1.7) $ (1.2)
Record estimated fair value of assets of acquired
Companies ............................................. 1.5 17.2 -- 0.8
Record increase in goodwill equal to the excess of
purchase price over fair value of net assets
acquired ................................................ -- -- 226.5 --
------- ------ ------- -------
Total Acquisition Adjustments ........................ (6.2) 16.4 224.8 (0.4)
------- ------ ------- -------
Use of Proceeds Adjustments:
Record deferred financing fees associated with the
Offering and the Credit Agreement Amendment ............ -- -- -- 8.1
------- ------ ------- -------
Total Use of Proceeds Adjustments ..................... -- -- -- 8.1
------- ------ ------- -------
Total Pro Forma Adjustments ........................... $ (6.2) $ 16.4 $ 224.8 $ 7.7
======= ====== ======= =======
</TABLE>
(B) Pro Forma adjustments to Liabilities and Stockholders' Equity consist
of the following (in millions):
<TABLE>
<CAPTION>
Long- Deferred Other Stock-
Current term Income Long-term holders'
Liabilities Debt Taxes Liabilities Equity
------------- ----------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Acquisition Adjustments:
Reverse liabilities and equity not assumed in
connection with acquisitions consummated
after June 30, 1997 and the Pending
Acquisitions .................................... $ (14.5) $ (71.9) $ (0.6) $ -- $(42.7)
Record purchase reserves and estimated fair
value of liabilities of acquired Companies ...... 4.2 -- -- 1.0 --
Record additional debt to finance acquisitions
consummated after June 30, 1997 and
Pending Acquisitions ........................... -- 244.7 -- -- --
Record equity used to finance acquisitions
consummated after June 30, 1997 and
Pending Acquisitions ........................... -- -- -- -- 114.4
-------- -------- ------- ----- -------
Total Acquisition Adjustments .................. (10.3) 172.8 (0.6) 1.0 71.7
-------- -------- ------- ----- -------
Use of Proceeds Adjustments:
Proceeds from the Offering ........................ -- 249.5 -- -- --
Repayment of the Credit Agreement ............... -- (66.4) -- -- --
Use of proceeds to repay debt used to finance
acquisitions consummated after June 30,
1997 and Pending Acquisitions .................. -- (175.0) -- -- --
-------- -------- ------- ----- -------
Total Use of Proceeds Adjustments ............... -- 8.1 -- -- --
-------- -------- ------- ----- -------
Total Pro Forma Adjustments ..................... $ (10.3) $ 180.9 $ (0.6) $1.0 $ 71.7
======== ======== ======= ===== =======
</TABLE>
33
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (Continued)
Statements of Operations
Storage revenues consist of periodic charges related to the storage of
materials. Service and storage material sales revenues consist of charges for
related service activities and the sale of storage materials. In certain
circumstances, based upon customer requirements, storage revenues include
periodic charges associated with normal, recurring service activities.
All of the Recent and Pending Acquisitions, except FDB, CRC, DAS, CBD,
DAL, AEI and Allegiance, have a December 31 fiscal year end. DAL's fiscal year
end is February 28, CRC's and CBD's fiscal year end is June 30, DAS's fiscal
year end is May 31, FDB's fiscal year end is August 31 and AEI's fiscal year
end is September 30. During 1996, Allegiance changed its fiscal year end from
March 31 to December 31. Accordingly, CRC's, DAS's, FDB's and CBD's results of
operations were calendarized to the twelve months ended December 31, 1996.
Pro Forma Adjustments
The accompanying pro forma statements of operations for the year ended
December 31, 1996 and the six months ended June 30, 1997, have been prepared as
if the Transactions had occurred on January 1, 1996 and reflect the following
transaction adjustments:
(C) To reduce cost of sales to eliminate rent expense for facilities
purchased by the Company as part of certain acquisitions that would not have
been incurred had such acquisitions occurred as of January 1, 1996. All such
facilities had been previously owned by affiliates of the acquired companies.
(D) To conform the accounting policies of certain acquired companies to
those of the Company with respect to the capitalization of costs for software
developed for internal use.
(E) To reflect additional depreciation expense based on the fair value of
the assets acquired and the remaining estimated useful lives and the
amortization of goodwill. Property and equipment are depreciated over three to
50 years, goodwill is amortized over 25 to 30 years and covenants
not-to-compete are amortized over two to five years on a straight-line basis.
Such depreciation and amortization may change upon final appraisal of the fair
value of the net assets acquired and Common Stock issued.
(F) Pro forma adjustments to Interest Expense consist of the following (in
millions):
<TABLE>
<CAPTION>
Six-Months Year
Ended Ended
June 30, December 31,
1997 1996
------------ -------------
<S> <C> <C>
Acquisition Adjustments:
Reverse interest expense on debt retired or not assumed .................. $ (3.5) $ (6.1)
Use of Proceeds Adjustments:
Reverse interest expense on debt of the Company retired with
proceeds of the Initial Public Offering, the 1996 Notes, the Credit
Agreement and the Offering ............................................. (10.5) (13.8)
Record interest expense relating to the 1996 Notes including
amortization of deferred financing costs .............................. 8.7 17.3
Record interest expense relating to the Offering, at an effective interest
rate of 8.78% and the amortization of deferred financing costs ......... 11.2 22.5
Record interest expense related to borrowings under the Credit
Agreement at an assumed interest rate of 7.16% and the
amortization of deferred financing costs .............................. 2.7 5.4
------- -------
Total Acquisition and Use of Proceeds Adjustments ..................... $ 8.6 $ 25.3
======= =======
</TABLE>
The impact of a one-quarter of one percentage point change in the interest
rate on pro forma borrowings under the Credit Agreement for the year ended
December 31, 1996 and the six months ended June 30, 1997 is $0.2 million and
$0.1 million, respectively.
34
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (Continued)
(G) To adjust the provision for income taxes to a 40% rate on pro forma
income before nondeductible goodwill amortization and other nondeductible
expenses.
(H) To adjust the pro forma weighted average common and common equivalent
shares outstanding as if the Transactions had occurred on January 1, 1996. The
number of shares of Common Stock issued, or assumed to be issued, and the
adjustment for each period presented, is as follows (in thousands):
<TABLE>
<CAPTION>
Adjustment to
Weighted Average Shares
-------------------------------
Total Six-Months Year Ended
Number Ended December 31,
Transactions of Shares June 30, 1997 1996
- ------------ ----------- --------------- -------------
<S> <C> <C> <C>
Initial Public Offering .............................. 2,350 -- 200
Safesite ............................................. 1,770 1,584 1,770
DSI ................................................ 227 227 227
HIMSCORP ............................................. 1,196 1,196 1,196
Arcus ................................................ 1,523 1,523 1,523
Other ................................................ 35 35 35
Reversal of Common Equivalent Shares Due to
Pro Forma Loss .................................... -- -- (208)
------ ------ -----
Total Shares Issued, or Assumed to be Issued ...... 7,101 4,565 4,743
====== ====== =====
</TABLE>
Integration Adjustments
The integration adjustments relate to certain cost savings that management
believes would have been realized had the Recent Acquisitions consummated in
1997 and the Pending Acquisitions been fully integrated on January 1, 1996. The
accompanying pro forma as adjusted statement of operations for the six months
ended June 30, 1997 has been prepared as if the Transactions had occurred as of
January 1, 1996 and reflect the following adjustments:
(I) To reduce cost of sales to eliminate specific expenses that would not
have been incurred had such acquisitions occurred as of January 1, 1996. Such
cost savings relate to: (i) the termination of certain employees due to the
integration and consolidation of certain acquisitions; (ii) a reduction in
certain occupancy costs for facilities the Company will vacate upon completion
of certain acquisitions; and (iii) a reduction in rent expense to reflect new
or amended leases for certain facilities of acquisitions. Additional cost
savings that the Company expects to realize through integration of the Recent
and Pending Acquisitions into the Company's operations have not been reflected
herein.
(J) To adjust specific selling, general and administrative expenses had
such acquisitions occurred as of January 1, 1996. Such adjustments relate to:
(i) cost savings from the termination of certain employees due to the
integration and consolidation of certain acquisitions; (ii) cost savings from
the elimination of related party expenses, management fees and compensation
expenses in excess of amounts that would have been incurred by the Company; and
(iii) additional compensation and benefit expenses that would have been
incurred by the Company.
(K) To adjust the provision for income taxes to a 40% rate on pro forma
income before nondeductible goodwill amortization and other nondeductible
expenses.
35
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
(In thousands, except per share amounts)
The following selected consolidated statements of operations and balance
sheet data of the Company as of and for each of the years ended December 31,
1992, 1993, 1994, 1995 and 1996 have been derived from the Company's audited
consolidated financial statements. The selected consolidated statements of
operations and balance sheet data of the Company for the six months ended June
30, 1996 and 1997 have been derived from the Company's unaudited condensed
consolidated financial statements. The Company's unaudited condensed
consolidated financial statements include all adjustments, consisting of normal
recurring accruals, that the Company considers necessary for a fair
presentation of the financial position and the results of operations for those
periods. Operating results for the six months ended June 30, 1997 are not
necessarily indicative of the results for the entire year ending December 31,
1997. The selected consolidated financial and operating information set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and with Iron Mountain's
Consolidated Financial Statements and the Notes thereto included elsewhere in
this current report on Form 8-K.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1992 1993 1994 1995 1996
------------ ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Revenues:
Storage ....................................... $ 44,077 $ 48,892 $54,098 $ 64,165 $ 85,826
Service and Storage Material Sales ............ 26,596 32,781 33,520 40,271 52,892
-------- -------- ------- -------- --------
Total Revenues .............................. 70,673 81,673 87,618 104,436 138,718
Operating Expenses:
Cost of Sales (Excluding Depreciation) ...... 35,169 43,054 45,880 52,277 70,747
Selling, General and Administrative ......... 17,630 19,971 20,853 26,035 34,342
Depreciation and Amortization ............... 5,780 6,789 8,690 12,341 16,936
-------- -------- ------- -------- --------
Total Operating Expenses .................. 58,579 69,814 75,423 90,653 122,025
-------- -------- ------- -------- --------
Operating Income ................................. 12,094 11,859 12,195 13,783 16,693
Interest Expense ................................. 8,412 8,203 8,954 11,838 14,901
-------- -------- ------- -------- --------
Income (Loss) Before Provision (Credit) for
Income Taxes ................................. 3,682 3,656 3,241 1,945 1,792
Provision (Credit) for Income Taxes ............ 2,095 2,088 1,957 1,697 1,435
-------- -------- ------- -------- --------
Income (Loss) Before Extraordinary Charge ...... 1,587 1,568 1,284 248 357
Extraordinary Charge, Net of Tax Benefit (1) . -- -- -- -- 2,126
-------- -------- ------- -------- --------
Net Income (Loss) .............................. 1,587 1,568 1,284 248 (1,769)
Accretion of Redeemable Put Warrant ............ 626 940 1,412 2,107 280
-------- -------- ------- -------- --------
Net Income (Loss) Applicable to Common
Stockholders ................................. $ 961 $ 628 $ (128) $ (1,859) $(2,049)
======== ======== ======= ======== ========
Income (Loss) Before Extraordinary Item per
Common and Common Equivalent Share ............ $ 0.12 $ 0.08 $ (0.02) $ (0.24) $ 0.01
Net Income (Loss) per Common and Common
Equivalent Share .............................. $ 0.12 $ 0.08 $ (0.02) $ (0.24) $ (0.20)
Weighted Average Common and Common
Equivalent Shares Outstanding .................. 8,052 8,067 7,984 7,784 10,137
Other Data:
EBITDA (2) .................................... $ 17,874 $ 18,648 $20,885 $ 26,124 $33,629
EBITDA as a Percentage of Total Revenues ...... 25.3% 22.8% 23.8% 25.0% 24.2%
Capital Expenditures:
Growth (3)(4) ................................. $ 11,226 $ 13,605 $15,829 $ 14,395 $23,334
Maintenance ................................. 818 1,846 1,151 858 1,112
-------- -------- ------- -------- --------
Total Capital Expenditures (4) .................. $ 12,044 $ 15,451 $16,980 $ 15,253 $24,446
======== ======== ======= ======== ========
Additions to Customer Acquisition Costs ......... $ 1,268 $ 922 $ 1,366 $ 1,379 $ 1,642
Ratio of Earnings to Fixed Charges (5) ......... 1.3x 1.3x 1.2x 1.1x 1.1 x
(continued on next page)
35
<PAGE>
<CAPTION>
Six Months
Ended June 30,
------------------------
1996 1997
------------ -----------
<S> <C> <C>
Consolidated Statements of Operations Data:
Revenues:
Storage ....................................... $ 39,363 $ 53,810
Service and Storage Material Sales ............ 24,587 34,929
-------- --------
Total Revenues .............................. 63,950 88,739
Operating Expenses:
Cost of Sales (Excluding Depreciation) ...... 32,383 45,872
Selling, General and Administrative ......... 16,067 21,503
Depreciation and Amortization ............... 7,530 11,965
-------- --------
Total Operating Expenses .................. 55,980 79,340
-------- --------
Operating Income ................................. 7,970 9,399
Interest Expense ................................. 6,385 11,080
-------- --------
Income (Loss) Before Provision (Credit) for
Income Taxes ................................. 1,585 (1,681)
Provision (Credit) for Income Taxes ............ 888 (196)
-------- --------
Income (Loss) Before Extraordinary Charge ...... 697 (1,485)
Extraordinary Charge, Net of Tax Benefit (1) . -- --
-------- --------
Net Income (Loss) .............................. 697 (1,485)
Accretion of Redeemable Put Warrant ............ 280 --
-------- --------
Net Income (Loss) Applicable to Common
Stockholders ................................. $ 417 $ (1,485)
======== ========
Income (Loss) Before Extraordinary Item per
Common and Common Equivalent Share ............ $ 0.04 $ (0.14)
Net Income (Loss) per Common and Common
Equivalent Share .............................. $ 0.04 $ (0.14)
Weighted Average Common and Common
Equivalent Shares Outstanding .................. 9,899 10,326
Other Data:
EBITDA (2) .................................... $ 15,500 $ 21,364
EBITDA as a Percentage of Total Revenues ...... 24.2 % 24.1%
Capital Expenditures:
Growth (3)(4) ................................. $ 10,702 $ 12,458
Maintenance ................................. 460 500
-------- --------
Total Capital Expenditures (4) .................. $ 11,162 $ 12,958
======== ========
Additions to Customer Acquisition Costs ......... $ 717 $ 282
Ratio of Earnings to Fixed Charges (5) ......... 1.2x 0.9x
(continued on next page)
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------------- As of
June 30,
1992 1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and Cash Equivalents ...... $ 498 $ 591 $ 1,303 $ 1,585 $ 3,453 $ 585
Total Assets .................. 115,429 125,288 136,859 186,881 281,799 395,647
Total Debt ..................... 73,304 78,460 86,258 121,874 184,733 241,967
Stockholders' Equity ............ 23,419 24,047 22,869 21,011 52,384 104,422
</TABLE>
- --------
(footnotes from the preceding page)
(1) The extraordinary charge for 1996 consists of a prepayment penalty, the
write-off of deferred financing costs, original issue discount and loss on
termination of interest rate protection agreements.
(2) Based on its experience in the records management industry, the Company
believes that EBITDA is an important tool for measuring the performance of
records management companies (including potential acquisition targets) in
several areas, such as liquidity, operating performance and leverage. In
addition, lenders use EBITDA as a criterion in evaluating records
management companies, and substantially all of the Company's financing
agreements contain covenants in which EBITDA is used as a measure of
financial performance. However, EBITDA should not be considered an
alternative to operating or net income (as determined in accordance with
GAAP) as an indicator the Company's performance or to cash flow from
operations (as determined in accordance with GAAP) as a measure of
liquidity. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview" and "--Liquidity and
Capital Resources" for discussions of other measures of performance
determined in accordance with GAAP and the Company's sources and
applications of cash flow.
(3) Growth capital expenditures include investments in racking systems, new
buildings and leasehold improvements, equipment for new facilities,
management information systems and facilities restructuring. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources--Capital Investments."
(4) Includes $2,901 in 1994 related to the cost of constructing a records
management facility which was sold in a sale-leaseback transaction in the
fourth quarter of 1994.
(5) The ratio of earnings to fixed charges was 0.9x for the six months ended
June 30, 1997. For such period, the Company would have needed to generate
additional income from continuing operations, before provision for income
taxes, of $1,681 to cover its fixed charges of $15,274.The pro forma ratio
of earnings to fixed charges, giving effect to the Transactions as if each
had occurred as of January 1, 1996, would have been 0.7x for the year
ended December 31, 1996 and 0.8x for the six months ended June 30, 1997.
For such periods, the Company would have needed to generate additional pro
forma income from continuing operations, before provisions for income
taxes, of $18,121 and $4,631 to cover its fixed charges of $58,304 and
$29,295, respectively.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Consolidated Financial and Operating Information and the Company's Consolidated
Financial Statements and the Notes thereto and the other financial and operating
information included elsewhere in this current report on Form 8-K. This current
report on Form 8-K contains, in addition to historical information,
forward-looking statements that include risks and uncertainties. The Company's
actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include
those discussed below, as well as those discussed under "Risk Factors" and
elsewhere in this current report on Form 8-K. The Company undertakes no
obligation to release publicly the result of any revision to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
Overview
The primary financial objective of the Company is to increase its EBITDA,
which is a source of funds to service indebtedness and for investment in
continued internal growth and growth through acquisitions. The Company has
benefited from growth in EBITDA, which has increased from $17.9 million for
1992 to $33.6 million for 1996 (a compound annual growth rate of 17.1%). EBITDA
for the first six months of 1997 was $21.4 million, an increase of 37.8% over
the first six months of 1996. However, other measures of the Company's
financial performance, such as net income and net income applicable to common
stockholders, have been negatively affected by this objective.
In 1994, 1995, 1996 and the first six months of 1997, the Company
experienced net losses applicable to common stockholders. Such net losses are
attributable in part to significant increases in charges associated with the
Company's pursuit of its growth strategy, namely: (i) increases in depreciation
and amortization expenses associated with expansion of the Company's storage
capacity; (ii) increases in goodwill amortization associated with acquisitions
accounted for under the purchase method; and (iii) increases in interest
expense associated with the borrowings used to fund its acquisitions. In
addition, net income applicable to common stockholders has been negatively
affected by a charge for accretion of the Warrant (as defined herein) and, in
1996, by an extraordinary charge related to the early retirement of debt. The
Warrant was redeemed in February 1996, upon completion of the Initial Public
Offering. See Note 5 of Notes to the Company's Consolidated Financial
Statements.
The Company's revenues consist of storage revenues and service and storage
material sales revenues. Storage revenues are derived from charges for storing
records (either on a per unit or a per cubic foot of records basis) and have
accounted for approximately 60% of total revenues in each of the last five
years and the six months ended June 30, 1997. In certain circumstances, based
upon customer requirements, storage revenues include charges associated with
normal, recurring service activities. Service and storage material sales
revenues are derived primarily from the Company's courier operations
(consisting primarily of the pickup and delivery of records upon customer
request), additions of new Cartons, temporary removal of records from storage,
refiling of removed records, destructions of records, permanent withdrawals
from storage and sales of specially designed storage containers and related
supplies. Customers are generally billed on a monthly basis on contractually
agreed-upon terms.
While the Company's total revenues have increased from $70.7 million for
1992 to $104.4 million for 1995, average revenue on a per Carton basis declined
over such period. The year-over-year declines in average revenue per Carton for
1993, 1994 and 1995 were approximately 8%, 7% and 2%, respectively. For 1996,
total revenues increased to $138.7 million, and there was no decline in average
revenue per Carton. Such declines had been attributable to: (i) increases in
sales to large volume accounts, which typically generate lower revenue per
Carton (in particular the contract with the Federal Deposit Insurance
Corporation ("FDIC"), as successor to the Resolution Trust Corporation ("RTC"),
which incorporated substantial volume discounts, although such discounts were
offset by revenues from special service projects during 1994); (ii) a
facilities management arrangement with a large volume account under which,
prior to July 1996, the Company managed the customer's records management
facility and, therefore, the charges to the customer prior to July 1996 did not
include a rent component; and (iii) industry-wide pricing pressures. Despite
the decline, the Company has historically been able to maintain its EBITDA
margins through increased overall operating efficiencies and economies of scale
as well as specific efficiencies realized in the servicing of large volume
accounts. For 1993, 1994, 1995, 1996 and the first six months of 1997, EBITDA
margins were 22.8%, 23.8%, 25.0%, 24.2% and 24.1%, respectively. However, on a
pro forma basis giving effect to the Recent and Pending Acquisitions, for the
six months ended June 30, 1997 the EBITDA margin was 23.0%.
38
<PAGE>
Cost of sales (excluding depreciation) consists primarily of wages and
benefits, facility occupancy costs, vehicle and other equipment costs and
supplies. Of these, the most significant are wages and benefits and facility
occupancy costs. Over the past several years, the Company has been able to
reduce per Carton storage costs by: (i) designing racking systems and operating
space to maximize facility storage efficiency; (ii) negotiating favorable
facility leases and having facilities built to its custom specifications; and
(iii) leasing larger facilities, which, when filled, are less expensive per
Carton to operate.
Selling, general and administrative expenses consist primarily of
management, administrative, sales and marketing wages and benefits, as well as
travel, communications, professional fees, bad debts, training, office
equipment and supplies expenses.
The Company's depreciation and amortization charges result primarily from
the capital-intensive nature of the records management industry and the
acquisitions the Company has completed. The principal components of
depreciation relate to racking systems and related equipment, new buildings and
leasehold improvements, equipment for new facilities and computer system
software and hardware. Amortization primarily relates to goodwill and
noncompetition agreements arising from acquisitions and customer acquisition
costs. The Company has accounted for all of its acquisitions under the purchase
method. Since the purchase price for records management companies is usually
substantially in excess of the fair value of their net assets, these purchases
have given rise to significant goodwill and, accordingly, significant levels of
amortization. Although amortization is a non-cash charge, it does decrease
reported net income.
In February 1996, the Company received net proceeds of $33.3 million from
its Initial Public Offering. The Company used $6.6 million of such net proceeds
to repurchase a warrant to acquire 444,385 shares of Common Stock (the
"Warrant"). For financial reporting purposes, the Company recorded a charge
(based on the estimated redemption value calculated using the effective
interest rate method), resulting in substantial charges to net income
applicable to common stockholders over the period the Warrant was outstanding.
See Note 5 of Notes to the Company's Consolidated Financial Statements. The
remaining net proceeds were used by the Company to fund acquisitions, to repay
indebtedness used to fund acquisitions and for working capital.
In October 1996, the Company completed the sale of $165.0 million of the
1996 Notes, the net proceeds of which were used to repay outstanding bank debt
under the Company's prior credit facilities, its 13.42% notes due December 14,
2000 (the "Chrysler Notes") and certain other indebtedness, to fund the
purchase price of an acquisition and for general corporate purposes.
In March 1997, the Company experienced three fires that resulted in
extensive damage to two of its records management facilities in South
Brunswick, New Jersey. The affected facilities represented less than three
percent of revenues and less than two percent of EBITDA for 1996. The results
of the first six months of 1997 do not include any gain or loss resulting from
the fires. The Company has filed several insurance claims, including a
significant claim under its business interruption insurance policy. Currently,
the Company expects to realize a gain from proceeds under its business
interruption insurance. The claims process is lengthy and its outcome cannot be
predicted with certainty. Based on its present assessment of the situation,
management does not believe that the fires will have a material adverse effect
on the Company's financial condition or results of operations, although there
can be no assurance in this regard. At June 30, 1997, the Company had a
receivable of approximately $1.9 million related to various claims filed under
its property and casualty insurance policies.
The Company's total revenues increased $13.7 million, or 41.5%, to $46.6
million for the second quarter of 1997 from $32.9 million for the second
quarter of 1996. Of the 41.5% revenue growth, 34.7 percentage points were
attributable to 25 acquisitions completed by the Company in 1996 and the first
six months of 1997 and 6.8 percentage points were attributable to internal
growth. The internal growth percentage was reduced by the loss of revenues
resulting from the fires in South Brunswick, New Jersey in March 1997.
Excluding the Company's South Brunswick operations for both years, internal
growth for the quarter was 9.3%.
39
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, information
derived from the Company's consolidated statements of operations, expressed as
a percentage of revenues.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Storage .......................................... 61.7% 61.4% 61.9% 61.6% 60.6%
Service and Storage Material Sales ............... 38.3 38.6 38.1 38.4 39.4
--------- --------- --------- ------ ---------
Total Revenues ................................. 100.0 100.0 100.0 100.0 100.0
--------- --------- --------- ------ ---------
Operating Expenses:
Cost of Sales (Excluding Depreciation) ............ 52.4 50.1 51.0 50.6 51.7
Selling, General and Administrative ............... 23.8 24.9 24.8 25.1 24.2
Depreciation and Amortization ..................... 9.9 11.8 12.2 11.8 13.5
--------- --------- --------- ------ ---------
Total Operating Expenses ........................ 86.1 86.8 88.0 87.5 89.4
--------- --------- --------- ------ ---------
Operating Income .................................... 13.9 13.2 12.0 12.5 10.6
Interest Expense .................................... 10.2 11.3 10.7 10.0 12.5
--------- --------- --------- ------ ---------
Income (Loss) before Provision for Income Taxes ...... 3.7 1.9 1.3 2.5 (1.9)
Provision (Credit) for Income Taxes .................. 2.2 1.7 1.0 1.4 (0.2)
--------- --------- --------- ------ ---------
Income Before Extraordinary Charge .................. 1.5 0.2 0.3 1.1 (1.7)
Extraordinary Charge, Net of Tax Benefit ............ -- -- 1.6 -- --
--------- --------- --------- ------ ---------
Net Income (Loss) .................................... 1.5 0.2 (1.3) 1.1 (1.7)
Accretion of Redeemable Put Warrant .................. 1.6 2.0 0.2 0.4 --
--------- --------- --------- ------ ---------
Net Income (Loss) Applicable to Common
Stockholders ....................................... (0.1)% (1.8)% (1.5)% 0.7% (1.7)%
========= ========= ========= ====== =========
EBITDA ................................................ 23.8% 25.0% 24.2% 24.2% 24.1%
========= ========= ========= ====== =========
</TABLE>
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Storage revenues increased $14.4 million, or 36.7%, to $53.8 million for
the first six months of 1997 from $39.4 million for the first six months of
1996. Twenty five acquisitions completed by the Company in 1996 and the first
six months of 1997 accounted for $11.4 million, or 78.8%, of such increase. The
balance of the storage revenues growth resulted primarily from net increases in
Cartons stored by existing customers and from sales to new customers.
Service and storage material sales revenues increased $10.3 million, or
42.1%, to $34.9 million for the first six months of 1997 from $24.6 million for
the first six months of 1996. Acquisitions accounted for $8.7 million, or
84.4%, of such increase. The balance of such increase resulted from increases
in service and storage material sales to existing customers and the addition of
new customer accounts. The greater percentage increase in service and storage
material sales revenues, as compared to storage revenues, for the first six
months of 1997, over the same period in 1996, is primarily attributable to
certain businesses acquired in 1997 that have a higher component of service and
storage material sales revenues, compared to storage revenues, than the rest of
the Company.
For the reasons discussed above, total revenues increased $24.8 million,
or 38.8%, to $88.7 million for the first six months of 1997 from $64.0 million
for the first six months of 1996. Of such increase, $20.1 million, or 81.1%,
was attributable to acquisitions completed by the Company in 1996 and the first
six months of 1997.
Cost of sales (excluding depreciation) increased $13.5 million, or 41.7%,
to $45.9 million (51.7% of revenues) for the first six months of 1997 from
$32.4 million (50.6% of revenues) for the first six months of 1996. The
increase was primarily attributable to the increase in Cartons stored and
expenses related to certain facility relocations. The increase as a percentage
of revenues was primarily attributable to recent acquisitions, which initially
had lower gross margins than the rest of the Company.
40
<PAGE>
Selling, general and administrative expenses increased $5.4 million, or
33.8%, to $21.5 million (24.2% of revenues) for the first six months of 1997
from $16.1 million (25.1% of revenues) for the first six months of 1996. The
dollar increase was primarily attributable to increased personnel, office and
overhead costs needed to support the Company's growth.
Depreciation and amortization increased $4.4 million, or 58.9%, to $12.0
million (13.5% of revenues) for the first six months of 1997 from $7.5 million
(11.8% of revenues) for the first six months of 1996. The increase was
primarily attributable to the additional depreciation and amortization related
to the aforementioned acquisitions and capital expenditures including racking
systems, information systems and improvements to existing facilities.
As a result of the foregoing factors, operating income increased $1.4
million, or 17.9%, to $9.4 million (10.6% of revenues) for the first six months
of 1997 from $8.0 million (12.5% of revenues) for the first six months of 1996.
Interest expense increased $4.7 million, or 73.5%, to $11.1 million for
the first six months of 1997 from $6.4 million for the first six months of
1996. The increase was primarily attributable to increased indebtedness related
to the financing of acquisitions and capital expenditures. Such increase was
partially offset by lower effective interest rates for the first six months of
1997 as compared to the same period for 1996.
As a result of the foregoing factors, income (loss) before provision
(credit) for income taxes decreased $3.3 million to a loss of $1.7 million
(1.9% of revenues) for the first six months of 1997 from income of $1.6 million
(2.5% of revenues) for the first six months of 1996. Provision (credit) for
income taxes was a credit of $0.2 million for the first six months of 1997
compared with a provision of $0.9 million for the first six months of 1996. The
Company's effective tax rate is less favorable than statutory rates primarily
due to the amortization of the non-deductible portion of goodwill associated
with certain acquisitions (the tax laws generally permit deduction of such
expenses for asset purchases, but not for acquisitions of stock). In the first
six months of 1997, the Company recorded approximately $63.4 million in
non-deductible goodwill, primarily related to the acquisition of Safesite.
Net income (loss) decreased $2.2 million to a net loss of $1.5 million
(1.7% of revenues) for the first six months of 1997 from net income of $0.7
million (1.1% of revenues) for the second quarter of 1996. Net income (loss)
applicable to common stockholders decreased $1.9 million to a net loss of $1.5
million (1.7% of revenues) for the first six months of 1997 from net income of
$0.4 million (0.7% of revenues) after accretion of $0.3 million related to the
Warrant for the first six months of 1996. The Warrant was redeemed in full in
February 1996, with a portion of the proceeds from the Initial Public Offering.
As a result of such redemption, there will be no future charges for such
accretion.
As a result of the foregoing factors, EBITDA increased $5.9 million, or
37.8%, to $21.4 million (24.1% of revenues) for the first six months of 1997
from $15.5 million (24.2% of revenues) for the first six months of 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Storage revenues increased from $64.2 million for the year ended December
31, 1995 to $85.8 million for the year ended December 31, 1996, an increase of
$21.6 million or 33.8%. Twenty acquisitions completed by the Company in 1995
and 1996 accounted for $15.0 million or 69.1% of such increase. The balance of
the storage revenues growth resulted primarily from net increases in Cartons
stored by existing customers and from sales to new customers.
Service and storage material sales revenues increased from $40.3 million
for the year ended December 31, 1995 to $52.9 million for the year ended
December 31, 1996, an increase of $12.6 million or 31.3%. Acquisitions
accounted for $9.2 million or 72.7% of the increase. The balance of the
increase resulted from increases in service and storage material sales to
existing customers and the addition of new customer accounts.
For the reasons discussed above, total revenues increased from $104.4
million for the year ended December 31, 1995 to $138.7 million for the year
ended December 31, 1996, an increase of $34.3 million or 32.8%. Of this
increase, $24.1 million, or 70.4%, was attributable to acquisitions completed
by the Company in 1995 and 1996. The monthly average Cartons stored increased
approximately 33% for 1996 as compared to 1995, from approximately 20.4 million
Cartons to approximately 27.1 million Cartons.
Cost of sales (excluding depreciation) increased from $52.3 million for
the year ended December 31, 1995 to $70.7 million for the year ended December
31, 1996, an increase of $18.4 million or 35.3%, and increased as
41
<PAGE>
a percentage of revenues from 50.1% for the year ended December 31, 1995 to
51.0% for the year ended December 31, 1996. The $18.4 million increase was
primarily attributable to the increase in Cartons stored, increased expenses
related to the severe winter weather on the Atlantic coast during the first
quarter of 1996 and expenses related to certain facility relocations. The
increase as a percentage of revenue was primarily attributable to recent
acquisitions, which initially had lower gross margins than the Company.
Selling, general and administrative expenses increased from $26.0 million
for the year ended December 31, 1995 to $34.3 million for the year ended
December 31, 1996, an increase of $8.3 million or 31.9%, and decreased as a
percentage of revenues from 24.9% for the year ended December 31, 1995 to 24.8%
for the year ended December 31, 1996. The $8.3 million increase was primarily
attributable to the costs associated with accelerated acquisition activity,
including certain redundant transitional expenses as new acquisitions were
integrated into the Company, with the addition of personnel needed to support
the Company's growth and with becoming a public company. Additionally, the
selling, general and administrative expenses of acquired companies tend to be
higher than the Company's, and cost reductions and other possible synergies are
not realized immediately.
Depreciation and amortization expense increased from $12.3 million for the
year ended December 31, 1995 to $16.9 million for the year ended December 31,
1996, an increase of $4.6 million or 37.2%, and increased as a percentage of
revenues from 11.8% for the year ended December 31, 1995 to 12.2% for the year
ended December 31, 1996. The $4.6 million increase was primarily attributable
to the additional depreciation and amortization expense related to the
aforementioned acquisitions, capital expenditures, including racking systems,
information systems and improvements to existing facilities, and additions to
customer acquisition costs.
As a result of the foregoing factors, operating income increased from
$13.8 million for the year ended December 31, 1995 to $16.7 million for the
year ended December 31, 1996, an increase of $2.9 million or 21.1%. As a
percentage of revenues, operating income decreased from 13.2% for the year
ended December 31, 1995 to 12.0% for the year ended December 31, 1996.
Interest expense increased from $11.8 million for the year ended December
31, 1995 to $14.9 million for the year ended December 31, 1996, an increase of
$3.1 million or 25.9%. The $3.1 million increase was primarily attributable to
increased indebtedness to finance acquisitions and capital expenditures. This
increase was partially offset by a decrease in the Company's effective
borrowing rates.
As a result of the foregoing factors, income before provision for income
taxes decreased from $1.9 million (1.9% of revenues) for the year ended
December 31, 1995 to $1.8 million (1.3% of revenues) for the year ended
December 31, 1996, a decrease of $0.1 million or 7.9%. Provision for income
taxes decreased from $1.7 million (1.7% of revenues) for the year ended
December 31, 1995 to $1.4 million (1.0% of revenues) for the year ended
December 31, 1996. The Company's effective tax rate is higher than statutory
rates primarily due to the amortization of the nondeductible portion of
goodwill associated with acquisitions made prior to the change in tax laws
which now generally permit deduction of such expenses for asset purchases.
Since the Company has acquired all of the outstanding capital stock of
Safesite, goodwill associated with the acquisition will be nondeductible for
income tax purposes.
In October 1996, the Company recorded an extraordinary charge of $3.5
million, not including the related tax benefit of $1.4 million, related to the
early retirement of certain indebtedness. The charge consists of a prepayment
penalty, the write-off of deferred financing costs, an original issue discount
and loss on termination of interest rate protection agreements.
Net income (loss) was income of $0.2 million (0.2% of revenues) for the
year ended December 31, 1995 compared to a loss of $1.8 million (1.3% of
revenues) for the year ended December 31, 1996. Net loss applicable to common
stockholders was $1.9 million (1.8% of revenues), after accretion of $2.1
million related to the Warrant, for the year ended December 31, 1995 compared
to $2.0 million (1.5% of revenues), after accretion of $0.3 million related to
the Warrant, for the year ended December 31, 1996. The Warrant was redeemed in
full in February 1996, with a portion of the proceeds from the Initial Public
Offering. As a result of such redemption, there will be no future charges for
such accretion.
As a result of the foregoing factors, EBITDA increased from $26.1 million
for the year ended December 31, 1995 to $33.6 million for the year ended
December 31, 1996, an increase of $7.5 million, or 28.7%. As a percentage
42
<PAGE>
of revenues, EBITDA decreased from 25.0% for the year ended December 31, 1995
to 24.2% for the year ended December 31, 1996.
The Company acquired sixteen records management businesses in 1996
compared to four records management businesses in 1995. Primarily as a result
of the Company's acquisition activity, EBITDA margins were lower for the year
ended December 31, 1996 compared to the prior year. The decrease was primarily
attributable to the fact that the acquired businesses are initially less
operationally efficient than the Company and the anticipated margin increases
are generally not realized immediately.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Storage revenues increased from $54.1 million for 1994 to $64.2 million
for 1995, an increase of $10.1 million or 18.6%. Seven acquisitions completed
between June 1994 and December 1995 accounted for $5.7 million or 56.7% of such
increase. The balance of the storage revenues growth resulted primarily from
net increases in Cartons stored by existing customers and from sales to new
customers.
Service and storage material sales revenues increased from $33.5 million
for 1994 to $40.3 million for 1995, an increase of $6.8 million or 20.1%. This
increase was accomplished despite a decrease of approximately $0.8 million in
such revenues received from the RTC, which decrease was primarily due to a
reduction in revenues from special service projects. Acquisitions accounted for
$4.3 million or approximately 63.5% of such increase. The balance of such
increase resulted from increases in service and storage material sales to
existing customers and the addition of new customer accounts.
For the reasons discussed above, total revenues increased from $87.6
million for 1994 to $104.4 million for 1995, an increase of $16.8 million or
19.2%. Of such increase, $10.0 million or 59.4% was attributable to
acquisitions made by the Company between June 1994 and December 1995. The
monthly average Cartons stored increased approximately 22% in 1995 as compared
to 1994, from approximately 16.7 million Cartons to approximately 20.4 million
Cartons. The percentage increase was greater than that of total revenues
primarily for the reasons described in the third paragraph under "Overview"
above.
Cost of sales (excluding depreciation) increased from $45.9 million for
1994 to $52.3 million for 1995, an increase of $6.4 million or 13.9%, and
decreased as a percentage of revenues from 52.4% for 1994 to 50.1% for 1995.
The $6.4 million increase resulted primarily from an increase in Cartons
stored. The decrease as a percentage of revenues was due primarily to increased
storage efficiencies resulting from relocations to, or additions of, newer,
higher density facilities as well as increased utilization of storage capacity.
Selling, general and administrative expenses increased from $20.9 million
for 1994 to $26.0 million for 1995, an increase of $5.1 million or 24.9%, and
increased as a percentage of revenues from 23.8% for 1994 to 24.9% for 1995.
The $5.1 million increase was due primarily to increases in field management
and administrative staffing, including increases due to acquisitions. Of the
1.1% increase as a percentage of revenues, $0.6 million (0.6% of revenues)
resulted from a provision for a judgment in a lawsuit relating to a 1992
incident and a $0.5 million (0.5% of revenues) charge for the relocation of the
corporate accounting function from Los Angeles to Boston.
Depreciation and amortization expenses increased from $8.7 million for
1994 to $12.3 million for 1995, an increase of $3.6 million or 42.0%, and
increased as a percentage of revenues from 9.9% for 1994 to 11.8% for 1995.
Depreciation and amortization expenses, both in absolute dollars and as a
percentage of revenues, continued to increase, primarily as a result of the
Company's acquisitions and growth-related capital investments for racking
systems, improvements to records management facilities, information systems and
customer acquisition costs. Amortization during 1995 included a one-time charge
of $0.9 million (0.9% of revenues) in connection with the write-down of the
goodwill of a subsidiary due to the Company's decision to sell such subsidiary
at an estimated price which is $0.9 million less than such subsidiary's book
value and related goodwill. The Company subsequently decided not to sell such
subsidiary.
As a result of the foregoing factors, operating income increased from
$12.2 million for 1994 to $13.8 million for 1995, an increase of $1.6 million
or 13.0%, and decreased as a percentage of revenues from 13.9% to 13.2%.
Interest expense increased from $9.0 million for 1994 to $11.8 million for
1995. This increase was due primarily to increased levels of indebtedness
primarily to finance acquisitions, as well as higher interest rates and higher
deferred financing charges.
43
<PAGE>
As a result of the foregoing factors, income before provision for income
taxes decreased from $3.2 million (3.7% of revenues) for 1994 to $1.9 million
(1.9% of revenues) for 1995, a decrease of $1.3 million or 40.0%. Provision for
income taxes decreased from $2.0 million (2.2% of revenues) to $1.7 million
(1.7% of revenues). The Company's effective tax rates for 1994 and 1995 were
higher than statutory rates primarily due to $1.5 million and $2.5 million,
respectively, of amortization of nondeductible goodwill.
Net income decreased $1.1 million from $1.3 million (1.5% of revenues) for
1994 to $0.2 million (0.2% of revenues) for 1995 as a result of the factors
outlined above.
As a result of the foregoing factors, EBITDA increased from $20.9 million
for 1994 to $26.1 million for 1995, an increase of $5.2 million or 25.1%, and
increased as a percentage of revenues from 23.8% to 25.0%. These increases
reflect continuing economies of scale and increased operating efficiencies,
which were partially offset by the $0.6 million (0.6% of revenues) reserve
relating to the judgment in the lawsuit referred to above and by the $0.5
million (0.5% of revenues) charge for the relocation of the corporate
accounting function from Los Angeles to Boston.
Recent Quarterly Financial Data
The following table sets forth certain consolidated statements of
operations data of the Company for the quarterly periods shown. The unaudited
quarterly information has been prepared on the same basis as the annual
financial information and, in management's opinion, includes all adjustments
(consisting of normal recurring accruals) necessary to present fairly the
information for the quarters presented. The operating results for any quarter
are not necessarily indicative of results for the year or for any future
period.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------
1995
------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
--------- -------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Revenues:
Storage ............... $14,882 $ 15,866 $ 16,246 $ 17,171
Service and Storage
Material Sales ......... 9,456 10,020 10,324 10,471
-------- ---------- ----------- ----------
Total Revenues ......... 24,338 25,886 26,570 27,642
Operating Expenses:
Cost of Sales (Excluding
Depreciation) ......... 12,224 12,888 12,888 14,277
Selling, General and
Administrative ......... 5,849 6,848(1) 6,358 6,980(3)
Depreciation and
Amortization ......... 2,752 2,676 3,775(2) 3,138
-------- ---------- ----------- ----------
Total Operating Expenses 20,825 22,412 23,021 24,395
-------- ---------- ----------- ----------
Operating Income ...... $ 3,513 $ 3,474 $ 3,549 $ 3,247
======== ========== =========== ==========
EBITDA .................. $ 6,265 $ 6,150(1) $ 7,324 $ 6,385(3)
======== ========== =========== ==========
<PAGE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------
1996 1997
--------------------------------------------- ------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30
--------- -------------- ---------- --------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Storage ............... $19,154 $ 20,209 $22,056 $24,407 $25,823 $27,987
Service and Storage
Material Sales ......... 11,874 12,713 13,963 14,342 16,331 18,598
-------- ---------- -------- -------- -------- --------
Total Revenues ......... 31,028 32,922 36,019 38,749 42,154 46,585
Operating Expenses:
Cost of Sales (Excluding
Depreciation) ......... 15,668 16,715 18,708 19,656 21,764 24,108
Selling, General and
Administrative ......... 7,807 8,260(4) 8,695 9,580 10,207 11,296
Depreciation and
Amortization ......... 3,608 3,922 4,366 5,040 5,722 6,243
-------- ---------- -------- -------- -------- --------
Total Operating Expenses 27,083 28,897 31,769 34,276 37,693 41,647
-------- ---------- -------- -------- -------- --------
Operating Income ...... $ 3,945 $ 4,025 $ 4,250 $ 4,473 $ 4,461 $ 4,938
======== ========== ======== ======== ======== ========
EBITDA .................. $ 7,553 $ 7,947(4) $ 8,616 $ 9,513 $10,183 $11,181
======== ========== ======== ======== ======== ========
</TABLE>
- --------
(1) Includes a $600 reserve for litigation.
(2) Includes a $900 write-down of the goodwill of a subsidiary as described in
"Results of Operations."
(3) Includes a charge of $500 relating to the relocation of the Company's
corporate accounting function.
(4) Includes a charge of $321 relating to the relocation of the Company's
corporate accounting function.
Liquidity and Capital Resources
Recent Financings and Sources of Funds
In February 1996, the Company raised $33.3 million, net of underwriters'
discounts and commissions and associated costs, in the Initial Public Offering.
The net proceeds from the Initial Public Offering were used to retire the
Warrant, to fund acquisitions, to repay debt that had been incurred to make
acquisitions and for general corporate purposes.
44
<PAGE>
On October 1, 1996, the Company completed the sale of $165.0 million
aggregate principal amount of the 1996 Notes. The net proceeds to the Company
were $160.1 million after underwriting discounts and commissions. The net
proceeds of the sale of the 1996 Notes, after payment of related expenses, were
used to repay outstanding bank debt under the Company's prior credit
facilities, the Chrysler Notes and certain other indebtedness, to fund
acquisitions and for general corporate purposes. In connection with the
prepayment of the Credit Agreement, the Chrysler Notes and certain other
indebtedness, the Company recorded an extraordinary charge of $3.5 million, not
including the related tax benefit of $1.4 million, during the fourth quarter of
1996. The charge consists of a prepayment penalty, the write-off of deferred
financing costs, original issue discount and loss on termination of interest
rate protection agreements. This charge did not impact the Company's EBITDA.
In connection with the sale of the 1996 Notes, the Company entered into
the Credit Agreement, which provided for $100.0 million of revolving credit
availability. In March 1997, the Company entered into an amendment and
restatement of the Credit Agreement, which increased credit availability under
the facility to $150.0 million, and in September 1997 the Company entered into
the Credit Agreement Amendment, which increased such credit availability to
$250.0 million. The Credit Agreement as currently in effect matures on
September 30, 2002. As of October 20, 1997, the Company had $167.4 million in
outstanding indebtedness, and $82.6 million available, under the Credit
Agreement. See "Description of Certain Existing Indebtedness."
Net cash provided by financing activities was $6.7 million and $34.1
million for 1994 and 1995, respectively, substantially all of which was
provided under the Credit Agreement, and $80.6 million for the year ended
December 31, 1996, consisting primarily of the net proceeds of $160.1 million
from the sale of the 1996 Notes and of $33.3 million from the Initial Public
Offering, offset by $102.2 million of repayment of indebtedness and by $6.6
million due to the retirement of the Warrant. During the six months ended June
30, 1997 net cash provided by financing activities was $56.3 million,
consisting primarily of the proceeds from borrowings under the Credit Agreement
of $62.4 million, partially offset by repayments of debt of $5.8 million.
Through October 20, 1997, the Company had additional net borrowings of
approximately $101.0 million under the Credit Agreement to fund, among other
things, the cash portion of the purchase price of eight records management
businesses.
Net cash provided by operations was $6.9 million for the first six months
of 1997 compared to $8.1 million for the same period in 1996. The decrease
resulted from the increase in EBITDA being more than offset by the increase in
interest payments, the $1.9 million increase in the insurance receivable due to
costs associated with the South Brunswick, New Jersey fires, and other changes
in asset and liability accounts.
The annual maturities of the Company's indebtedness for the six months
ending December 31, 1997, and the years ending December 31, 1998, 1999, 2000
and 2001 are $0.2 million, $0.4 million, $0.4 million, $7.8 million and $0.3
million, respectively.
Under the Credit Agreement, the Company is required to use interest rate
protection and hedging instruments to reduce its exposure to increases in
interest rates. As of June 30, 1997, the Company had $242.0 million of total
debt, of which $175.6 million had fixed interest rates and $66.4 million had
variable interest rates. Consistent with the Credit Agreement, as of October
20, 1997 the Company had in place interest rate cap agreements covering a
notional amount of $20.0 million. See Note 3 of Notes to the Company's
Consolidated Financial Statements.
As of December 31, 1996, the Company had estimated net operating loss
carryforwards of approximately $9.0 million for federal income tax purposes. As
a result of such loss carryforwards, cash paid for income taxes has
historically been substantially lower than the provision for income taxes.
Capital Investments
As the Company has sought to increase its EBITDA, it has made significant
capital investments, consisting primarily of: (i) acquisitions; (ii)
growth-related capital expenditures; and (iii) customer acquisition costs.
These investments have been primarily funded through the Initial Public
Offering, the 1996 Notes, the Credit Agreement and cash flows from operations.
For 1994, 1995, 1996 and the first six months of 1997, the Company's
growth-related capital expenditures were $15.8 million, $14.4 million, $23.3
million and $12.5 million, respectively. Included in capital expenditures for
1994 is $2.9 million for the construction of a records management facility
which was sold in a sale and leaseback transaction. Growth-related capital
expenditures consist primarily of: (i) investment in racking systems; (ii) new
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building and leasehold improvements; (iii) equipment for new facilities; (iv)
management information systems; and (v) facilities restructuring. For 1994,
1995, 1996 and the first six months of 1997, the Company's maintenance capital
expenditures were $1.2 million, $0.9 million, $1.1 million and $0.5 million,
respectively. The Company currently anticipates spending approximately $15
million for growth-related capital expenditures for the second half of 1997,
excluding capital expenditures related to acquisition integration expenditures
for recently consummated acquisitions and the HIMSCORP Merger, which is
expected to close in the fourth quarter of 1997. The Company's preliminary
estimate for growth-related capital expenditures for 1998, including
acquisition integration costs for the Pending Acquisitions (but not any capital
expenditures related to future acquisitions, which cannot presently be
estimated) is approximately $35 million; however, the Company is continuously
re-evaluating its capital needs. The anticipated increases in capital
expenditures for the second half of 1997 compared to the first half of 1997 and
for 1998 compared to 1997 are due to the number and size of Recent and Pending
Acquisitions. See "Business--Growth Strategy--Growth Through Acquisitions." The
Company expects to fund these expenditures and costs from cash flows from
operations and borrowings under the Credit Agreement.
In addition, the Company incurs costs (net of revenues received for the
initial transfer of records) related to the acquisition of large volume
accounts (typically over 10,000 Cartons). For 1994, 1995, 1996 and the first
six months of 1997, the Company's additions to customer acquisition costs were
$1.4 million, $1.4 million, $1.6 million and $0.3 million, respectively.
The Company expects to incur costs during the next two to three years as
it addresses the impact of the year 2000 on its information systems. According
to published reports, certain information systems, primarily computer software
programs, cannot properly recognize and process date sensitive information for
the year 2000 and beyond. The Company is evaluating its systems to determine
whether they are year 2000 compliant and is in the process of addressing this
issue. Accordingly, management has not yet estimated the cost of this effort.
Recent and Pending Acquisitions
The Company's liquidity and capital resources have been significantly
impacted by acquisitions and, given the Company's acquisition strategy, may be
significantly impacted for the foreseeable future. In order to capitalize on
industry consolidation, the Company, in mid-1994, adopted a more active
acquisition strategy. Since mid-1994, the Company has acquired or entered into
agreements to acquire 42 records management businesses, 40 of these
acquisitions have been completed, for a total purchase price of approximately
$571 million (not including contingent payments of up to $5.1 million based
upon the achievement of certain targets during 1997 and 1998). The Company has
primarily financed its acquisitions with borrowings under its credit agreements
in conjunction with cash flows provided by operations, the Initial Public
Offering and the 1996 Notes. The Company's future interest expense will
increase as a result of the Offering and additional indebtedness the Company
may incur to finance possible future acquisitions. To the extent that future
acquisitions are financed by additional borrowings under the Credit Agreement
or other credit facilities, the resulting increase in debt and interest expense
could have a negative effect on measures of liquidity, such as debt to equity,
EBITDA to debt and EBITDA to interest expense ratios.
The Company has recently issued shares of Common Stock and options to
purchase Common Stock as partial consideration for certain acquisitions,
particularly for larger acquisitions. In June 1997, the Company issued
approximately 1.8 million shares of Common Stock, valued at $51.3 million, and
options to acquire approximately 0.1 million shares of Common Stock, valued at
$2.3 million, as partial consideration for its acquisition of Safesite.
Subsequent to June 30, 1997, the Company issued approximately 0.3 million
shares of Common Stock, valued at $8.2 million, as partial consideration for
two of the Recent Acquisitions. Upon completion of HIMSCORP Merger, the Company
will issue approximately 1.2 million shares of Common Stock, valued at
approximately $41 million. Upon completion of the Arcus Merger, the Company
will issue approximately 1.5 million shares of Common Stock and options to
acquire approximately 0.6 million shares of Common Stock (assuming that vested
options are not exercised prior to the closing and using a price of $32.50 per
share of Common Stock to determine the number of shares to be issued in the
Arcus Merger), valued at approximately $64 million.
The Company may utilize a portion of the approximately 4.3 million shares
of authorized but unissued Common Stock remaining after the consummation of the
Pending Acquisitions as consideration for possible future acquisitions,
although no assurances can be given as to the number of such shares or as to
willingness of the stockholders of potential acquired companies to receive
Common Stock.
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The Company has issued shares of Common Stock in connection with certain
of the Recent Acquisitions and will record such shares for financial reporting
purposes at fair value. Because under the terms of the relevant acquisition
agreements a portion of such shares are subject to resale restrictions, the
Company is in the process of obtaining appraisals to determine the fair value
of such shares. Pending the appraisals, the Company initially recorded the
value of such shares based upon their market price at the time of closing. The
Company anticipates that the appraised value of the restricted shares will be
less than the initially recorded value for accounting purposes and expects to
record corresponding decreases in equity, goodwill and goodwill amortization.
The Company intends to follow the same process with respect to those shares of
Common Stock to be issued in the Pending Acquisitions that will be subject to
resale restrictions.
In connection with acquisitions completed in 1996 and the first six months
of 1997, the Company has undertaken certain restructurings of the acquired
businesses. Formalized restructuring plans for acquisitions will be completed
within one year of the date of acquisition. The restructuring activities
include certain reductions in staffing levels, elimination of duplicate
facilities and other costs associated with exiting certain activities of the
acquired businesses. In connection with these restructuring activities, the
Company established reserves of $3.7 million. These amounts were recorded as
costs of the acquisitions and were provided in accordance with Emerging Issues
Task Force Issue No. 95-3, "Recognition of Liabilities In Connection with a
Purchase Business Combination." During 1996 and the first six months of 1997,
the Company expended $1.1 million for restructuring costs. These expenditures
consisted primarily of severance costs, move costs and costs relating to exited
facilities. As of June 30, 1997, the Company had a total of $2.6 million
accrued for restructuring costs on all of its then completed acquisitions.
In addition, the Company currently anticipates establishing reserves of
approximately $4.0 million for restructuring costs associated with the
acquisitions consummated after June 30, 1997 and the Pending Acquisitions;
however, the Company will continuously re-evaluate its restructuring plans
regarding these acquisitions during the year following their consummation.
Future Capital Needs
The Company's ability to generate cash adequate to fund its needs depends
generally on the results of its operations and the availability of financing.
Management believes that cash flow from operations in conjunction with
borrowings from existing and possible future credit facilities will be
sufficient for the foreseeable future to meet debt service requirements and to
make possible future acquisitions and capital expenditures. However, there can
be no assurance in this regard or that the terms available for any future
financing, if required, would be favorable to the Company.
At the 1997 Annual Meeting of Stockholders, the stockholders of the
Company approved an amendment to the Company's Restated Certificate of
Incorporation to increase the number of shares of Common Stock that the Company
is authorized to issue from 13,000,000 to 20,000,000 shares. Such additional
shares would provide the Company with additional flexibility to issue shares in
connection with business acquisitions or for cash through sales of stock to
public and private investors.
Seasonality
Historically, the Company's business has not been subject to seasonality
in any material respect.
Inflation
Certain of the Company's expenses, such as wages and benefits, occupancy
costs and equipment repair and replacement, are subject to normal inflationary
pressures. Although the Company to date has been able to offset inflationary
cost increases through increased operating efficiencies, there can be no
assurance that the Company will be able to offset any future inflationary cost
increases through similar efficiencies or increased storage or service charges.
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BUSINESS
Introduction
Iron Mountain is America's largest records management company, as measured
by its revenues. The Company is a national, full-service provider of records
management and related services, enabling customers to outsource records
management functions. Iron Mountain has a diversified customer base, which
includes more than half of the Fortune 500 and numerous commercial, legal,
banking, healthcare, accounting, insurance, entertainment and government
organizations. The Company provides storage for all major media, including
paper (the dominant form of records storage), computer disks and tapes,
microfilm and microfiche, master audio and video tapes, film and optical disks,
X-rays and blueprints. Iron Mountain's principal services provided to its
storage customers include courier pick-up and delivery, filing, retrieval and
destruction of records, database management, customized reporting and disaster
recovery support. The Company also sells storage materials and provides
consulting, facilities management and other outsourcing services.
The completion of the Pending Acquisitions will significantly increase the
Company's presence in off-site data protection services (the management of
electronic records) and medical records management, which management believes
will make the Company the industry leader in both of these specialized records
management activities. The Pending Acquisitions will also expand the ancillary
services offered by the Company to include IT staffing and enhance its range of
facilities management services. As of October 3, 1997, giving effect to the
Pending Acquisitions, Iron Mountain managed over 50,000 customer accounts and
operated 220 records management facilities in 52 markets.
The Records Management Industry
Overview
The records management industry stores information in a variety of media
formats, which can broadly be divided into paper and electronic records, and
provides a wide range of services related to the records stored. Paper records
are defined to include paper documents, as well as all other non-electronic
media such as microfilm and microfiche, master audio and video tapes, film,
X-rays and blue prints. Based on publicly available information, organizations
in the United States generate an estimated four trillion documents each year,
many of which must be retained and available for reference for many years.
Electronic records primarily include computer disks and tapes and optical
disks.
Paper Records
Paper records may be broadly divided into two categories: active and
inactive. Active records relate to ongoing and recently completed activities or
contain information that is frequently referenced. Active records are usually
stored and managed on-site by the organization which originated them to ensure
ready availability. Inactive paper records are the principal focus of the
records management industry. Inactive records consist of those records which
are not needed for immediate access but which must be retained for legal
reasons or regulatory compliance or for occasional reference in support of
ongoing business operations. Based on industry studies, the Company believes
that inactive records make up approximately 80% of all paper records.
Electronic Records
Electronic records management focuses on the storage of and related
services for computer media that is either archival in nature or a back-up copy
of recently processed data. Archival data is generally not needed for access
but is retained for legal, regulatory and compliance reasons. Back-up data
exists because of the need of many businesses to maintain back-up copies of
data in order to be able to operate in the event of a system failure, casualty
loss or other disaster. It is standard operating procedure for data processing
groups to rotate back-up tapes to off-site locations on a regular basis and to
require multiple copies of such information at multiple sites.
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Growth of Market
The Company believes that the volume of stored paper and electronic
records will continue to increase for a number of reasons, including: (i) the
rapid growth of inexpensive document producing technologies such as facsimile
and desktop printing; (ii) the continued proliferation of data processing
technologies such as personal computers and networks; (iii) increased
regulatory requirements; (iv) concerns over possible future litigation and the
resulting increases in volume and holding periods of documentation; (v) the
high cost of reviewing records and deciding whether to retain or destroy them;
(vi) the failure of many entities to adopt or follow policies on records
destruction; and (vii) audit requirements to keep backup copies of certain
records in off-site locations. Despite the growth of new "paperless"
technologies, such as the Internet and e-mail, management believes that stored
information remains predominantly paper-based and that such technologies have
promoted the creation of hard copies of such electronic information. In
addition, management believes that the proliferation of digital information
technologies and distributed data networks has led to increased demand for data
protection services, such as the storage and off-site rotation of back-up
copies of magnetic media, and outsourcing support services that address the
needs of data center operations and disaster recovery programs.
Highly Fragmented Industry
Most records management companies serve a single local market, and are
often either owner-operated or ancillary to another business, such as a moving
company. According to PRISM, as of January 1994 (the latest date for which such
information is available), approximately 2,600 firms offered records storage
and management services in the United States. The Company believes that there
are only three national providers in the industry (including the Company and
excluding Arcus, a Pending Acquisition) and that the rest are regional or, in
most instances, single-city operators. In contrast, due to the specialized
nature of the services provided, the provision of data protection services,
medical records management and vital records protection services have higher
market concentrations. The Company has made, and intends to make, acquisitions
to increase its presence in these markets.
Industry Consolidation
Over the past several years, there has been consolidation in the records
management industry. The Company believes that this trend will continue because
of the industry's capital requirements for growth, customer demands for more
sophisticated technology solutions, a trend for certain large customer
organizations to contract with one vendor in multiple cities and opportunities
for large records management providers to achieve economies of scale. In
particular, the records management business requires significant up-front
capital investment for real estate, racking systems and management information
technology. Economies of scale available in these areas can reward larger
initial capital investments by reducing per unit storage costs. However, such
economies of scale are only realized once a facility fills available capacity.
Thus, larger companies with both access to capital and the ability to quickly
fill a new facility enjoy a competitive cost advantage, thereby putting
pressures on smaller competitors.
Financial Characteristics of Iron Mountain's Business
Iron Mountain's records management business has the following financial
characteristics:
[bullet] Recurring Revenues. Iron Mountain derives a majority of its
revenues from fixed periodic (usually monthly) fees charged to customers
based on the volume of records stored. Revenues from these fixed periodic
fees have grown for 34 consecutive quarters and have represented
approximately 60% of the Company's total revenues in each of the last five
years. Once a customer places paper records in storage with the Company
and until those records are destroyed or permanently removed (for which
the Company typically receives a service fee), the Company receives
recurring payments of fixed periodic fees without incurring additional
labor or marketing expenses or significant capital costs. Similarly,
contracts for the storage of electronic media consist primarily of fixed
monthly payments. The stable and growing storage base also provides the
foundation for increases in revenues and EBITDA from related service
activities and sales of storage materials.
[bullet] Historically Non-Cyclical Business. Iron Mountain has not
experienced a reduction of its business as a result of past general
economic downturns, although there can be no assurance that this would be
the case in the future. Management believes that the outsourcing of
records management may accelerate during
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economic downturns as companies focus on reducing costs through
outsourcing non-core operating functions. In addition, management believes
that companies that have outsourced records management are less likely
during economic downturns to incur the move-out costs and other expenses
associated with switching vendors or moving records management in-house.
[bullet] Inherent Growth from Existing Paper Records Customers. The
Company's paper records customers have on average generated additional
Cartons at a faster rate than stored Cartons have been destroyed or
permanently removed. From January 1, 1992 through December 31, 1996, net
Cartons from existing customers grew at an average annual rate of 6.5%.
The Company believes the consistent growth of its paper storage revenues
is the result of a number of factors, including: (i) the trend toward
increased records retention; (ii) customer satisfaction with the Company's
services; and (iii) the costs and inconvenience of moving storage
operations in-house or to another provider of records management services.
[bullet] Diversified and Stable Customer Base. As of October 3, 1997 the
Company had over 43,000 customer accounts (50,000 customer accounts, after
giving effect to the Pending Acquisitions) in a variety of industries. The
Company currently provides services to more than half of the Fortune 500
and numerous commercial, legal, banking, healthcare, accounting,
insurance, entertainment and government organizations. After giving effect
to the Recent and Pending Acquisitions, no customer accounted for more
than 2% of revenues for the six month period ended June 30, 1997. From
January 1, 1992 through December 31, 1996, average annual permanent
removals of Cartons represented only approximately 4% of total Cartons
stored.
[bullet] Capital Expenditures Related Primarily to Growth. The Company's
business requires limited annual maintenance capital expenditures.
Maintenance capital expenditures were $1.2 million, $0.9 million, $1.1
million and $0.5 million in 1994, 1995, 1996 and the six months ended June
30, 1997, respectively. From 1992 to 1996, over 90% of the Company's
aggregate capital expenditures were growth-related investments, primarily
in racking systems, new buildings and leasehold improvements, equipment
for new facilities, management information systems and facilities
restructuring. These growth-related capital expenditures are primarily
discretionary and create additional capacity for increases in revenues and
EBITDA.
Growth Strategy
The Company's objective is to be one of the largest records management
service providers in each of its geographic markets and nationally in the data
protection services market, the medical records management market and the vital
records protection services market. The Company seeks to expand through: (i)
selective acquisitions in existing and new markets; (ii) increased business
with existing customers, including the provision of new services; and (iii)
additions of new customers. The Company's acquisition strategy includes both
expanding geographically, focusing primarily on the 60 largest U.S. markets,
and increasing its presence and scale within existing markets through "fold-in"
acquisitions. The Company has significantly increased its presence in the data
protection services and medical records management markets in the last four
years. Of the acquisitions completed since 1994, 11 have been records
management companies that focused on the data protection services market and
three have been records management companies that focused on the medical
records management market. With the completion of the acquisitions of Arcus and
HIMSCORP, the Company believes that it will be the largest provider of medical
records management services and off-site data protection services. The Company
seeks to leverage existing business relationships with its customer base by
providing related ancillary services and products. Such services include a
broad range of records management consulting and outsourcing services,
including, with the acquisition of Arcus and HIMSCORP, temporary
staffing/outsourcing services in the IT, clerical and medical sectors. Products
sold by the Company are primarily storage containers and computer media, such
as magnetic tapes. See "Recent and Pending Acquisitions."
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The following table sets forth for the periods presented the Company's
approximate growth in Cartons stored in its paper records management business
by existing customers, new customers and as a result of acquisitions.
Cartons Added to Storage(1)
(In millions)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1993 1994 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cartons at Beginning of Period .................. 12.6 15.5 17.7 23.3
===== ===== ===== =====
Additions from Existing Customers
Gross Cartons Added(2) ........................ 1.9 2.6 2.5 3.3
Cartons Deleted:
Destructions ................................. (0.6) (0.9) (1.0) (1.1)
Permanent Removals ........................... (0.6) (0.6) (0.6) (0.9)
----- ----- ----- -----
Net Carton Growth from Existing Customers ...... 0.7 1.1 0.9 1.3
Additions from New Customers(2) ............... 2.2 1.0 1.4 1.4
Additions from Acquisitions ..................... 0.0 0.1 3.3 4.6
----- ----- ----- -----
Total Carton Additions ........................... 2.9 2.2 5.6 7.3
===== ===== ===== =====
Percentage Increase .............................. 23% 14% 32% 31%
</TABLE>
- --------
(1) Excludes storage volumes attributable to the Company's vital records
services and data protection services.
(2) Gross Cartons added by the RTC or its successor, the FDIC, were
approximately 0.9 million, 0.3 million, 0.3 million and 0.1 million for
1993, 1994, 1995 and 1996, respectively. RTC additions in 1993 are
included in Additions from New Customers because the initial transfer of
Cartons from the RTC commenced in the fourth quarter of 1992 and continued
into 1993. Additions in 1994, 1995 and 1996 are included in Additions from
Existing Customers.
Growth from Existing Customers
Existing Iron Mountain customers storing paper records have contributed to
storage and services revenue growth because they have on average generated
additional Cartons at a faster rate than old Cartons are destroyed or
permanently removed. In order to maximize growth opportunities from existing
customers, the Company seeks to maintain high levels of customer retention by
providing premium customer service through its decentralized customer support
staff.
The local customer support staff, working in conjunction with the
Company's corporate staff, is also responsible for marketing additional
services to existing customers, including records tracking, indexing,
customized reporting, vital records management, records management consulting
services, and, with the acquisitions of Arcus and HIMSCORP, additional
temporary staffing/outsourcing services in the IT, clerical and medical
sectors. See "Recent and Pending Acquisitions."
Additions of New Customers
The Company's direct sales force is dedicated solely to establishing new
account relationships and draws on the Company's national marketing
organization and senior management. New customer sales efforts have resulted in
the addition of more than 900 new customer accounts in each of the years 1993
through 1995 and over 1,200 new customer accounts in 1996.
During the twelve months ended June 30, 1997, the Company tripled its
sales force from 21 to 63 sales people primarily from the acquisition of
Safesite and the decision by the Company to significantly increase its direct
selling resources. Safesite's sales force brings to the Company an expertise in
cross-marketing multiple services to new and existing customers. In order to
better manage its growing sales force, Iron Mountain has established a sales
management organization consisting of eight regional sales managers located in
its primary markets throughout the country.
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Growth through Acquisitions
Iron Mountain has a successful record of acquiring and integrating smaller
records management companies. In order to capitalize on industry consolidation,
the Company in mid-1994 adopted an active acquisition strategy and implemented
changes in its management, systems and financial infrastructure, to execute
such strategy. Since June 1994, the Company has acquired or entered into
agreements to acquire 42 companies, 40 of which have been completed and two of
which are pending. The Company operates in 44 markets and intends to continue
to make fold-in acquisitions in existing markets and to make strategic
acquisitions in new geographic markets, with an emphasis on the 60 largest
markets in the United States. The Company's corporate development staff is
engaged in an ongoing review of acquisition candidates. Management believes
that Iron Mountain is well positioned to participate in the further
consolidation of the records management industry. See "Risk Factors--Risks
Associated with Acquisition Strategy" and "Recent and Pending Acquisitions."
The Company has made, and intends to continue to make, acquisitions to
increase its presence in the data protection services and medical records
management markets. Of the acquisitions completed since 1994, 11 have been
records management companies that focused on data protection services and three
have been records management companies that focused on medical records
management. With the completion of the acquisitions of Arcus and HIMSCORP, Iron
Mountain believes that it will be the industry leader in both off-site data
protection services and medical records management.
The Company seeks to expand its national presence, size and customer base
through new-market acquisitions. Management believes that the high start-up
costs of commencing operations make acquisitions an attractive means of
entering new markets. The Company seeks to acquire records management companies
in markets where management believes there is the potential for growth. Within
such markets, the Company uses a variety of criteria to evaluate acquisition
candidates, including the capacity and condition of existing storage
facilities, past and current operating performance and revenues and the
experience and depth of existing management.
The Company believes that it can use its expertise and central
administrative organization to leverage the acquisition candidate's local
market presence, promoting the development of underperforming facilities and
enhancing the value of the local assets. The Company believes that its
new-market acquisition strategy could have a number of benefits, including: (i)
continued growth in revenues and EBITDA and diversification across a greater
number of markets; (ii) introduction of the Company's storage, labor,
transportation and other operating efficiencies into new markets; (iii) the
increased utilization of efficiencies available through the Company's central
administrative and management information functions; (iv) increased market
awareness of Iron Mountain's national scope and presence; and (v) increased
overall scale, which should broaden the range of and facilitate the Company's
capital-raising activities. See "Risk Factors--Risks Associated with
Acquisition Strategy."
The Company also intends to continue to make fold-in acquisitions to
augment its operations in existing markets. The Company's goal in its existing
markets is to exploit economies of scale while maintaining high quality
service. Following a new-market acquisition, the Company seeks to increase its
business with the acquired customer base and to supplement that growth with new
customers and, potentially, with appropriate fold-in acquisitions so that the
Company may benefit from economies of scale.
In addition, Iron Mountain may consider capitalizing upon its expertise in
the records management industry by making investments in records management
businesses outside the United States. From time to time, the Company has had
discussions concerning such investments. Such investments, if consummated,
would be subject to risks and uncertainties relating to the indigenous
political, social, regulatory, tax and economic structures of countries in
those areas, as well as fluctuations in currency valuation, exchange controls,
expropriation and governmental policies limiting returns to foreign investors.
At this time, there can be no assurance as to whether any such investment will
be made or, if made, will be successful in achieving its objectives. Upon
completion of the Arcus acquisition, the Company will operate one data
protection facility in the United Kingdom.
Premium Service Strategy
Organizations selecting a provider of records management services consider
a number of factors in addition to price. Management believes that the Company
is a "premium" brand in the marketplace based upon its reputation for
reliability, customer-oriented organization, full service approach, investment
in technology and national operating presence. The Company seeks to exploit its
strengths in each of these areas to maintain customer
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relationships and to attract new customers. Management believes that the Arcus
and HIMSCORP's Record Masters brand names are similarly viewed as premium
brands in their specific markets.
Reputation for Reliability
The Company believes it has a reputation for reliability based on its more
than 45 years of operations, the continuity and depth of its management, its
successful historical growth, the quality and diversity of its customer base
which includes more than half the Fortune 500, its technological capabilities
and its size and financial resources.
Customer-Oriented Organization and Locally Responsive Management
Iron Mountain has developed a decentralized, local management structure
that brings significant management experience and stability to local markets
and allows the Company to respond directly, effectively and flexibly to
customers. Broad operating authority is delegated to regional Vice Presidents
and to local managers. In pursuing its acquisition strategy, Iron Mountain
seeks to capitalize upon the experience and strengths of existing management.
In addition, all full-time union and non-union employees participate in
incentive-based compensation programs that provide payments based on profits or
attainment of specified objectives for the unit in which they work. Iron
Mountain believes that the experience, stability and commitment of its regional
and local management is integral to its ability to provide superior customer
service and maximize growth potential.
Full Service Approach
Iron Mountain offers a full range of records management services. The
Company provides storage for all major media, including paper (which is the
dominant form of records storage), computer disks and tapes, microfilm and
microfiche, master audio and video tapes, film and optical disks, X-rays and
blueprints. Iron Mountain's principal services provided to its storage
customers include courier pick-up and delivery, filing, retrieval and
destruction of records, database management, customized reporting and disaster
recovery support. The Company also sells storage materials and provides
consulting, facilities management and other outsourcing services. The Company
believes that its ability to provide all of these services provides numerous
competitive advantages, including: (i) cross marketing opportunities from
marketing additional services to existing customers; (ii) leverage of its
general, administrative, software development and real estate expenses; and
(iii) the selling advantage provided by offering one-stop shopping to certain
customers who prefer to use one vendor for all of their records management
services.
Investment in Technology
The Company has invested over $20 million in management information
systems and computer technology since 1992 in order to provide faster and more
flexible solutions for its customers and to enhance the quality and lower the
costs of its own operations. The Company believes that its technological
capabilities, especially its Safekeeper and Safekeeper MediaLink systems, are a
significant tool in attracting new customers. The Company plans to continue to
invest in its proprietary technologies in the future. See "--Technology and
Development; Management Information Systems."
National Operating Presence
The Company believes it is one of only three records management companies
with a national operating presence (excluding Arcus, a Pending Acquisition).
Traditionally, the purchase decision for large multi-site customers has been
made at the local level. Recently, however, the Company has found that certain
large organizations have sought to obtain operating and economic efficiencies
by outsourcing a significant portion of their records management functions with
a single records management company. The Company seeks to use its national
operating presence to compete for such large multi-site customer accounts. In
addition, certain customers prefer to use large, sophisticated records
management companies for the storage of vital records and disaster recovery
programs.
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Low-Cost Operating Strategy
Iron Mountain pursues a low-cost operating strategy based primarily on
achieving economies of scale in the areas of storage, labor and transportation,
general and administrative functions and management information systems. The
Company believes that it is one of the few records management companies with
the size and resources to realize significant economies of scale in these
areas.
Storage Costs
Because occupancy costs are a major component of the Company's cost of
sales, reducing per unit storage costs is a primary strategic goal of the
Company and its real estate management staff. The Company seeks to minimize per
unit storage costs by: (i) designing racking systems and operating space to
maximize facility storage efficiency; (ii) negotiating favorable facility
leases and having facilities built to its custom specifications; and (iii)
leasing larger facilities, which, when filled, are less expensive per storage
unit to operate. Since 1991, the Company has acquired or leased 11 records
management facilities constructed per the Company's specifications. The average
Carton density (the ratio of standard Carton storage capacity to total square
feet of floor space) of these facilities is approximately twice that of the
Company's overall average Carton density. As a result of these practices,
average Carton density in the Company's facilities increased 38% from December
31, 1992 to June 30, 1997. Because medical records are inherently more active,
the Company stores these records in specialized shelving systems that provide
easy access to individual files, but generally have lower storage densities
than carton shelving. These lower densities are generally offset by higher
total revenues per unit. Management believes its expertise in designing storage
facilities and racking systems will lead to improved densities and cost
reductions in the storage of its medical records.
Labor and Transportation Efficiency
The Company has made significant investments in computer technologies for
its service operations, resulting in greater operating and logistics
efficiencies. In addition, by increasing the scale of its operations and
customer base in a local market area, the Company seeks to maximize its courier
delivery fleet usage and to increase delivery and routing efficiencies.
The Company's incentive structure has also contributed to labor
efficiency. Each of the Company's full-time employees participates in incentive
compensation programs based upon achievement of specific operating targets
designed to integrate the objectives and performance of records management
facility employees and managers. For the year ended December 31, 1996, the
Company's employees earned incentive compensation in an amount equal to
approximately 12.0% of the base wages paid by the Company.
In part as a result of the foregoing factors, while the number of Cartons
stored at the Company's facilities between December 31, 1991 and December 31,
1996 increased by approximately 19.8 million (or approximately 183%), the
Company's staff increased during the same period by approximately 430 employees
(or approximately 54%).
G&A and MIS Efficiencies
The Company's corporate staff provides support to local management in the
areas of acquisitions, marketing, facility acquisition and leasing, racking
system purchasing, finance, accounting and human resource management. In
addition, the Company's corporate staff is responsible for the design and
support of all records management technology. The Company believes that central
support in these areas provides local managers with competitive advantages over
smaller, local competitors and results in significant economies of scale.
Technology and Development; Management Information Systems
The Company pioneered the application of advanced information technology
to the records management industry. Iron Mountain's proprietary Safekeeper
system provides advanced inventory control and information access, enabling the
Company to provide faster, higher quality and more flexible solutions to its
customers and to lower the costs of its operations. Iron Mountain's Safekeeper
system exploits bar-code technology to provide inventory integrity and a
comprehensive, standardized approach to tracking, accessing and retrieving
records. Safekeeper offers state-of-the-art records management capabilities and
ease of access to customers while featuring security functions to protect
customer information from unauthorized access. The system coordinates inventory
control, order entry, billing, material sales, service activity, accounts
receivable and management reporting, and features system-driven
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quality assurance and error-prevention. Since 1992, the Company has invested
over $20 million to develop and refine its management information systems and
computer technology, including Safekeeper. Safekeeper is built on an open
systems architecture which is fully portable and can be implemented in small
processing environments with several users and in large processing environments
with hundreds of users. This allows the Company a substantial measure of
flexibility and vendor independence, and reduces the risk of technological
obsolescence.
The Company's data protection operations utilize the Company's Safekeeper
MediaLink software, a state-of-the-art media management system, which provides
integrated bar-code tracking and an electronic data interface between a
customer's data center and an Iron Mountain facility, as well as audit trail
and remote inventory query capabilities. Safekeeper MediaLink assists customers
in meeting their disaster recovery standards. Safekeeper MediaLink's
interactive VoiceLink[TM] allows access to off-site inventory directly from a
touch-tone telephone.
Safekeeper has improved the Company's customer support and operating
efficiency in the following ways:
Acquisition System Integration
Safekeeper has been designed to integrate newly acquired records
management companies and offer improved levels of customer service and records
management capabilities to customers acquired through acquisitions. The
critical components of integrating acquisition systems are the abilities to
match the acquired company's carton identifiers, location identifiers, records
descriptive data, and billing data. Safekeeper is designed with flexible,
comprehensive capabilities in each of these areas. Consequently, an acquired
company's inventory can be converted to Safekeeper without having to relabel
cartons or reset and relabel inventory locations. The customers of the acquired
company retain their records data and receive similar billing rate structures.
In addition, acquisition customers experience minimal disruption during
integration and, after conversion, gain access to advanced records management
and information access capabilities. Safekeeper utilizes a suite of conversion
routines to automate the conversion process and effectively translate customer
and inventory information.
Storage Efficiency
Safekeeper enables the Company to maximize the efficient use of storage
space at its facilities. When cartons are added or returned to storage,
Safekeeper identifies available space and the location of the customer's other
records at the facility. Because there is a continual flow of cartons into and
out of the Company's facilities, Safekeeper also permits facility operators to
utilize space that becomes available as soon as cartons are removed. Safekeeper
can pinpoint the location of any carton, enabling facility operators to quickly
determine the optimal location for new or returning cartons.
Inventory Integrity
Bar-coding and scanning are used to track a carton or a record throughout
its life cycle at Iron Mountain. Safekeeper identifies inventory discrepancies
during the order processing cycle and forces their resolution before they
affect the customer. This forced discrepancy resolution means that errors must
be resolved before an order can be closed; until the order is closed, billing
cannot be processed. Management believes that this system-driven quality
assurance is a significant advantage over the "best efforts" approach used by
many of its competitors.
Customer Information Access
Customers can access their records management data through a variety of
formats, including direct access via Safekeeper Online[TM], access on their own
PCs via Safekeeper Desktop[TM], integration of their internal system with
Safekeeper via automated file transfers and paper reports. Safekeeper Online
enables a customer to place orders directly via online access, resulting in
efficiencies for Iron Mountain order processing. It features robust querying
and searching tools to enable customers to identify records with only partial
information. Safekeeper Desktop is a PC application, run from customers'
desktop or network PCs; it provides customers with an entire set of records
management data along with user-friendly tools for querying, reporting, and
editing. Safekeeper's suite of file transfers enable customers to automatically
transfer records data and service requests from their internal system to
Safekeeper. The paper reports include inventory detail and summary, service
activity analysis, quality assurance, and management review.
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Records Management Flexibility
Safekeeper offers full life-cycle records management, from file creation
to destruction, enabling each customer to establish schedules for records
retention and destruction as dictated by the customer's specific needs.
Safekeeper can flexibly accommodate large or small amounts of records
management data in accordance with customer requirements. A series of
customer-specific features and options allows Iron Mountain to tailor the
records management functionality and reporting to the customer's needs.
Security
Safekeeper incorporates strict security protocols and procedures for all
customers to prevent unauthorized access to a client's records information.
Advanced security features that can automatically restrict access by
departmental identification and/or type of service request are available to
customers that are internally set up to provide this information.
Description of Iron Mountain Records Management Services
Iron Mountain provides storage for all major media, including paper (the
dominant form of records storage), computer disks and tapes, microfilm and
microfiche, master audio and video tapes, film and optical disks, X-rays and
blueprints. Iron Mountain's principal services provided to its storage
customers include courier pick-up and delivery, filing, retrieval and
destruction of records, database management, customized reporting and disaster
recovery support. Iron Mountain also sells storage materials and provides
consulting, outsourcing and other services.
Paper Storage Operations
Storage revenues accounted for approximately 60% of revenues in each of
the Company's last five fiscal years. Storage charges are generally billed
monthly on a per storage unit basis (usually either per unit or per cubic foot
of records) and include the provision of space, racking, computerized inventory
and activity tracking, physical security, environmental and climate control and
fire protection.
The storage of a carton begins by issuing Safekeeper bar-coded labels to
the customer. The customer packs records in cartons and affixes the bar-coded
label to each carton. Customer personnel and the Iron Mountain driver conduct a
physical count of the cartons and the driver signs for the cartons, which are
then transported to the records management facility. Upon delivery to the
facility, the cartons are subjected to a second physical count. The cartons are
delivered to available space identified by Safekeeper and the bar-coded
information is scanned into the computer together with a bar-coded location
identifier. At the same time, a computer operator enters the customer's data
describing the stored material into the computer and the system confirms that
the cartons sent match the data entered in the computer. Under the Company's
computer control system, the order can only be closed out when all requisite
steps and checks have been completed and counts and locations have been
reconciled.
Data Protection Services
Data protection services consist of the storage and rotation of back-up
and archival computer media as part of corporate disaster and business recovery
plans. Computer tapes, cartridges and disk packs are transported off-site by
the Company's courier operations on a scheduled basis to secure,
climate-controlled facilities, where they are available to customers 24 hours a
day, 365 days a year, to facilitate data recovery in the event of a disaster.
This process is managed by Iron Mountain's Safekeeper MediaLink software. Iron
Mountain also manages tape library relocation and supports disaster recovery
testing and execution.
Medical Records Services
Medical records management services principally include the handling,
storage, filing, processing and retrieval of medical records used by hospitals,
private practitioners, and other medical institutions. Medical records tend to
be more active in nature and are typically stored on specialized shelving
systems that provide access to individual files. Medical records management
services also include recurring project work and ancillary services. Recurring
project work involves the on-site removal of aged patient files and related
computerized file indexing. Ancillary medical records management services
include release of information, temporary staffing, contract coding, facilities
management and imaging.
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Vital Records Services
Vital records contain critical or irreplaceable data such as master audio
and video recordings, film, software source code and other highly proprietary
information. Vital records may require special facilities or services, either
because of the data they contain or the media on which they are recorded. The
Company's charges for providing enhanced security and special
climate-controlled environments for vital records are higher than for typical
storage functions. The Company provides the same ancillary services for vital
records as it provides for its other storage operations.
Service and Courier Operations
Services operations include adding records to storage, temporary removal
of records from storage, refiling of removed records, permanent withdrawals
from storage and destruction of records. Service charges are generally assessed
for each procedure on a per unit basis. The Safekeeper system controls the
service processes from order entry through transportation and invoicing.
Courier operations consist primarily of the pickup and delivery of records
upon customer request. Courier delivery schedules can be tailored to fit
customers' needs, but generally customer orders received by 4:00 p.m. on a
business day are delivered the following business day. The Company also
provides same-day and immediate delivery during business hours and emergency
delivery at night and on weekends and holidays. Charges for courier services
are based on urgency of delivery, volume and location and are billed monthly as
incurred. The Company currently utilizes a fleet of approximately 420 owned or
leased delivery vehicles.
Outsourcing and Staffing Services
Iron Mountain offers a variety of additional services, which customers may
request or contract for on an individual basis. These services include
inventorying records, packing records into cartons or other containers, and
creating computerized indexes of files and individual documents. The Company
also provides services for the management of active records programs. The
Company can provide these services, which generally include document and file
processing and storage, both off-site at its own facilities and by supplying
its own personnel to perform management functions on-site at the customer's
premises.
In addition to providing temporary staffing services for records
management customers, upon completion of the Arcus and HIMSCORP acquisitions,
the Company will provide temporary staffing resources in the IT, clerical and
medical fields. IT staffing services include temporary or project staffing and
permanent placements for data center operations and MIS functions, including
supplying data center clerks, tape librarians, systems operators and software
programmers.
Additional Services and Products
The Company provides professional consulting services to large customers,
enabling them to develop and implement comprehensive records management
programs. Iron Mountain's consulting business draws on the Company's experience
in records management to analyze the practices of such companies and assist
them in creating more effective programs of records management. The Company's
consultants work with such customers to develop policies for document review,
analysis and evaluation and for scheduling of document retention and
destruction.
The Company also sells a full line of specially designed corrugated
cardboard, metal and plastic storage containers and magnetic media products.
Customers
The Company's customer base is diversified in terms of revenue and
industry concentration. Iron Mountain tracks customer accounts, which are based
on invoices. Accordingly, depending upon how many invoices have been arranged
at the request of a customer, one organization may represent multiple customer
accounts. As of October 3, 1997 the Company had over 43,000 customer accounts
(50,000 customer accounts, after giving pro forma effect to the Pending
Acquisitions) in a variety of industries. The Company currently provides
services to more than half of the Fortune 500 and numerous commercial, legal,
banking, healthcare, accounting, insurance, entertainment and government
organizations. After giving effect to the Recent and Pending Acquisitions, no
customer accounted for more than 2% of revenues for the six month period ending
June 30, 1997.
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Marketing and Sales
The Company's selling organization consists of telemarketing, direct sales
and account management, all supported by a corporate marketing group.
Telemarketing consists of seven sales people who use advanced database
telemarketing techniques to identify and source account leads. Leads are
pursued by the direct salesforce which is comprised of 63 local sales
representatives and 10 regional and national account managers. Once an account
is established, it is assigned to an account manager. Over 50 account managers
focus on serving the needs of new and existing customers and selling additional
services to this customer base. The corporate marketing organization provides
training and marketing communications as sales support functions.
Competition
The Company competes with two other national records management companies
(excluding Arcus, a Pending Acquisition) as well as a large number of local and
regional concerns. The Company believes that competition for customers is based
on price, reputation for reliability, quality of service and scope and scale of
technology, and believes that it generally competes effectively based on these
factors. Management believes that, except for Pierce Leahy Corporation, all of
these competitors have United States based revenues significantly lower than
those of the Company. Upon completion of the Pending Acquisitions, the Company
believes that the Company will be the industry leader in the specialized
records management activities of off-site data protection services, medical
records management services and vital records management services. To
accommodate growth, a records management vendor must invest in incremental
storage capacity, which requires added warehouses, racking systems, and related
equipment including computer systems capable of tracking increasingly large
inventories. The amount of such investment is significant relative to the
immediate return that can be realized, and the faster a vendor grows, the more
capital is required. As a result, the industry trend toward consolidation will,
in management's opinion, continue. In addition, the Company faces competition
from the internal document handling capability of its current and potential
customers. There can be no assurance that these organizations will outsource
more of their document management needs or that they will not bring in-house
some or all of the functions they currently outsource. The Company also faces
competition for acquisition candidates.
The substantial majority of the Company's revenues have been derived from
the storage of paper documents and from related services. Such storage requires
significant physical space. Alternative technologies for generating, capturing,
managing, transmitting and storing information have been developed, many of
which require significantly less space than paper. Such technologies include
computer media, microforms, audio/video tape, film, CD-ROM and optical disk.
None of these technologies has replaced paper as the principal means for
storing information. However, there can be no assurance that one or more
non-paper-based technologies (whether now existing or developed in the future)
may not in the future significantly reduce or supplant the use of paper as a
preferred medium, which could in turn adversely affect the Company's business.
Properties
As of September 30, 1997, Iron Mountain conducted operations through 133
leased and 23 owned facilities containing a total of 8.9 million square feet of
space. The leased facilities typically have initial lease terms of 10 years
with options to renew for an additional 10 years. The weighted average
remaining term of the leases on these facilities is approximately eight years.
In addition, many of the leases contain either a purchase option or a right of
first refusal upon the sale of the property. The leases include one property
leased from affiliates of the Company. See "Management--Executive
Compensation--Compensation Committee Interlocks and Insider Participation" and
Note 8 of Notes to the Company's Audited Consolidated Financial Statements.
The following table sets forth the records management facilities owned or
leased by the Company (directly or through its subsidiaries) in the geographic
locations indicated below as of September 30, 1997 and pro forma, giving effect
to the acquisitions consummated after September 30, 1997 and the Pending
Acquisitions.
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<TABLE>
<CAPTION>
Pro
Location Actual Forma
- ---------------------- -------- ------
<S> <C> <C>
Arizona ............ 5 7
California ......... 28 44
Colorado ............ 5 7
Connecticut ......... 2 3
Delaware ............ 1 1
Florida ............ 16 19
Georgia ............ 9 10
Illinois ............ 9 10
Kansas ............... 1 1
Louisiana ............ 2 4
Maryland ............ 3 4
Massachusetts ...... 11 11
Michigan ............ 6 8
Minnesota ............ 6 6
Missouri ............ 2 3
Nevada ............... 0 1
New Hampshire ...... 1 1
New Jersey ......... 3 11
New York ............ 11 16
North Carolina ...... 1 2
Ohio ............... 7 9
Oklahoma ............ 0 1
Oregon ............... 2 5
Pennsylvania ......... 2 5
Rhode Island ......... 1 1
Tennessee ............ 2 2
Texas ............... 11 14
Utah ............... 1 1
Virginia ............ 5 5
Washington ......... 1 2
Wisconsin ............ 2 2
London (U.K.) ...... 0 1
---- ----
Total ............ 156 217
==== ====
</TABLE>
The Company or its principal subsidiary is a guarantor of a substantial
portion of the leases to which other subsidiaries are party. See Note 8 of
Notes to the Company's Audited Consolidated Financial Statements for
information regarding the minimum annual rental commitments of the Company.
Employees
A key feature of the Company's operating strategy is its decentralized
management structure and reliance on local management operating in local
business environments. The Company's operations are divided into five areas
comprising 15 local management regions to maximize marketing and operating
effectiveness and to minimize supervisory costs. The management regions, each
of which is managed by a Vice President, are further divided into market based
districts, each managed by a General Manager. The management regions are
overseen by offices in Boston and Los Angeles, but regional Vice Presidents and
General Managers have broad operating authority. The Company's headquarters
staff performs a variety of central administrative and support functions in
order to maximize the time and resources that local personnel can devote to
customer service and client development.
The Company had approximately 2,000 full-time employees as of June 30,
1997, of whom approximately 94% were employed at the field level and 6% at the
Company's headquarters.
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Approximately 8% of the Company's employees are represented by various
Teamsters Union locals under four different agreements. One of these
agreements, currently covering 14 employees, is scheduled to expire in March
1999. In addition, in one of Iron Mountain's markets the Company is currently
in negotiations with a union local with respect to 45 employees.
All non-union employees are eligible to participate in the Company's
benefit programs, which include medical, dental, life, short and long-term
disability and accidental death and dismemberment plans. Unionized employees
receive these types of benefits through their unions. In addition to base
compensation and other usual benefits, all full-time union and non-union
employees participate in some form of incentive-based compensation program that
provides payments based on profits, collections, or attainment of specified
objectives for the unit in which they work. Management believes that the
Company has good relationships with its employees and unions.
Insurance
The Company carries a comprehensive property insurance policy with
insurers that it believes to be reputable and in amounts that it believes to be
appropriate, covering replacement cost of real and personal property, including
improvements. Subject to sub-limits, the policy also covers extraordinary
expenses associated with business interruption and damage or loss from flood or
earthquake, subject to certain deductibles. Separate policies for California
earthquake insurance carry other deductibles that may be significant. Iron
Mountain also maintains general liability and excess liability insurance
covering bodily injury, property damage and personal injury. See "Risk
Factors--Casualty."
The Company's standard form of contract sets forth an agreed maximum value
for each carton or other storage unit held by the Company as a limitation on
liability for loss or damage, as permitted under the Uniform Commercial Code.
In contracts containing such limits, such values are nominal, and the Company
believes that in typical circumstances its liability would be so limited in the
event of loss or damage relating to the value of information stored on media
held by the Company. However, certain of the Company's agreements with certain
large volume accounts and certain of the contracts assumed by the Company as a
result of its acquisitions contain no such limits or contain higher limits or
supplemental insurance arrangements.
Environmental Matters
Under various environmental laws, an owner of real estate or a lessee
conducting operations thereon may become liable for the costs of investigation,
removal or remediation of soil and groundwater contaminated by certain
hazardous substances or wastes or petroleum products. Certain such laws impose
cleanup responsibility and liability without regard to whether the owner or
operator of the real estate or operations thereon knew of or was responsible
for the contamination, and whether or not operations at the property have been
discontinued or title to the property has been transferred. In addition, the
presence of such substances, or the failure to properly remediate such property
may adversely affect the current property owner's or operator's ability to sell
or rent such property or to borrow using such property as collateral. The owner
or operator of contaminated real estate also may be subject to common law
claims by third parties based on damages and costs resulting from off-site
migration of the contamination.
Certain environmental laws govern the removal, encapsulation or
disturbance of ACMs. Such laws may impose liability for the release of ACMs and
may enable third parties to seek recovery from owners or operators of real
estate for personal injury associated with exposure to such substances. The
Company is aware of the presence of ACMs at some of its facilities, but
believes that such materials are in acceptable condition at this time. The
Company believes that future costs related to any remediation of ACMs at these
facilities will not be material, either on an annual basis or in the aggregate,
although there can be no assurance with respect thereto.
In addition, certain of the properties formerly or currently owned or
operated by the Company were previously used for industrial or other purposes
that involved the use or storage of hazardous substances or petroleum products
or the generation and disposal of hazardous wastes and, in some instances,
included the operation of USTs. In connection with its former and current
ownership or operation of certain properties, the Company may be potentially
liable for environmental costs such as those discussed above.
The Company has from time to time conducted certain environmental
investigations and remedial activities at certain of its former and current
facilities, but an in-depth environmental review of all properties has not been
conducted by or on behalf of the Company. The Company believes that it is in
substantial compliance with all
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applicable material environmental laws. The Company has not received any
written notice from any governmental authority or third party asserting, and is
not otherwise aware of, any material noncompliance, liability or claim relating
to hazardous substances or wastes, petroleum products or material environmental
laws applicable to Company operations in connection with any of its present or
former properties. However, no assurance can be given that there are no
environmental conditions for which the Company might be liable in the future or
that future regulatory action, as well as compliance with future environmental
laws, will not require the Company to incur costs for or at its properties that
could have a material adverse effect on the Company's financial condition and
results of operations.
Legal Proceedings
The Company is involved in litigation from time to time in the ordinary
course of business. In the opinion of management, no material legal proceedings
are pending to which the Company, or any of its properties, is subject.
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MANAGEMENT
Directors, Executive Officers and Certain Other Officers
The Directors, Director nominees, executive officers and certain other
officers of the Company are as follows:
<TABLE>
<CAPTION>
Names of Directors and Executive Officers Age Position
- ------------------------------------------- ----- ------------------------------------------------
<S> <C> <C>
C. Richard Reese(1) ..................... 51 Chairman of the Board of Directors and Chief
Executive Officer
David S. Wendell ........................ 43 President and Chief Operating Officer, Director
John F. Kenny, Jr. ........................ 40 Executive Vice President and Chief Financial
Officer
Eugene B. Doggett(1) ..................... 61 Executive Vice President, Director
Harold E. Ebbighausen ..................... 42 Executive Vice President
Robert G. Miller ........................ 40 Executive Vice President
Christopher Neefus ........................ 41 Executive Vice President
Kenneth F. Radtke, Jr. .................. 52 Executive Vice President
Robert P. Swift ........................... 56 Executive Vice President
Constantin R. Boden (2)(3) ............... 61 Director
Arthur D. Little(2)(3) .................. 53 Director
Vincent J. Ryan (1)(3) .................. 61 Director
B. Thomas Golisano ........................ 55 Director
Names of Director Nominees
- --------------------------
Kent P. Dauten(4) ........................ 42 Director Nominee
Clarke H. Bailey(5) ..................... 43 Director Nominee
Names of Certain Other Officers Age Position
- ------------------------------- --- --------
Jean A. Bua .............................. 39 Vice President and Corporate Controller
Michael Karp .............................. 32 Vice President, Sales and Marketing
Joseph J. Larizza ........................ 55 Vice President and Chief Information Officer
Van Latham .............................. 39 Vice President, Human Resources
John P. Lawrence ........................ 46 Vice President and Treasurer
Kenneth A. Rubin ........................ 35 Vice President, Business Development
T. Anthony Ryan ........................... 57 Vice President, Real Estate
</TABLE>
- --------
(1) Member of the Executive Committee; Mr. Ryan is the Chairman of the
Executive Committee.
(2) Member of the Audit Committee; Mr. Boden is the Chairman of the Audit
Committee.
(3) Member of the Compensation Committee; Mr. Little is the Chairman of the
Compensation Committee.
(4) Upon the consummation of the HIMSCORP Merger, Mr. Dauten will be appointed
to serve as a director.
(5) Upon the consummation of the Arcus Merger, Mr. Bailey will be appointed to
serve as a director.
The Board of Directors currently consists of seven directors. Upon the
consummation of each of the Arcus and HIMSCORP acquisitions one additional
director will be added. There are three classes of directors who serve for
three-year terms and are elected on a staggered basis, one class of directors
standing for election each year. Directors of each class will thereafter hold
office until the third annual meeting of the stockholders of the Company
following their election or until their successors are elected and qualified.
The executive officers and other officers were elected by the Board of
Directors on May 29, 1997 with the exception of Messrs. Ebbighausen and Neefus,
who were appointed in July 1997. All executive officers and other officers hold
office at the discretion of the Board of Directors until the first meeting of
the Board of Directors following the next annual meeting of stockholders and
until their successors are chosen and qualified.
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Directors, Director Nominees and Executive Officers
C. Richard Reese is the Chairman of the Board of Directors of Iron
Mountain, a position he has held since November 1995, and the Chief Executive
Officer of Iron Mountain, a position he has held since December 1981. Prior to
November 1995, Mr. Reese was the President of Iron Mountain, a position he had
held since 1981. Mr. Reese is also a Director of Schooner Capital Corporation
("Schooner"), which owns approximately 16% of the outstanding stock of the
Company. Prior to joining Iron Mountain, he lectured at Harvard Business School
in "Entrepreneurship" and provided consulting services to small and
medium-sized emerging enterprises. Mr. Reese has also served as president and a
Director of PRISM. He holds a Master of Business Administration degree from
Harvard Business School.
David S. Wendell is the President and Chief Operating Officer and a
Director of Iron Mountain, positions that he has held since November 1995.
After practicing law with Brown & Wood, Mr. Wendell joined Iron Mountain in
1984, where he has served in a variety of positions. Prior to November 1995, he
was Executive Vice President, Atlantic Area and prior to 1991, he was Vice
President, New England Region. He holds a Master of Business Administration
degree from Harvard Business School and a Juris Doctor degree from the
University of Virginia.
John F. Kenny, Jr. is an Executive Vice President and the Chief Financial
Officer of Iron Mountain. Mr. Kenny joined Iron Mountain in 1991, and held
operating responsibilities as regional Vice President of New England and later
Northeast operations before assuming the position of Vice President of
Corporate Development in 1995. Prior to 1991, he was Vice President of CS First
Boston Merchant Bank, New York, with responsibility for risk capital
investments. Mr. Kenny is also a director and the Treasurer of PRISM. He holds
a Master of Business Administration degree from Harvard Business School.
Eugene B. Doggett is an Executive Vice President and a Director of Iron
Mountain, positions that he has held since 1990. From 1987 until May 1997, Mr.
Doggett was the Chief Financial Officer of Iron Mountain. Mr. Doggett is also a
Director of Schooner. Prior to joining the Company, he had extensive experience
in commercial and investment banking, as well as financial and general
management experience at senior levels. He holds a Master of Business
Administration degree from Harvard Business School.
Harold E. Ebbighausen was appointed Executive Vice President of Iron
Mountain effective July 1, 1997. He has been serving as Vice President of Data
Protection Services since joining the Company in September 1996. Prior to
joining Iron Mountain, Mr. Ebbighausen was Vice President of Document
Management Services with INSCI Corporation, a software provider for computer
output and data storage solutions to optical and CD technology. Previously, he
held a number of field management positions with Anacomp, Inc., a service
bureau provider in the micrographics industry.
Robert G. Miller is an Executive Vice President of Iron Mountain, a
position that he has held since December 1996. Mr. Miller joined Iron Mountain
in 1988 and held various positions including District Manager from 1988 through
1991 and regional Vice President from 1991 through 1996. Prior to 1988, Mr.
Miller was employed as a District Manager at Bell & Howell Records Management
Company.
Christopher Neefus is an Executive Vice President of Iron Mountain, a
position that he has held since August 1997. Mr. Neefus was a Vice President of
Sales and Customer Service for ASI, Inc., a software provider for the storage
of computer generated information from 1995 until joining the Company. From
1990 to 1995, Mr. Neefus was the Region Vice President of Anacomp, Inc., a
service bureau provider in the micrographics industry. Mr. Neefus holds a
Bachelors of Arts degree in Communications Arts from Hofstra University.
Kenneth F. Radtke, Jr. is an Executive Vice President of Iron Mountain, a
position that he has held since June 1996. Prior to June 1996, Mr. Radtke was
Northeast Regional Vice President and prior to 1995 was Sales Manager, New York
Region. Mr. Radtke has worked in the records and information industry since
1988 as President and Chief Executive Officer, Dataport Company, Inc. and
Senior Vice President, Arcus. He holds a graduate degree from the University of
Wisconsin, Graduate School of Banking.
Robert P. Swift is an Executive Vice President of Iron Mountain, a
position he has held since November 1995. Prior to November 1995, Mr. Swift was
the Executive Vice President, Western Area of Iron Mountain and prior to 1988,
Mr. Swift was employed in various positions at Bell & Howell Records Management
Company.
63
<PAGE>
Constantin R. Boden is a Director of Iron Mountain, a position he has held
since December 1990. Mr. Boden is on the advisory board of Boston Capital
Ventures, a risk capital concern. For 33 years, until January 1995, Mr. Boden
was employed by Bank of Boston, most recently as Executive Vice President,
International Banking. He holds a Master of Business Administration degree from
Harvard Business School.
Arthur D. Little is a Director of Iron Mountain, a position he has held
since November 1995. Mr. Little is a principal of The Little Investment
Company, which he founded in 1992. Prior to that, he was Managing Director of
and also a partner in Narragansett Capital, Inc., a private investment firm. He
holds a Bachelor of Arts degree in history from Stanford University.
Vincent J. Ryan is a Director of Iron Mountain. Mr. Ryan is the founder of
Schooner and has served as Chairman and Chief Executive Officer of Schooner
since 1971. Prior to November 1995, Mr. Ryan served as Chairman of the Board of
Directors of Iron Mountain. He holds a Bachelors of Arts degree in English from
Boston University.
B. Thomas Golisano is a Director of Iron Mountain, a position he has held
since June 1997. He founded Paychex Inc., a publicly held, national payroll
service company, in 1971 and has served for more than five years as its
Chairman, President and Chief Executive Officer. Mr. Golisano serves on the
Board of Trustees of Rochester Institute of Technology and on the boards of
several privately held companies. He has also served on the boards of numerous
non-profit organizations and is the founder of the B. Thomas Golisano
Foundation.
Kent P. Dauten is a proposed Director of Iron Mountain. He has served as
President of Keystone Capital, Inc., a venture capital firm, since March 1994
and as President of HIMSCORP since February 1995. From January 1993 to March
1994, he was Senior Vice President of Madison Dearborn Partners, Inc. and from
September 1979 to December 1992, he was Senior Vice President of First Chicago
Venture Capital. Mr. Dauten currently serves as a director of Health Management
Associates, Inc. of Naples, Florida, a NYSE-listed hospital management firm and
is a Trustee Nominee for Elder Trust of Kennett Square, Pennsylvania, a newly
formed health care real estate investment trust. Mr. Dauten holds a Master of
Business Administration from the Harvard Business School and a Bachelor of Arts
in Economics from Dartmouth College.
Clarke H. Bailey is a proposed Director of Iron Mountain. He is
Co-Chairman and Director of Hudson River Capital LLC, a private investment
company. Mr. Bailey is also currently the Chairman and Chief Executive Officer
of each of AGI, United Acquisition Company and Arcus, positions which he has
held since 1995, and is a Director of Connectivity Technologies Inc. and Swiss
Army Brands, Inc. Mr. Bailey also serves as Director of Glenayre Technologies,
Inc., a manufacturing company in the telecommunications industry, and serves as
the Chairman of its Executive Committee. Prior to joining Glenayre in 1990, Mr.
Bailey was a Managing Director at Oppenheimer & Co., Inc. where he served in a
variety of capacities, most recently as head of the Principal Investments
Department. He holds a Master of Business Administration degree from The
Wharton School, University of Pennsylvania.
Certain Other Officers
Jean A. Bua is Vice President and Corporate Controller of Iron Mountain.
Ms. Bua joined Iron Mountain in such capacity in March 1996. From 1993, to
1996, Ms. Bua was the Corporate Controller for Duracraft Corp., a consumer
products manufacturer. Prior to that, Ms. Bua was the accounting manager for a
high-tech manufacturer and was a management consultant for Ernst & Young. She
holds a Master of Business Administration degree from the University of Rhode
Island. Ms. Bua is a certified public accountant.
Michael Karp is Vice President, Sales and Marketing of Iron Mountain. Mr.
Karp joined Iron Mountain in June 1997 as a result of the Safesite merger. From
1988 until June 1997, he was employed by Safesite in various positions,
including as branch manager, regional manager and director of national sales.
Mr. Karp holds a Bachelors degree in business from Arizona State University.
Joseph J. Larizza is Vice President and Chief Information Officer of Iron
Mountain, with responsibility for management information systems, including
oversight of the development of Iron Mountain's Safekeeper system. Prior to
joining Iron Mountain in 1996, Mr. Larizza was the chief information officer at
Service America, a large food service corporation and, prior to that, chief
information officer at the Advertising Checking Bureau, with responsibility for
information systems and development of client-server products. He holds a
Bachelors degree in management from Post College.
64
<PAGE>
Van Latham is Vice President of Human Resources of Iron Mountain. Mr.
Latham joined Iron Mountain in 1997. For the preceding 10 years he was employed
by PepsiCola and Pizza Hut, most recently as human resources director of
PepsiCola East. He holds a Ph.D. in industrial psychology from Wayne State
University.
John P. Lawrence is Vice President and Treasurer of Iron Mountain, with
responsibility for acquisition integration, internal audit, risk management and
purchasing and contracting. Mr. Lawrence has been associated with Iron Mountain
since 1988. Prior to 1988, he worked for Hewlett Packard for nine years in
various management positions in finance, control, marketing and manufacturing.
He holds a Master of Business Administration degree from Harvard Business
School.
Kenneth A. Rubin is Vice President of Business Development of Iron
Mountain. Mr. Rubin joined Iron Mountain in 1989. Prior to 1989, he was
Director of both Sales and Marketing for Leahy/Instar, a records management
company. He was also a founding director of Software Escrow Security. He holds
a Bachelors degree in political science from Drew University.
T. Anthony Ryan is Vice President of Real Estate of Iron Mountain. Mr.
Ryan manages the real estate of Iron Mountain and is responsible for
identifying and evaluating new facility opportunities and negotiating long-term
leases. He has been involved in real estate development for 22 years. His work
experience includes positions as Director of Development for Gilbane Property,
Vice President of CRJ Investments and, more recently, Vice President and
Partner at the Linpro Company. He holds a Bachelors degree in history from The
George Washington University.
Biographical information of the Directors, Director nominees, executive
officers and other officers is as of September 26, 1997.
Executive Compensation
The following table provides certain information concerning compensation
earned by the Chief Executive Officer and the four highest paid executive
officers serving in such capacity at December 31, 1996 (collectively, the
"Named Executive Officers") for the years ended December 31, 1994, December 31,
1995 and December 31, 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
-------------------------------------
Annual Compensation
-------------------------------- Number of Shares
Name and Underlying All Other
Principal Position Year Salary Bonus Options Compensation (1)
- ------------------------------- ------ ---------- ---------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
C. Richard Reese ............ 1996 $268,958 $165,000 -- $2,250
Chairman of the Board and 1995 261,765 200,000 -- 1,790
Chief Executive Officer 1994 255,400 125,000 -- 1,623
David S. Wendell ............ 1996 203,550 125,000 40,000 2,250
President, Chief Operating 1995 136,627 62,731 35,469 1,573
Officer and Director 1994 129,800 50,000 -- 1,352
Eugene B. Doggett ............ 1996 194,639 100,000 -- 2,250
Executive Vice President and 1995 192,274 165,000 -- 1,790
Director 1994 187,500 93,750 -- 1,623
Robert P. Swift ............ 1996 133,600 50,800 15,000 1,905
Executive Vice President 1995 131,119 24,397 8,096 (2) 1,243
1994 126,600 16,740 -- 865
Kenneth F. Radtke, Jr. ...... 1996 119,800 33,759 20,000 1,350
Executive Vice President
</TABLE>
- --------
(1) Reflects Iron Mountain's matching contribution to the Iron Mountain Profit
Sharing Retirement Plan for each individual. The amounts shown for 1996
are estimated maximum contributions; the actual contributions have not yet
been calculated.
(2) These options were granted in 1995 contingent upon Iron Mountain's
completion of its Initial Public Offering, which was consummated in 1996.
65
<PAGE>
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of Mr. Little, who is the Chairman of
the Committee, and Messrs. Boden and Ryan. Messrs. Reese and Doggett are
executive officers of Iron Mountain and are directors of Schooner. Mr. Ryan is
the Chairman of the Board and principal stockholder of Schooner.
In each of 1994 and 1995, Iron Mountain paid fees of $111,048 to Schooner
for consulting services rendered by Mr. Ryan. These services and fees
terminated as of December 31, 1995.
Iron Mountain Records Management, Inc., a wholly owned subsidiary of the
Company ("IMRM"), is the tenant under a lease dated January 1, 1991 for a
31,500 square-foot building in Houston, Texas. The owner of the building is IM
Houston (CR) Limited Partnership, a Texas limited partnership, of which
Mountain Realty, Inc., a Massachusetts corporation whose sole stockholder is
Vincent J. Ryan, is the sole general partner, and the limited partners of which
are C. Richard Reese and Eugene B. Doggett. The term of the lease expires
December 31, 2000, with two five-year extension options exercisable by IMRM.
IMRM currently pays annual rent in the amount of approximately $99,000, subject
to adjustment in 1999 (and in the option periods if the term is extended) based
upon percentage changes in the consumer price index, with a floor of 3% and a
ceiling of 5%, compounded annually. As tenant, IMRM is responsible for taxes,
insurance and maintenance. The space is used by IMRM as a records management
facility. During 1994, 1995 and 1996, IMRM paid rent in the annual amount of
$88,000, $93,000 and $93,625 respectively, under the lease. The lease is, in
the opinion of management, on commercially reasonable terms, no less favorable
to IMRM than could have been obtained from an unaffiliated party at the time of
the transaction.
The Company paid compensation of $144,000, $154,000 and $155,720 for 1994,
1995 and 1996, respectively, to Mr. T. Anthony Ryan. Mr. Ryan is Vice
President, Real Estate, of the Company and is the brother of Mr. Vincent J.
Ryan, a Director and the former Chairman of the Board of the Company. The
Company believes that the terms of Mr. Ryan's employment are no less favorable
to it than would be negotiable with an unrelated third party.
The Company was indebted to Schooner in the principal amount of $382,500
under a junior subordinated note, which was incurred by the Company in 1990 in
connection with an acquisition. Schooner subsequently acquired the note from
the holder as an investment. The Company prepaid such indebtedness in its
entirety with a portion of the net proceeds from the sale of the 1996 Notes.
Schooner leases space from the Company at the Company's corporate
headquarters. Such lease is a tenancy-at-will and may be terminated by either
the Company or Schooner at any time. As consideration for such lease, Schooner
pays rent to the Company based on its pro rata share of all expenses related to
the use and occupancy of the premises. The rent paid by Schooner to the Company
under such lease was approximately $58,000, $49,000 and $68,000 in 1994, 1995
and 1996, respectively.
Employees of Schooner were eligible to participate in the Iron Mountain
Profit Sharing Retirement Plan, a Section 401(k) plan, as well as the Company's
group medical, dental, life, disability and accidental death and dismemberment
arrangements (the "Company Benefit Plans"). Schooner reimbursed the Company for
costs incurred as a result of the participation of Schooner employees in the
Company Benefit Plans. Participation by Schooner employees in the Company
Benefit Plans terminated shortly after the consummation of the Initial Public
Offering.
Certain Transactions
In 1993, in connection with the employment of David S. Wendell, Iron
Mountain made demand loans to Mr. Wendell in an aggregate principal amount of
$70,000 in connection with Mr. Wendell's purchase of a home. The loans bore
interest at a rate equal to Iron Mountain's cost to borrow such funds and were
secured by a second mortgage on the home. The loans were repaid in full in
March 1997.
Director Compensation
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each Director who is not an employee of
the Company receives an annual retainer fee of $10,000 as compensation for his
or her services as a member of the Board of Directors and is also paid $2,500
per quarter (to a maximum of $10,000 per year) for attendance at meetings (the
"Director's Compensation"). Directors may be granted options, either in lieu of
or in addition to the Director's Compensation, under the Company's 1995 Stock
Incentive Plan (the "Iron Mountain Stock Option Plan").
66
<PAGE>
Stock Option Information
Effective November 30, 1995, Iron Mountain instituted the Iron Mountain
Stock Option Plan, which is administered by the Stock Incentive Plan
Subcommittee of the Compensation Committee, as a restatement of Iron Mountain's
then-existing stock option plan. The Iron Mountain Stock Option Plan was
amended by the Board of Directors on March 3, 1997 and by the Company's
stockholders on May 29, 1997. The purpose of the Iron Mountain Stock Option
Plan is to encourage key employees, Directors, and consultants of Iron Mountain
and its subsidiaries who render services of special importance to, and who have
contributed or may be expected to contribute materially to the success of, Iron
Mountain or a subsidiary to continue their association with Iron Mountain and
its subsidiaries by providing favorable opportunities for them to participate
in the ownership of Iron Mountain and in its future growth through the granting
of restricted shares, options to acquire Common Stock ("Options"), stock
appreciation rights and other rights to compensation in amounts determined by
the value of the Common Stock. Restricted shares, stock appreciation rights and
other rights are referred to collectively as "Other Rights."
The total number of shares of Common Stock that may be subject to Options
and Other Rights under the Iron Mountain Stock Option Plan may not exceed
1,400,000 and grants to any single employee may not exceed in the aggregate
250,000 shares. In no event will any Option intended to qualify as an incentive
stock option (an "ISO") within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), be exercisable after the
expiration of ten years after the date of grant or have an exercise price that
is less than the fair market value of Common Stock on the date the ISO is
granted.
Awards of Options and Other Rights under the Iron Mountain Stock Option
Plan are made by the Stock Incentive Plan Subcommittee of the Compensation
Committee, consisting of Messrs. Little and Boden, which selects the persons to
whom Options and Other Rights are to be granted and determines the number or
value and the terms and conditions of Options or Other Rights granted,
including the exercise price, the term and the vesting of such Option or Other
Right. Each Option is evidenced by an option agreement setting forth the terms
of such Option. In the case of any employee who owns (or is considered under
Section 424(d) of the Code as owning) stock possessing more than 10% of the
total combined voting power of all classes of stock of Iron Mountain or any of
its subsidiaries, no ISO shall be exercisable after the expiration of five
years from its date of grant and the exercise price of such ISO shall be at
least 110% of the fair market value of Common Stock on the date such ISO is
granted.
The exercise price in respect of any Option may be paid in cash, in shares
of Common Stock owned by the optionee, by delivery of a recourse promissory
note secured by the Common Stock acquired upon exercise of the Option or by
means of a "cashless exercise" procedure in which a broker transmits to Iron
Mountain the exercise price in cash, either as a margin loan or against the
optionee's notice of exercise and confirmation by Iron Mountain that it will
issue and deliver to the broker stock certificates for that number of shares of
Common Stock having an aggregate fair market value equal to the exercise price
or agrees to pay the Option price to Iron Mountain in cash upon its receipt of
stock certificates. In its discretion, the Stock Incentive Plan Subcommittee of
the Compensation Committee may grant a new option to purchase the number of
shares of Common Stock delivered to Iron Mountain in full or partial payment of
the option price, upon the exercise of any Option, or in full or partial
payment of the tax withholding obligations resulting from the exercise of any
Option.
The following table sets forth certain information concerning the grant of
Options to purchase Common Stock to the Named Executive Officers in the year
ended December 31, 1996.
67
<PAGE>
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Percent of Value at Assumed
Total Annual Rates of
Number of Options Stock
Securities Granted to Appreciation for
Underlying Employees Exercise Option Terms (1)
Options in Fiscal Price Per Expiration --------------------
Name Granted Year 1996 (Share) Date 5% ($) 10% ($)
- ------------------------------------------- ------------ ----------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
David S. Wendell, President and Chief
Operating Officer ..................... 40,000 10.3% $ 15.375 4/8/2006 $386,600 $980,200
Robert P. Swift, Executive Vice President 15,000 3.9 15.375 4/8/2006 144,975 367,575
Kenneth F. Radtke, Jr., Executive Vice
President .............................. 20,000 5.1 15.375 4/8/2006 193,300 490,100
</TABLE>
- --------
(1) Potential Realizable Value is based on the assumed growth rates for an
assumed ten-year option term. 5% annual growth results in an Common Stock
price per share of $25.04 and 10% results in an Common Stock price per
share of $39.88 respectively, for such term. The actual value, if any, an
executive officer may realize will depend on the excess of the market
price of the Common Stock over the exercise price on the date the option
is exercised, so that there is no assurance the value realized by an
executive will be at or near the amounts reflected in this table.
The following table sets forth certain information with respect to the
unexercised Options to purchase Common Stock granted to the Named Executive
Officers. None of such individuals exercised any Options during the year ended
December 31, 1996.
Fiscal Year End Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money-Options at
Options at December 31, 1996 December 31, 1996 (1)
------------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
David S. Wendell, President and Chief
Operating Officer .............................. 79,960 84,383 $1,900,329 $1,307,850
Robert P. Swift, Executive Vice President ...... 15,420 26,952 366,472 429,122
Kenneth F. Radtke, Jr., Executive Vice
President .................................... 795 25,110 14,048 380,966
</TABLE>
- --------
(1) Based on a year end value of $30.25 per share, less the exercise price.
68
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to Iron Mountain
with respect to beneficial ownership of the Common Stock by (i) each
stockholder known by Iron Mountain to be the beneficial owner of more than five
percent of the Common Stock, (ii) each Director, including each nominee for
director, (iii) each Named Executive Officer and (iv) all executive officers
and Directors of Iron Mountain as a group. Such information is presented as of
September 26, 1997.
<TABLE>
<CAPTION>
Percent
Name(1) Shares Owned
- ------- ----------- --------
<S> <C> <C>
Directors and Executive Officers
C. Richard Reese(2) ................................................... 1,127,503 9.6%
David S. Wendell(3) ................................................... 107,822 *
Eugene B. Doggett(4) ................................................ 129,550 1.1%
Kenneth F. Radtke, Jr.(5) ............................................. 5,976 *
Robert P. Swift(6) ................................................... 23,895 *
Constantin R. Boden(7) ................................................ 20,880 *
Arthur D. Little(8) ................................................... 26,265 *
Vincent J. Ryan(9) ................................................... 3,445,750 29.3%
B. Thomas Golisano(10) ................................................ 931,704 7.9%
All Directors and executive officers as a group (15 persons)(11) ...... 5,174,426 43.4%
Director Nominees
Kent P. Dauten(12) ................................................... -- --
Clarke H. Bailey(13) ................................................ -- --
Five Percent Stockholders
Schooner Capital Corporation(14) .................................... 1,909,384 16.3%
William Blair & Company, L.L.C.(15) ................................. 1,055,384 9.0%
</TABLE>
- --------
* Less than 1%
(1) Except as otherwise indicated, the persons named in the table above have
sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them.
(2) Mr. Reese is a Director and Chairman of the Board and Chief Executive
Officer of Iron Mountain. Includes 13,450 shares of Common Stock held by
trusts for the benefit of Mr. Reese's children, as to which Mr. Reese
disclaims beneficial ownership. Also includes 668,166 shares of Common
Stock as to which Mr. Reese shares beneficial ownership with Schooner as a
result of a 1988 deferred compensation arrangement, as amended, between
Schooner and Mr. Reese relating to Mr. Reese's former services as
President of Schooner. Pursuant to such arrangement, upon the earlier to
occur of (i) Schooner's sale or exchange of substantially all of the
shares of Common Stock held by Schooner or (ii) the cessation of Mr.
Reese's employment with Iron Mountain, Schooner is required to transfer
such shares of Common Stock to Mr. Reese or remit to Mr. Reese cash in an
amount equal to the then current fair market value of such shares of
Common Stock. Schooner has agreed to vote the shares of Common Stock
subject to such arrangement at the direction of Mr. Reese. See "Management
--Executive Compensation." Mr. Reese's address is c/o Iron Mountain
Incorporated, 745 Atlantic Avenue, Boston, Massachusetts 02111.
(3) Mr. Wendell is a Director and President and Chief Operating Officer of Iron
Mountain. Includes 103,967 shares that Mr. Wendell has the right to
acquire pursuant to currently exercisable options. See
"Management--Executive Compensation." Mr. Wendell's address is c/o Iron
Mountain Incorporated, 745 Atlantic Avenue, Boston, Massachusetts 02111.
(4) Mr. Doggett is a Director and Executive Vice President of Iron Mountain.
Includes 29,550 shares of Common Stock as to which Mr. Doggett shares
beneficial ownership with Schooner as a result of a 1988 deferred
compensation arrangement, as amended, between Schooner and Mr. Doggett
relating to Mr. Doggett's former services as Chief Financial Officer of
Schooner. Pursuant to such arrangement, upon the earlier to occur of (i)
Schooner's sale or exchange of substantially all of the shares of Common
Stock held by Schooner or (ii) the cessation of Mr. Doggett's employment
with Iron Mountain, Schooner is required to transfer such shares of Common
Stock to Mr. Doggett or remit to Mr. Doggett cash in an amount equal to
the then current fair market value of such shares of Common Stock.
Schooner has agreed to vote the shares of Common Stock subject to such
arrangement at the direction of Mr. Doggett. See "Management--Executive
Compensation." Mr. Doggett's address is c/o Iron Mountain Incorporated,
745 Atlantic Avenue, Boston, Massachusetts 02111.
(5) Mr. Radtke is an Executive Vice President of Iron Mountain. Consists of
shares that Mr. Radtke has the right to acquire pursuant to currently
exercisable options. See "Management--Executive Compensation." Mr.
Radtke's address is c/o Iron Mountain Incorporated, 745 Atlantic Avenue,
Boston, Massachusetts 02111.
(6) Mr. Swift is an Executive Vice President of Iron Mountain. Consists of
shares that Mr. Swift has the right to acquire pursuant to currently
exercisable options. See "Management--Executive Compensation." Mr. Swift's
address is c/o Iron Mountain Incorporated, 1340 East 6th Street, Los
Angeles, California 90021.
69
<PAGE>
(7) Mr. Boden is a Director of Iron Mountain. Mr. Boden's address is c/o
Boston Capital Ventures, 45 School Street, Boston, Massachusetts 02110.
(8) Mr. Little is a Director of Iron Mountain. Includes 25,000 shares held by
The Little Family Trust, as to which Mr. Little disclaims beneficial
ownership. Mr. Little's address is c/o The Little Investment Company, 33
Broad Street, Boston, Massachusetts 02109.
(9) Mr. Ryan is a Director of Iron Mountain. Mr. Ryan holds 1,536,366 shares
of Common Stock. The remaining shares of Common Stock listed as being
beneficially owned by Mr. Ryan are held by Schooner, as to which Mr. Ryan
has sole voting power and investment power as the Chairman of the Board
and principal stockholder of Schooner. Mr. Ryan's address is c/o Schooner
Capital Corporation, 745 Atlantic Avenue, Boston, Massachusetts 02111. See
footnote (14) regarding shares held by Schooner.
(10) Mr. Golisano is a Director of Iron Mountain. Includes 3,618 shares that
Mr. Golisano has the rights to acquire pursuant to currently exercisable
options. Mr. Golisano's address is c/o Paychex, Inc., 911 Panorama Trail
South, Rochester, New York 14625.
(11) Includes 182,543 shares that directors and executive officers have the
right to acquire pursuant to currently exercisable options.
(12) The Company has been advised that Mr. Dauten would own approximately
934,000 shares of Common Stock upon consummation of the HIMSCORP Merger,
assuming (i) the Common Stock is valued at $31.11 per share and (ii)
HIMSCORP indebtedness of approximately $28 million. In addition, upon the
consummation of the Arcus Merger, Mr. Dauten would beneficially own
approximately 450 shares of Common Stock, as to which Mr. Dauten would
have shared voting power and investment power. Mr. Dauten's address is c/o
Keystone Capital, Inc., 520 Lake Cook Road, Suite #450, Deerfield,
Illinois 60015.
(13) The Company has been advised that Mr. Bailey would own or have the right
to acquire pursuant to currently exercisable options approximately 127,000
shares of Common Stock upon consummation of the Arcus Merger, assuming (i)
a determination price of $32.50 per share, (ii) no Arcus entity options
have been exercised prior to the closing of the Arcus Merger and (iii)
Arcus indebtedness of approximately $33 million. In addition, Mr. Bailey
would beneficially own approximately 405,000 shares of Common Stock, as to
which Mr. Bailey would have shared voting power and investment power.
(14) Mr. Ryan is the Chairman of the Board and the principal stockholder of
Schooner and, accordingly has sole voting and investment power with
respect to the shares of Common Stock held by Schooner. Includes 668,166
shares of Common Stock as to which Schooner shares beneficial ownership
with Mr. Reese as described in footnote (2). Also includes 29,550 shares
of Common Stock as to which Schooner shares beneficial ownership with Mr.
Doggett as described in footnote (4). Schooner has agreed to vote the
shares of Common Stock subject to such arrangements at the direction of
Mr. Reese or Mr. Doggett, as the case may be. The address of Schooner
Capital Corporation is 745 Atlantic Avenue, Boston, Massachusetts 02111.
(15) Includes 369,200 shares of Common Stock over which William Blair &
Company, L.L.C. has sole investment power, but over which customers of
William Blair & Company, L.L.C. have sole voting power. The address of
William Blair & Company, L.L.C. is 222 West Adams Street, Chicago,
Illinois 60606.
70
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Financial Statements of Completed Acquisitions:
Security Archives of Minnesota.............................................F-2
Wellington Financial Services, Inc.........................................F-9
Concorde Group, Inc. and Neil Tucker Trust.................................F-17
Data Securities International, Inc.........................................F-25
Records Retention/FileSafe.................................................F-35
Allegiance Business Archives, Ltd..........................................F-44
Financial Statements of Pending Acquisitions:
HIMSCORP, Inc..............................................................F-52
Arcus Technology Services, Inc.............................................F-63
Arcus Group, Inc...........................................................F-80
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Iron Mountain Incorporated:
We have audited the accompanying combined balance sheet of Security Archives of
Minnesota as of December 31, 1996, and the related combined statements of
operations and retained earnings and cash flows for the year 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 Security Archives of Minnesota
as of December 31, 1996, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Minneapolis, Minnesota
August 15, 1997
F-2
<PAGE>
SECURITY ARCHIVES OF MINNESOTA
COMBINED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents ..................... $ 101,046
Accounts receivable ........................... 324,508
Other current assets ........................... 7,097
-----------
Total Current Assets ........................ 432,651
-----------
Property and Equipment ........................... 955,162
Less--accumulated depreciation .................. 302,189
-----------
Net property and equipment .................. 652,973
Other Assets, net ................................. 77,968
-----------
$1,163,592
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .............................. $ 64,484
Current portion of long-term note payable ...... 96,600
Note payable to related parties ............... 196,000
Accrued expenses .............................. 11,922
-----------
Total Current Liabilities ..................... 369,006
Long-Term Note Payable ........................... 152,747
-----------
Total Liabilities ........................... 521,753
Commitments and Contingencies (Note 6)
Stockholders' Equity:
Common stock .................................... 12,000
Paid-in capital ................................. 188,000
Retained earnings .............................. 441,839
-----------
Total Stockholders' Equity .................. 641,839
-----------
$1,163,592
===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-3
<PAGE>
SECURITY ARCHIVES OF MINNESOTA
COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Revenues:
Storage .................................... $1,088,492
Service and storage materials sales ......... 883,384
----------
Total Revenues ........................... 1,971,876
----------
Operating Expenses:
Cost of sales (excluding depreciation) ...... 876,247
Selling, general and administrative ......... 566,652
Depreciation and amortization ............... 181,111
----------
Total Operating Expenses .................. 1,624,010
----------
Income from Operations ........................ 347,866
----------
Interest expense .............................. (60,826)
----------
Net Income .................................... 287,040
Retained Earnings, Beginning of Year ............ 154,799
----------
Retained Earnings, End of Year .................. $ 441,839
==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-4
<PAGE>
SECURITY ARCHIVES OF MINNESOTA
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Cash Flows Provided by Operating Activities:
Net income ..................................................................... $ 287,040
Adjustments to reconcile net income to net cash provided by operating activities--
Depreciation and amortization ................................................ 181,111
Changes in operating assets and liabilities:
Accounts receivable ......................................................... (162,832)
Other current assets ......................................................... 12,767
Accounts payable and accrued expenses ....................................... 5,849
----------
Net Cash Provided by Operating Activities .................................... 323,935
----------
Cash Flows from Investing Activities:
Purchases of property and equipment, net ....................................... (71,992)
----------
Cash Flows from Financing Activities:
Principal payments on notes payable ............................................. (283,525)
----------
Net Decrease in Cash and Cash Equivalents .......................................... (31,582)
Cash and Cash Equivalents, beginning of year ....................................... 132,628
----------
Cash and Cash Equivalents, end of year ............................................. $ 101,046
==========
Supplemental Disclosure of Cash Flow Information:
Interest paid .................................................................. $ 60,826
==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-5
<PAGE>
SECURITY ARCHIVES OF MINNESOTA
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. Organization of Business
The accompanying combined financial statements of Security Archives of
Minnesota include the accounts of Security Archives of MSP, Inc., a Minnesota
corporation (MSP) and Security Archives II, a Minnesota corporation (SAII),
(collectively, the Company). The Company is a full service records management
company providing storage and related services for all types of media. The
Company serves numerous legal, banking, healthcare, accounting, insurance,
entertainment and retail organizations in the Minneapolis, Minnesota
metropolitan area.
Stockholders' equity for MSP and SAII at December 31, 1996 was as follows:
<TABLE>
<CAPTION>
Common Paid-In Retained
Stock Capital Earnings Total
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
MSP, $1 par value, 25,000 shares authorized;
10,000 shares issued and outstanding ...... $10,000 $140,000 $248,424 $398,424
SAII, $1 par value, 25,000 shares authorized;
2,000 shares issued and outstanding ...... 2,000 48,000 193,415 243,415
-------- --------- --------- ---------
Total ....................................... $12,000 $188,000 $441,839 $641,839
======== ========= ========= =========
</TABLE>
2. Summary of Significant Accounting Policies
Principles of Combination
The financial statements reflect the financial position and results of
operations of the Company on a combined basis. All significant intercompany
account balances and transactions with affiliates have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
maturities of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are depreciated over their estimated useful lives,
principally using the straight-line method for financial reporting purposes and
accelerated methods for tax purposes. Property and equipment consist of the
following:
<TABLE>
<CAPTION>
Useful Lives December 31, 1996
-------------- ------------------
<S> <C> <C>
Warehouse and disintegration equipment ...... 6-10 years $769,080
Transportation equipment ..................... 5 years 100,246
Leasehold improvements ..................... 10 years 72,082
Office equipment ........................... 10 years 13,754
---------
Property and equipment .................. 955,162
Accumulated depreciation .................. 302,189
---------
Property and equipment, net ............... $652,973
=========
</TABLE>
Minor maintenance costs are expensed as incurred. Major improvements to
the leased warehouse are capitalized as leasehold improvements and depreciated
as described above.
Other Assets
Other assets consist primarily of customer acquisition costs, which are
the costs, net of revenues received for the initial transfer of the records,
related to the acquisition of new accounts. Customer acquisition costs are
F-6
<PAGE>
SECURITY ARCHIVES OF MINNESOTA
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
capitalized and amortized over an appropriate period not exceeding three years,
unless the customer terminates its relationship with the Company, at which time
the unamortized cost is charged to expense. However, in the event of such
termination, the Company collects and records as income permanent removal fees
that generally equal or exceed the amount of unamortized customer acquisition
costs. As of December 31, 1996, the Company had $264,166 of customer
acquisition costs less accumulated amortization of $195,161.
Revenue Recognition
Storage and service revenues are recognized in the month the respective
service is provided. Storage material sales are recognized when shipped to the
customer. The Company has six customers which collectively accounted for 66.8%
of revenues for the year ended 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. These estimates relate primarily to the realizability of
accounts receivable and the adequacy of certain accrued expenses. Ultimate
results could differ from those estimates.
3. Note Payable
Note payable consisted of the following as of December 31, 1996:
<TABLE>
<S> <C>
Long-term note payable with an initial balance of $461,530, paid in
monthly installments with an interest rate of 9.3%, principal due on
November 4, 1999 ................................................ $249,347
Less--current maturities .......................................... 96,600
---------
Note payable, net of current maturities ........................... $152,747
=========
</TABLE>
Maturities of Notes Payable, including $196,000 of notes with related
parties are as follows:
<TABLE>
<CAPTION>
Amount
---------
<S> <C>
1997 ...... $292,600
1998 ...... 105,978
1999 ...... 46,769
---------
Total ...... $445,347
=========
</TABLE>
The long-term note payable requires that the Company meet certain
covenants, as defined. The loan further requires the Company to pledge
substantially all of the property and equipment obtained under the loan as
collateral. As of December 31, 1996, the Company was in compliance with all
covenants.
4. Income Taxes
MSP and SAII have elected to be treated as S corporations for income tax
purposes, under Subchapter S of the Internal Revenue Code. Accordingly, the
income and losses of MSP and SAII are passed through to the shareholders, who
pay all income taxes on the companies' earnings. As a result, no provision for
income taxes has been reflected in the accompanying combined financial
statements.
F-7
<PAGE>
SECURITY ARCHIVES OF MINNESOTA
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
5. Related-Party Transactions
The Company receives management services from affiliated entities in
exchange for a management fee. Management fee expense was $46,020 for the year
ended December 31, 1996.
In addition, the Company has unsecured notes payable to two stockholders.
The notes bear interest of 8% which is payable monthly, and have principal
payments which are due in various installments through 1997. Interest expense
on related party notes payable was $11,504 for the year ended December 31,
1996.
During 1996, the Company transferred property to an affiliate. In return,
the affiliate made payments to the Company in the amount equal to that which
the Company owed for the property under an associated loan agreement with an
unrelated financial institution. The Company believes this, as well as each of
the aforementioned related-party activities, were at terms no more or less
favorable than similar transactions which could have occurred with unaffiliated
third parties.
6. Commitments and Contingencies
Operating Leases
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with initial or remaining terms of one year or more are
$81,228 for 1997 and $0 thereafter.
The Company's rent expense for operating leases was $502,377 for the year
ended December 31, 1996.
7. Subsequent Event
On January 3, 1997, the Company sold substantially all of its operating
assets to Iron Mountain Incorporated. All debt of the Company was repaid from
the proceeds of the sale.
F-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Iron Mountain Incorporated:
We have audited the accompanying balance sheet of Wellington Financial
Services, Inc. (a Michigan corporation) as of December 31, 1996, and the
related statements of operations, stockholders' equity and cash flows for the
year 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 Wellington Financial Services,
Inc. as of December 31, 1996, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Detroit, Michigan
April 25, 1997
F-9
<PAGE>
WELLINGTON FINANCIAL SERVICES, INC.
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents ....................................... $ 141,865
Accounts receivable--trade ....................................... 290,179
Note receivable--stockholder ....................................... 100,000
Inventory ......................................................... 60,914
Prepaid expenses ................................................ 29,964
-----------
Total Current Assets ............................................. 622,922
-----------
Property and Equipment, at Cost .................................... 1,710,759
Less--Accumulated depreciation .................................... 1,131,438
-----------
Net property and equipment ....................................... 579,321
-----------
Other Assets:
Goodwill, net ...................................................... 258,678
Other ............................................................ 11,500
-----------
Total Other Assets ............................................. 270,178
-----------
Total Assets ................................................... $1,472,421
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt ................................. $ 380,282
Note payable--stockholders ....................................... 94,720
Line of credit ................................................... 70,000
Accounts payable ................................................... 138,395
Accrued liabilities ................................................ 132,491
Deferred revenue ................................................... 137,869
-----------
Total Current Liabilities ....................................... 953,757
-----------
Long-term Debt, Net of Current Portion .............................. 159,064
-----------
Commitments and Contingencies (Note 7)
Stockholders' Equity:
Common stock, $100 par value per share; 4,000,000 shares authorized,
1,000 shares issued and outstanding .............................. 100,000
Retained earnings ................................................ 259,600
-----------
Total Stockholders' Equity ....................................... 359,600
-----------
Total Liabilities and Stockholders' Equity ..................... $1,472,421
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
WELLINGTON FINANCIAL SERVICES, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Revenue:
Storage .................................... $1,225,803
Service and storage material sales ......... 2,018,906
----------
Total Revenue ........................... 3,244,709
----------
Operating Expenses:
Cost of sales (excluding depreciation) ...... 1,558,038
Selling, general and administrative ......... 1,065,073
Depreciation and amortization ............... 152,537
----------
Total Operating Expenses .................. 2,775,648
----------
Operating Income: .............................. 469,061
----------
Other (Income) Expense:
Interest expense ........................... 72,145
Interest income .............................. (15,039)
----------
Total Other Expense ..................... 57,106
----------
Net Income .............................. $ 411,955
==========
STATEMENT OF STOCKHOLDERS' EQUITY
</TABLE>
<TABLE>
<CAPTION>
Common Retained
Stock Earnings Total
---------- ------------- -------------
<S> <C> <C> <C>
Balance--December 31, 1995 ...... $100,000 $ 431,942 $ 531,942
Net income .................. -- 411,955 411,955
Dividends (Note 5) ............ -- (584,297) (584,297)
--------- ---------- ----------
Balance--December 31, 1996 ...... $100,000 $ 259,600 $ 359,600
========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
WELLINGTON FINANCIAL SERVICES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net income ..................................................................... $ 411,955
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................ 152,537
Changes in operating assets and liabilities- .................................
Accounts receivable ......................................................... 72,610
Inventory ..................................................................... (12,044)
Prepaid expenses ............................................................ (8,609)
Accounts payable and accrued expenses ....................................... 194,787
Deferred revenue ............................................................ 7,064
----------
Net Cash Provided by Operating Activities .................................... 818,300
----------
Cash Flows from Investing Activities:
Purchases of property and equipment ............................................. (183,111)
Proceeds from notes receivable ................................................ 25,000
----------
Net Cash Used in Investing Activities ....................................... (158,111)
----------
Cash Flows from Financing Activities:
Proceeds from contractual obligations .......................................... 190,142
Payments of contractual obligations ............................................. (372,957)
Distributions to shareholders (Note 5) .......................................... (464,297)
----------
Net Cash Used in Financing Activities ....................................... (647,112)
----------
Net Increase in Cash and Cash Equivalents ....................................... 13,077
Cash and Cash Equivalents, Beginning of Year .................................... 128,788
----------
Cash and Cash Equivalents, End of Year .......................................... 141,865
----------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest .......................................... $ 74,199
==========
Non-cash distribution to shareholders (Note 5) ................................. $ 120,000
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
WELLINGTON FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. Summary of Significant Accounting Policies
Line of Business
Wellington Financial Services, Inc. d/b/a Michigan Data Storage (the
Company) provides storage of electronic media, the sale of electronic media
accessories and the rental of safe deposit boxes to customers in Southeastern
Michigan.
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
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with a maturity of three months or less to be
cash equivalents.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based upon the anticipated
collectibility of each specific account. Management has determined that no
allowance is necessary at December 31, 1996.
Inventories
Inventories, consisting primarily of purchased electronic media
accessories, are valued at the lower of cost or market, with cost determined
substantially on a first-in, first-out basis. Maintenance, operating and office
supplies are not inventoried, but are charged to expense when purchased.
Property and Equipment
Property and equipment are carried at cost. Expenditures for maintenance
and repairs are charged to operating expense. Adjustment of the assets and the
related accumulated depreciation accounts are made for property and equipment
retirement and disposals, with the resulting gain or loss included in the
statement of operations.
Depreciation of property and equipment is computed using the straight-line
and accelerated methods over the estimated useful lives. Property and equipment
consist of the following:
<TABLE>
<CAPTION>
December 31,
Useful Lives 1996
--------------- -------------
<S> <C> <C>
Machinery and equipment ...... 5 to 27 years $ 623,533
Furniture and fixtures ......... 5 279,717
Transportation equipment ...... 5 243,862
Leasehold improvements ......... 5 563,647
-----------
$1,710,759
===========
</TABLE>
Goodwill
Goodwill arising from the acquisition of net assets when the cost exceeded
the net asset value is amortized on a straight-line basis over a fifteen-year
period. Amortization expense during the year amounted to $19,898 and
accumulated amortization as of December 31, 1996 amounted to $39,797.
F-13
<PAGE>
WELLINGTON FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Revenue Recognition
Customers are generally billed for storage and safety deposit box rental
one month in advance. Revenue is recognized over the storage or rental period.
Income Taxes
The Company has elected to be treated as a Subchapter S corporation under
the Internal Revenue Code. Under these provisions, the Company generally does
not pay Federal corporate income taxes on its taxable income. Instead, the
stockholders are liable for individual Federal income taxes on their respective
shares of the Company's taxable income. Accordingly, no provision for Federal
corporate income taxes has been reflected in the financial statements.
2. Line of Credit
At December 31, 1996, the Company has a line of credit with a bank with a
limit of $100,000. All assets of the Company secure the line of credit with
interest at 1% over prime (prime rate was 8.25% at December 31, 1996). The
outstanding balance at December 31, 1996 was $70,000.
3. Notes Payable--Stockholders
At December 31, 1996, the stockholders notes payables were $94,720. The
notes were due on demand, non-interest bearing and unsecured. The notes were
paid in full in February 1997.
4. Long-Term Debt
At December 31, 1996, long-term debt consisted of the following:
<TABLE>
<S> <C>
Note payable to a bank in monthly installments of $30,000, interest at the prime rate plus
1.0% (prime rate was 8.25% at December 31, 1996), secured by substantially all of the
Company's assets not otherwise encumbered and the personal guarantees of its
stockholders; loan was paid in full February, 1997 ................................. $461,031
Capital leases payable in monthly installments of $3,922, interest at various rates with
various due dates through June, 1999, secured by equipment ........................ 55,175
Transportation equipment contracts payable to a financing company in monthly payments
of
$1,156, interest at 10.0%, through October 1998, secured by the equipment ............ 23,140
---------
539,346
Less--Current maturities ............................................................ 380,282
---------
$159,064
=========
</TABLE>
Future maturities of long-term debt are as follows:
Year
1997 ...... $380,282
1998 ...... 154,322
1999 ...... 4,742
---------
$539,346
=========
F-14
<PAGE>
WELLINGTON FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
5. Dividends
During the year ended December 31, 1996, the Board of Directors declared
and paid dividends of $584,297. The dividends consisted of $464,297 in cash and
$120,000 reduction in Stockholders' Note Receivable.
6. Obligations under Capital Leases
The Company is the lessee of equipment under capital leases expiring
through June, 1999. The assets and liabilities under the capital leases are
recorded at the lower of the present value of the minimum lease payments or the
fair value of the assets. The assets are depreciated over the lower of their
related lease terms or their estimated productive lives.
The following is a summary of property held under capital leases:
<TABLE>
<S> <C>
Equipment
Cost ................................. $123,910
Less--accumulated depreciation ...... 63,870
---------
$ 60,040
=========
</TABLE>
Minimum future lease payments under the capital leases as of December 31,
1996 for each of the next three years and in the aggregate are detailed as
contractual obligation payments in Note 4.
Depreciation on the assets under capital leases charged to expense for the
year ended December 31, 1996 was $31,436.
Interest expense paid on capital leases for the year ended December 31,
1996 was $7,278.
7. Commitments and Contingencies
Operating Leases
The Company leases its operating facility under two operating leases
expiring in April 2001 with one five-year renewal option. Total rent expense
for the year ended December 31, 1996 was $417,361.
Minimum future rental payments under non-cancelable operating leases
having an initial term in excess of one year are as follows:
<TABLE>
<S> <C>
Year
1997 ...... $ 303,541
1998 ...... 313,311
1999 ...... 323,202
2000 ...... 333,213
2001 ...... 343,350
-----------
$1,616,617
===========
</TABLE>
8. Related Party Transactions
On December 31, 1996, the Company has a $100,000 note receivable from
stockholders, bearing interest at approximately 6%. This note was paid in full
in February, 1997.
Interest received from stockholders for the year ended December 31, 1996
was $12,576.
Management fees paid to stockholders during the year ended December 31,
1996 were $30,000.
F-15
<PAGE>
WELLINGTON FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
The Company leases one of its storage facilities from stockholders, under
a month-to-month operating lease agreement. Total of this lease expense was
approximately $80,000 in 1996.
9. Retirement Plan
The Company started a 401(k) profit-sharing plan during 1996, which covers
substantially all employees and provides a matching contribution. Participating
employees may also contribute up to 20% of their annual compensation. The
matching contribution for the year ended December 31, 1996 was $5,586. The
Company has funded or accrued all calculated contributions as of the balance
sheet date.
10. Buy-Sell Agreement
The stockholders have previously entered into a buy-sell agreement with
the Company to guarantee the continuity of management of the corporation by
providing for the purchase of stock in the event that any stockholder should
die.
11. Subsequent Event
On February 19, 1997, the Company sold the majority of its assets and its
business to Iron Mountain Incorporated. A portion of the sales transaction
requires the State of Michigan Financial Institutions Bureau's approval. It is
the intention of the stockholders to liquidate the Company during 1997.
F-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Iron Mountain Incorporated:
We have audited the accompanying combined balance sheet of Concorde Group, Inc.
and Neil Tucker Trust as of December 31, 1996 and the related statements of
operations and retained earnings and cash flows for the year then ended. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Concorde Group,
Inc. and Neil Tucker Trust as of December 31, 1996, as of December 31, 1996,
and the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
Fisher, Schacht & Oliver, LLP
Rochester, New York
August 8, 1997
F-17
<PAGE>
CONCORDE GROUP, INC. AND NEIL TUCKER TRUST
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
-------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................................. $ 550,609 $ 812,469
Accounts receivable ....................................... 331,750 328,006
Prepaid expenses and other current assets .................. 56,570 76,745
----------- -----------
Total Current Assets .................................... 938,929 1,217,220
Property and Equipment:
Land ...................................................... 43,520 43,520
Buildings ................................................ 1,416,530 1,416,530
Improvements ................................................ 634,234 745,364
Property under capitalized lease ........................... 531,646 531,646
Equipment and furniture .................................... 1,257,415 1,280,733
Vehicles ................................................... 151,118 151,118
----------- -----------
4,034,463 4,168,911
Less: accumulated depreciation and amortization ............ 1,836,790 1,955,870
----------- -----------
Net Property and Equipment .............................. 2,197,673 2,213,041
Other Assets ................................................ 52,929 48,008
----------- -----------
Total Assets ............................................. $3,189,531 $3,478,269
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of capitalized lease obligation ............ $ 87,331 $ 101,475
Current portion of notes payable ........................... 205,583 169,744
Accounts payable .......................................... 70,049 16,337
Accrued expenses .......................................... 44,785 48,116
Deferred revenue .......................................... 20,845 369,589
----------- -----------
Total Current Liabilities .............................. 428,593 705,261
Long-Term Liabilities:
Capitalized lease obligation, net of current portion ...... 110,987 55,493
Notes payable, net of current portion ..................... 1,767,504 1,721,833
----------- -----------
Total Long-Term Liabilities .............................. 1,878,491 1,777,326
----------- -----------
Total Liabilities ....................................... 2,307,084 2,482,587
Shareholders' Equity:
Common Stock, no par value, 200 shares authorized, 100 shares
issued and outstanding .................................... 50,000 50,000
Additional paid-in capital ................................. 90,000 90,000
Retained earnings .......................................... 742,447 855,682
----------- -----------
Total Shareholders' Equity .............................. 882,447 995,682
----------- -----------
Total Liabilities and Shareholders' Equity ............ $3,189,531 $3,478,269
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
CONCORDE GROUP, INC. AND NEIL TUCKER TRUST
COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30,
December 31, ----------------------------
1996 1996 1997
-------------- ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenues:
Storage ...................................................... $1,411,612 $ 691,010 $ 676,586
Service and storage material sales ........................... 1,542,810 578,253 602,247
---------- ---------- ----------
Total Revenues ............................................. 2,954,422 1,269,263 1,278,833
Operating Expenses:
Cost of sales (excluding depreciation and amortization) ...... 1,049,940 487,944 462,559
Selling, general and administrative ........................... 933,666 443,706 342,574
Depreciation and amortization ................................. 286,116 92,641 124,001
---------- ---------- ----------
Total Operating Expenses .................................... 2,269,722 1,024,291 929,134
---------- ---------- ----------
Operating Income .......................................... 684,700 244,972 349,699
Other Income/(Expense):
Interest income ............................................. 14,359 -- 13,916
Interest expense ............................................. 192,079 93,457 79,911
---------- ---------- ----------
Total Other Expense ....................................... 177,720 93,457 65,995
---------- ---------- ----------
Net Income ............................................. 506,980 151,515 283,704
Retained Earnings, Beginning of Period ........................ 340,829 340,829 742,447
Distributions ................................................ (105,362) (26,784) (170,469)
---------- ---------- ----------
Retained Earnings, End of Period .............................. $ 742,447 $ 465,560 $ 855,682
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
CONCORDE GROUP, INC. AND NEIL TUCKER TRUST
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30,
December 31, ----------------------------
1996 1996 1997
-------------- ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income .......................................... $ 506,980 $ 151,515 $ 283,704
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization ..................... 282,827 92,641 124,001
Changes in assets and liabilities:
Accounts receivable .............................. (115,435) (72,278) 3,744
Prepaid expenses and other current assets ......... 47,166 (100,083) (20,175)
Accounts payable ................................. 28,194 12,980 (53,712)
Accrued expenses ................................. 40,081 9,611 3,331
Deferred revenue ................................. 20,845 432,696 348,744
Loss on disposal of property ..................... 3,289 -- --
---------- ---------- ----------
Total Adjustments .............................. 306,967 375,567 405,933
---------- ---------- ----------
Net Cash Provided by Operating Activities ...... 813,947 527,082 689,637
Cash Flows from Investing Activities:
Acquisition of property and equipment ............... (243,483) (52,955) (134,448)
Cash proceeds from the sale of property ............ 500 -- --
---------- ---------- ----------
Net Cash Used by Investing Activities ............ (242,983) (52,955) (134,448)
Cash Flows from Financing Activities:
Principal payments on capital lease ............... (78,724) (37,275) (41,350)
Principal payments on notes payable ............... (143,597) (92,732) (81,510)
Dividends paid .................................... (105,362) (26,784) (170,469)
Proceeds from Notes Payable ........................ 283,525 -- --
---------- ---------- ----------
Net Cash Used by Financing Activities ............ (44,158) (156,791) (293,329)
---------- ---------- ----------
Net Increase in Cash and Cash Equivalents ............ 526,806 317,336 261,860
Cash and Cash Equivalents, Beginning of Period ...... 23,803 23,803 550,609
---------- ---------- ----------
Cash and Cash Equivalents, End of Period ............ $ 550,609 $ 341,139 $ 812,469
========== ========== ==========
Supplemental Cash Flows Information:
Interest paid ....................................... $ 177,604 $ 93,457 $ 94,150
Property acquired by notes payable .................. 167,978 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
CONCORDE GROUP, INC. AND NEIL TUCKER TRUST
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. Significant Accounting Policies
Reporting Entity
Concorde Group, Inc. (the "Company") is a New York State Corporation
located in Farmington, New York whose primary business is the storage of
business documents and records.
Principles of Combination
The financial statements reflect the financial position and results of
operations of the Company and Neil Tucker Trust on a combined basis. All
significant intercompany balances and transactions have been eliminated.
Property and Amortization
Property and equipment are recorded at cost. Depreciation and amortization
is provided on the straight-line method over the estimated useful lives of the
respective assets.
The estimated useful lives are as follows:
Equipment and Furniture ............... 5-10 years
Building and Improvements ............ 10-39 years
Property under capitalized lease ...... 5-20 years
Vehicles .............................. 5 years
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.
Revenue Recognition
Storage and service revenues are recognized in the month the respective
service is provided. Storage material sales are recognized when shipped to the
customer. Amounts related to future storage for customers where storage fees
are billed in advance are accounted for as deferred revenue and recognized in
the applicable period.
Unaudited Combined Financial Statements
The unaudited combined financial statements included herein have been
prepared in accordance with generally accepted accounting principles. In the
opinion of management, the unaudited combined financial statements include all
adjustments of a normal and recurring nature which are necessary for a fair
presentation. The results of operations for the six months ended are not
necessarily indicative of the results expected for the full year.
Income Taxes
No provision for income taxes is necessary as the Company has elected to
be treated as an "S" Corporation under the provisions of the Internal Revenue
and New York State income tax codes. As an "S" Corporation, the income of the
Company is generally passed through to the shareholders and taxed on an
individual basis.
F-21
<PAGE>
CONCORDE GROUP, INC. AND NEIL TUCKER TRUST
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
2. Capitalized Lease Obligation
The Company entered into a lease with the County of Monroe Industrial
Development Agency (COMIDA) for the purpose of acquiring, renovating and
equipping two parcels of property in Rochester, New York. The Company is
obligated to repay a $1,400,000 Commercial Development Note which is secured by
a first mortgage on the properties owned by COMIDA. The Company has
substantially complied with the provisions regulating the acquisition,
renovations and equipping of the properties.
The lease shall terminate when the commercial development note has been
repaid, at which time the Company may acquire title to the properties for a
nominal fee. The note is payable in 48 quarterly installments with varying
principal payments plus interest at 73.50% of the prime rate effective February
1, 1988. With the approval from COMIDA the Company has assigned $660,800 of the
Commercial Development Note to an affiliated Partnership, Concorde Properties.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 13--Accounting for Leases, the lease has been accounted for as a
capital lease. Accordingly, the present value of the future minimum lease
payments under the lease (equivalent to the principal of the commercial
development note) has been recorded as leased property and capitalized leased
obligation.
Based upon the interest rates in effect at December 31, 1996 (6.8%), the
future minimum lease payments required are as follows:
1997 ................................................... $ 97,371
1998 ................................................... 115,192
---------
212,563
Less: amount representing interest ..................... 14,245
---------
Present value of future minimum lease payments ......... 198,318
Less: current portion ................................. 87,331
---------
$110,987
---------
Property under capitalized lease:
Improvements .......................................... $ 93,583
Equipment ............................................. 438,063
---------
531,646
Less: Accumulated depreciation and amortization ...... 491,750
---------
$ 39,896
=========
The lease was paid in full on August 1, 1997 in connection with the
acquisition described in Note 6.
F-22
<PAGE>
CONCORDE GROUP, INC. AND NEIL TUCKER TRUST
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
3. Notes Payable
Notes payable consisted of the following at December 31, 1996:
<TABLE>
<S> <C>
Marine Midland--The note is payable in monthly principal installments of
$2,487 principal plus interest with interest at 8.1%. $ 97,576
Marine Midland--Line of credit payable on demand with interest at prime. 50,000
Marine Midland--The note is payable in monthly installments of
$216 principal and interest with interest at 9.99%. 8,380
Ford Credit--The note is payable in monthly installments of $384 principal
and interest with interest at 9.15%. 14,574
Chase--The note is payable in monthly installments of $254 principal and
interest with interest at 9.50%. 5,309
Key Bank--The note is payable in monthly installments of $383 principal and
interest with interest at 7.5%. 8,180
Key Corp. Leasing--The note is payable in monthly installments of
$1,805 principal and interest with interest at 8.2%. 115,756
Key Bank -- The note is payble in monthly installments of $9,557 principal
and interest with interest at prime plus 2%. 879,199
Key Bank -- The note is payable in monthly installments of $3,835 principal
and interest with interest at prime plus 1.25%. 324,878
Key Bank -- The note is payable in monthly installments of $2,441 principal
and interest with interest at 8.36%. 239,818
Key Bank -- The note is payable in monthly installments of $2,334 principal
and interest with interest at 9.38%. 223,319
GMAC--The note is payable in monthly installments of $420 principal and
interest with interest at 4.8%. 6,098
-----------
Total Notes Payable 1,973,087
Less: Current Portion 205,583
-----------
$1,767,504
===========
</TABLE>
The notes are collateralized by certain property equipment. Principal
payments on the notes payable due in future years are as follows:
Years ended December 31,
1997 ............... $ 205,583
1998 ............... 160,144
1999 ............... 163,067
2000 ............... 118,015
2001 ............... 105,306
Thereafter ......... 1,220,972
-----------
$1,973,087
===========
The notes were paid in full on August 1, 1997 in connection with the
acquisition described in Note 6.
4. Related Party Transactions
The Company leases space from affiliates under three month-to-month leases
with an aggregate monthly rental of $34,650.
F-23
<PAGE>
CONCORDE GROUP, INC. AND NEIL TUCKER TRUST
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
5. Significant Components of Combined Financial Statements
The significant components of the entities as of December 31, 1996, before
elimination, comprising the combined financial statements are as follows:
<TABLE>
<CAPTION>
Concorde Neil Tucker
Group, Inc. Trust
------------- ------------
<S> <C> <C>
Total Assets .............................. $1,564,072 $1,832,032
=========== ==========
Total Liabilities ........................ $ 626,120 $1,887,537
=========== ==========
Total Stockholders' Equity (Deficit) ...... $ 937,952 $ (55,505)
=========== ==========
Net Income (Loss) ........................ $ 533,372 $ (26,392)
=========== ==========
</TABLE>
6. Subsequent Events
Effective August 1, 1997, substantially all of the Company's operating
assets were acquired by Iron Mountain Records Management, Inc. (a wholly owned
subsidiary of Iron Mountain Incorporated). Proceeds from the sale were used to
pay all of the outstanding notes and leases and the remainder was distributed
to the shareholders.
F-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Directors of
Data Securities International, Inc.:
We have audited the accompanying balance sheet of Data Securities
International, Inc. as of December 31, 1996, and the related statements of
operations, stockholders' deficit and cash flows for the year 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 Data Securities International,
Inc. as of December 31, 1996, and the results of their operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
San Jose, California
September 12, 1997
F-25
<PAGE>
DATA SECURITIES INTERNATIONAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
-------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ....................................... $ 220,482 $ 100,131
Accounts receivable, less allowance for doubtful accounts of
$174,607 and $179,381 in 1996 and 1997, respectively............ 1,078,209 1,259,875
Prepaid expenses ................................................ 58,588 63,880
------------ ------------
Total current assets .......................................... 1,357,279 1,423,886
------------ ------------
Office Furniture and Equipment, at cost, net of accumulated
depreciation and amortization of $436,169 in 1996 and $481,230 in
1997 ............................................................ 153,917 147,506
Goodwill, net of accumulated amortization of $836,347 in 1996 and
$1,069,747 in 1997 ................................................ 1,964,429 1,731,329
Deposits ......................................................... 19,514 18,107
------------ ------------
$ 3,495,139 $ 3,320,828
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Notes payable ................................................... $ 5,504,979 $ 5,044,304
Accounts payable and accrued expenses ........................... 80,015 69,871
Accrued salary and related expenses ........................... 42,815 31,619
Income tax payable ............................................. 374,584 172,956
Deferred revenue, current portion .............................. 2,425,717 2,711,415
Capital leases, current portion ................................. 24,109 30,000
Customer deposits ............................................. -- 65,600
------------ ------------
Total current liabilities .................................... 8,452,219 8,125,765
------------ ------------
Capital Leases ................................................... 38,943 37,171
Deferred Revenue ................................................ 126,801 121,440
Deferred Rent ................................................... 9,191 8,426
Commitments (Notes 4 and 5)
Stockholders' Deficit:
Common stock, $0.01 par value, 3,000,000 shares authorized,
193,664 issued and 183,981 and 176,717 outstanding in 1996
and 1997, respectively ....................................... 1,840 1,767
Accumulated deficit .......................................... (5,133,855) (4,973,741)
------------ ------------
Total stockholders' deficit ................................. (5,132,015) (4,971,974)
------------ ------------
$ 3,495,139 $ 3,320,828
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-26
<PAGE>
DATA SECURITIES INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
1996 ----------------------------
1996 1997
------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenues:
Annual escrow fees .................................... $3,366,703 $1,701,367 $2,126,985
Contract set-up charges and other fees .................. 850,962 319,376 437,532
---------- ---------- -----------
Total revenues ....................................... 4,217,665 2,020,743 2,564,517
---------- ---------- -----------
Operating Expenses:
Selling, general and administrative ..................... 2,997,023 1,492,345 1,431,968
Depreciation and amortization ........................... 607,753 331,852 278,968
---------- ---------- -----------
Total operating expenses .............................. 3,604,776 1,824,197 1,710,936
---------- ---------- -----------
Operating Income ....................................... 612,889 196,546 853,581
Interest Expense, net .................................... 547,662 285,880 242,102
---------- ---------- -----------
Income (loss) before provision for income taxes ...... 65,227 (89,334) 611,479
Provision for Income Taxes .............................. 460,474 210,000 9,172
---------- ---------- -----------
Net (Loss) Income ....................................... $ (395,247) $ (299,334) $ 602,307
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
DATA SECURITIES INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
1996 ----------------------------
1996 1997
------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) ....................................... $ (395,247) $ (299,334) $ 602,307
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Goodwill amortization ................................. 466,800 233,400 233,400
Depreciation and amortization ........................... 140,953 98,452 45,855
(Gain) loss on disposal of property and equipment ...... (145) (146) 8,206
Increase (decrease) in cash attributable to changes in
assets and liabilities:
Accounts receivable ................................. (351,526) (265,668) (181,666)
Prepaid expenses and other ........................... 19,396 717 11,739
Accounts payable and accrued expenses ............... (147,747) (117,941) 27,568
Customer deposits .................................... -- -- 65,600
Income tax payable .................................... 360,584 210,000 (266,161)
Deferred revenue .................................... 871,788 471,354 280,337
Deferred rent ....................................... 967 973 (765)
---------- ----------- ----------
Net cash provided by operating activities ............ 965,823 331,807 826,420
---------- ----------- ----------
Cash Flows from Investing Activities:
Proceeds from the sale of property and equipment ......... 590 590 --
Acquisitions of property and equipment .................. (82,650) (71,383) (33,173)
---------- ----------- ----------
Net cash used in investing activities ............... (82,060) (70,793) (33,173)
---------- ----------- ----------
Cash Flow from Financing Activities:
Principal payments on long-term debt ..................... (690,710) (359,067) (460,675)
Distributions to stockholders ........................... -- -- (255,000)
Payments of obligations under capital leases ............ (28,698) (14,207) (10,657)
Purchase of treasury stock .............................. (40,000) (40,000) (187,266)
---------- ----------- ----------
Net cash used in financing activities ............... (759,408) (413,274) (913,598)
---------- ----------- ----------
Increase (Decrease) in Cash and Cash Equivalents ......... 124,355 (152,260) (120,351)
Cash and Cash Equivalents, Beginning of Period ............ 96,127 96,127 220,482
---------- ----------- ----------
Cash and Cash Equivalents, End of Period .................. $ 220,482 $ (56,133) $ 100,131
========== =========== ==========
Supplemental Disclosure of Cash Flow Information,
Cash Paid During the Period for: ........................
Taxes ................................................... $ 102,502 $ 71,350 $ 211,225
========== =========== ==========
Interest ................................................ $ 547,662 $ 285,880 $ 242,102
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
DATA SECURITIES INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Class I Common Stock
----------------------
Number of Accumulated
Shares Amount Deficit Total
----------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 ...... 193,664 $1,937 $ (4,698,705) $ (4,696,768)
Repurchase of common stock ...... (9,683) (97) (39,903) (40,000)
Net loss ........................ -- -- (395,247) (395,247)
------- ------ ------------ ------------
Balance, December 31, 1996 ...... 183,981 $1,840 $ (5,133,855) $ (5,132,015)
======= ====== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
DATA SECURITIES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. Basis of Presentation and Principal Accounting Policies
Data Securities International, Inc. (the "Company") was incorporated under
the laws of the state of Delaware in 1982. The Company provides escrow and
consulting services involving the use, sale, financing and transfer of
technology assets.
Basis of Preparation
The Company prepares its financial statements on the accrual basis of
accounting in accordance with generally accepted accounting principles.
Revenue Recognition
The Company provides its services under automatically-renewing, ongoing,
multi-party escrow agreements, in exchange for annual fees. Termination of such
agreements requires notice to and by all parties to the original agreement, and
approval by all of them to such termination. Contracts are renewed
automatically on their anniversary date unless notice of termination is
received. The set-up portion of the annual service fee is recognized as revenue
on the first day of the service period. The remaining revenue is deferred and
recognized ratably over the term of the contract.
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.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and held in banks, highly
liquid money market funds, commercial paper, and other short-term investments
with original maturities of three months or less.
Goodwill
Goodwill resulting from the leveraged buyout transaction (see Note 2) is
being amortized using the straight-line method over the period of expected
benefit estimated at 6 years.
Depreciation and Amortization
The cost of office furniture and fixtures is depreciated using the
straight-line method over the estimated useful lives of 5 years. The cost of
computer equipment is depreciated using the straight-line method over the
estimated useful lives, which range from 1 to 5 years. Depreciation expense was
approximately $124,860, $44,130 and $45,568 for the year ended December 31,
1996 and the six months ended June 30, 1996 and 1997, respectively.
Income Taxes
Deferred income taxes are determined in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109. Deferred income taxes reflect
the future tax consequences of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year-end.
Deferred Rent
Rent expense is calculated on the total minimum lease payments and
recognized on a straight-line basis over the term of the lease. Deferred rent
is recorded in the accompanying balance sheet as the difference between rent
expense and actual lease payments.
F-30
<PAGE>
DATA SECURITIES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Interim Financial Data
The unaudited interim financial statements as of June 30, 1997, and for
the six months ended June 30, 1996 and 1997, have been prepared on the same
basis as the year end financial statements and, in the opinion of management,
include all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial information set forth therein, in
accordance with generally accepted accounting principles. The Company's interim
results are subject to fluctuation. As a result, the Company believes the
results of operations for the interim periods are not necessarily indicative of
the results to be expected for any future period.
2. Shareholder Buyout and New Investor Transaction
Effective March 13, 1995, the Company entered into a transaction which
transferred majority ownership of the Company to new investors. Pursuant to the
transaction, stock options for 199,500 shares were exercised, the Company
repurchased a total of 2,588,719 shares of common stock, which comprised 97% of
the outstanding stock at the date of purchase, for $13,792 in cash and notes
payable of $6,669,720 to existing shareholders (see Note 4). Three new private
investors acquired 57.5% of the Company's stock for $287,500.
This transaction has been accounted for under the provisions of EITF issue
No. 88-16, Basis in Leveraged Buyout Transactions, and, accordingly, the
Company has allocated its purchase price among assets and liabilities. The
difference between the fair value of common stock acquired from management and
management's predecessor basis in such stock of $3,735,999 has been charged
against the Company's shareholders' equity in fiscal 1995 as a shareholder
distribution. The excess of the purchase price paid by the new investors over
the fair market value of acquired assets was recorded as goodwill. Amortization
of goodwill was approximately $466,800, $233,400 and $233,400 for the year
ended December 31, 1996, and the six months ended June 30, 1996 and 1997,
respectively.
3. Related Party Transactions
The Company has a management agreement with an entity in which the new
investors are partners. The agreement provides for an annual fee of $120,000,
payable quarterly; payments shall not be made if the quarterly debt
installments related to the buyout transaction have not been paid (see Note 4).
The agreement ends on December 31, 1999 or under certain other specified
conditions. Total fees charged in connection with this agreement in the year
ended December 31, 1996, and the six months ended June 30, 1996 and 1997, were
$120,000, $60,000 and $60,000, respectively.
4. Debt
As described in Note 2, the Company repurchased common stock from its
shareholders in return for notes payable. The notes bear interest at a variable
rate (9.25% at December 31, 1996) linked to the prime rate. In conjunction with
the Company's acquisition by a third party on August 25, 1997 (see Note 9), the
notes became immediately due and payable in full. The notes payable balances as
of December 31, 1996 and June 30, 1997, were classified in current liabilities
in the accompanying balance sheets. Interest expense related to these notes was
approximately $553,000, $285,000 and $242,000 for the year ended December 31,
1996, and the six-month periods ended June 30, 1996 and 1997, respectively.
As of June 30, 1997, the Company also has available $75,000 under a bank
line of credit arrangement.
F-31
<PAGE>
DATA SECURITIES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
5. Leases
The Company leases office equipment, furniture and telephones at an
aggregate cost of $97,000 and $116,000 as of December 31, 1996 and June 30,
1997, respectively, under non-cancelable capital leases expiring at various
dates through November, 2000.
The Company also leases certain office space under non-cancelable
operating leases which expire at various dates through 2001. Rent expense was
approximately $160,000, $74,000 and $78,000 for the year ended December 31,
1996 and six months ended June 30, 1996 and 1997, respectively.
Minimum future lease payments as of June 30, 1997 are as follows:
<TABLE>
<CAPTION>
Operating
Year ending December 31: Capital Leases Leases
- ----------------------------------------------------------------------- ---------------- ----------
<S> <C> <C>
1997 ............................................................... $ 19,077 $ 75,000
1998 ............................................................... 33,278 134,000
1999 ............................................................... 22,658 86,000
2000 ............................................................... 1,767 64,000
2001 ............................................................... -- 5,000
--------- ---------
Total minimum lease payments ....................................... 76,780 $364,000
=========
Less: Interest ................................................... 9,609
---------
Present value of minimum lease payments under capital leases ...... 67,171
Less: Current portion ............................................. 30,000
---------
Long-term portion of capitalized leases ........................... $ 37,171
=========
</TABLE>
6. Common Stock
Under the terms of the Company's incentive stock option plan, options to
purchase shares of the Company's Class I common stock are granted at prices
equal to the market price of the stock at the date of grant. Options generally
vest over 4 years from the date of grant and have a term of 10 years.
Following is a summary of stock option transactions:
<TABLE>
<CAPTION>
Outstanding Options
------------------------
Options Weighted
Available Average
for Grant Shares Price
----------- ------------ ---------
<S> <C> <C> <C>
Balance at January 1, 1996 ......... 5,317 9,683 $ 2.58
Granted ........................... (4,500) 4,500 2.58
Terminated ........................ 13,783 (13,783) 2.58
-------- -------- -------
Balance at December 31, 1996 ...... 14,600 400 2.58
Granted ........................... (11,075) 11,075 3.00
-------- -------- -------
Balance at June 30, 1997 ......... 3,525 11,475 $ 2.99
======== ======== =======
</TABLE>
The range of exercise prices for stock options outstanding at June 30,
1997 was $2.58 to $3.00.
F-32
<PAGE>
DATA SECURITIES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for its stock options. Accordingly, under APB 25,
no compensation expense was recognized. As discussed below, the alternative
fair value accounting provided for under Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
requires the use of option valuation models that were not developed for use in
valuing stock options.
Pro forma information regarding net income is required by SFAS 123 and has
been determined as if the Company had accounted for its stock options under the
fair value method of SFAS 123. The fair value for the stock options was
estimated at the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions for June 30, 1997 and fiscal
year 1996: risk-free interest rates in the range of 5.33% and 6.69%; dividend
yields of zero; an expected volatility factor of the market price of the
Company's common stock of zero; and an expected life of the option of 4 years.
The weighted average estimated fair value of options granted during June 30,
1997 and fiscal 1996 were $3.00 and $2.58, respectively.
For purposes of pro forma disclosures, the estimated value of the options
is to be amortized to expense over the option vesting periods. The Company's
resulting pro forma net income (net loss) would have been $(395,297) for the
year ended December 31, 1996, and $(299,359) and $601,323 for the six months
ended June 30, 1996 and June 30, 1997, respectively.
7. Income Taxes
On January 1, 1997, the Company elected S-Corporation legal status.
Accordingly, the tax provision for the six months ended June 30, 1997, of
$9,172 was calculated at the 11/2% statutory rate and is included in the
accompanying statements of operations.
The provision for income taxes differs from the amounts which would result
by applying the applicable statutory Federal income tax rate to income before
taxes, as follows:
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Provision at Federal statutory rate .................. $ 22,194
Goodwill amortization .............................. 191,388
Change in valuation allowance ........................ 235,449
State income taxes, net of Federal tax benefit ...... 4,007
Other ................................................ 7,436
---------
Total provision for income taxes ..................... $460,474
=========
</TABLE>
The components of the net deferred income tax asset are as follows:
<TABLE>
<CAPTION>
December 31,
1996
-------------
<S> <C>
Deferred revenue .................. $ 751,896
Other temporary differences ......... 136,217
----------
888,113
Less: Valuation allowance ......... (888,113)
----------
Net deferred income tax asset ...... $ --
==========
</TABLE>
The Company believes sufficient uncertainty exists regarding the
realizability of the deferred tax asset and, accordingly, a 100% valuation
allowance has been established.
Certain assets owned by the Company as of January 1, 1997, are subject to
a built-in gains tax. In the event of a sale of these assets, a tax may be
assessed on any gains at the maximum corporate rate.
F-33
<PAGE>
DATA SECURITIES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
8. 408(k) Retirement Plan
The Company sponsors a 408(k) retirement plan (the "Plan") in which
employees become eligible to participate after completion of 90 days of
service. The participants are fully vested in the Company's contribution after
completion of two years of service. In 1996, the Board of Directors elected to
match one-half of each participating employee's contribution, up to a maximum
of $200 per employee. No contributions were made in 1996.
Beginning in 1997, the Company agreed to make a matching contribution of
up to $200 per employee to the Plan. Total employer matching contributions to
the Plan were approximately $12,000 for the six months ended June 30, 1997.
9. Subsequent Event
On August 25, 1997, a third party acquired all of the outstanding shares
of the Company in exchange for cash and stock in the third party. The
outstanding notes payable were paid in full in conjunction with the
acquisition.
F-34
<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-35
<PAGE>
RECORDS RETENTION/FILESAFE
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------- June 30,
1995 1996 1997
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash ................................................... $ 1,370 $ 447,285 $ 818,145
Accounts receivable, less allowance for doubtful
accounts of $206,000 in 1996 and $100,000 in 1997 ...... 1,930,670 1,701,096 2,299,637
Inventories ............................................. 41,357 27,675 32,672
Prepaid expenses and other .............................. 75,909 64,288 64,756
----------- ----------- -----------
Total Current Assets ................................. 2,049,306 2,240,344 3,215,210
Property, Equipment and Improvements, net ............... 5,586,680 5,518,217 5,444,680
Due From Partner ....................................... 50,000 50,000 8,333
Other Assets ............................................. 80,151 78,331 75,306
----------- ----------- -----------
$7,766,137 $7,886,892 $8,743,529
=========== =========== ===========
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 71,895
Accrued expenses ....................................... 168,800 90,747 96,885
Deferred income ....................................... 986,600 1,117,076 1,118,860
----------- ----------- -----------
Total Current Liabilities ........................... 1,674,382 1,497,198 1,519,074
Notes Payable, Net of Current Portion .................. 3,351,648 3,202,989 3,076,102
Capital Leases, Net of Current Portion .................. 57,998 82,160 57,139
----------- ----------- -----------
Total Liabilities .................................... 5,084,028 4,782,347 4,652,315
Commitments (Notes 4 and 5)
Partners' Equity ....................................... 2,682,109 3,104,545 4,091,214
----------- ----------- -----------
$7,766,137 $7,886,892 $8,743,529
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE>
RECORDS RETENTION/FILESAFE
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June 30,
----------------------------- ----------------------------
1995 1996 1996 1997
------------- ------------- ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Storage .................................... $ 5,901,579 $ 6,662,020 $2,853,134 $ 3,548,218
Service and storage material sales ......... 3,301,360 4,147,064 2,391,322 2,218,212
------------ ------------ ----------- ------------
Total Revenues ........................... 9,202,939 10,809,084 5,244,456 5,766,430
Operating Expenses:
Cost of sales (excluding depreciation) ...... 4,467,005 4,206,687 2,109,210 2,234,469
Selling, general and administrative ......... 1,712,969 2,268,967 806,896 792,788
Depreciation and amortization ............... 489,865 564,572 284,006 204,733
------------ ------------ ----------- ------------
Total Operating Expenses .................. 6,669,839 7,040,226 3,200,112 3,231,990
------------ ------------ ----------- ------------
Operating Income .............................. 2,533,100 3,768,858 2,044,344 2,534,440
Interest Expense .............................. 67,298 249,498 129,996 111,356
------------ ------------ ----------- ------------
Net Income .................................... $ 2,465,802 $ 3,519,360 $1,914,348 $ 2,423,084
============ ============ =========== ============
</TABLE>
See accompanying notes to financial statements.
F-37
<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
========== ========== ============ ========== ============
</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-38
<PAGE>
RECORDS RETENTION/FILESAFE
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June 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 $ 1,914,348 $ 2,423,084
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision (credit) for doubtful accounts ...... -- 206,000 -- (106,000)
Depreciation and amortization .................. 489,865 564,572 284,006 204,733
Loss (gain) on disposal of property and
equipment .................................... 47,420 (1,001) -- --
Increase (decrease) in cash attributable
to changes in assets and liabilities:
Accounts receivable ........................... (497,825) 23,574 164,096 (492,541)
Inventories ................................. (29,907) 13,682 12,540 (4,997)
Prepaid expenses and other .................. 6,507 11,621 460 (468)
Accounts payable .............................. (30,627) 3,879 (5,848) (17,508)
Accrued expenses .............................. 20,052 (78,053) (80,085) 6,138
Deferred income .............................. 111,154 130,476 (127,312) 1,784
------------ ------------ ------------ ------------
Net Cash Provided by Operating Activities ...... 2,582,441 4,394,110 2,162,205 2,014,225
------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Acquisitions of property and equipment ......... (3,962,891) (434,045) (241,843) (128,171)
Proceeds from sale of property and
equipment .................................... -- 6,417 -- --
Change in other assets ........................ 254,940 (1,683) 48,335 41,667
------------ ------------ ------------ ------------
Net Cash Used in Investing Activities ............ (3,707,951) (429,311) (193,508) (86,504)
------------ ------------ ------------ ------------
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 20,975 --
Repayment of long-term debt ..................... (457,741) (181,212) (29,608) (120,446)
Distributions to partners ..................... (2,340,286) (3,096,924) (1,269,629) (1,436,415)
------------ ------------ ------------ ------------
Net Cash Provided by/(Used in) Financing
Activities .................................... 934,273 (3,518,884) (1,550,562) (1,556,861)
------------ ------------ ------------ ------------
Increase (Decrease) in Cash ..................... (191,237) 445,915 418,135 370,860
Cash, Beginning of Period ........................ 192,607 1,370 1,370 447,285
------------ ------------ ------------ ------------
Cash, End of Period .............................. $ 1,370 $ 447,285 $ 419,505 $ 818,145
============ ============ ============ ============
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for interest ......... $ 137,859 $ 269,347 $ 134,674 $ 130,375
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-39
<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
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 six months ended June 30, 1996 and 1997 are not
necessarily indicative of the results expected for the full year.
F-40
<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,
--------------------------
1995 1996
------------ -----------
<S> <C> <C>
Land and building .............................. $3,558,640 $3,558,640
Shelving ....................................... 2,765,931 2,891,370
Real property improvements ..................... 1,394,707 1,433,386
Computer equipment .............................. 426,483 500,704
Machinery and equipment ........................ 346,176 399,038
Vehicles ....................................... 166,449 213,302
Property under capital lease .................. 106,836 170,813
Office equipment .............................. 100,669 140,174
----------- -----------
Total property and equipment .................. 8,865,891 9,307,427
Accumulated depreciation and amortization ...... 3,279,211 3,789,210
----------- -----------
Net property, equipment and improvements ...... $5,586,680 $5,518,217
=========== ===========
</TABLE>
4. Notes Payable
Notes payable consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1996
------------- ------------
<S> <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
Note payable to a business due in $2,940 monthly installments
including interest at 7.5%
maturing 1998 ................................................... 72,618 41,737
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
Less current portion .......................................... 144,930 169,480
------------ ------------
$ 3,351,648 $ 3,202,989
============ ============
</TABLE>
F-41
<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,
----------------------
1995 1996
---------- ---------
<S> <C> <C>
Equipment at cost .................................... $106,836 $170,813
Less accumulated depreciation and amortization ...... 36,537 52,125
--------- ---------
$ 70,299 $118,688
========= =========
</TABLE>
F-42
<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 2, 1997, the Partnership sold substantially all of the
Partnerships assets and certain liabilities to Iron Mountain Incorporated for
approximately $44,600,000.
F-43
<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-44
<PAGE>
ALLEGIANCE BUSINESS ARCHIVES, LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
-------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 587,262 $ 854,841
Accounts receivable, net .................................... 571,698 651,236
Inventories ................................................ 17,989 19,264
Deferred taxes ............................................. 1,266 1,266
Prepaid expenses and other ................................. 18,092 14,428
----------- -----------
Total current assets ....................................... 1,196,307 1,541,035
Equipment and improvements, net of accumulated depreciation of
$939,491 in 1996 and $1,032,301 in 1997........................ 534,422 480,360
Security deposits ............................................. 60,019 60,019
----------- -----------
Total assets ............................................. $1,790,748 $2,081,414
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 47,360 $ 49,777
Accrued expenses ............................................. 93,374 92,880
Deferred income ............................................. 266,190 273,432
----------- -----------
Total current liabilities ................................. 406,924 416,089
Deferred taxes ................................................ 2,923 2,923
Deferred rent ................................................ 85,919 99,843
----------- -----------
Total liabilities .......................................... 495,766 518,855
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 1,462,559
----------- -----------
Total stockholders' equity ................................. 1,294,982 1,562,559
----------- -----------
Total liabilities and stockholders' equity .................. $1,790,748 $2,081,414
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-45
<PAGE>
ALLEGIANCE BUSINESS ARCHIVES, LTD.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Nine Months Six Months Ended
Ended June 30,
December -----------------------------
1996 1996 1997
------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenues:
Storage .......................................... $1,505,724 $ 980,865 $ 1,073,177
Service and storage material sales ............... 1,046,340 686,167 772,915
----------- ----------- -----------
Total revenues ................................. 2,552,064 1,667,032 1,846,092
Operating expenses:
Cost of sales (excluding depreciation) ............ 1,207,751 809,437 915,201
Selling, general and administrative expenses ...... 574,518 445,486 362,421
Depreciation and amortization ..................... 151,431 102,001 92,810
----------- ----------- -----------
Total operating expenses ........................ 1,933,700 1,356,924 1,370,432
----------- ----------- -----------
Operating income ................................. 618,364 310,108 475,660
Interest expense ................................. (11,543) (8,971) --
Other income (expense), net ........................ 28,924 (8,229) 16,577
----------- ----------- -----------
Income before provision for income taxes ......... 635,745 292,908 492,237
Provision for income taxes ........................ 4,647 17,690 16,300
----------- ----------- -----------
Net income ....................................... 631,098 275,218 475,937
Retained earnings:
Beginning of period .............................. 863,224 817,046 1,194,982
Distributions .................................... (299,340) (37,805) (208,360)
----------- ----------- -----------
End of period .................................... $1,194,982 $ 1,054,459 $ 1,462,559
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-46
<PAGE>
ALLEGIANCE BUSINESS ARCHIVES, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Six Months Ended
Ended June 30,
December ----------------------------
1996 1996 1997
------------ ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .......................................... $ 631,098 $ 275,218 $ 449,837
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................... 151,431 102,001 92,810
Deferred income taxes .............................. (20,809) 3,100 --
Increase (decrease) in cash attributable to changes in
assets and liabilities:
Accounts receivable .............................. (41,503) (11,803) (79,538)
Inventories ....................................... 16,050 17,562 (1,275)
Prepaid expenses and other ........................ 9,318 20,585 3,664
Accounts payable ................................. 17,315 (44,969) 2,417
Accrued expenses ................................. (29,292) (63,058) 9,306
Deferred income .................................... 18,697 51,407 7,242
Income taxes payable .............................. (127,379) (35,278) 16,300
Deferred rent .................................... (12,862) (31,611) 13,924
---------- --------- ----------
Net cash provided by operating activities ...... 612,064 283,154 514,687
Cash used in investing activities:
Acquisitions of equipment ........................... (20,000) (50,824) (38,748)
Cash flows from financing activities:
Shareholder distributions ........................... (299,340) (37,805) (208,360)
Repayment of long-term debt ........................ (166,230) (61,923) --
---------- --------- ----------
Net cash used in financing activities ............ (465,570) (99,728) (208,360)
---------- --------- ----------
Net increase in cash and cash equivalents ............ 126,494 132,602 267,579
Cash and cash equivalents, beginning of period ...... 460,768 293,278 587,262
---------- --------- ----------
Cash and cash equivalents, end of period ............ $ 587,262 $ 425,880 $ 854,841
========== ========= ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest .............................. $ 8,708 $ 3,423 $ --
Cash paid for income taxes ........................... $ 164,082 $ 183,836 $ 16,050
Non-cash transaction--Elimination of Federal deferred
income taxes ....................................... $ 22,466 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these statements.
F-47
<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 six months ended June 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-48
<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-49
<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-50
<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-51
<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-52
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------- June 30,
1995 1996 1997
------------- ------------- ------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .................................... $ 87,314 $ 103,617 $ 138,562
Accounts receivable, net of allowance of $2,500 in 1995,
$64,394 in 1996 and $104,800 in 1997 ........................ 2,100,106 2,709,549 4,196,425
Prepaid expenses and deposits .............................. 133,415 182,568 319,386
Restricted certificates of deposit ........................... -- 3,000,000 3,500,000
------------ ------------ ------------
Total Current Assets .................................... 2,320,835 5,995,734 8,154,373
Equipment and Leasehold Improvements:
Warehouse machinery and equipment ........................... 995,435 1,694,632 2,666,252
Office machinery and equipment .............................. 389,028 715,896 1,039,287
Vehicles ................................................... 277,207 488,637 926,434
Leasehold improvements ....................................... 133,827 243,575 479,778
Furniture and fixtures ....................................... 45,719 42,943 69,799
------------ ------------ ------------
1,841,216 3,185,683 5,181,550
Less: accumulated depreciation .............................. 394,027 979,729 1,355,767
------------ ------------ ------------
Net Equipment and Leasehold Improvements .................. 1,447,189 2,205,954 3,825,783
Other Assets:
Goodwill, net of accumulated amortization of $455,073
in 1995, $1,110,921 in 1996 and $1,659,785 in 1997 ......... 13,187,687 18,049,189 27,662,030
Deferred financing costs, net of accumulated amortization
of $43,725 in 1995, $123,876 in 1996 and $187,650
in 1997 ................................................... 271,017 483,174 667,457
Organization costs, net of accumulated amortization
of $49,227 in 1995, $122,304 in 1996 and $172,918
in 1997 ................................................... 252,526 309,460 357,182
Other ...................................................... 600 800 1,000
------------ ------------ ------------
Total Other Assets .................................... 13,711,830 18,842,623 28,687,669
------------ ------------ ------------
Total Assets .......................................... $17,479,854 $27,044,311 $40,667,825
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ........................ $ 212,902 $ 3,092,805 $ 2,586,440
Accounts payable ............................................. 411,899 328,054 376,692
Accrued payroll and related expenses ........................ 249,327 497,117 589,426
Accrued expenses ............................................. 65,685 306,204 555,598
Income taxes payable ....................................... 114,757 149,174 41,640
Deferred revenue ............................................. 494,558 775,176 1,050,996
Deferred income taxes ....................................... 113,000 19,000 19,000
Other ...................................................... -- 400,000 300,000
------------ ------------ ------------
Total Current Liabilities .............................. 1,662,128 5,567,530 5,519,792
Long-Term Debt, Less Current Maturities ..................... 11,184,010 15,210,011 27,909,010
Deferred Income Taxes ....................................... 122,000 300,000 446,000
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 13,329 shares in 1997 ...... 125 132 133
Additional paid-in capital ................................. 3,866,468 4,056,461 4,227,472
Retained earnings .......................................... 645,042 1,610,096 2,565,337
------------ ------------ ------------
Total Stockholders' Equity .............................. 4,511,716 5,666,770 6,793,023
------------ ------------ ------------
Total Liabilities and Stockholders' Equity ............... $17,479,854 $27,044,311 $40,667,825
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-53
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Period from
February 1, 1995
(commencement Six months ended June 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 $6,654,906 $10,746,909
Service revenue ........................... 469,791 1,584,744 409,955 2,324,685
----------- ----------- ----------- -----------
Total Revenues ........................... 9,513,205 15,651,619 7,064,861 13,071,594
Operating Expenses:
Cost of services ........................... 4,825,935 7,859,723 3,489,174 6,543,945
Selling, general, and administrative ...... 1,671,018 3,207,340 1,568,493 2,630,848
Depreciation and amortization ............ 942,052 1,474,846 620,313 1,122,272
----------- ----------- ----------- -----------
Total Operating Expenses ............... 7,439,005 12,541,909 5,677,980 10,297,065
----------- ----------- ----------- -----------
Operating Income ........................... 2,074,200 3,109,710 1,386,881 2,774,529
Other (Income) Expense:
Interest income ........................... -- (40,633) -- (97,625)
Interest expense ........................... 995,688 1,318,994 588,043 1,240,769
----------- ----------- ----------- -----------
Total Other Expense ..................... 995,688 1,278,361 588,043 1,143,144
----------- ----------- ----------- -----------
Income Before Provision for Income Taxes 1,078,512 1,831,349 798,838 1,631,385
Provision for Income Taxes .................. 433,470 866,295 332,838 676,144
----------- ----------- ----------- -----------
Net Income ................................. $ 645,042 $ 965,054 $ 466,000 $ 955,241
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-54
<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
Stock compensation (unaudited) ...... -- -- -- -- 57,712 -- 57,712
Net Income for the period ended
June 30, 1997 (unaudited) ......... -- -- -- -- -- 955,241 955,241
------ ---- ------- ----- ----------- ----------- -----------
Balance at June 30, 1997 (unaudited) 8,050 $81 13,329 $133 $4,227,472 $2,565,337 $6,793,023
====== ==== ======= ===== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-55
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
February 1, 1995
(commencement Six months ended June 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 $ 466,000 $ 955,241
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation .............................. 394,027 665,773 253,249 459,020
Amortization .............................. 548,025 809,073 367,064 663,252
Deferred income taxes ........................ 235,000 84,700 (10,000) 146,000
Stock compensation expense .................. -- -- -- 57,712
Changes in operating assets and
liabilities:
Accounts receivable ..................... (583,888) (84,462) (347,693) (913,819)
Prepaid expenses and deposits ............ (39,559) (31,053) (20,144) (27,373)
Accounts payable ........................ (203,849) (88,545) 472,593 (519,057)
Other current liabilities ............... 341,715 301,009 (394,769) 44,693
------------- ------------ ------------ ------------
Net Cash Provided by Operating Activities ...... 1,336,513 2,621,549 786,300 865,669
Investing Activities:
Acquisitions, net of cash acquired ............ (13,387,245) (2,433,000) (2,358,000) (7,540,277)
Purchases of equipment and leasehold
improvements ................................. (501,401) (990,087) (478,391) (990,981)
Purchases of certificates of deposits ......... -- (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) (2,836,391) (9,031,258)
Financing Activities:
Proceeds from borrowings of long-term
debt ....................................... 12,295,773 10,314,224 4,968,463 10,987,234
Payments of long-term debt ..................... (3,440,000) (6,686,383) (2,960,000) (2,900,000)
Issuance of common stock, net of issuance
costs ....................................... 3,783,674 190,000 -- 113,300
------------- ------------ ------------ ------------
Net Cash Provided by Financing Activities ...... 12,639,447 3,817,841 2,008,463 8,200,534
------------- ------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash
Equivalents .................................... 87,314 16,303 (41,628) 34,945
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 $ 45,686 $ 138,562
============= ============ ============ ============
Noncash Investing and Financing Activities:
Subordinated notes payable issued in
acquisitions ................................. $ 2,259,010 $ 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-56
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
(Information with respect to the six-month periods ended June 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 June 30, 1997 and for the
six-month periods ended June 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 June 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-57
<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-58
<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 Six-months ended
to December 31, December 31, June 30,
1995 1996 1997
------------------ -------------- -----------------
Revenues ......... $18,439 $23,801 $13,990
Net income ...... 1,281 2,135 1,032
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-59
<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 in the six months ended June 30, 1997
for the performance shares based on their estimated fair value at June 30,
1997. The Company anticipates a substantially larger compensation charge in the
quarter ending September 30, 1997 as a result of the sale of the Company
described in Note 10 and the related increase in fair value of shares vesting
in 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-60
<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
========= =========
</TABLE>
F-61
<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 September 17, 1997, Iron Mountain Incorporated signed an agreement to
acquire all outstanding stock of the Company in the fourth quarter of 1997.
Most of the Company's outstanding debt is expected to be repaid with proceeds
from the sale.
F-62
<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.
Ernst & Young LLP
Dallas, Texas
February 28, 1997, except for
Note 12, as to which the date is
September 26, 1997
F-63
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
(Successor Company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
June 30,
1995 1996 1997
------------- ------------- ------------
(Unaudited)
<S> <C> <C> <C>
ASSETS (Note 4)
Current Assets:
Cash ................................................ $ 712,818 $ 1,687,101 $ 1,298,927
Accounts receivable, less allowance for doubtful
accounts of $123,055, $156,227 and $68,000,
respectively ....................................... 8,846,628 14,008,613 15,378,534
Inventory .......................................... 293,393 371,715 378,342
Prepaid expenses and other current assets ............ 721,558 1,018,281 946,547
----------- ------------ ------------
Total Current Assets ........................... 10,574,397 17,085,710 18,002,350
Property and Equipment, at Cost:
Land, buildings, and leasehold improvements ......... 5,395,640 6,266,886 6,593,358
Vault equipment and vehicles ........................ 6,628,169 8,819,780 9,477,122
Furniture and other equipment ........................ 1,275,251 3,958,006 4,380,913
----------- ------------ ------------
13,299,060 19,044,672 20,451,393
Less accumulated depreciation .................. 892,339 3,649,357 5,104,091
----------- ------------ ------------
Property and Equipment, Net ........................... 12,406,721 15,395,315 15,347,302
Cost In Excess of Net Assets Acquired, Net of
Accumulated Amortization of $594,377, $2,310,903
and $3,467,092, respectively ........................ 35,093,200 55,367,074 54,047,886
Other Assets .......................................... 2,056,056 609,649 555,338
----------- ------------ ------------
Total Assets ................................. $60,130,374 $88,457,748 $87,952,876
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................... $ 3,309,324 $ 5,796,844 $ 3,749,203
Accrued payroll ....................................... 2,186,478 2,441,433 3,450,688
Other accrued liabilities ........................... 926,069 1,344,001 858,871
Deferred revenue .................................... 2,856,621 3,469,265 3,423,170
Due to parent (Note 2) .............................. 13,500 1,335,702 1,829,292
Current portion of long-term debt ..................... 2,272,237 3,218,794 3,676,862
----------- ------------ ------------
Total Current Liabilities ..................... 11,564,229 17,606,039 16,988,086
Long-Term Debt (Note 4) .............................. 29,724,941 39,513,473 36,887,907
Deferred Income Taxes (Note 6) ........................ 1,000 501,000 648,000
Other Liabilities .................................... 266,540 226,700 213,319
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 5,043,330
Translation adjustment .............................. (12,952) 40,457 23,826
----------- ------------ ------------
Total Stockholders' Equity ..................... 18,573,664 30,610,536 33,215,564
----------- ------------ ------------
Total Liabilities and Stockholders' Equity ...... $60,130,374 $88,457,748 $87,952,876
=========== ============ ============
</TABLE>
See accompanying notes.
F-64
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended
Seven Five June 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 $20,838,298 $25,147,059
Other ..................... 6,339,489 4,276,499 4,519,868 22,310,314 5,118,900 19,755,997
----------- ----------- ------------ ------------ ------------ ------------
Total Revenues ...... 40,833,347 25,677,964 20,678,358 65,981,376 25,957,198 44,903,056
Operating Expenses:
Cost of services rendered . 18,034,862 11,345,153 9,450,781 32,737,753 11,561,840 24,182,446
Selling and administrative
expenses ............... 14,027,645 8,730,900 6,632,234 21,591,852 8,926,509 13,488,087
Depreciation and
amortization ............ 2,850,154 1,532,211 1,601,464 4,436,529 2,053,319 3,077,037
----------- ----------- ------------ ------------ ------------ ------------
Total Operating
Expenses ............ 34,912,661 21,608,264 17,684,479 58,766,134 22,541,668 40,747,570
----------- ----------- ------------ ------------ ------------ ------------
Operating Income ............ 5,920,686 4,069,700 2,993,879 7,215,242 3,415,530 4,155,486
Interest (Income) Expense,
Net ........................ (264,788) (336,556) 1,128,963 2,668,719 1,249,548 1,614,095
----------- ----------- ------------ ------------ ------------ ------------
Income Before Income
Taxes ..................... 6,185,474 4,406,256 1,864,916 4,546,523 2,165,982 2,541,391
Provision for Income Taxes
(Note 6) .................. 2,601,000 1,852,000 807,500 1,984,000 944,000 1,118,000
----------- ----------- ------------ ------------ ------------ ------------
Net Income .................. $ 3,584,474 $ 2,554,256 $ 1,057,416 $ 2,562,523 $ 1,221,982 $ 1,423,391
=========== =========== ============ ============ ============ ============
Earnings per share ......... $ 0.46 $ 0.32 $ 0.48 $ 0.99 $ 0.53 $ 0.43
=========== =========== ============ ============ ============ ============
Weighted average shares
outstanding ............... 7,848,632 7,885,252 2,191,150 2,583,642 2,302,849 3,277,167
=========== =========== ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-65
<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) ......... -- -- -- -- (16,631) (16,631)
Net income (unaudited) ......... -- -- -- 1,423,391 -- 1,423,391
---------- -------- ------------ ------------ ---------- -----------
Balances at June 30, 1997
(unaudited) ..................... 3,325,229 $33,252 $28,115,156 $ 5,043,330 $ 23,826 $33,215,564
========== ======== ============ ============ ========== ===========
</TABLE>
See accompanying notes.
F-66
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Seven Months
December 31, Ended July 31,
1994 1995
--------------- ----------------
(Predecessor) (Predecessor)
<S> <C> <C>
Operating Activities:
Net income ........................ $ 3,584,474 $ 2,554,256
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization .................. 2,850,154 1,532,211
Deferred tax provision
(benefit) ..................... (183,912) (124,000)
Provision for losses on
accounts receivable ......... 24,000 21,000
(Gain) loss on disposal
of assets ..................... 105,613 3,961
Changes in operating
assets and liabilities, net
of acquisitions:
Accounts receivable ......... (626,622) (138,515)
Inventory .................. (84,287) (64,996)
Prepaid expenses ............ 99,233 42,197
Other assets ............... 42,084 11,773
Accounts payable ............ 161,186 41,491
Accrued and other
liabilities ............... 75,320 332,906
Deferred revenue ............ 159,545 87,259
------------- -------------
Net Cash Provided by
Operating Activities ............ 6,206,788 4,299,543
Investing Activities:
Acquisitions, net of cash
acquired ........................ -- --
Purchase of property and
equipment ..................... (1,840,880) (1,831,165)
Funds invested with Parent ...... (3,987,731) (1,515,060)
Sales of property and
equipment ..................... -- 13,087
Other investing activities ...... 64,447 293
------------- -------------
Net Cash Used for Investing
Activities ........................ (5,764,164) (3,332,845)
Financing Activities:
Proceeds from sales of
common stock .................. -- 42,500
Proceeds from issuances of
long-term debt .................. (458,889) --
Payments on long-term debt ...... -- (131,071)
Increase (decrease) in due
to parent ........................ (18,530) --
Net increase (decrease) in
revolving line of credit ...... -- --
------------- -------------
Net Cash Provided by (Used
for) Financing Activities ...... (477,419) (88,571)
Effect of Exchange Rate
Changes on Cash .................. 2,432 1,093
------------- -------------
Net Increase (Decrease) in
Cash ........................... (32,363) 879,220
Cash at Beginning of Period ...... 88,999 56,636
------------- -------------
Cash at End of Period ............ $ 56,636 $ 935,856
============= =============
<CAPTION>
Six Months Ended
Five June 30,
Months Ended Year Ended -------------------------------
December 31, December 31,
1995 1996 1996 1997
---------------- ---------------- --------------- ---------------
(Successor) (Successor) (Successor) (Successor)
(Unaudited)
<S> <C> <C> <C> <C>
Operating Activities:
Net income ........................ $ 1,057,416 $ 2,562,523 $ 1,221,982 $ 1,423,391
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization .................. 1,601,464 4,436,529 2,053,319 3,077,037
Deferred tax provision
(benefit) ..................... (47,000) 237,000 181,000 191,000
Provision for losses on
accounts receivable ......... 15,000 56,000 18,000 (77,559)
(Gain) loss on disposal
of assets ..................... 185 (18,110) (10,737) (6,986)
Changes in operating
assets and liabilities, net
of acquisitions:
Accounts receivable ......... (1,614,511) (2,988,055) 96,859 (1,436,428)
Inventory .................. (18,239) (65,232) 35,366 (6,713)
Prepaid expenses ............ (341,081) (72,961) (10,689) 38,670
Other assets ............... (7,315) (96,822) (267,345) (39,306)
Accounts payable ............ 1,388,888 1,970,283 (826,427) (1,957,586)
Accrued and other
liabilities ............... 719,665 (330,112) (246,812) 641,100
Deferred revenue ............ 48,263 254,460 290,329 (46,095)
-------------- -------------- ------------- -------------
Net Cash Provided by
Operating Activities ............ 2,802,735 5,945,503 2,534,845 1,800,525
Investing Activities:
Acquisitions, net of cash
acquired ........................ (48,751,173) (15,128,889) (8,137,076) (3,155,716)
Purchase of property and
equipment ..................... (2,290,595) (5,280,173) (2,058,566) (1,654,356)
Funds invested with Parent ...... -- -- -- --
Sales of property and
equipment ..................... -- 1,808,959 1,808,959 16,840
Other investing activities ...... (8,085) (68,568) 25,571 30,813
-------------- -------------- ------------- -------------
Net Cash Used for Investing
Activities ........................ (51,049,853) (18,668,671) (8,361,112) (4,762,419)
Financing Activities:
Proceeds from sales of
common stock .................. 17,529,200 7,118,328 3,813,828 1,198,268
Proceeds from issuances of
long-term debt .................. 30,000,000 9,883,000 5,457,000 3,001,152
Payments on long-term debt ...... (1,580,544) (3,540,918) (1,516,335) (1,932,677)
Increase (decrease) in due
to parent ........................ 13,500 1,322,202 490,966 509,394
Net increase (decrease) in
revolving line of credit ...... 3,000,000 (1,100,000) (2,400,000) (200,000)
-------------- -------------- ------------- -------------
Net Cash Provided by (Used
for) Financing Activities ...... 48,962,156 13,682,612 5,845,459 2,576,137
Effect of Exchange Rate
Changes on Cash .................. (2,220) 14,839 409 (2,417)
-------------- -------------- ------------- -------------
Net Increase (Decrease) in
Cash ........................... 712,818 974,283 19,601 (388,174)
Cash at Beginning of Period ...... -- 712,818 712,818 1,687,101
-------------- -------------- ------------- -------------
Cash at End of Period ............ $ 712,818 $ 1,687,101 $ 732,419 $ 1,298,927
============== ============== ============= =============
</TABLE>
See accompanying notes.
F-67
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the six months ended June 30, 1996 and the six months ended
June 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%, 95% 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 six month periods ended June 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 six month periods ended June 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 June
30, 1997, and the consolidated results of operations and cash flows of the
Company for the six month periods ended June 30, 1996 and 1997. The
consolidated results of operations for the six month period ended June 30,
1997, are not necessarily indicative of the results expected for the full year.
F-68
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the six months ended June 30, 1996 and the six months ended
June 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, $530,000 and $586,000 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 six month periods
ended June 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,
$116,000, and $58,000 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 six month periods ended June 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, $816,000, and $1,130,000
for the year ended December 31, 1994, the seven month period ended July 31,
F-69
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the six months ended June 30, 1996 and the six months ended
June 30, 1997 is unaudited)
1995, the five month period ended December 31, 1995, the year ended December
31, 1996, and the six-month periods ended June 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, $4,517,000, and
$6,475,000 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 six-month periods ended June 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 June 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 six month periods ended June
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).
Reclassifications
Certain 1994 and 1995 amounts have been reclassified in order to conform
to the 1996 presentation.
F-70
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the six months ended June 30, 1996 and the six months ended
June 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 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.
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
F-71
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the six months ended June 30, 1996 and the six months ended
June 30, 1997 is unaudited)
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 June 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 June 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 June 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 expires on September 5, 1997.
F-72
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the six months ended June 30, 1996 and the six months ended
June 30, 1997 is unaudited)
Long-term debt is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
June 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 $12,953,000
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 10,816,000
Acquisition Facility, increasing quarterly principal
payments over a four year period starting September
30, 1999 ............................................. -- 9,725,000 12,726,000
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 1,700,000
Acquisition notes and obligations ..................... -- 5,485,000 1,954,000
7% mortgage note payable in quarterly principal and
interest installments, maturing April 2001 ............ 521,000 441,000 398,000
Capital lease obligations .............................. 30,000 26,000 18,000
------------ ------------ ------------
31,997,000 42,732,000 40,565,000
Less current portion .................................... 2,272,000 3,219,000 3,677,000
------------ ------------ ------------
$29,725,000 $39,513,000 $36,888,000
============ ============ ============
</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 six month periods ended
June 30, 1996 and 1997 were $79,000, $35,000, $913,000, $3,131,000, $1,396,000
and $1,778,000, respectively.
At December 31, 1995 and 1996 and June 30, 1997, the fair value of the
Company's revolving line of credit and long-term debt approximated its carrying
value.
5. Stock Option Plans
The Company's 1995 Stock Option Plan reserves 340,000 and 402,000 shares
at December 31, 1996 and June 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.
F-73
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the six months ended June 30, 1996 and the six months ended
June 30, 1997 is unaudited)
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 June 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 427,000 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 June 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-74
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the six months ended June 30, 1996 and the six months ended
June 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,
-----------------------------
June 30,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Property and equipment ........................ $ 122,000 $ -- $ --
Accrued liabilities ........................... 43,000 166,000 148,000
Other .......................................... 5,000 14,000 7,000
---------- ---------- ----------
170,000 180,000 155,000
Deferred tax liabilities:
Costs in excess of net assets acquired in stock
purchase transactions and other assets ...... (123,000) (455,000) (646,000)
Property and equipment ........................ -- (46,000) (2,000)
---------- ---------- ----------
(123,000) (501,000) (648,000)
---------- ---------- ----------
Net deferred tax assets (liabilities) ......... $ 47,000 $ (321,000) $ (493,000)
========== ========== ==========
</TABLE>
Deferred tax assets totaling $48,000, $180,000 and $155,000 as of December
31, 1995 and 1996 and June 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>
Six Months Ended
Seven Five June 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 $568,000 $ 698,000
State ......... 609,000 444,000 176,000 410,000 195,000 229,000
---------- ---------- --------- ----------- --------- -----------
2,785,000 1,976,000 854,500 1,747,000 763,000 927,000
Deferred ...... (184,000) (124,000) (47,000) 237,000 181,000 191,000
---------- ---------- --------- ----------- --------- -----------
$2,601,000 $1,852,000 $ 807,500 $1,984,000 $944,000 $1,118,000
========== ========== ========= =========== ========= ===========
</TABLE>
The effective tax rates differ from the federal statutory rates primarily
as a result of the following:
<TABLE>
<CAPTION>
Six Months Ended
Seven Five June 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 4.0
------ ------ ------ ------ ------ ------
42.1% 42.0% 43.3% 43.6% 43.6% 44.0%
====== ====== ====== ====== ====== ======
</TABLE>
Cash payments for income taxes during the year ended December 31, 1994,
the seven month period ended July 31, 1996, the five-month period ended
December 31, 1995, the year ended December 31, 1996 and the six month periods
ended June 30, 1996 and 1997, were $2,785,000, $1,961,000, $720,000, $609,000,
$366,000 and $446,000, respectively.
F-75
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the six months ended June 30, 1996 and the six months ended
June 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, $69,000
and $92,000, for the five month period ended December 31, 1995 and the year
ended December 31, 1996 and the six month periods ended June 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 six month periods ended June 30, 1996
and 1997 was $147,000, $427,000, $196,000 and $240,000, 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
The Company leases 30 vault facilities, 13 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
F-76
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the six months ended June 30, 1996 and the six months ended
June 30, 1997 is unaudited)
$4,409,000 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>
Six Months Ended
Seven Five June 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 $24,577,658 $29,174,015
Technical staffing ...... -- 713,645 810,599 12,997,907 1,435,427 15,911,356
Intercompany
eliminations ............ -- -- -- (161,865) (55,887) (182,315)
------------ ------------ ------------ ----------- ----------- -----------
Total operating
revenues ............... $40,833,347 $25,677,964 $20,678,358 $65,981,376 $25,957,198 $44,903,056
============ ============ ============ =========== =========== ===========
Cost of Services
Rendered
Data security ............ $18,034,862 $10,874,499 $ 8,929,784 $23,554,642 $10,621,734 $12,765,193
Technical staffing ...... -- 470,654 520,997 9,344,976 995,993 11,599,568
Intercompany
eliminations ............ -- -- -- (161,865) (55,887) (182,315)
------------ ------------ ------------ ----------- ----------- -----------
Total costs of services
rendered ............... $18,034,862 $11,345,153 $ 9,450,781 $32,737,753 $11,561,840 $24,182,446
============ ============ ============ =========== =========== ===========
</TABLE>
F-77
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the six months ended June 30, 1996 and the six months ended
June 30, 1997 is unaudited)
<TABLE>
<CAPTION>
Six Months Ended
Seven Five June 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 $ 1,883,136 $ 2,251,582
Technical staffing ............ -- -- 1,575 219,586 13,036 682,279
Corporate ..................... 156,621 100,527 111,796 309,118 157,147 143,176
------------ ------------ ------------ ------------ ------------ ------------
Total depreciation and
amortization ............... $ 2,850,154 $ 1,532,211 $ 1,601,464 $ 4,436,529 $ 2,053,319 $ 3,077,037
============ ============ ============ ============ ============ ============
Operating Income
Data security .................. $ 9,321,434 $ 5,958,390 $ 4,629,540 $12,149,565 $ 5,876,629 $ 6,762,489
Technical staffing ............ -- 242,991 114,709 442,812 (235,300) 6,609
Corporate ..................... (3,400,748) (2,131,681) (1,750,370) (5,377,135) (2,225,799) (2,613,612)
------------ ------------ ------------ ------------ ------------ ------------
Total operating income . $ 5,920,686 $ 4,069,700 $ 2,993,879 $ 7,215,242 $ 3,415,530 $ 4,155,486
============ ============ ============ ============ ============ ============
Capital Expenditures
Data security .................. $ 1,666,190 $ 1,785,025 $ 2,115,127 $ 4,363,670 $ 1,720,883 $ 1,055,526
Technical staffing ............ -- -- 43,662 317,302 128,335 389,632
Corporate ..................... 174,690 46,140 131,806 599,201 209,348 209,198
------------ ------------ ------------ ------------ ------------ ------------
Total capital
expenditures .................. $ 1,840,880 $ 1,831,165 $ 2,290,595 $ 5,280,173 $ 2,058,566 $ 1,654,356
============ ============ ============ ============ ============ ============
Identifiable Assets
Data security .................. $59,657,300 $85,687,540 $ 85,299,853
Technical staffing ............ 152,260 2,041,337 1,920,030
Corporate ..................... 320,814 728,871 732,993
------------ ------------ ------------
Total identifiable assets . $60,130,374 $88,457,748 $ 87,952,876
============ ============ ============
</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.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1995 1996
------------- ------------
<S> <C> <C>
Revenues ............... $64,512,369 $80,799,868
============ ============
Operating income ......... $ 6,426,829 $ 8,457,204
============ ============
Net income ............... $ 1,757,474 $ 2,891,871
============ ============
Earnings per share ...... $ 0.53 $ 0.87
============ ============
</TABLE>
F-78
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the six months ended June 30, 1996 and the six months ended
June 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-79
<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.
Ernst & Young LLP
Dallas, Texas
April 30, 1997, except for
Note 15, as to which the date is
September 26, 1997
F-80
<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.
Arthur Andersen LLP
Houston, Texas
April 4, 1995
F-81
<PAGE>
ARCUS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------------- June 30,
1995 1996 1997
----------------- ----------------- -----------------
(Unaudited)
<S> <C> <C> <C>
ASSETS (Note 5)
Current Assets:
Cash and cash equivalents ........................... $ 24,099,950 $ 17,408,382 $ 14,473,402
Accounts receivable, less allowance for doubtful
accounts of $123,055, $156,227 and $68,000,
respectively ....................................... 8,951,495 14,008,613 15,378,534
Other receivables .................................... 493,500 828,128 828,128
Inventory .......................................... 293,393 371,715 378,342
Prepaid expenses and other current assets ............ 673,558 791,337 802,003
-------------- -------------- --------------
Total Current Assets .............................. 34,511,896 33,408,175 31,860,409
Property and Equipment, at Cost:
Land, buildings, and leasehold improvements ......... 5,395,640 6,266,886 6,593,358
Vault equipment and vehicles ........................ 6,628,169 8,819,780 9,477,122
Furniture and other equipment ........................ 1,288,251 3,994,497 4,420,175
-------------- -------------- --------------
13,312,060 19,081,163 20,490,655
Less accumulated depreciation ........................ 895,589 3,661,338 5,122,309
-------------- -------------- --------------
Property and Equipment, Net ........................ 12,416,471 15,419,825 15,368,346
Cost in Excess of Net Assets Acquired, Net of Accumulated
Amortization of $594,377, $2,310,903 and $3,467,092,
respectively .......................................... 35,093,200 55,235,881 53,916,693
Investments (Note 4) .................................... 821,908 817,629 1,484,291
Other Assets .......................................... 2,067,351 581,375 560,986
-------------- -------------- --------------
Total Assets ....................................... $ 84,910,826 $ 105,462,885 $ 103,190,725
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................... $ 3,334,939 $ 5,952,043 $ 3,754,176
Accrued payroll .................................... 2,186,478 2,814,509 3,478,754
Accrued liabilities ................................. 804,569 1,344,791 859,728
Deferred revenue .................................... 2,856,621 3,469,265 3,423,170
Current portion of long-term debt .................. 2,272,237 4,406,794 3,676,862
-------------- -------------- --------------
Total Current Liabilities ........................ 11,454,844 17,987,402 15,192,690
Long-Term Debt (Note 5) ................................. 29,724,941 38,325,473 36,887,907
Other Liabilities ....................................... 266,540 226,700 231,209
Commitments and Contingencies (Notes 3 and 11)
Minority Interest in Subsidiaries ..................... 4,750,185 8,007,551 8,316,112
Preferred Stock of Subsidiary, Redeemable (Note 6) ...... 23,661,526 25,556,105 26,578,349
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) (187,039,152)
Translation adjustment .............................. (12,952) 40,457 23,826
-------------- -------------- --------------
Total Stockholders' Equity ........................ 15,037,790 15,344,654 15,969,458
-------------- -------------- --------------
Total Liabilities and Stockholders' Equity ......... $ 84,910,826 $ 105,462,885 $ 103,190,725
============== ============== ==============
</TABLE>
See accompanying notes.
F-82
<PAGE>
ARCUS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------------- -------------------------------
1994 1995 1996 1996 1997
--------------- -------------- -------------- ------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Storage and transport ............... $ -- $ 16,158,490 $ 43,671,062 $20,838,298 $ 25,147,059
Other .............................. -- 4,519,868 22,310,314 5,118,900 19,755,997
------------ ------------ ------------ ----------- ------------
Total Revenues ..................... -- 20,678,358 65,981,376 25,957,198 44,903,056
Operating Expenses:
Cost of services rendered ............ -- 9,450,781 32,737,753 11,561,840 24,182,446
Selling and administrative
expenses ........................... -- 6,632,234 21,591,852 8,926,509 13,488,087
Holding company expenses ............ 504,291 1,122,653 1,991,115 736,344 671,022
Depreciation and amortization ...... -- 1,608,479 4,449,025 2,059,049 3,085,156
------------ ------------ ------------ ----------- ------------
Total Operating Expenses ......... 504,291 18,814,147 60,769,745 23,283,742 41,426,711
------------ ------------ ------------ ----------- ------------
Operating Income (Loss) ............... (504,291) 1,864,211 5,211,631 2,673,456 3,476,345
Other Income (Expense):
Interest income (expense), net ...... 1,165,373 612,499 (1,668,324) (696,115) (1,240,109)
Equity in income of limited
partnership ........................ 49,042 53,346 34,481 -- --
Minority interest .................. 87,345 (58,329) (321,023) (152,190) (271,263)
Preferred stock dividends of
subsidiary ........................ (1,028,000) (1,754,240) (1,894,579) (947,290) (1,022,244)
------------ ------------ ------------ ----------- ------------
Income (Loss) Before Income
Taxes .............................. (230,531) 717,487 1,362,186 877,861 942,729
Provision for Income Taxes
(Note 9) ........................... -- 226,000 475,000 235,000 274,000
------------ ------------ ------------ ----------- ------------
Net Income (Loss) ..................... $ (230,531) $ 491,487 $ 887,186 $ 642,861 $ 668,729
============ ============ ============ =========== ============
Earnings (Loss) per share ............ $ (.02) $ 0.04 $ 0.08 $ 0.06 $ 0.06
============ ============ ============ =========== ============
Weighted average shares
outstanding ........................... 11,426,525 11,426,525 11,426,525 11,426,525 11,426,525
============ ============ ============ =========== ============
</TABLE>
See accompanying notes.
F-83
<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) ........................... -- -- -- (16,631) (16,631)
Net income (unaudited) ............... -- -- 668,729 -- 668,729
------- ------------ -------------- --------- -----------
Balances at June 30, 1997
(unaudited) ........................... $1,143 $202,983,641 $ (187,039,152) $ 23,826 $15,969,458
======= ============ ============== ========= ===========
</TABLE>
See accompanying notes.
F-84
<PAGE>
ARCUS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------------------------------- ------------------------------
1994 1995 1996 1996 1997
-------------- --------------- ---------------- --------------- --------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income (loss) .................. $ (230,531) $ 491,487 $ 887,186 $ 642,861 $ 668,729
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Equity in income of limited
partnership ..................... (49,042) (53,346) (34,481) -- --
Minority interest ............... (87,345) 58,329 321,023 152,190 271,263
Preferred stock dividends of
subsidiary ..................... 1,028,000 1,754,240 1,894,579 947,290 1,022,244
Depreciation and amortization ... 3,765 1,608,479 4,449,025 2,059,049 3,085,156
Provision for losses on accounts
receivable ..................... -- 15,000 56,000 18,000 (77,559)
(Gain) loss on disposal of assets 5,443 185 (18,110) (10,737) (6,986)
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable ............... -- (1,642,378) (2,911,055) 96,859 (1,436,428)
Other receivables ............... (58,070) (719,500) (334,628) (334,628) --
Inventory ........................ -- (18,239) (65,232) 35,366 (6,713)
Prepaid expenses .................. -- (314,361) (26,017) (24,049) (19,730)
Other assets ..................... (19,825) (7,315) (96,821) (179,978) (39,304)
Accounts payable .................. (29,972) 1,395,537 2,099,867 (859,034) (2,107,812)
Accrued, other liabilities and
deferred revenue ............... (1,205,406) 872,428 419,907 192,067 267,952
------------ ------------- ------------- ------------ ------------
Net Cash Provided by
(Used in) Operating
Activities .................. (642,983) 3,440,546 6,641,243 2,735,256 1,620,812
Investing Activities:
Acquisitions, net of cash acquired -- (48,751,173) (15,128,889) (8,137,076) (3,155,716)
Purchases of property and
equipment ........................ -- (2,303,595) (5,303,665) (2,072,223) (1,657,129)
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 16,840
Other investing activities ...... 1,000 (8,085) (4,897) 130,437 30,813
------------ ------------- ------------- ------------ ------------
Net Cash Provided by
(Used in) Investing
Activities .................. 81,270 (50,934,660) (18,589,732) (8,269,903) (5,431,854)
</TABLE>
See accompanying notes.
F-85
<PAGE>
ARCUS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 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 5,457,000 3,001,152
Payments on long-term debt ... -- (1,580,544) (3,540,918) (1,516,335) (1,932,677)
Net increase (decrease) in
revolving line of credit ... -- 3,000,000 (1,100,000) (2,400,000) (200,000)
------------ ------------- ------------ ------------ ------------
Net Cash Provided by
Financing Activities ...... 23,394,286 33,698,656 5,242,082 1,540,665 878,479
Effect of Exchange Rate Changes on
Cash ........................... -- (2,220) 14,839 409 (2,417)
------------ ------------- ------------ ------------ ------------
Net Increase (Decrease) in Cash 22,832,573 (13,797,678) (6,691,568) (3,993,573) (2,934,980)
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 $ 20,106,377 $ 14,473,402
============ ============= ============ ============ ============
</TABLE>
See accompanying notes.
F-86
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
(Information for the six months ended June 30, 1996 and the six months ended
June 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 June 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%, 95% and 65% of the Company's revenue during the years
ended December 31, 1995 and 1996 and the six month periods ended June 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.
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.
F-87
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the six months ended June 30, 1996 and the six months ended
June 30, 1997 is unaudited)
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, $530,000 and $586,000 for the years ended December 31,
1995 and 1996 and the six month periods ended June 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, $118,000 and $60,000 for the years ended December 31, 1994,
1995 and 1996 and the six month periods ended June 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.
Included in other revenues are product sales, net of product costs,
totaling $665,000, $1,800,000, $816,000, and $1,130,000 for the years ended
December 31, 1995 and 1996 and the six month periods ended June 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, $4,517,000 and $6,475,000 for
the years ended December 31, 1995 and 1996 and the six month periods ended June
30, 1996 and 1997, respectively.
F-88
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the six months ended June 30, 1996 and the six months ended
June 30, 1997 is unaudited)
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 six months ended June 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.
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
F-89
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the six months ended June 30, 1996 and the six months ended
June 30, 1997 is unaudited)
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.
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.
F-90
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the six months ended June 30, 1996 and the six months ended
June 30, 1997 is unaudited)
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 June 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 June 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 June 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 expires on September 5, 1997.
F-91
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the six months ended June 30, 1996 and the six months ended
June 30, 1997 is unaudited)
Long-term debt is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------- June 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 $12,953,000
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 10,816,000
Acquisition Facility, increasing quarterly principal
payments over a four year period starting
September 30, 1999 ................................. -- 9,725,000 12,726,000
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 1,700,000
Acquisition notes and obligations .................. -- 5,485,000 1,954,000
7% mortgage note payable in quarterly principal and
interest installments, maturing April 2001 ......... 521,000 441,000 398,000
Capital lease obligations ........................... 30,000 26,000 18,000
------------ ------------ ------------
31,997,000 42,732,000 40,565,000
Less current portion ................................. 2,272,000 4,407,000 3,677,000
------------ ------------ ------------
$29,725,000 $38,325,000 $36,888,000
============ ============ ============
</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 six month periods ended June 30, 1996 and 1997 were $913,000,
$3,131,000, $1,396,000 and $1,778,000, respectively. No cash payments for
interest were made in 1994.
At December 31, 1995 and 1996 and June 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 June 30, 1997, UAC had
accrued the payment of a dividend for the years
F-92
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the six months ended June 30, 1996 and the six months ended
June 30, 1997 is unaudited)
ended December 31, 1994, 1995, 1996 and the six month period ended June 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 shares of authorized but
unissued common stock of ATSI 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
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.
F-93
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the six months ended June 30, 1996 and the six months ended
June 30, 1997 is unaudited)
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 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. 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.
9. Income Taxes
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------- June 30,
1995 1996 1997
----------------- ----------------- ----------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating losses ........................... $ 174,093,000 $ 173,228,000 $ 172,468,000
Tax credits .................................... 3,814,000 3,879,000 3,924,000
Property and equipment ........................ 122,000 -- --
Accrued liabilities ........................... 43,000 166,000 148,000
Other .......................................... 5,000 14,000 7,000
-------------- -------------- --------------
178,077,000 177,287,000 176,547,000
Deferred tax liabilities:
Costs in excess of net assets acquired in stock
purchase transactions and other assets ...... (123,000) (455,000) (646,000)
Property and equipment ........................ -- (46,000) (2,000)
-------------- -------------- --------------
(123,000) (501,000) (648,000)
-------------- -------------- --------------
177,954,000 176,786,000 175,899,000
Valuation allowance ........................... (177,954,000) (176,786,000) (175,899,000)
-------------- -------------- --------------
Net deferred tax assets ........................ $ -- $ -- $ --
============== ============== ==============
</TABLE>
F-94
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the six months ended June 30, 1996 and the six months ended
June 30, 1997 is unaudited)
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------ ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Current:
Federal ...... $ -- $ 50,000 $ 65,000 $ 40,000 $ 45,000
State ......... -- 176,000 410,000 195,000 229,000
--------- --------- --------- --------- ---------
-- 226,000 475,000 235,000 274,000
Deferred ...... -- -- -- -- --
--------- --------- --------- --------- ---------
$ -- $226,000 $475,000 $235,000 $274,000
========= ========= ========= ========= =========
</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>
Six Months Ended
Year Ended December 31, June 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 6.6 6.8
Change in deferred tax asset valuation
allowance ........................ (34.0) (32.0) (32.9) (34.9) (32.0)
Other .............................. -- 2.4 4.7 6.2 3.5
------ ------ ------ ------ ------
0.0% 9.1% 13.4% 11.9% 12.3%
====== ====== ====== ====== ======
</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.
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 six month periods ended June 30, 1996 and 1997, were $720,000,
$609,000, $366,000 and $446,000, respectively. No cash payments for income
taxes were made during 1994.
F-95
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the six months ended June 30, 1996 and the six months ended
June 30, 1997 is unaudited)
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, $69,000 and $92,000 for the years
ended December 31, 1995 and 1996, and the six month periods ended June 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 six month periods ended June 30, 1996 and 1997 was $147,000,
$430,000, $203,000 and $247,000, respectively.
11. Commitments and Contingencies
The Company leases 30 vault facilities, 13 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:
<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 six month
periods ended June 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, $89,000 and $104,000 respectively. The investment advisory fee is
included in holding company expenses in the consolidated statements of
operations.
F-96
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the six months ended June 30, 1996 and the six months ended
June 30, 1997 is unaudited)
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>
Six Months Ended
Year Ended December 31, June 30,
-------------------------------------------- -------------------------------
1994 1995 1996 1996 1997
------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues
Data Security ........................ $ -- $19,867,759 $ 53,145,334 $ 24,577,658 $ 29,174,015
Technical staffing .................. -- 810,599 12,997,907 1,435,427 15,911,356
Intercompany eliminations ............ -- -- (161,865) (55,887) (182,315)
---------- ------------ ------------ ------------ ------------
Total revenues ..................... $ -- $20,678,358 $ 65,981,376 $ 25,957,198 $ 44,903,056
========== ============ ============ ============ ============
Cost of Services Rendered
Data security ........................ $ -- $ 8,929,784 $ 23,554,642 $ 10,621,734 $ 12,765,193
Technical staffing .................. -- 520,997 9,344,976 995,993 11,599,568
Intercompany eliminations ............ -- -- (161,865) (55,887) (182,315)
---------- ------------ ------------ ------------ ------------
Total costs of services rendered ... $ -- $ 9,450,781 $ 32,737,753 $ 11,561,840 $ 24,182,446
========== ============ ============ ============ ============
Depreciation and Amortization
Data security ........................ $ -- $ 1,488,093 $ 3,907,825 $ 1,883,136 $ 2,251,582
Technical staffing .................. -- 1,575 219,586 13,036 682,279
Corporate ........................... -- 118,811 321,614 162,877 151,295
---------- ------------ ------------ ------------ ------------
Total depreciation and amortization $ -- $ 1,608,479 $ 4,449,025 $ 2,059,049 $ 3,085,156
========== ============ ============ ============ ============
Operating Income
Data security ........................ $ -- $ 4,629,540 $ 12,149,565 $ 5,876,629 $ 6,762,489
Technical staffing .................. -- 114,709 442,812 (235,000) 6,609
Corporate ........................... (504,291) (2,880,038) (7,380,746) (2,968,173) (3,292,753)
---------- ------------ ------------ ------------ ------------
Total operating income ............... $ (504,291) $ 1,864,211 $ 5,211,631 $ 2,673,456 $ 3,476,345
========== ============ ============ ============ ============
Capital Expenditures
Data security ........................ $ -- $ 2,115,127 $ 4,363,670 $ 1,720,883 $ 1,055,526
Technical staffing .................. -- 43,662 317,302 128,335 389,632
Corporate ........................... -- 144,806 622,693 223,005 211,971
---------- ------------ ------------ ------------ ------------
Total capital expenditures ......... $ -- $ 2,303,595 $ 5,303,665 $ 2,072,223 $ 1,657,129
========== ============ ============ ============ ============
Identifiable Assets
Data security ........................ $ -- $59,657,300 $ 85,687,540 $ 85,299,853
Technical staffing .................. -- 152,260 2,041,337 1,920,030
Corporate ........................... -- 25,101,266 17,734,008 15,970,842
---------- ------------ ------------ ------------
Total identifiable assets ............ -- $84,910,826 $105,462,885 $103,190,725
========== ============ ============ ============
</TABLE>
F-97
<PAGE>
ARCUS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information for the six months ended June 30, 1996 and the six months ended
June 30, 1997 is unaudited)
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.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1995 1996
------------- ------------
<S> <C> <C>
Revenues ............... $64,512,369 $80,799,868
============ ============
Operating income ...... $ 5,297,161 $ 6,453,593
============ ============
Net income ............... $ 1,190,579 $ 1,233,990
============ ============
Earnings per share ...... $ 0.10 $ 0.11
============ ============
</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.
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.
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-98
================================================================================
IRON MOUNTAIN INCORPORATED
8 3/4% SENIOR SUBORDINATED NOTES DUE 2009
-----------------
INDENTURE
Dated as of October 24, 1997
-----------------
THE BANK OF NEW YORK,
as Trustee
================================================================================
<PAGE>
CROSS-REFERENCE TABLE*
Trust Indenture
Act Section Indenture Section
310 (a)(1)................................................. 7.10
(a)(2)................................................ 7.10
(a)(3) ............................................... N.A.
(a)(4)................................................ N.A.
(a)(5)................................................ 7.10
(b) .................................................. 7.10
(c) .................................................. N.A.
311 (a) ................................................... 7.11
(b) .................................................. 7.11
(c) .................................................. N.A.
312 (a).................................................... 2.05
(b)................................................... 12.03
(c) .................................................. 12.03
313 (a) ................................................... 7.06
(b)(1) ............................................... N.A.
(b)(2) ............................................... 7.06;7.07
(c) .................................................. 7.06;12.02
(d)................................................... 7.06
314 (a) ................................................... 4.03;12.02
(b) .................................................. N.A.
(c)(1) ............................................... 12.04
(c)(2) ............................................... 12.04
(c)(3) ............................................... N.A.
(d)................................................... N.A.
(e) ................................................. 12.05
(f)................................................... N.A.
315 (a).................................................... 7.01
(b)................................................... 7.05,12.02
(c) ................................................. 7.01
(d)................................................... 7.01
(e)................................................... 6.11
316 (a)(last sentence) .................................... 2.09
(a)(1)(A)............................................. 6.05
(a)(1)(B) ............................................ 6.04
(a)(2) ............................................... N.A.
(b) .................................................. 6.07
(c) .................................................. 2.13
317 (a)(1) ................................................ 6.08
(a)(2)................................................ 6.09
(b) .................................................. 2.04
318 (a).................................................... 12.01
(b)................................................... N.A.
(c)................................................... 12.01
N.A. means not applicable.
*This Cross-Reference Table is not part of this Indenture.
-i-
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1 DEFINITIONS AND INCORPORATION
BY REFERENCE...............................................1
Section 1.01. Definitions................................................1
Section 1.02. Other Definitions.........................................16
Section 1.03. Incorporation by Reference of Trust Indenture Act.........17
Section 1.04. Rules of Construction.....................................17
ARTICLE 2 THE NOTES.................................................18
Section 2.01. Form and Dating...........................................18
Section 2.02. Execution and Authentication..............................18
Section 2.03. Registrar, Paying Agent...................................19
Section 2.04. Paying Agent to Hold Money in Trust.......................20
Section 2.05. Lists of Holders of the Notes.............................20
Section 2.06. Transfer and Exchange.....................................20
Section 2.07. Replacement Notes.........................................24
Section 2.08. Outstanding Notes.........................................24
Section 2.09. Treasury Notes............................................24
Section 2.10. Temporary Notes...........................................25
Section 2.11. Cancellation..............................................25
Section 2.12. Defaulted Interest........................................25
Section 2.13. Record Date...............................................25
Section 2.14. CUSIP Number..............................................26
Section 2.15. Computation of Interest...................................26
Section 2.16. Exchange of Series A Notes for Series B Notes.............26
Section 2.17. Legends...................................................27
ARTICLE 3 REDEMPTION AND OFFERS TO PURCHASE.........................28
Section 3.01. Notices to Trustee........................................28
Section 3.02. Selection of Notes to Be Redeemed.........................28
Section 3.03. Notice of Redemption......................................28
Section 3.04. Effect of Notice of Redemption............................29
Section 3.05. Deposit of Redemption Price...............................29
Section 3.06. Notes Redeemed in Part....................................30
Section 3.07. Optional Redemption.......................................30
Section 3.08. Mandatory Redemption......................................31
Section 3.09. Asset Sale Offers.........................................31
-ii-
<PAGE>
TABLE OF CONTENTS (cont.)
Page
ARTICLE 4 COVENANTS..................................................33
Section 4.01. Payment of Notes...........................................33
Section 4.02. Maintenance of Office or Agency............................33
Section 4.03. Reports....................................................34
Section 4.04. Compliance Certificate.....................................34
Section 4.05. Taxes......................................................35
Section 4.06. Stay, Extension and Usury Laws.............................35
Section 4.07. Restricted Payments........................................36
Section 4.08. Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries..........................38
Section 4.09. Incurrence of Indebtedness and Issuance
of Preferred Stock.........................................39
Section 4.10. Asset Sales................................................39
Section 4.11. Transactions with Affiliates...............................41
Section 4.12. Liens......................................................42
Section 4.13. Additional Subsidiary Guarantees...........................42
Section 4.14. Offer to Purchase Upon Change of Control...................43
Section 4.15. Corporate Existence........................................44
Section 4.16. Certain Senior Subordinated Debt...........................44
Section 4.17. Designation of unrestricted subsidiaries...................45
Section 4.18. Limitation on Sale and Leaseback Transactions..............45
ARTICLE 5 SUCCESSORS.................................................46
Section 5.01. Merger, Consolidation, or Sale of Assets...................46
Section 5.02. Successor Corporation Substituted..........................46
ARTICLE 6 CERTAIN DEFAULT PROVISIONS.................................47
Section 6.01. Events of Default..........................................47
Section 6.02. Acceleration...............................................49
Section 6.03. Other Remedies.............................................49
Section 6.04. Waiver of Past Defaults....................................50
Section 6.05. Control by Majority........................................50
Section 6.06. Limitation on Suits........................................50
Section 6.07. Rights of Holders of Notes to Receive Payment..............51
Section 6.08. Collection Suit by Trustee.................................51
Section 6.09. Trustee May File Proofs of Claim...........................51
Section 6.10. Priorities.................................................52
-iii-
<PAGE>
TABLE OF CONTENTS (cont.)
Page
Section 6.11. Undertaking for Costs......................................52
ARTICLE 7 TRUSTEE ...................................................53
Section 7.01. Duties of Trustee..........................................53
Section 7.02. Rights of Trustee..........................................54
Section 7.03. Individual Rights of Trustee...............................54
Section 7.04. Trustee's Disclaimer.......................................55
Section 7.05. Notice of Defaults.........................................55
Section 7.06. Reports by Trustee to Holders of the Notes.................55
Section 7.07. Compensation and Indemnity.................................55
Section 7.08. Replacement of Trustee.....................................56
Section 7.09. Successor Trustee by Merger, etc...........................57
Section 7.10. Eligibility; Disqualification..............................58
Section 7.11. Preferential Collection of Claims Against Company..........58
ARTICLE 8 LEGAL DEFEASANCE AND COVENANT
DEFEASANCE.................................................58
Section 8.01. Option to Effect Legal Defeasance or
Covenant Defeasance........................................58
Section 8.02. Legal Defeasance and Discharge.............................58
Section 8.03. Covenant Defeasance........................................59
Section 8.04. Conditions to Legal or Covenant Defeasance.................59
Section 8.05. Deposited Money and Government Securities
to be Held in Trust; Other Miscellaneous Provisions........61
Section 8.06. Repayment to Company.......................................61
Section 8.07. Reinstatement..............................................62
ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER ..........................62
Section 9.01. Without Consent of Holders of Notes........................62
Section 9.02. With Consent of Holders of Notes...........................63
Section 9.03. Compliance with Trust Indenture Act........................64
Section 9.04. Revocation and Effect of Consents..........................64
Section 9.05. Notation on or Exchange of Notes...........................65
Section 9.06. Trustee to Sign Amendments, etc............................65
ARTICLE 10 SUBORDINATION.............................................65
Section 10.01. Agreement to Subordinate..................................65
-iv-
<PAGE>
TABLE OF CONTENTS (cont.)
Page
Section 10.02. Liquidation; Dissolution; Bankruptcy.........................65
Section 10.03. Default on Designated Senior Debt............................66
Section 10.04. Acceleration of Notes........................................67
Section 10.05. When Distribution Must be Paid Over..........................67
Section 10.06. Notice By Company............................................67
Section 10.07. Subrogation..................................................67
Section 10.08. Relative Rights..............................................68
Section 10.09. Subordination May Not Be Impaired by Company.................68
Section 10.10. Distribution or Notice to Representative.....................68
Section 10.11. Rights of Trustee and Paying Agent...........................69
Section 10.12. Authorization to Effect Subordination........................69
Section 10.13. Amendments...................................................69
ARTICLE 11 SUBSIDIARY GUARANTEES.....................................69
Section 11.01. Subsidiary Guarantee.........................................69
Section 11.02. Subordination................................................71
Section 11.03. Liquidation; Dissolution; Bankruptcy.........................71
Section 11.04. Default on Senior Debt of the Guarantor......................72
Section 11.05. Acceleration of Notes........................................72
Section 11.06. When Distribution Must Be Paid Over..........................72
Section 11.07. Notice by a Guarantor........................................73
Section 11.08. Subrogation..................................................73
Section 11.09. Relative Rights..............................................74
Section 11.10. Subordination May Not Be Impaired
By Any Guarantor..........................................74
Section 11.11. Distribution or Notice to Representative.....................74
Section 11.12. Rights of Trustee and Paying Agent........................75
Section 11.13. Authorization to Effect Subordination.....................75
Section 11.14. Amendments................................................75
Section 11.15. Limitation of Guarantor's Liability..........................75
Section 11.16. Restricted Subsidiaries May Consolidate, etc.,
on Certain Terms..........................................76
Section 11.17. Releases Following Sale of Assets or
Designation as Unrestricted Subsidiary....................76
ARTICLE 12 MISCELLANEOUS.............................................77
Section 12.01. Trust Indenture Act Controls..............................77
NYMAIN02 Doc: 209277_6
-v-
<PAGE>
TABLE OF CONTENTS (cont.)
Page
Section 12.02. Notices......................................................77
Section 12.03. Communication by Holders of Notes with
Other Holders of Notes....................................78
Section 12.04. Certificate and Opinion as to Conditions Precedent........78
Section 12.05. Statements Required in Certificate or Opinion.............78
Section 12.06. Rules by Trustee and Agents...............................79
Section 12.07. No Personal Liability of Directors, Officers,
Employees and Stockholders................................79
Section 12.08. Governing Law.............................................79
Section 12.09. No Adverse Interpretation of Other Agreements.............79
Section 12.10. Successors................................................79
Section 12.11. Severability..............................................80
Section 12.12. Counterpart Originals.....................................80
Section 12.13. Table of Contents, Headings, etc..........................80
EXHIBITS
Exhibit A FORM OF NOTE
Exhibit B FORM OF SUPPLEMENTAL INDENTURE
Exhibit C FORM OF NOTATION ON NOTE RELATING TO
GUARANTEE
Exhibit D CERTIFICATE OF TRANSFEROR
Exhibit E PURCHASER LETTER
-vi-
<PAGE>
INDENTURE dated as of October 24, 1997 among Iron Mountain
Incorporated, a Delaware corporation (the "Company"), the Restricted
Subsidiaries signatories hereto and The Bank of New York, a New York banking
corporation, as trustee (the "Trustee").
The Company, the Restricted Subsidiaries signatory hereto and the
Trustee agree as follows for the benefit of each other and for the equal and
ratable benefit of the Holders of the 8 3/4% Senior Subordinated Notes due 2009:
ARTICLE 1
DEFINITIONS AND INCORPORATION
BY REFERENCE
SECTION 1.01. DEFINITIONS.
"Acquired Debt" means, with respect to any specified Person, (a)
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person
and (b) Indebtedness encumbering any asset acquired by such specified Person.
"Acquisition EBITDA" means, as of any date of determination, with
respect to an Acquisition EBITDA Entity, the sum of (a) EBITDA of such
Acquisition EBITDA Entity for its last fiscal quarter for which financial
statements are available at such date of determination (adjusted to give pro
forma effect to any acquisition or disposition of a business or Person by such
Acquisition EBITDA Entity consummated during the period covered by, or after the
date of, such quarterly financial statements), multiplied by four (or if such
quarterly statements are not available, EBITDA for the most recent fiscal year
for which financial statements are available), plus (b) projected quantifiable
improvements in operating results (on an annualized basis) due to cost
reductions calculated in good faith by the Company or one of its Restricted
Subsidiaries, as certified by an Officers' Certificate filed with the Trustee,
without giving effect to any operating losses of the acquired Person.
"Acquisition EBITDA Entity" means, as of any date of determination, a
business or Person (a) which has been acquired by the Company or one of its
Restricted Subsidiaries and with respect to which financial results on a
consolidated basis with the Company have not been made available for an entire
fiscal quarter or (b) which is to be acquired in whole or in part with
Indebtedness, the incurrence of which will require the calculation on such date
of the Acquisition EBITDA of such Acquisition EBITDA Entity for purposes of
Section 4.09 hereof.
"Adjusted EBITDA" means, as of any date of determination and without
duplication, the sum of (a) EBITDA of the Company and its Restricted
Subsidiaries for the most recent fiscal quarter for which internal financial
statements are available at such date of determination, multiplied by four, and
(b) Acquisition EBITDA of each business or Person that
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is an Acquisition EBITDA Entity as of such date of determination, multiplied by
a fraction, (i) the numerator of which is three minus the number of months
(and/or any portion thereof ) in such most recent fiscal quarter for which the
financial results of such Acquisition EBITDA Entity are included in the EBITDA
of the Company and its Restricted Subsidiaries under clause (a) above, and (ii)
the denominator of which is three. The effects of unusual or non-recurring items
in respect of the Company, a Restricted Subsidiary or an Acquisition EBITDA
Entity occurring in any period shall be excluded in the calculation of Adjusted
EBITDA.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, will mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided, however,
that beneficial ownership of 10% or more of the voting securities of a Person
shall be deemed to be control. Notwithstanding the foregoing, none of the
Initial Purchasers nor any of their Affiliates will be deemed to be Affiliates
of the Company.
"Agent" means any Registrar, Paying Agent or co-registrar.
"Attributable Indebtedness" in respect of a Sale and Leaseback
Transaction means, as of the time of determination, the greater of (a) the fair
market value of the property subject to such arrangement (as determined by the
Board of Directors of the Company) and (b) the present value (discounted at the
rate of interest implicit in such transaction) of the total obligations of the
lessee for rental payments during the remaining term of the lease included in
such Sale and Leaseback Transaction (including any period for which such lease
has been extended).
"Bankruptcy Law" means Title 11, U.S. Code or any similar federal or
state law for the relief of debtors.
"Board of Directors" means the Board of Directors of the Company, or
any authorized committee of the Board of Directors.
"Business Day" means any day other than a Legal Holiday.
"Capital Lease Obligation" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be so required to be capitalized on the balance sheet in
accordance with GAAP.
"Capital Stock" means any and all shares, interests, participations,
rights or other equivalents (however designated) of corporate stock, including,
without limitation, with respect to partnerships, partnership interests (whether
general or limited) and any other interest or participation that confers on a
Person the right to receive a share of the profits and losses of, or
distributions of assets of, such partnership.
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"Cash Equivalents" means (a) securities with maturities of one year or
less from the date of acquisition, issued, fully guaranteed or insured by the
United States Government or any agency thereof, (b) certificates of deposit,
time deposits, overnight bank deposits, bankers acceptances and repurchase
agreements issued by a Qualified Issuer having maturities of 270 days or less
from the date of acquisition, (c) commercial paper of an issuer rated at least
A-2 by Standard & Poor's Rating Group, a division of McGraw Hill, Inc., or P-2
by Moody's Investors Service, or carrying an equivalent rating by a nationally
recognized rating agency if both of the two named rating agencies cease
publishing ratings of investments and having maturities of 270 days or less from
the date of acquisition, (d) money market accounts or funds with or issued by
Qualified Issuers and (e) Investments in money market funds substantially all of
the assets of which are comprised of securities and other obligations of the
types described in clauses (a) through (c) above.
"Change of Control" means the occurrence of any of the following
events:
(a) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act), other than the Principal
Stockholders (or any of them), is or becomes the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, of more than a majority of the voting power of all classes
of Voting Stock of the Company;
(b) the Company consolidates with, or merges with or into,
another Person or conveys, transfers, leases or otherwise disposes of
all or substantially all of its assets to any Person, or any Person
consolidates with, or merges with or into, the Company, in any such
event pursuant to a transaction in which the outstanding Voting Stock
of the Company is converted into or exchanged for cash, securities or
other property, other than any such transaction where (i) the
outstanding Voting Stock of the Company is not converted or exchanged
at all (except to the extent necessary to reflect a change in the
jurisdiction of incorporation) or is converted into or exchanged for
(A) Voting Stock (other than Disqualified Stock) of the surviving or
transferee Person or (B) cash, securities and other property (other
than Capital Stock described in the foregoing clause (A)) of the
surviving or transferee Person in an amount that could be paid as a
Restricted Payment pursuant to Section 4.07 hereof and (ii) immediately
after such transaction, no "person" or "group" (as such terms are used
in Sections 13(d) and 14(d) of the Exchange Act), other than the
Principal Stockholders (or any of them), is the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, of more than a majority of the total outstanding Voting
Stock of the surviving or transferee Person;
(c) during any consecutive two-year period, individuals who at
the beginning of such period constituted the Board of Directors
(together with any new directors whose election to such Board of
Directors, or whose nomination for election by the stockholders of the
Company, was approved by a vote of 662/3% of the directors then still
in office who were either directors at the beginning of such
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period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors then in office; or
(d) the Company is liquidated or dissolved or adopts a plan of
liquidation or dissolution other than in a transaction which complies
with the provisions of Section 5.01 hereof.
"Company" means the party named as such in this Indenture until a
successor replaces it pursuant to this Indenture and thereafter means the
successor.
"Consolidated Adjusted Net Income" means, for any period, the net
income (or net loss) of the Company and its Restricted Subsidiaries for such
period as determined on a consolidated basis in accordance with GAAP, adjusted
to the extent included in calculating such net income or loss by excluding (a)
any net after-tax extraordinary gains or losses (less all fees and expenses
relating thereto), (b) any net after-tax gains or losses (less all fees and
expenses relating thereto) attributable to Asset Sales, (c) the portion of net
income (or loss) of any Person (other than the Company or a Restricted
Subsidiary), including Unrestricted Subsidiaries, in which the Company or any
Restricted Subsidiary has an ownership interest, except to the extent of the
amount of dividends or other distributions actually paid to the Company or any
Restricted Subsidiary in cash dividends or distributions by such Person during
such period, and (d) the net income (or loss) of any Person combined with the
Company or any Restricted Subsidiary on a "pooling of interests" basis
attributable to any period prior to the date of combination.
"Consolidated Income Tax Expense" means, for any period, the provision
for federal, state, local and foreign income taxes of the Company and its
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Interest Expense" means, for any period, without
duplication, the sum of (a) the amount which, in conformity with GAAP, would be
set forth opposite the caption "interest expense" (or any like caption) on a
consolidated statement of operations of the Company and its Restricted
Subsidiaries for such period, including, without limitation, (i) amortization of
debt discount, (ii) the net cost of interest rate contracts (including
amortization of discounts), (iii) the interest portion of any deferred payment
obligation, (iv) amortization of debt issuance costs and (v) the interest
component of Capital Lease Obligations of the Company and its Restricted
Subsidiaries, plus (b) all interest on any Indebtedness of any other Person
guaranteed and paid by the Company or any of its Restricted Subsidiaries;
provided, however, that Consolidated Interest Expense will not include any gain
or loss from extinguishment of debt, including write-off of debt issuance costs.
"Consolidated Non-Cash Charges" means, for any period, the aggregate
depreciation, amortization and other non-cash expenses of the Company and its
Restricted Subsidiaries reducing Consolidated Adjusted Net Income for such
period, determined on a consolidated basis in accordance with GAAP (excluding
any such non-cash charge that requires an accrual of or reserve for cash charges
for any future period).
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"Corporate Trust Office of the Trustee" will be at the address of the
Trustee specified in Section 12.02 hereof or such other address as to which the
Trustee may give notice to the Company.
"Credit Agent" means The Chase Manhattan Bank, in its capacity as
administrative agent for the lenders party to the Credit Agreement, or any
successor or successors party thereto.
"Credit Agreement" means the Second Amended and Restated Credit
Agreement dated as of September 26, 1997 among the Company, the lenders party
thereto and the Credit Agent, as amended, restated, supplemented, modified,
renewed, refunded, increased, extended, replaced or refinanced from time to
time.
"Custodian" means any receiver, trustee, assignee, liquidator or
similar official under any Bankruptcy Law.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Definitive Note" means a Note that evidences a part of the Notes and
is authenticated and delivered to, and registered in the name of the Holder
thereof, in the form of the Note attached hereto as Exhibit A, that does not
contain the paragraph referred to in footnotes 1, 2 and 3 and the additional
schedule referred to in footnote 4 thereof.
"Depositary" means, with respect to Notes issuable in whole or in part
in the form of the Global Note, a clearing agency registered under the Exchange
Act that is designated to act as Depositary for such Notes as contemplated by
Section 2.01.
"Designated Senior Debt" means (a) Senior Bank Debt and (b) other
Senior Debt the principal amount of which is $50.0 million or more at the date
of designation by the Company in a written instrument delivered to the Trustee;
provided that Senior Debt designated as Designated Senior Debt pursuant to
clause (b) shall cease to be Designated Senior Debt at any time that the
aggregate principal amount thereof outstanding is $10.0 million or less.
"Disqualified Stock" means any Capital Stock which, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the Holder thereof, in whole or in part, in each case on or
prior to the stated maturity of the Notes.
"distribution" means, for purposes of Articles 10 and 11, a
distribution consisting of cash, securities or other property, by set-off or
otherwise.
"Dollars" and "$" mean lawful money of the United States of America.
"DTC" means The Depository Trust Company.
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"EBITDA" means for any period Consolidated Adjusted Net Income for such
period increased by (a) Consolidated Interest Expense for such period, plus (b)
Consolidated Income Tax Expense for such period, plus (c) Consolidated Non-Cash
Charges for such period.
"Equity Interests" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Proceeds" means (a) with respect to Equity Interests (or debt
securities converted into Equity Interests) issued or sold for cash Dollars, the
aggregate amount of such cash Dollars and (b) with respect to Equity Interests
(or debt securities converted into Equity Interests) issued or sold for any
consideration other than cash Dollars, the aggregate Market Price thereof
computed on the date of the issuance or sale thereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Offer" means the offer that may be made by the Company
pursuant to the Registration Rights Agreement to exchange Series B Notes for
Series A Notes.
"Excluded Restricted Subsidiary" means any Wholly Owned Restricted
Subsidiary principally engaged in the records management business (including,
without limitation, the Company's outsourcing and staffing businesses) domiciled
outside the United States of America if the issuance of a Subsidiary Guarantee
by such Subsidiary would, as determined in a resolution of the Board of
Directors set forth in an Officers' Certificate delivered to the Trustee, create
a tax disadvantage that is material in relation to the aggregate amount of the
Company's and any Restricted Subsidiary's Investment or proposed Investment
therein.
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries (other than under the Credit Agreement) in existence on the date of
this Indenture, until such amounts are repaid.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of this Indenture.
"Global Note" means a Note that evidences all or part of the Notes and
is authenticated and delivered to, and registered in the name of, the Depositary
for the Notes or a nominee thereof, in the form of the Note attached hereto as
Exhibit A, that contains the paragraph referred to in footnotes 1, 2 and 3 and
the additional schedule referred to in footnote 4 thereof.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States of America is
pledged.
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"Guarantee" means, as applied to any obligation, (a) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (b) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
obligation to reimburse amounts drawn down under letters of credit securing such
obligations.
"Hedging Obligations" means, with respect to any Person, the
obligations of such Person under (a) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (b) other agreements
or arrangements designed to protect such Person against fluctuations in interest
rates.
"Holder" means a Person in whose name a Note is registered.
"IAI" means an institutional "accredited investor" as defined in Rule
501(A)(1), (2), (3) or (7) of Regulation D under the Securities Act.
"Indebtedness" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person, and
whether or not contingent, (a) every obligation of such Person for money
borrowed, (b) every obligation of such Person evidenced by bonds, debentures,
notes or other similar instruments, (c) every reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (d) every obligation of such
Person issued or assumed as the deferred purchase price of property or services,
(e) every Capital Lease Obligation and every obligation of such Person in
respect of Sale and Leaseback Transactions that would be required to be
capitalized on the balance sheet in accordance with GAAP, (f) all Disqualified
Stock of such Person valued at the greater of its voluntary or involuntary
maximum fixed repurchase price, plus accrued and unpaid dividends (unless
included in such maximum repurchase price), (g) all obligations of such Person
under or with respect to Hedging Obligations which would be required to be
reflected on the balance sheet as a liability of such Person in accordance with
GAAP and (h) every obligation of the type referred to in clauses (a) through (g)
of another Person and dividends of another Person the payment of which, in
either case, such Person has guaranteed. For purposes of this definition, the
"maximum fixed repurchase price" of any Disqualified Stock that does not have a
fixed repurchase price will be calculated in accordance with the terms of such
Disqualified Stock as if such Disqualified Stock were repurchased on any date on
which Indebtedness is required to be determined pursuant to this Indenture, and
if such price is based upon, or measured by, the fair market value of such
Disqualified Stock, such fair market value will be determined in good faith by
the board of directors of the issuer of such Disqualified Stock. Notwithstanding
the foregoing, trade accounts payable and accrued liabilities arising in the
ordinary course of business and any liability for federal, state or local taxes
or other taxes owed by such Person will not be considered Indebtedness for
purposes of this definition. The amount outstanding at any time of any
Indebtedness issued with original issue discount is the aggregate principal
amount at maturity of such Indebtedness, less the remaining unamortized portion
of the original issue discount of such Indebtedness at such time, as determined
in accordance with GAAP.
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"Indenture" means this Indenture, as amended or supplemented from time
to time.
"Initial Purchasers" means Bear, Stearns & Co. Inc., Chase Securities
Inc., Donaldson, Lufkin and Jenrette Securities Corporation, William Blair &
Company, L.L.C. and Prudential Securities Incorporated.
"Investments" means, with respect to any Person, all investments by
such Person in other Persons (including Affiliates) in the forms of loans
(including Guarantees), advances or capital contributions (excluding commission,
travel and similar advances to officers and employees made in the ordinary
course of business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities and all other items that are
or would be classified as investments on a balance sheet prepared in accordance
with GAAP.
"Issuance Date" means the closing date for the sale and original
issuance of the Series A Notes.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York or at a place of payment are authorized by
law, regulation or executive order to remain closed. If a payment date is a
Legal Holiday at a place of payment, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest will accrue for
the intervening period.
"Leverage Ratio" means, at any date, the ratio of (a) the aggregate
principal amount of Indebtedness of the Company and its Restricted Subsidiaries
outstanding as of the most recent available quarterly or annual balance sheet to
(b) Adjusted EBITDA, after giving pro forma effect, without duplication, to (i)
the incurrence, repayment or retirement of any Indebtedness by the Company or
its Restricted Subsidiaries since the last day of the most recent full fiscal
quarter of the Company, (ii) if the Leverage Ratio is being determined in
connection with the incurrence of Indebtedness by the Company or a Restricted
Subsidiary, such Indebtedness to be incurred, and (iii) the Indebtedness to be
incurred in connection with the acquisition of any Acquisition EBITDA Entity.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code, or equivalent statutes, of any jurisdiction).
"Liquidated Damages" has the meaning set out in the Registration Rights
Agreement.
"Make-Whole Amount" means, with respect to any Note, an amount equal to
the excess, if any, of (a) the present value of the remaining principal, premium
and interest payments that would be payable with respect to such Note if such
Note were redeemed on September 30,
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2002, computed using a discount rate equal to the Treasury Rate plus 75 basis
points, over (b) the outstanding principal amount of such Note.
"Make-Whole Average Life" means, with respect to any date of redemption
of Notes, the number of years (calculated to the nearest one-twelfth) from such
redemption date to September 30, 2002.
"Make-Whole Price" means, with respect to any Note, the greater of (a)
the sum of the principal amount of Make-Whole Amount with respect to such Note,
and (b) the redemption price of such Note on September 30, 2002.
"Market Price" means, (a) with respect to the calculation of Equity
Proceeds from the issuance or sale of debt securities which have been converted
into Equity Interests, the value received upon the original issuance or sale of
such converted debt securities, as determined reasonably and in good faith by
the Board of Directors, and (b) with respect to the calculation of Equity
Proceeds from the issuance or sale of Equity Interests, the average of the daily
closing prices for such Equity Interests for the 20 consecutive trading days
preceding the date of such computation. The closing price for each day will be
(a) such closing price on the NYSE Consolidated Tape (or any successor
consolidated tape reporting transactions on the New York Stock Exchange) or, if
such composite tape is not in use or does not report transactions in such Equity
Interests, or if such Equity Interests are listed on a stock exchange other than
the New York Stock Exchange (including for this purpose the Nasdaq National
Market), the last reported sale price regular way for such day, or in case no
such reported sale takes place on such day, the average of the closing bid and
asked prices regular way for such day, in each case on the principal national
securities exchange on which such Equity Interests are listed or admitted to
trading (which will be the national securities exchange on which the greatest
number of such Equity Interests have been traded during such 20 consecutive
trading days), or (b) if such Equity Interests are not listed or admitted to
trading on any such exchange, the average of the closing bid and asked prices
thereof in the over-the-counter market as reported by the National Association
of Securities Dealers Automated Quotation System or any successor system, or if
not included therein, the average of the closing bid and asked prices thereof
furnished by two members of the National Association of Securities Dealers
selected reasonably and in good faith by the Board of Directors for that
purpose. In the absence of one or more such quotations, the Market Price for
such Equity Interests will be determined reasonably and in good faith by the
Board of Directors.
"Net Proceeds" means the aggregate cash proceeds received by the
Company or any of its Restricted Subsidiaries in respect of any Asset Sale,
which amount is equal to the excess, if any, of (a) the cash received by the
Company or such Restricted Subsidiary (including any cash payments received by
way of deferred payment pursuant to, or monetization of, a note or installment
receivable or otherwise, but only as and when received) in connection with such
disposition over (b) the sum of (i) the amount of any Indebtedness which is
secured by such asset and which is required to be repaid in connection with the
disposition thereof, plus (ii) the reasonable out-of-pocket expenses incurred by
the Company or such Restricted Subsidiary, as the case may be, in connection
with such disposition or in connection with the transfer of such amount from
such Restricted Subsidiary to the Company, plus (iii) provisions for taxes,
including income
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taxes, attributable to the disposition of such asset or attributable to required
prepayments or repayments of Indebtedness with the proceeds thereof, plus (iv)
if the Company does not first receive a transfer of such amount from the
relevant Restricted Subsidiary with respect to the disposition of an asset by
such Restricted Subsidiary and such Restricted Subsidiary intends to make such
transfer as soon as practicable, the out-of-pocket expenses and taxes that the
Company reasonably estimates will be incurred by the Company or such Restricted
Subsidiary in connection with such transfer at the time such transfer is
expected to be received by the Company (including, without limitation,
withholding taxes on the remittance of such amount).
"1996 Indenture" means the Indenture dated as of October 1, 1996 among
the Company, the Restricted Subsidiaries parties thereto as guarantors and First
Bank National Association, as trustee, pursuant to which the 1996 Notes were
issued.
"1996 Notes" means the 101/8% Senior Subordinated Notes due 2006 issued
under the 1996 Indenture.
"Notes" means, collectively, the Series A Notes and the Series B Notes.
"Obligations" means any principal, interest (including post-petition
interest, whether or not allowed as a claim in any proceeding), penalties, fees,
costs, expenses, indemnifications, reimbursements, damages and other liabilities
payable under or in connection with any Indebtedness.
"Officer" means, with respect to any Person, the Chairman of the Board,
the Chief Executive Officer, the President, the Chief Operating Officer, the
Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller,
the Secretary or any Vice-President of such Person.
"Officers' Certificate" means a certificate signed, unless otherwise
specified, by any two of the Chairman of the Board, a Vice Chairman of the
Board, the President, the Chief Financial Officer, the Controller or an
Executive Vice President of the Company, and delivered to the Trustee, that
meets the requirements of Section 12.05 hereof.
"Opinion of Counsel" means an opinion from legal counsel who is
reasonably acceptable to the Trustee, that meets the requirements of Section
12.05 hereof. The counsel may be an employee of or counsel to the Company, any
Subsidiary of the Company or the Trustee.
"Permitted Investments" means (a) any Investments in the Company or in
a Restricted Subsidiary (other than an Excluded Restricted Subsidiary) of the
Company, including without limitation the Guarantee of Indebtedness permitted
under Section 4.09 hereof; (b) any Investments in Cash Equivalents; (c)
Investments by the Company or any Restricted Subsidiary of the Company in a
Person, if as a result of such Investment (i) such Person becomes a Restricted
Subsidiary (other than an Excluded Restricted Subsidiary) of the Company or (ii)
such Person is merged, consolidated or amalgamated with or into, or transfers or
conveys substantially all of its assets to, or is liquidated into, the Company
or a Restricted Subsidiary (other than an Excluded
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Restricted Subsidiary) of the Company; (d) Investments in assets (including
accounts and notes receivable) owned or used in the ordinary course of business;
(e) Investments for any purpose related to the Company's records management
business (including, without limitation, the Company's outsourcing and staffing
businesses) in an aggregate outstanding principal amount not to exceed $10.0
million; and (f) Investments by the Company or a Restricted Subsidiary (other
than an Excluded Restricted Subsidiary) in one or more Excluded Restricted
Subsidiaries, the aggregate outstanding amount of which does not exceed 10% of
the consolidated assets of the Company and its Restricted Subsidiaries.
"Permitted Liens" means:
(a) Liens existing as of the Issuance Date;
(b) Liens on property or assets of the Company or any
Restricted Subsidiary securing Senior Debt;
(c) Liens on any property or assets of a Restricted Subsidiary
granted in favor of the Company or any Wholly Owned Restricted
Subsidiary;
(d) Liens securing the Notes or the Subsidiary Guarantees;
(e) any interest or title of a lessor under any Capital Lease
Obligation or Sale and Leaseback Transaction so long as the
Indebtedness, if any, secured by such Lien does not exceed the
principal amount of Indebtedness permitted under Section 4.09 hereof;
(f) Liens securing Acquired Debt created prior to (and not in
connection with or in contemplation of) the incurrence of such
Indebtedness by the Company or any Restricted Subsidiary; provided that
such Lien does not extend to any property or assets of the Company or
any Restricted Subsidiary other than the assets acquired in connection
with the incurrence of such Acquired Debt;
(g) Liens securing Hedging Obligations permitted to be
incurred pursuant to clause (g) of Section 4.09 hereof;
(h) Liens arising from purchase money mortgages and purchase
money security interests, or in respect of the construction of property
or assets, incurred in the ordinary course of the business of the
Company or a Restricted Subsidiary; provided that (i) the related
Indebtedness is not secured by any property or assets of the Company or
any Restricted Subsidiary other than the property and assets so
acquired or constructed and (ii) the Lien securing such Indebtedness is
created within 60 days of such acquisition or construction;
(i) statutory Liens or landlords' and carriers',
warehousemen's, mechanics', suppliers', materialmen's, repairmen's or
other like Liens arising in
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the ordinary course of business and with respect to amounts not yet
delinquent or being contested in good faith by appropriate proceedings,
if a reserve or other appropriate provision, if any, as is then
required in conformity with GAAP has been made therefor;
(j) Liens for taxes, assessments, government charges or claims
with respect to amounts not yet delinquent or that are being contested
in good faith by appropriate proceedings diligently conducted, if a
reserve or other appropriate provision, if any, as is required in
conformity with GAAP has been made therefor;
(k) Liens incurred or deposits made to secure the performance
of tenders, bids, leases, statutory obligations, surety and appeal
bonds, government contracts, performance bonds and other obligations of
a like nature incurred in the ordinary course of business (other than
contracts for the payment of money);
(l) easements, rights-of-way, restrictions and other similar
charges or encumbrances not interfering in any material respect with
the business of the Company or any Restricted Subsidiary incurred in
the ordinary course of business;
(m) Liens arising by reason of any judgment, decree or order
of any court so long as such Lien is adequately bonded and any
appropriate legal proceedings that may have been duly initiated for the
review of such judgment, decree or order shall not have been finally
terminated or the period within which such proceedings may be initiated
shall not have expired;
(n) Liens arising under options or agreements to sell assets;
(o) other Liens securing obligations incurred in the ordinary
course of business, which obligations do not exceed $1.0 million in the
aggregate at any one time outstanding; and
(p) any extension, renewal or replacement, in whole or in
part, of any Lien described in the foregoing clauses (a) through (o);
provided that any such extension, renewal or replacement does not
extend to any additional property or assets.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, or any government or any agency or political
subdivision thereof.
"Principal Stockholders" means each of Vincent J. Ryan, Schooner
Capital Corporation, C. Richard Reese, Eugene B. Doggett, and their respective
Affiliates.
"QIB" means "qualified institutional buyer" as defined in Rule 144A.
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"Qualified Equity Offering" means an offering of Capital Stock, other
than Disqualified Stock, of the Company for Dollars, whether registered or
exempt from registration under the Securities Act.
"Qualified Issuer" means (a) any lender party to the Credit Agreement
or (b) any commercial bank (i) which has capital and surplus in excess of
$500,000,000 and (ii) the outstanding short-term debt securities of which are
rated at least A-2 by Standard & Poor's Rating Group, a division of McGraw-Hill,
Inc. or at least P-2 by Moody's Investors Service, or carry an equivalent rating
by a nationally recognized rating agency if both of the two named rating
agencies cease publishing ratings of investments.
"Qualifying Sale and Leaseback Transaction" means any Sale and
Leaseback Transaction between the Company or any of its Restricted Subsidiaries
and any bank, insurance company or other lender or investor providing for the
leasing to the Company or such Restricted Subsidiary of any property (real or
personal) which has been or is to be sold or transferred by the Company or such
Restricted Subsidiary to such lender or investor or to any Person to whom funds
have been or are to be advanced by such lender or investor and where the
property in question has been constructed or acquired after the date of this
Indenture.
"Refinancing Indebtedness" means new Indebtedness incurred or given in
exchange for, or the proceeds of which are used to repay, redeem, defease,
extend, refinance, renew, replace or refund, other Indebtedness; provided,
however, that (a) the principal amount of such new Indebtedness shall not exceed
the principal amount of Indebtedness so repaid, redeemed, defeased, extended,
refinanced, renewed, replaced or refunded (plus the amount of fees, premiums,
consent fees, prepayment penalties and expenses incurred in connection
therewith); (b) such Refinancing Indebtedness shall have a Weighted Average Life
to Maturity equal to or greater than the Weighted Average Life to Maturity of
the Indebtedness so repaid, redeemed, defeased, extended, refinanced, renewed,
replaced or refunded or shall mature after the maturity date of the Notes; (c)
to the extent such Refinancing Indebtedness refinances Indebtedness that has a
final maturity date occurring after the maturity date of the Notes, such new
Indebtedness shall have a final scheduled maturity not earlier than the final
scheduled maturity of the Indebtedness so repaid, redeemed, defeased, extended,
refinanced, renewed, replaced or refunded and shall not permit redemption at the
option of the holder earlier than the earliest date of redemption at the option
of the holder of the Indebtedness so repaid, redeemed, defeased, extended,
refinanced, renewed, replaced or refunded; (d) to the extent such Refinancing
Indebtedness refinances Indebtedness subordinate to the Notes, such Refinancing
Indebtedness shall be subordinated in right of payment to the Notes and to the
extent such Refinancing Indebtedness refinances Notes or Indebtedness pari passu
with the Notes, such Refinancing Indebtedness shall be pari passu with or
subordinated in right of payment to the Notes, in each case on terms at least as
favorable to the holders of Notes as those contained in the documentation
governing the Indebtedness so repaid, redeemed, defeased, extended, refinanced,
renewed, replaced or refunded; and (e) with respect to Refinancing Indebtedness
incurred by a Restricted Subsidiary, such Refinancing Indebtedness shall rank no
more senior, and shall be at least as subordinated, in right of payment to the
Subsidiary Guarantee of such Restricted Subsidiary as the Indebtedness being
repaid, redeemed, defeased, extended, refinanced, renewed, replaced or refunded.
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"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the Issuance Date, by and among the Company, the
Guarantors and the Initial Purchasers, as amended or supplemented from time to
time.
"Regulation S" means Regulation S under the Securities Act.
"Representative" means, for purposes of Articles 10 and 11, the Credit
Agent or other agent, trustee or representative for any Senior Debt of the
Company or, with respect to any Restricted Subsidiary, for any Senior Debt of
such Restricted Subsidiary.
"Responsible Officer" when used with respect to the Trustee, means any
officer within the corporate trust department of the Trustee (or any successor
group of the Trustee) or any other officer of the Trustee customarily performing
functions similar to those performed by any of the above designated officers and
also means, with respect to a particular corporate trust matter, any other
officer to whom such matter is referred because of his knowledge of and
familiarity with the particular subject.
"Restricted Securities" means Notes that bear or are required to bear
the legends set forth in Exhibit A hereto.
"Restricted Subsidiary" means (a) each direct or indirect Subsidiary of
the Company existing on the date of this Indenture and (b) any other direct or
indirect Subsidiary of the Company formed, acquired or existing after the date
of this Indenture, in each case which is not designated by the Board of
Directors as an "Unrestricted Subsidiary."
"Rule 144A" means Rule 144A under the Securities Act, as such Rule may
be amended from time to time, or any similar rule or regulation hereafter
adopted by the SEC.
"Sale and Leaseback Transaction" means any transaction or series of
related transactions pursuant to which a Person sells or transfers any property
or asset in connection with the leasing, or the resale against installment
payments, of such property or asset to the seller or transferor.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Bank Debt" means all Obligations outstanding under or in
connection with the Credit Agreement (including Guarantees of such Obligations
by Subsidiaries of the Company).
"Senior Debt" means (a) the Senior Bank Debt and (b) any other
Indebtedness permitted to be incurred by the Company or any Restricted
Subsidiary, as the case may be, under the terms of this Indenture, unless the
instrument under which such Indebtedness is incurred expressly provides that it
is on a parity with or subordinated in right of payment to the Notes.
Notwithstanding anything to the contrary in the foregoing, Senior Debt shall not
include (i) any
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liability for federal, state, local or other taxes owed or owing by the Company,
(ii) any Indebtedness of the Company to any of its Subsidiaries or other
Affiliates, (iii) any trade payables or (iv) any Indebtedness that is incurred
in violation of this Indenture.
"Series A Notes" means the Company's 8 3/4% Series A Senior
Subordinated Notes due 2009, as amended or supplemented from time to time
pursuant to the terms hereof, that are issued under this Indenture.
"Series B Notes" means the Company's 8 3/4% Series B Senior
Subordinated Notes due 2009, as amended or supplemented from time to time
pursuant to the terms hereof, that are issued under this Indenture.
"Significant Subsidiary" means any Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date hereof.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of such Person or a combination
thereof.
"Subsidiary Guarantee" means a Guarantee of a Guarantor pursuant to
Article 11 hereof.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. ss.ss.
77aaa-77bbbb) as in effect on the date on which this Indenture is qualified
under the TIA, except as provided in Section 9.03.
"Treasury Rate" means, at any time of computation, the yield to
maturity at such time (as compiled by and published in the most recent Federal
Reserve Statistical Release H.15(519), which has become publicly available at
least two business days prior to the date of the redemption notice or if such
Statistical Release is no longer published, any publicly available source of
similar market data) of United States Treasury securities with a constant
maturity most nearly equal to the Make-Whole Average Life; provided, however,
that if the Make-Whole Average Life is not equal to the constant maturity of the
United States Treasury security for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except that if the
Make-Whole Average Life is less than one year, the weekly average yield on
actually traded United States Treasury securities adjusted to a constant
maturity of one year shall be used.
"Trustee" means the party named as such above until a successor
replaces it in accordance with the applicable provisions of this Indenture and
thereafter means the successor serving hereunder.
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"Unrestricted Subsidiary" means (a) any Subsidiary that is designated
by the Board of Directors as an Unrestricted Subsidiary in accordance with
Section 4.17 hereof and (b) any Subsidiary of an Unrestricted Subsidiary.
"U.S. person" means U.S. person as defined in Regulation S.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of any Person (irrespective of whether or not, at the time, stock of
any other class or classes has, or might have, voting power by reason of the
happening of any contingency).
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the sum
of the products obtained by multiplying (x) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (y) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (b) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
the Company all of the outstanding Capital Stock or other ownership interests of
which (other than director's qualifying shares) shall at the time be owned by
the Company or by one of more Wholly Owned Restricted Subsidiaries of the
Company.
SECTION 1.02. OTHER DEFINITIONS.
Defined in
Term Section
"Affiliate Transaction"....................... 4.11
"Asset Sale".................................. 4.10
"Asset Sale Offer"............................ 4.10
"Benefitted Party"............................ 11.01
"Change of Control Offer"..................... 4.14
"Change of Control Payment"................... 4.14
"Change of Control Payment Date".............. 4.14
"Covenant Defeasance"......................... 8.03
"Commencement Date"........................... 4.10
"Company Order"............................... 2.02
"Event of Default"............................ 6.01
"Excess Proceeds"............................. 4.10
"Guarantor"................................... 11.01
"incur"....................................... 4.09
"Legal Defeasance" ........................... 8.02
"Non-Monetary Default"........................ 10.03
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"Offer Amount"................................ 3.09
"Offer Period"................................ 3.09
"Paying Agent"................................ 2.03
"Payment Blockage Notice"..................... 10.03
"Payment Default"............................. 10.03
"Purchase Date"............................... 3.09
"Registrar"................................... 2.03
"Restricted Payments"......................... 4.07
"Separation Date"............................. 2.06
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
Whenever this Indenture refers to a provision of the TIA, the provision
is incorporated by reference in and made a part of this Indenture, other than
those provisions of the TIA that may be excluded herein, which provision shall
be excluded to the extent specifically excluded in this Indenture.
The following TIA terms used in this Indenture have the following
meanings:
"indenture securities" means the Notes and the Subsidiary Guarantees,
if any;
"indenture security holder" means a Holder of a Note;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the Trustee;
"obligor" on the Notes means the Company, the Guarantors and any
successor obligor upon the Notes or any Subsidiary Guarantee, as the case may
be.
All other terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by a rule or regulation
promulgated by the SEC under the TIA have the meanings so assigned to them.
SECTION 1.04. RULES OF CONSTRUCTION.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with GAAP;
(3) "or" is not exclusive;
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(4) words in the singular include the plural, and in the plural include
the singular;
(5) provisions apply to successive events and transactions; and
(6) references to sections of or rules under the Securities Act or the
Exchange Act shall be deemed to include substitute, replacement or successor
sections or rules adopted by the SEC from time to time.
ARTICLE 2
THE NOTES
SECTION 2.01. FORM AND DATING.
The Notes and the Trustee's certificate of authentication shall be
substantially in the form of Exhibit A hereto, the terms of which are
incorporated in and made a part of this Indenture. The notation on each Note
relating to the Subsidiary Guarantees shall be substantially in the form set
forth on Exhibit C, which is part of this Indenture. The Notes may have
notations, legends or endorsements approved as to form by the Company and
required by law, stock exchange rule, agreements to which the Company or each
Restricted Subsidiary is subject, or usage. Each Note shall be dated the date of
its authentication. The Notes shall be issuable only in denominations of $1,000
and integral multiples thereof.
The Notes shall, in accordance with the following provisions, be
issuable (i) in whole or in part in the form of the Global Note and, in such
case, the Depositary for such Global Note shall be designated by the Company in
an Officers' Certificate delivered to the Trustee on or prior to the Issuance
Date and (ii) in definitive form in the form of one or more Definitive Notes.
The Global Note shall represent the aggregate amount of outstanding Notes of all
Holders other than, in the case of Notes that are Restricted Securities, Holders
that are IAIs, from time to time en dorsed thereon; provided, that the aggregate
amount of outstanding Notes represented thereby may from time to time be reduced
or increased, as appropriate, to reflect exchanges and redemptions. In the case
of Notes that are Restricted Securities, Definitive Notes shall be issued to all
Holders that are IAIs in the aggregate amount of outstanding Notes held by such
Holders. Any en dorsement of the Global Note to reflect the amount of any
increase or decrease in the amount of outstanding Notes represented thereby
shall be made by the Trustee, in accordance with instructions given by the
Holder thereof as required by Section 2.06 hereof. Every Global Note
authenticated and delivered hereunder will bear a legend substantially in the
form thereof set forth on Exhibit A hereto.
SECTION 2.02. EXECUTION AND AUTHENTICATION.
Two Officers of the Company shall sign the Notes for the Company by
manual or facsimile signature. The Company's seal shall be reproduced on the
Notes and may be in facsimile form. An Officer of each Guarantor shall sign the
Subsidiary Guarantee for such Guarantor by manual or facsimile signature.
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If an Officer of the Company or a Guarantor whose signature is on a
Note or a Subsidiary Guarantee, as the case may be, no longer holds that office
at the time the Note is authenticated, the Note or the Subsidiary Guarantee, as
the case may be, shall nevertheless be valid.
A Note shall not be valid until authenticated by the manual signature
of the Trustee. The signature of the Trustee shall be conclusive evidence that
the Note has been authenticated under this Indenture. The form of Trustee's
certificate of authentication to be borne by the Notes shall be substantially as
set forth in Exhibit A hereto.
The Trustee shall, upon a written order of the Company signed by two
Officers of the Company (a "Company Order"), authenticate Notes for original
issue up to an aggregate principal amount stated in paragraph 4 of the Notes.
The aggregate principal amount of Notes outstanding at any time shall not exceed
$250,000,000 except as provided in Section 2.07 hereof.
The Trustee may appoint an authenticating agent acceptable to the
Company to authenticate Notes. Unless limited by the terms of such appointment,
an authenticating agent may authenticate Notes whenever the Trustee may do so.
Each reference in this Indenture to authentication by the Trustee includes
authentication by such agent. An authenticating agent has the same rights as an
Agent to deal with the Company or any Guarantor or an Affiliate of the Company
or any Guarantor.
SECTION 2.03. REGISTRAR, PAYING AGENT AND DEPOSITARY.
The Company shall maintain (i) an office or agency where Notes may be
presented for registration of transfer or for exchange (including any
co-registrar, the "Registrar") and (ii) an office or agency where Notes may be
presented for payment ("Paying Agent"). The Registrar shall keep a register of
the Notes and of their transfer and exchange. The Company may appoint one or
more co-registrars and one or more additional paying agents. The term "Paying
Agent" includes any additional paying agent. The Company may change any Paying
Agent, Registrar or co-registrar without prior notice to any Holder of a Note.
The Company shall notify the Trustee and the Trustee shall notify the Holders of
the Notes of the name and address of any Agent not a party to this Indenture.
The Company or any Guarantor may act as Paying Agent, Registrar or co-registrar.
The Company shall enter into an appropriate agency agreement with any Agent not
a party to this Indenture, which shall be subject to any obligations imposed by
the provisions of the TIA. The agreement shall implement the provisions of this
Indenture that relate to such Agent. The Company shall notify the Trustee of the
name and address of any such Agent. If the Company fails to maintain a Registrar
or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as
such, and shall be entitled to appropriate compensation in accordance with
Section 7.07 hereof.
The Company initially appoints the Trustee as Registrar, Paying Agent
and agent for service of notices and demands in connection with the Notes.
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The Company initially appoints DTC to act as Depositary with respect
to the Global Note. The Trustee shall act as custodian for the Depositary with
respect to the Global Note.
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST.
The Company shall require each Paying Agent other than the Trustee to
agree in writing that the Paying Agent shall hold in trust for the benefit of
the Holders of the Notes or the Trustee all money held by the Paying Agent for
the payment of principal of, premium, if any, and interest on the Notes, and
shall promptly notify the Trustee of any Default by the Company or the
Guarantors in making any such payment. While any such Default continues, the
Trustee may require a Paying Agent to pay all money held by it to the Trustee.
The Company at any time may require a Paying Agent to pay all money held by it
to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other
than the Company or a Guarantor) shall have no further liability for the money
delivered to the Trustee. If the Company or a Guarantor acts as Paying Agent, it
shall segregate and hold in a separate trust fund for the benefit of the Holders
of the Notes, subject to Article 10 hereof, all money held by it as Paying
Agent. Upon any bankruptcy or reorganization proceeding relating to the Company
or a Guarantor, the Trustee shall serve as Paying Agent for the Notes.
SECTION 2.05. LISTS OF HOLDERS OF THE NOTES.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Holders of the Notes and shall otherwise comply with TIA ss. 312(a). If the
Trustee is not the Registrar, the Company and/or the Guarantors shall furnish to
the Trustee at least seven Business Days before each interest payment date and
at such other times as the Trustee may request in writing a list in such form
and as of such date as the Trustee may reasonably require of the names and
addresses of Holders of the Notes, including the aggregate principal amount of
the Notes held by each thereof, and the Company and each Guarantor shall
otherwise comply with TIA ss. 312(a).
SECTION 2.06. TRANSFER AND EXCHANGE.
(a) Transfer and Exchange of Definitive Notes. When Definitive Notes
are presented by a Holder to the Registrar with a request (1) to register the
transfer of the Definitive Notes or (2) to exchange such Definitive Notes for an
equal principal amount of Definitive Notes of other au thorized denominations,
the Registrar shall register the transfer or make the exchange as requested if
its requirements for such transactions are met; provided that any Definitive
Notes presented or surrendered for registration of transfer or exchange (A)
shall be duly endorsed or accompanied by a written instruction of transfer in
form satisfactory to the Registrar duly executed by the Holder thereof or by his
attorney duly authorized in writing; (B) unless the Global Note has previously
been exchanged in whole for Definitive Notes, shall only be exchanged for an
interest in the Global Note in accordance with Section 2.06(b) if such
Definitive Notes are being transferred (i) pursuant to an effective registration
statement under the Securities Act; (ii) to a QIB in reliance on Rule 144A; or
(iii) outside the United States to a non-U.S. person in reliance on Regulation
S; and (C) in the case of a Restricted Security, such request shall be
accompanied by
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the following additional documents: (i) if such Restricted Security is being
delivered to the Regis trar by a Holder for registration in the name of such
Holder, without transfer, a certification to that effect (in substantially the
form of Exhibit D attached hereto) and a letter containing certain
representations and agreements (in substantially the form of Exhibit E attached
hereto); or (ii) if such Restricted Security is being transferred to an IAI in
reliance on an exemption from the registration requirements of the Securities
Act, other than to a QIB in reliance on Rule 144A or outside the United States
to a non-U.S. person in reliance on Regulation S, a certification to that effect
(in substantially the form of Exhibit D attached hereto), and a letter
containing certain representations and agreements (in substantially the form of
Exhibit E attached hereto) and, if requested by the Company or the Trustee, an
opinion of counsel reasonably acceptable to the Com pany and the Trustee to the
effect that such transfer is in compliance with the Securities Act.
(b) Transfer of a Definitive Note for a Beneficial Interest in the
Global Note. A Definitive Note may be exchanged for a beneficial interest in the
Global Note only upon receipt by the Trustee of a Definitive Note, duly endorsed
or accompanied by appropriate instruments of transfer, in form satisfactory to
the Trustee, together with: (i) written instructions directing the Trustee to
make an endorsement on the Global Note to reflect an increase in the aggregate
princi pal amount of the Notes represented by the Global Note, and (ii) if such
Definitive Note is a Restricted Security, a certification (in substantially the
form of Exhibit D attached hereto) to the effect that such Definitive Note is
either being transferred to a QIB in reliance on Rule 144A or outside the United
States to a non-U.S. person in reliance on Regulation S; in which case the
Trustee shall cancel such Definitive Note and cause the aggregate principal
amount of Notes represented by the Global Note to be increased accordingly. If
no Global Note is then outstanding, the Company shall issue and the Trustee
shall authenticate a new Global Note in the appropriate principal amount.
(c) Transfer of a Beneficial Interest in a Global Note for a
Definitive Note. A beneficial interest in the Global Note may be exchanged for a
Definitive Note only in the case of a Restricted Security, and upon receipt by
the Trustee of written transfer instructions (or such other form of instructions
as is customary for the Depositary) from the Depositary (or its nominee) on
behalf of any Person having a beneficial interest in a Global Note that such
Restricted Security is being transferred to an IAI in reliance on an exemption
from the registration requirements of the Securities Act, other than to a QIB in
reliance on Rule 144A or outside the United States to a non- U.S. person in
reliance on Regulation S, provided however that such request is accompanied by a
certification to that effect (in substantially the form of Exhibit D attached
hereto) and a letter containing certain representations and agreements (in
substantially the form of Exhibit E attached hereto) and, if requested by the
Company or the Trustee, an opinion of counsel reasonably acceptable to the
Company and the Trustee to the effect that such transfer is in compliance with
the Securities Act, in which case the Trustee shall, in accordance with the
standing instructions and procedures existing between the Depositary and the
Trustee, cause the aggregate principal amount of the Global Note to be reduced
accordingly and, following such reduction, the Company shall execute and the
Trustee shall authenticate and make available for delivery to the transferee a
Definitive Note in the appropriate principal amount.
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Definitive Notes issued in exchange for a beneficial interest in a
Global Note shall be registered in such names and in such authorized
denominations as the Depositary shall instruct the Trustee.
(d) Transfer and Exchange of beneficial interests in the Global Note.
The transfer and exchange of beneficial interests in the Global Note shall be
effected through the Depositary in accordance with this Indenture and the
procedures of the Depositary therefor, which shall include restrictions on
transfer comparable to those set forth herein to the extent required by the
Securities Act.
When a Global Note is presented to the Registrar with a request (1)
to register the transfer of the Global Note or (2) to exchange such Global Notes
for an equal principal amount of Notes of other denominations, the Registrar
shall register the transfer or make the exchange if its requirements for such
transactions are met; provided, however, that any Note presented or surrendered
for registration of transfer or exchange (A) shall be duly endorsed or
accompanied by a written instruction of transfer in form satisfactory to the
Registrar and the Trustee duly executed by the Holder thereof or by his attorney
duly authorized in writing and (B) in the case of a Restricted Security, such
request shall be accompanied by the following additional documents: (i) if such
Restricted Security is being transferred to the Person designated by the
Depositary as being the beneficial owner, a certification to that effect (in
substantially the form of Exhibit D attached hereto), (ii) if such Restricted
Security is being transferred to a QIB in accordance with Rule 144A or pursuant
to an effective registration statement under the Securities Act, a certification
to that effect (in substantially the form of Exhibit D attached hereto), or
(iii) if such Restricted Security is being transferred in reliance on another
exemption from the registration requirements of the Securities Act, a
certification to that effect (in substantially the form of Exhibit D attached
hereto) and, if requested by the Company or the Trustee, an opinion of counsel
reasonably acceptable to the Company and to the Trustee to the effect that such
transfer is in compliance with the Securities Act. To permit registrations of
transfer and exchanges, the Company shall issue and the Trustee shall
authenticate Notes at the Registrar's request, subject to such rules as the
Trustee may reasonably require.
(e) Cancellation and/or Adjustment of the Global Note. At such time
as all beneficial interests in the Global Note have either been exchanged for
Definitive Notes, redeemed, repurchased or cancelled, the Global Note shall be
returned to or retained and cancelled by the Trustee. At any time prior to such
cancellation, if any beneficial interest in the Global Note is exchanged for
Definitive Notes, redeemed, repurchased or cancelled, the aggregate principal
amount of Notes represented by such Global Note shall be reduced accordingly and
an endorsement shall be made on such Global Note by the Trustee to reflect such
reduction.
(f) General Provisions Relating to Transfers and Exchanges. To permit
registrations of transfers and exchanges effected in accordance with this
Indenture, the Company shall execute and the Trustee shall authenticate the
Global Note and any Definitive Notes at the Registrar's request. The Global Note
and any Definitive Notes issued upon any registration of transfer or exchange of
beneficial interests in the Global Note or the Definitive Notes shall be legal,
valid and binding obligations of the Company, evidencing the same debt, and
entitled to the same benefits under this
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Indenture, as the Definitive Notes or Global Notes surrendered upon such
registration of transfer or exchange.
Neither the Company nor the Registrar shall be required to (a) issue,
register the transfer of or exchange Notes during a period beginning at the
opening of business on a Business Day 15 days before the day of mailing of any
notice of redemption of Notes under Section 3.02 hereof and ending at the close
of business on the day of such mailing or (b) register the transfer of or
exchange any Note so selected for redemption in whole or in part, except the
unredeemed portion of any Note being redeemed in part.
No service fee shall be charged to any Holder of a Note for any
registration of transfer or exchange (except as otherwise expressly permitted
herein), but the Company may require payment of a sum sufficient to cover any
transfer tax or similar governmental charge payable in connection therewith
(other than such transfer tax or similar governmental charge payable upon
exchanges pursuant to Sections 2.10, 3.06 or 9.05 hereof, which shall be paid by
the Company).
Prior to due presentment to the Trustee for registration of the
transfer of any Note, the Trustee, any Agent, the Company and each Guarantor may
deem and treat the Person in whose name any Note is registered as the absolute
owner of such Note for the purpose of receiving payment of principal of,
premium, if any, and interest on such Note and for all other purposes
whatsoever, whether or not such Note is overdue, and none of the Trustee, any
Agent, the Company or any Guarantor shall be affected by notice to the contrary.
(g) General Provisions Relating to the Global Note. Notwithstanding
any other provision in this Indenture, no Global Note may be transferred to, or
registered or exchanged for Notes registered in the name of, any Person other
than the Depositary for such Global Note or any nominee thereof, and no such
transfer may be registered, unless (i) such Depositary (A) notifies the Company
that it is unwilling or unable to continue as Depositary for such Global Note or
(B) ceases to be a clearing agency registered under the Exchange Act, (ii) the
Company delivers to the Trustee an Officers' Certificate stating that such
Global Note shall be so transferable, registrable, and exchangeable, and such
transfers shall be registrable, or (iii) there shall have occurred and be
continuing an Event of Default with respect to the Notes evidenced by such
Global Note. Notwithstanding any other provision in this Indenture, a Global
Note to which the restriction set forth in the preceding sentence shall have
ceased to apply may be transferred only to, and may be registered and exchanged
for Notes registered only in the name or names of, such Person or Persons as the
Depositary for such Global Note shall have directed and no transfer thereof
other than such a transfer may be registered. Every Note authenticated and
delivered upon registration of transfer of, or in exchange for or in lieu of, a
Global Note to which the restriction set forth in the first sentence of this
paragraph shall apply, whether pursuant to this Section 2.06 or otherwise, shall
be authenticated and delivered in the form of, and shall be, a Global Note.
(h) Exchange of Series A Notes for Series B Notes. The Series A Notes
may be exchanged for Series B Notes pursuant to the terms of the Exchange Offer
in accordance with the procedures set out under Section 2.16 hereof.
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SECTION 2.07. REPLACEMENT NOTES.
If any mutilated Note is surrendered to the Trustee, or the Company
and the Trustee receive evidence to their satisfaction of the destruction, loss
or theft of any Note, the Company shall issue and the Trustee, upon the written
order of the Company signed by two Officers of the Company, shall authenticate a
replacement Note (accompanied by a notation of the Subsidiary Guarantees duly
endorsed by each Guarantor) if the Trustee's requirements for replacements of
Notes are met. An indemnity bond must be supplied by the Holder that is
sufficient in the judgment of the Trustee, the Company and the Guarantors to
protect the Company, the Guarantors, the Trustee, any Agent or any
authenticating agent from any loss which any of them may suffer if a Note is
replaced. Each of the Company, the Guarantors and the Trustee may charge for its
expenses in replacing a Note.
Every replacement Note is an additional obligation of the Company and
the Guarantors and shall be entitled to all of the benefits of this Indenture
equally and ratably with all other Notes duly issued hereunder.
SECTION 2.08. OUTSTANDING NOTES.
The Notes outstanding at any time are all the Notes authenticated by
the Trustee except for those canceled by it, those delivered to it for
cancellation and those described in this Section 2.08 as not outstanding. If a
Note is replaced pursuant to Section 2.07 hereof, it ceases to be outstanding
unless the Trustee receives proof satisfactory to it that the replaced Note is
held by a bona fide purchaser. If the principal amount of any Note is considered
paid under Section 4.01 hereof, it ceases to be outstanding and interest on it
ceases to accrue. Subject to Section 2.09 hereof, a Note does not cease to be
outstanding because the Company, a Guarantor, a Subsidiary of the Company or a
Guarantor or an Affiliate of the Company or a Guarantor holds the Note.
SECTION 2.09. TREASURY NOTES.
In determining whether the Holders of the required principal amount
of Notes have concurred in any direction, waiver or consent, Notes owned by the
Company, any Guarantor, any of their respective Subsidiaries or any Affiliate of
the Company or any Guarantor shall be considered as though not outstanding,
except that for purposes of determining whether the Trustee shall be protected
in relying on any such direction, waiver or consent, only Notes which a
Responsible Officer of the Trustee actually knows to be so owned shall be so
considered. Notwithstanding the foregoing, Notes that are to be acquired by the
Company, any Guarantor, any Subsidiary of the Company or any Guarantor or an
Affiliate of the Company or any Guarantor pursuant to an exchange offer, tender
offer or other agreement shall not be deemed to be owned by the Company, such
Guarantor, a Subsidiary of the Company or such Guarantor or an Affiliate of the
Company or such Guarantor until legal title to such Notes passes to the Company,
such Guarantor, such Subsidiary or such Affiliate, as the case may be.
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SECTION 2.10. TEMPORARY NOTES.
Until definitive Notes are ready for delivery, the Company may
prepare and the Trustee shall authenticate temporary Notes (accompanied by a
notation of the Subsidiary Guarantees duly endorsed by each Guarantor).
Temporary Notes shall be substantially in the form of definitive Notes but may
have variations that the Company and the Trustee consider appropriate for
temporary Notes. Without unreasonable delay, the Company shall prepare and the
Trustee, upon receipt of the written order of the Company signed by two Officers
of the Company, shall authenticate definitive Notes (accompanied by a notation
of the Subsidiary Guarantees duly endorsed by each Guarantor) in exchange for
temporary Notes. Until such exchange, temporary Notes shall be entitled to the
same rights, benefits and privileges as definitive Notes.
SECTION 2.11. CANCELLATION.
The Company at any time may deliver Notes to the Trustee for
cancellation. The Registrar and Paying Agent shall forward to the Trustee any
Notes surrendered to them for registration of transfer, exchange or payment. The
Trustee shall cancel all Notes surrendered for registration of transfer,
exchange, payment, replacement or cancellation and shall return canceled Notes
to the Company. The Company may not issue new Notes to replace Notes that it has
redeemed or paid or that have been delivered to the Trustee for cancellation.
SECTION 2.12. DEFAULTED INTEREST.
If the Company and the Guarantors default in a payment of interest on
the Notes, the Company or any such Guarantor (to the extent of its obligations
under its Subsidiary Guarantee) shall pay the defaulted interest in any lawful
manner plus, to the extent lawful, interest payable on the defaulted interest,
to the Persons who are Holders of the Notes on a subsequent special record date,
which date shall be at the earliest practicable date but in all events at least
five Business Days prior to the payment date, in each case at the rate provided
in the Notes and in Section 4.01 hereof. The Company shall fix or cause to be
fixed each such special record date and payment date, and shall, promptly
thereafter, notify the Trustee of any such date. At least 15 days before the
special record date, the Company (or the Trustee, in the name of and at the
expense of the Company) shall mail to Holders of the Notes a notice that states
the special record date, the related payment date and the amount of such
interest to be paid.
SECTION 2.13. RECORD DATE.
The record date for purposes of determining the identity of Holders
of the Notes entitled to vote or consent to any action by vote or consent
authorized or permitted under this Indenture shall be determined as provided for
in TIA ss. 316(c).
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SECTION 2.14. CUSIP NUMBER.
The Company in issuing the Notes may use a "CUSIP" number and, if it
does so, the Trustee shall use the CUSIP number in notices of redemption or
exchange as a convenience to Holders; provided that any such notice may state
that no representation is made as to the correctness or accuracy of the CUSIP
number printed in the notice or on the Notes and that reliance may be placed
only on the other identification numbers printed on the Notes. The Company will
promptly notify the Trustee of any change in the CUSIP number.
SECTION 2.15. COMPUTATION OF INTEREST.
Interest will be computed on the basis of a 360-day year consisting of
twelve 30-day months.
SECTION 2.16. EXCHANGE OF SERIES A NOTES FOR SERIES B NOTES
The Series A Notes may be exchanged for Series B Notes pursuant to the
terms of the Exchange Offer. The Trustee and Registrar shall make the exchange
as follows:
The Company shall present the Trustee with an Officers' Certificate
certifying the following:
(a) upon issuance of the Series B Notes, the transactions contemplated
by the Exchange Offer have been consummated;
(b) the principal amount of Series A Notes properly tendered in the
Exchange Offer that are represented by a Global Note for Series B Notes shall be
registered and sent for each such Holder; and
(c) the principal amount of Series A Notes properly tendered in the
Exchange Offer that are represented by Definitive Notes, the name of each Holder
of such Definitive Notes, the principal amount at maturity properly tendered in
the Exchange Offer by each such Holder, and the name and address to which
Definitive Notes for Series B Notes shall be registered and sent for each such
Holder.
The Trustee, upon receipt of (i) such Officers' Certificate, (ii) an
Opinion of Counsel (x) to the effect that the Series B Notes have been
registered under Section 5 of the Securities Act and this Indenture has been
qualified under the TIA and (iii) a Company Order, shall authenticate (A) a
Global Note for Series B Notes in an aggregate principal amount equal to the
aggregate principal amount of Series A Notes represented by a Global Note
indicated in such Officers' Certificate as having been properly tendered and (B)
Definitive Notes for Series B Notes in an aggregate principal amount equal to
the aggregate principal amount of Series A Notes registered in the names of the
Holders and represented by the Definitive Notes indicated in such Officers'
Certificate as having been properly tendered.
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If the principal amount at maturity of the Global Note for the Series
B Notes is less than the principal amount at maturity of the Global Note for the
Series A Notes, the Trustee shall make an endorsement on such Global Note for
Series A Notes indicating a reduction in the principal amount at maturity
represented thereby.
The Trustee shall deliver such Definitive Notes for Series B Notes to
the Holders thereof as indicated in such Officers' Certificate.
SECTION 2.17. LEGENDS.
(a) Except as permitted by subsections (b) or (c) hereof, each Note
shall bear legends relating to restrictions on transfer pursuant to the
securities laws in substantially the form set forth on Exhibit A attached
hereto.
(b) Upon any sale or transfer of a Restricted Security (including any
Restricted Security represented by a Global Note) pursuant to Rule 144 under the
Securities Act or pursuant to an effective registration statement under the
Securities Act: (i) in the case of any Restricted Security that is a Definitive
Note, the Registrar shall permit the Holder thereof to exchange such Restricted
Security for a Definitive Note that does not bear the legends required by
subsection (a) above; and (ii) in the case of any Restricted Security
represented by a Global Note, such Restricted Security shall not be required to
bear the legends required by subsection (a) above, but shall continue to be
subject to the provisions of Section 2.06(d) hereof; provided however, that with
respect to any request for an exchange of a Restricted Security that is
represented by a Global Note for a Defini tive Note that does not bear the
legends required by subsection (a) above, which request is made in reliance upon
Rule 144, the Holder thereof shall certify in writing to the Registrar that such
re quest is being made pursuant to Rule 144.
(c) The Company (and the Restricted Subsidiaries) shall issue and the
Trustee shall authenticate Series B Notes in exchange for Series A Notes
accepted for exchange in the Exchange Offer. The Series B Notes shall not bear
the legends required by subsection (a) above unless the Holder of such Series A
Notes is either (i) a broker-dealer who purchased such Series A Notes directly
from the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act, (ii) a Person participating in the
distribution of the Series A Notes or (iii) a Person who is an affiliate (as
defined in Rule 144A) of the Company.
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ARTICLE 3
REDEMPTION AND OFFERS TO PURCHASE
SECTION 3.01. NOTICES TO TRUSTEE.
If the Company elects to redeem Notes pursuant to the optional
redemption provisions of Section 3.07 hereof, it shall furnish to the Trustee,
at least 45 days but not more than 60 days before a redemption date, an
Officers' Certificate setting forth (i) the Section of this Indenture pursuant
to which the redemption shall occur, (ii) the redemption date, (iii) the
principal amount of Notes to be redeemed and (iv) the redemption price.
SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED.
If less than all of the Notes are to be redeemed at any time, the
Trustee shall select the Notes to be redeemed among the applicable Holders of
the Notes in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed or, if the Notes are
not so listed, on a pro rata basis, by lot or in accordance with any other
method the Trustee considers fair and appropriate, provided that no Notes of
$1,000 or less shall be redeemed in part. In the event of partial redemption by
lot, the particular Notes to be redeemed shall be selected, unless otherwise
provided herein, not less than 30 nor more than 60 days prior to the redemption
date by the Trustee from the outstanding Notes not previously called for
redemption.
The Trustee shall promptly notify the Company in writing of the Notes
selected for redemption and, in the case of any Note selected for partial
redemption, the principal amount thereof to be redeemed. Notes and portions of
Notes selected shall be in amounts of $1,000 or whole multiples of $1,000;
except that if all of the Notes of a Holder are to be redeemed, the entire
outstanding amount of Notes held by such Holder, even if not a multiple of
$1,000, shall be redeemed. Except as provided in the preceding sentence,
provisions of this Indenture that apply to Notes called for redemption also
apply to portions of Notes called for redemption.
SECTION 3.03. NOTICE OF REDEMPTION.
At least 30 days but not more than 60 days before a redemption date,
the Company shall mail or cause to be mailed, by first class mail, a notice of
redemption to each Holder whose Notes are to be redeemed at its registered
address.
The notice shall identify the Notes (including CUSIP number) to be
redeemed and shall state:
(a) the redemption date;
(b) the redemption price (including accrued interest and Liquidated
Damages, if any, to the redemption date);
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(c) if any Note is being redeemed in part, the portion of the principal
amount of such Note to be redeemed and that, after the redemption date upon
surrender of such Note, a new Note or Notes in principal amount equal to the
unredeemed portion shall be issued upon cancellation of the original Note;
(d) the name and address of the Paying Agent;
(e) that Notes called for redemption must be surrendered to the Paying
Agent to collect the redemption price;
(f) that, unless the Company defaults in making such redemption
payment, interest and Liquidated Damages, if any, on Notes called for redemption
shall cease to accrue on and after the redemption date;
(g) the paragraph of the Notes and/or Section of this Indenture
pursuant to which the Notes called for redemption are being redeemed; and
(h) that no representation is made as to the correctness or accuracy of
the CUSIP number, if any, listed in such notice or printed on the Notes.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at its expense; provided, however, that the
Company shall have delivered to the Trustee, at least 45 days prior to the
redemption date, an Officers' Certificate requesting that the Trustee give such
notice and setting forth the information to be stated in such notice as provided
in the preceding paragraph.
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION.
Once notice of redemption is mailed in accordance with Section 3.03
hereof, Notes called for redemption become irrevocably due and payable on the
redemption date at the redemption price. A notice of redemption may not be
conditional. On and after the redemption date, unless the Company defaults in
the payment of the redemption price, interest and Liquidated Damages, if any,
will cease to accrue on the Notes or portions thereof called for redemption and
all rights of Holders with respect to such Notes will terminate except for the
right to receive payment of the redemption price upon surrender for redemption.
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE.
One Business Day prior to the redemption date, the Company shall
deposit with the Trustee or with the Paying Agent money sufficient to pay the
redemption price of and accrued interest and Liquidated Damages, if any, on all
Notes to be redeemed on that date. The Trustee or the Paying Agent shall
promptly return to the Company any money deposited with the Trustee or the
Paying Agent by the Company in excess of the amounts necessary to pay the
redemption price of, and accrued interest and Liquidated Damages, if any, on,
all Notes to be redeemed.
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If the Company complies with the provisions of the preceding paragraph,
on and after the redemption date, interest and Liquidated Damages, if any, shall
cease to accrue on the Notes or the portions of Notes called for redemption,
whether or not such Notes are presented for payment. If a Note is redeemed on or
after an interest record date but on or prior to the related interest payment
date, then any accrued and unpaid interest and Liquidated Damages, if any, shall
be paid to the Person in whose name such Note was registered at the close of
business on such record date. If any Note called for redemption shall not be so
paid upon surrender for redemption because of the failure of the Company to
comply with the preceding paragraph, interest and Liquidated Damages, if any,
shall be paid on the unpaid principal, from the redemption date until such
principal is paid, and to the extent lawful on any interest not paid on such
unpaid principal, in each case at the rate provided in the Notes and in Section
4.01 hereof.
SECTION 3.06. NOTES REDEEMED IN PART.
Upon surrender of a Note that is redeemed in part, the Company shall
issue and, upon the Company's written request, the Trustee shall authenticate
for the Holder at the expense of the Company a new Note (accompanied by a
notation of the Subsidiary Guarantees duly endorsed by each Guarantor) equal in
principal amount to the unredeemed portion of the Note surrendered.
SECTION 3.07. OPTIONAL REDEMPTION.
Prior to September 30, 2002, the Notes will be subject to redemption at
any time at the option of the Company, in whole or in part, upon not less than
30 nor more than 60 day's notice, at the Make-Whole Price, plus accrued and
unpaid interest and Liquidated Damages, if any, to but excluding the applicable
redemption date. On and after September 30, 2002, the Notes will be subject to
redemption at any time at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued and
unpaid interest and Liquidated Damages, if any, to but excluding the applicable
redemption date, if redeemed during the twelve-month period beginning on
September 30 of the years indicated below:
Year Percentage
2002.................................. 104.375%
2003.................................. 102.916%
2004.................................. 101.458%
2005 and thereafter................... 100.000%
Notwithstanding the foregoing, at any time during the first 36 months
after the date of issuance of the Notes, the Company may redeem up to 35% of the
initial principal amount of the Notes originally issued with the net proceeds of
one or more Qualified Equity Offerings at a redemption price equal to 108.75% of
the principal amount of such Notes, plus accrued and unpaid interest and
Liquidated Damages, if any, to but excluding the redemption date; provided, that
at least 65% of the principal amount of Notes originally issued remains
outstanding
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immediately after the occurrence of any such redemption and that such redemption
occurs within 60 days following the closing of any such Qualified Equity
Offering.
SECTION 3.08. MANDATORY REDEMPTION.
Except as set forth below under Section 4.10 and Section 4.14 hereof,
the Company shall not be required to make sinking fund or redemption payments
with respect to the Notes.
SECTION 3.09. ASSET SALE OFFERS.
In the event that the Company shall commence an Asset Sale Offer
pursuant to Section 4.10 hereof, it shall follow the procedures specified below:
The Asset Sale Offer shall remain open for 20 Business Days after the
Commencement Date relating to such Asset Sale Offer, except to the extent
required to be extended by applicable law (as so extended, the "Offer Period").
No later than one Business Day after the termination of the Offer Period (the
"Purchase Date"), the Company shall purchase the principal amount (the "Offer
Amount") of Notes required to be purchased in such Asset Sale Offer pursuant to
Sections 3.02 and 4.10 hereof or, if less than the Offer Amount has been
tendered, all Notes tendered in response to the Asset Sale Offer.
If the Purchase Date is on or after an interest payment record date
and on or before the related interest payment date, any interest and Liquidated
Damages accrued to such Purchase Date shall be paid to the Person in whose name
a Note is registered at the close of business on such record date, and no
additional interest or Liquidated Damages shall be payable to Holders who tender
Notes pursuant to the Asset Sale Offer.
On the Commencement Date of any Asset Sale Offer, the Company shall
send or cause to be sent, by first class mail, a notice to each of the Holders,
with a copy to the Trustee. Such notice, which shall govern the terms of the
Asset Sale Offer, shall contain all instructions and materials necessary to
enable the Holders to tender Notes pursuant to the Asset Sale Offer and shall
state:
(1) that the Asset Sale Offer is being made pursuant to this Section
3.09 and Section 4.10 hereof and the length of time the Asset
Sale Offer shall remain open;
(2) the Offer Amount, the Purchase Price and the Purchase Date;
(3) that any Note not tendered or accepted for payment shall continue
to accrue interest and Liquidated Damages, if any;
(4) that, unless the Company defaults in the payment of the Purchase
Price, any Note accepted for payment pursuant to the Asset Sale
Offer shall cease to accrue interest and Liquidated Damages, if
any, after the Purchase Date;
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(5) that Holders electing to have a Note purchased pursuant to any
Asset Sale Offer shall be required to surrender the Note, with
the form entitled "Option of Holder to Elect Purchase" on the
reverse of the Note completed, to the Company, a depositary, if
appointed by the Company, or a Paying Agent at the address
specified in the notice prior to the close of business on the
Business Day preceding the Purchase Date;
(6) that Holders shall be entitled to withdraw their election if the
Company, depositary or Paying Agent, as the case may be,
receives, not later than the close of business on the Business
Day preceding the termination of the Offer Period, a facsimile
transmission or letter setting forth the name of the Holder, the
principal amount of the Note the Holder delivered for purchase
and a statement that such Holder is withdrawing his election to
have the Note purchased;
(7) that, if the aggregate principal amount of Notes surrendered by
Holders exceeds the Offer Amount, the Trustee shall select the
Notes to be purchased on a pro rata basis (with such adjustments
as may be deemed appropriate by the Company so that only Notes in
denominations of $1,000, or integral multiples thereof, shall be
purchased); and
(8) that Holders whose Notes were purchased only in part shall be
issued new Notes equal in principal amount to the unpurchased
portion of the Notes surrendered.
On or before 12:00 p.m. on each Purchase Date, the Company shall
irrevocably deposit with the Trustee or Paying Agent in immediately available
funds the aggregate Purchase Price with respect to a principal amount of Notes
equal to the Offer Amount, together with accrued interest and Liquidated
Damages, if any, thereon, to be held for payment in accordance with the terms of
this Section 3.09. On the Purchase Date, the Company shall, to the extent
lawful, (i) accept for payment, on a pro rata basis to the extent necessary, an
aggregate principal amount equal to the Offer Amount of Notes tendered pursuant
to the Asset Sale Offer, or if less than the Offer Amount has been tendered, all
Notes or portions thereof tendered, (ii) deliver or cause the Paying Agent or
depositary, as the case may be, to deliver to the Trustee Notes so accepted and
(iii) deliver to the Trustee an Officers' Certificate stating that such Notes or
portions thereof were accepted for payment by the Company in accordance with the
terms of this Section 3.09. The Company, depositary or Paying Agent, as the case
may be, shall promptly (but in any case not later than three Business Days after
the Purchase Date) mail or deliver to each tendering Holder an amount equal to
the Purchase Price with respect to the Notes tendered by such Holder and
accepted by the Company for purchase, and the Company shall promptly issue a new
Note, and the Trustee shall authenticate and mail or deliver such new Note, to
such Holder, equal in principal amount to any unpurchased portion of such
Holder's Notes surrendered. Any Note not accepted in the Asset Sale Offer shall
be promptly mailed or delivered by the Company to the Holder thereof. The
Company shall publicly announce in a newspaper of general circulation the
results of the Asset Sale Offer on the Purchase Date.
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The Asset Sale Offer shall be made by the Company in compliance with
all applicable laws, including, without limitation, Regulation 14E of the
Exchange Act and the rules thereunder, to the extent applicable, and all other
applicable federal and state securities laws.
Each purchase pursuant to this Section 3.09 shall be made pursuant to
the provisions of the second paragraph of Section 3.05 hereof to the extent
applicable.
In the event the amount of Excess Proceeds to be applied to an Asset
Sale Offer would result in the purchase of a principal amount of Notes which is
not evenly divisible by $1,000, the Trustee shall promptly refund to the Company
the portion of such Excess Proceeds that is not necessary to purchase the
immediately lesser principal amount of Notes that is so divisible.
ARTICLE 4
COVENANTS
SECTION 4.01. PAYMENT OF NOTES.
The Company shall pay or cause to be paid the principal of, premium, if
any, and interest on the Notes on the dates and in the manner provided in the
Notes. Principal, premium, if any, and interest shall be considered paid on the
date due if the Paying Agent, if other than the Company or a Restricted
Subsidiary, holds as of 10:00 a.m. Eastern Time on the due date money deposited
by the Company in immediately available funds and designated for and sufficient
to pay all principal, premium, if any, and interest then due. The Company shall
pay any and all amounts, including without limitation Liquidated Damages, if
any, on the dates and in the manner required under the Registration Rights
Agreement.
The Company shall pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on overdue principal at the rate equal to
1% per annum in excess of the then applicable interest rate on the Notes to the
extent lawful; it shall pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on overdue installments of interest
(without regard to any applicable grace period) at the same rate to the extent
lawful.
SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY.
The Company shall maintain in the Borough of Manhattan, the City of New
York, an office or agency (which may be an office of the Trustee or an affiliate
of the Trustee, Registrar or co-registrar) where Notes may be surrendered for
registration of transfer or for exchange and where notices and demands to or
upon the Company or any Restricted Subsidiary in respect of the Notes and this
Indenture may be served. The Company shall give prompt written notice to the
Trustee of the location, and any change in the location, of such office or
agency. If at any time the Company shall fail to maintain any such required
office or agency or shall fail to furnish the Trustee with the address thereof,
such presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee.
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The Company may also from time to time designate one or more other
offices or agencies where the Notes may be presented or surrendered for any or
all such purposes and may from time to time rescind such designations; provided,
however, that no such designation or rescission shall in any manner relieve the
Company of its obligation to maintain an office or agency in the Borough of
Manhattan, the City of New York for such purposes. The Company shall give prompt
written notice to the Trustee of any such designation or rescission and of any
change in the location of any such other office or agency.
The Company hereby designates the Corporate Trust Office of the Trustee
as one such office or agency of the Company in accordance with Section 2.03
hereof.
SECTION 4.03. REPORTS.
(a) Whether or not required by the rules and regulations of the SEC, so
long as any Notes are outstanding, the Company will furnish to the Holders of
Notes (i) all quarterly and annual financial information that would be required
to be contained in a filing with the SEC on Forms 10-Q and 10-K if the Company
were required to file such Forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all financial information that would be
required to be included in a Form 8-K filed with the SEC if the Company were
required to file such reports. In addition, whether or not required by the rules
and regulations of the SEC, the Company will file a copy of all such information
and reports with the SEC for public availability (unless the SEC will not accept
such a filing) and make such information available to investors who request it
in writing. Notwithstanding anything to the contrary contained herein, the
Trustee shall have no duty to review such documents for purposes of determining
compliance with any provisions of this Indenture.
(b) So long as is required for an offer or sale of the Notes to qualify
for an exemption under Rule 144A, the Company (and the Restricted Subsidiaries)
shall, upon request, provide the information required by clause (d)(4)
thereunder to each Holder and to each beneficial owner and prospective purchaser
of Notes identified by any Holder of Restricted Securities.
(c) Delivery of such reports, information and documents to the Trustee
is for informational purposes only and the Trustee's receipt of such shall not
constitute constructive notice of any information contained therein or
determinable from information contained therein, including the Company's
compliance with any of its covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates).
SECTION 4.04. COMPLIANCE CERTIFICATE.
(a) The Company shall deliver to the Trustee, within 90 days after the
end of each fiscal year, an Officers' Certificate, one of the signers of which
shall be the principal executive, principal financial or principal accounting
officer of the Company, stating that a review of the activities of the Company
and its Subsidiaries during the preceding fiscal year has been made
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under the supervision of the signing Officers with a view to determining whether
the Company and each Restricted Subsidiary has kept, observed, performed and
fulfilled its obligations under this Indenture (including with respect to any
Restricted Payments made during such year, the basis upon which the calculations
required by Section 4.07 hereof were computed, which calculations may be based
on the Company's latest available financial statements), and further stating, as
to each such Officer signing such certificate, that to the best of his or her
knowledge, the Company and each Restricted Subsidiary has kept, observed,
performed and fulfilled each and every covenant contained in this Indenture and
is not in default in the performance or observance of any of the terms,
provisions and conditions of this Indenture (or, if a Default or Event of
Default shall have occurred, describing all such Defaults or Events of Default
of which he or she may have knowledge and what action the Company and each
Restricted Subsidiary, as the case may be, is taking or proposes to take with
respect thereto) and that to the best of his or her knowledge no event has
occurred and remains in existence by reason of which payments on account of the
principal of or interest, if any, on the Notes is prohibited or if such event
has occurred, a description of the event and what action the Company and each
Restricted Subsidiary, as the case may be, is taking or proposes to take with
respect thereto.
(b) So long as not contrary to the then current professional standards
of the American Institute of Certified Public Accountants, the year-end
financial statements delivered pursuant to Section 4.03 hereof shall be
accompanied by a written statement of the Company's independent public
accountants (who shall be a firm of established national reputation) that in
conducting their audit of such financial statements, nothing has come to their
attention that would lead them to believe that the Company has violated any
provisions of Article 4 or Article 5 hereof insofar as they pertain to
accounting matters or, if any such violation has occurred, specifying the nature
and period of existence thereof, it being understood that such accountants shall
not be liable directly or indirectly to any Person for any failure to obtain
knowledge of any such violation.
(c) The Company shall, so long as any of the Notes are outstanding,
deliver to the Trustee, forthwith upon any Officer becoming aware of any Default
or Event of Default, an Officers' Certificate specifying such Default or Event
of Default and what action the Company is taking or proposes to take with
respect thereto.
SECTION 4.05. TAXES.
The Company shall pay, and shall cause each of its Subsidiaries to pay,
prior to delinquency, all material taxes, assessments, and governmental levies
except (i) such as are contested in good faith and by appropriate proceedings or
(ii) the nonpayment of which would not materially adversely affect the business,
condition (financial or otherwise), operations, performance or properties of the
Company and its Subsidiaries, taken as a whole.
SECTION 4.06. STAY, EXTENSION AND USURY LAWS.
Each of the Company and the Guarantors covenants (to the extent that it
may lawfully do so) that it shall not at any time insist upon, plead, or in any
manner whatsoever claim or take the benefit or advantage of, any stay, extension
or usury law wherever enacted, now or at any time
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hereafter in force, that may affect the covenants or the performance of this
Indenture; and each of the Company and the Guarantors (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it shall not, by resort to any such law, hinder, delay
or impede the execution of any power herein granted to the Trustee, but shall
suffer and permit the execution of every such power as though no such law has
been enacted.
SECTION 4.07. RESTRICTED PAYMENTS.
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly: (a) declare or pay any dividend or make
any distribution on account of the Company's or any of its Restricted
Subsidiaries' Equity Interests (other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the Company or such
Restricted Subsidiary or dividends or distributions payable to the Company or
any Restricted Subsidiary); (b) purchase, redeem or otherwise acquire or retire
for value any Equity Interests of the Company or any Restricted Subsidiary or
other Affiliate of the Company (other than any such Equity Interests owned by
the Company or any Restricted Subsidiary); (c) purchase, redeem or otherwise
acquire or retire prior to scheduled maturity for value any Indebtedness that is
subordinated in right of payment to the Notes; or (d) make any Investment other
than a Permitted Investment (all such payments and other actions set forth in
clauses (a) through (d) above being collectively referred to as "Restricted
Payments"), unless, at the time of such Restricted Payment:
(i) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(ii) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto, have been permitted to incur at
least $1.00 of additional Indebtedness pursuant to the test set forth in
the first paragraph of Section 4.09 hereof; and
(iii) such Restricted Payment, together with the aggregate of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of this Indenture is less than (x) the
cumulative EBITDA of the Company minus 1.75 times the cumulative
Consolidated Interest Expense of the Company, in each case for the period
(taken as one accounting period) from June 30, 1996, to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment, plus (y)
the aggregate net Equity Proceeds received by the Company from the issuance
or sale since the date of the 1996 Indenture of Equity Interests of the
Company or of debt securities of the Company that have been converted into
such Equity Interests (other than Equity Interests or convertible debt
securities sold to a Restricted Subsidiary of the Company and other than
Disqualified Stock or debt securities that have been converted into
Disqualified Stock), plus (z) $2.0 million.
The foregoing provisions will not prohibit (A) the payment of any
dividend within 60 days after the date of declaration thereof, if at said date
of declaration such payment would have complied with the provisions of this
Indenture; (B) the redemption, repurchase, retirement or other acquisition or
retirement for value of any Equity Interests of the Company in exchange for, or
with
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the net cash proceeds of, the substantially concurrent sale (other than to a
Restricted Subsidiary of the Company) of other Equity Interests of the Company
(other than any Disqualified Stock); (C) the defeasance, redemption, repurchase,
retirement or other acquisition or retirement for value of Indebtedness that is
subordinated or pari passu in right of payment to the Notes in exchange for, or
with the net cash proceeds of, a substantially concurrent issuance and sale
(other than to a Restricted Subsidiary of the Company) of Equity Interests of
the Company (other than Disqualified Stock); (D) the defeasance, redemption,
repurchase, retirement or other acquisition or retirement for value of
Indebtedness that is subordinated or pari passu in right of payment to the Notes
in exchange for, or with the net cash proceeds of, a substantially concurrent
issue and sale (other than to the Company or any of its Restricted Subsidiaries)
of Refinancing Indebtedness; (E) the repurchase of any Indebtedness subordinated
or pari passu in right of payment to the Notes at a purchase price not greater
than 101% of the principal amount of such Indebtedness in the event of a Change
of Control in accordance with provisions similar to the covenant set forth in
Section 4.14 hereof, provided that prior to or contemporaneously with such
repurchase the Company has made the Change of Control Offer as provided in such
covenant with respect to the Notes and has repurchased all Notes validly
tendered for payment in connection with such Change of Control Offer; and (F)
additional payments to current or former employees or directors of the Company
for repurchases of stock, stock options or other equity interests, provided that
the aggregate amount of all such payments under this clause (F) does not exceed
$500,000 in any year and $2.0 million in the aggregate.
The Restricted Payments described in clauses (B), (C), (E) and (F) of
the immediately preceding paragraph will be Restricted Payments that will be
permitted to be taken in accordance with such paragraph but will reduce the
amount that would otherwise be available for Restricted Payments under clause
(iii) of the first paragraph of this section, and the Restricted Payments
described in clauses (A) and (D) of the immediately preceding paragraph will be
Restricted Payments that will be permitted to be taken in accordance with such
paragraph and will not reduce the amount that would otherwise be available for
Restricted Payments under clause (iii) of the first paragraph of this section.
If an Investment results in the making of a Restricted Payment, the
aggregate amount of all Restricted Payments deemed to have been made as
calculated under the foregoing provision will be reduced by the amount of any
net reduction in such Investment (resulting from the payment of interest or
dividends, loan repayment, transfer of assets or otherwise) to the extent such
net reduction is not included in the Company's EBITDA; provided, however, that
the total amount by which the aggregate amount of all Restricted Payments may be
reduced may not exceed the lesser of (a) the cash proceeds received by the
Company and its Restricted Subsidiaries in connection with such net reduction
and (b) the initial amount of such Investment.
If the aggregate amount of all Restricted Payments calculated under
the foregoing provision includes an Investment in an Unrestricted Subsidiary or
other Person that thereafter becomes a Restricted Subsidiary, such Investment
will no longer be counted as a Restricted Payment for purposes of calculating
the aggregate amount of Restricted Payments. For the purpose of making any
calculations under this Indenture, (a) an Investment will include the fair
market value of the net assets of any Restricted Subsidiary at the time that
such Restricted
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Subsidiary is designated an Unrestricted Subsidiary and will exclude the fair
market value of the net assets of any Unrestricted Subsidiary that is designated
as a Restricted Subsidiary, (b) any property transferred to or from an
Unrestricted Subsidiary will be valued at fair market value at the time of such
transfer, provided that, in each case, the fair market value of an asset or
property is as determined by the Board of Directors in good faith, and (c)
subject to the foregoing, the amount of any Restricted Payment, if other than
cash, will be determined by the Board of Directors, whose good faith
determination will be conclusive.
The Board of Directors may designate a Restricted Subsidiary to be an
Unrestricted Subsidiary in compliance with Section 4.17 hereof. Upon such
designation, all outstanding Investments by the Company and its Restricted
Subsidiaries (except to the extent repaid in cash) in the Subsidiary so
designated will be deemed to be Restricted Payments made at the time of such
designation and will reduce the amount available for Restricted Payments under
the first paragraph of this Section 4.07. Such designation will only be
permitted if such Restricted Payment would be permitted at such time and if such
Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
SECTION 4.08. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES.
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to (a) (i) pay dividends or make any other distributions
to the Company or any of its Restricted Subsidiaries (A) on its Capital Stock or
(B) with respect to any other interest or participation in, or measured by, its
profits, or (ii) pay any Indebtedness owed to the Company or any of its
Restricted Subsidiaries, (b) make loans or advances to the Company or any of its
Restricted Subsidiaries or (c) transfer any of its properties or assets to the
Company or any of its Restricted Subsidiaries, except for such encumbrances or
restrictions existing under or by reason of (1) Existing Indebtedness as in
effect on the date of this Indenture, (2) the Credit Agreement as in effect as
of the date of this Indenture, and any amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or refinancing
thereof, provided that such amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings are no more
restrictive in the aggregate with respect to such dividend and other payment
restrictions than those contained in the Credit Agreement as in effect on the
date of this Indenture, (3) this Indenture and the Notes, (4) applicable law,
(5) any instrument governing Indebtedness or Capital Stock of a Person acquired
by the Company or any of its Restricted Subsidiaries as in effect at the time of
such acquisition (except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of the Person, so
acquired, provided that the EBITDA of such Person is not taken into account in
determining whether such acquisition was permitted by the terms of this
Indenture, (6) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices, (7) restrictions
on the transfer of property subject to purchase money obligations or Capital
Lease Obligations otherwise permitted by clause (e) of Section 4.09 hereof,
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or (8) permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Refinancing Indebtedness are no more
restrictive in the aggregate than those contained in the agreements governing
the Indebtedness being refinanced.
SECTION 4.09. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK.
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guaranty
or otherwise become directly or indirectly liable with respect to (collectively,
"incur") any Indebtedness (including Acquired Debt) and the Company will not
permit any of its Restricted Subsidiaries to issue any shares of preferred
stock; provided, however, that the Company may incur Indebtedness and may permit
a Restricted Subsidiary to incur Indebtedness if at the time of such incurrence
and after giving effect thereto the Leverage Ratio would be less than 6.5 to
1.0.
The foregoing limitations will not apply to (a) the incurrence by the
Company or any Restricted Subsidiary of Senior Bank Debt in an aggregate amount
not to exceed $100.0 million at any one time outstanding, (b) the issuance by
the Restricted Subsidiaries of Subsidiary Guarantees, (c) the incurrence by the
Company and its Restricted Subsidiaries of the Existing Indebtedness, (d) the
issuance by the Company of the Notes, (e) the incurrence by the Company and its
Restricted Subsidiaries of Capital Lease Obligations and/or additional
Indebtedness constituting purchase money obligations up to an aggregate of $2.5
million at any one time outstanding, provided that the Liens securing such
Indebtedness constitute Permitted Liens, (f) the incurrence of Indebtedness
between (i) the Company and its Restricted Subsidiaries and (ii) the Restricted
Subsidiaries, (g) Hedging Obligations that are incurred for the purpose of
fixing or hedging interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of this Indenture to be outstanding,
(h) the incurrence by the Company and its Restricted Subsidiaries of
Indebtedness arising out of letters of credit, performance bonds, surety bonds
and bankers' acceptances incurred in the ordinary course of business up to an
aggregate of $2.0 million at any one time outstanding, (i) the incurrence by the
Company and its Restricted Subsidiaries of Indebtedness consisting of
guarantees, indemnities or obligations in respect of purchase price adjustments
in connection with the acquisition or disposition of assets, including, without
limitation, shares of Capital Stock, and (j) the incurrence by the Company and
its Restricted Subsidiaries of Refinancing Indebtedness issued in exchange for,
or the proceeds of which are used to repay, redeem, defease, extend, refinance,
renew, replace or refund, Indebtedness referred to in clauses (b) through (e)
above, and this clause (j).
SECTION 4.10. ASSET SALES.
The Company will not, and will not permit any of its Restricted
Subsidiaries to, (a) sell, lease, convey or otherwise dispose of any assets
(including by way of a Sale and Leaseback Transaction, but excluding a
Qualifying Sale and Leaseback Transaction) other than sales of inventory in the
ordinary course of business (provided that the sale, lease, conveyance or other
disposition of all or substantially all of the assets of the Company will be
governed by the provisions of Section 4.14 hereof and/or the provisions of
Section 5.01 hereof, and not by the provisions of this Section 4.10), or (b)
issue or sell Equity Interests of any of its Restricted
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Subsidiaries, that, in the case of either clause (a) or (b) above, whether in a
single transaction or a series of related transactions, (i) have a fair market
value in excess of $1.0 million, or (ii) result in Net Proceeds in excess of
$1.0 million (each of the foregoing, an "Asset Sale"), unless (x) the Company
(or the Restricted Subsidiary, as the case may be) receives consideration at the
time of such Asset Sale at least equal to the fair market value (evidenced by an
Officers' Certificate delivered to the Trustee, and for Asset Sales having a
fair market value or resulting in net proceeds in excess of $5.0 million,
evidenced by a resolution of the Board of Directors set forth in an Officers'
Certificate delivered to the Trustee) of the assets sold or otherwise disposed
of and (y) at least 75% of the consideration therefor received by the Company or
such Restricted Subsidiary is in the form of cash or like-kind assets (in each
case as determined in good faith by the Company, evidenced by a resolution of
the Board of Directors and certified by an Officers' Certificate delivered to
the Trustee); provided, however, that the amount of (A) any liabilities (as
shown on the Company's or such Restricted Subsidiary's most recent balance sheet
or in the notes thereto) of the Company or such Restricted Subsidiary (other
than liabilities that are by their terms subordinated to the Notes or any
Subsidiary Guarantee) that are assumed by the transferee of any such assets and
(B) any notes or other obligations received by the Company or such Restricted
Subsidiary from such transferee that are immediately converted by the Company or
such Restricted Subsidiary into cash (to the extent of the cash received) or
Cash Equivalents, shall be deemed to be cash for purposes of this provision; and
provided, further, that the 75% limitation referred to in the foregoing clause
(y) shall not apply to any Asset Sale in which the cash portion of the
consideration received therefrom is equal to or greater than what the after-tax
proceeds would have been had such Asset Sale complied with the aforementioned
75% limitation. A transfer of assets or issuance of Equity Interests by the
Company to a Wholly Owned Restricted Subsidiary or by a Wholly Owned Restricted
Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary will
not be deemed to be an Asset Sale.
Within 360 days of any Asset Sale, the Company may, at its option,
apply an amount equal to the Net Proceeds from such Asset Sale either (a) to
permanently reduce Senior Debt, or (b) to an investment in a Restricted
Subsidiary or in another business or capital expenditure or other
long-term/tangible assets, in each case, in the same line of business as the
Company or any of its Restricted Subsidiaries was engaged in on the date of this
Indenture or in businesses similar or reasonably related thereto. Pending the
final application of any such Net Proceeds, the Company may temporarily reduce
Senior Bank Debt or otherwise invest such Net Proceeds in any manner that is not
prohibited by this Indenture. Any Net Proceeds from such Asset Sale that are not
applied or invested as provided in the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds exceeds $5.0 million, the Company shall make an offer to all Holders of
Notes and the holders of any future Indebtedness ranking pari passu with the
Notes, which Indebtedness contains similar provisions requiring the Company to
repurchase such Indebtedness (an "Asset Sale Offer"), to purchase the maximum
principal amount of Notes and such other Indebtedness that may be purchased out
of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of
the principal amount thereof plus accrued and unpaid interest, if any, to the
date of purchase, in accordance with the procedures set forth in this Indenture;
provided, however, that prior to making any such Asset Sale Offer, the Company
may, to the extent required by the 1996 Indenture, use such Excess Proceeds to
repurchase the 1996 Notes. To the extent that the aggregate amount of Notes and
other pari
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passu Indebtedness tendered pursuant to an Asset Sale Offer is less than the
Excess Proceeds, the Company may use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of Notes surrendered by
Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select
the Notes to be purchased on a pro rata basis. Upon completion of such offer to
purchase, the amount of Excess Proceeds shall be reset at zero.
An Asset Sale Offer shall be made pursuant to the provisions of
Section 3.09 hereof. No later than the date which is five Business Days after
the date on which the aggregate amount of Excess Proceeds exceeds $5 million,
the Company shall notify the Trustee of such Asset Sale Offer and provide the
Trustee with an Officers' Certificate setting forth the calculations used in
determining the amount of Net Proceeds to be applied to the purchase of Notes.
The Company shall commence or cause to be commenced the Asset Sale Offer on a
date no later than 15 Business Days after such notice (the "Commencement Date").
SECTION 4.11. TRANSACTIONS WITH AFFILIATES.
The Company will not, and will not permit any of its Restricted
Subsidiaries to, sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase any property or assets from, or enter into
any contract, agreement, understanding, loan, advance or guarantee with, or for
the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (a) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with a non-Affiliated Person and (b) the Company delivers
to the Trustee (i) with respect to any Affiliate Transaction involving aggregate
payments in excess of $1.0 million, a resolution of the Board of Directors set
forth in an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (a) above and such Affiliate Transaction is approved by a
majority of the disinterested members of the Board of Directors and (ii) with
respect to any Affiliate Transaction involving aggregate payments in excess of
$5.0 million, an opinion as to the fairness to the Company or such Restricted
Subsidiary from a financial point of view issued by an investment banking firm
of national standing; provided, however, that (A) any employment agreement
entered into by the Company or any of its Restricted Subsidiaries in the
ordinary course of business and consistent with the past practice of the Company
or such Restricted Subsidiary, (B) transactions between or among the Company
and/or its Restricted Subsidiaries, (C) transactions permitted by the provisions
of Section 4.07 hereof and (D) the grant of stock, stock options or other equity
interests to employees and directors of the Company in accordance with duly
adopted Company stock grant, stock option and similar plans, in each case, shall
not be deemed Affiliate Transactions; and further provided that (1) the
provisions of clause (b) shall not apply to sales of inventory by the Company or
any Restricted Subsidiary to any Affiliate in the ordinary course of business
and (2) the provisions of clause (b)(ii) shall not apply to loans or advances to
the Company or any Restricted Subsidiary from, or equity investments in the
Company or any Restricted Subsidiary by, any Affiliate to the extent permitted
by Section 4.09 hereof.
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SECTION 4.12. LIENS.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien (other than a Permitted Lien) upon any property or assets now
owned or hereafter acquired, or any income, profits or proceeds therefrom, or
assign or otherwise convey any right to receive income therefrom, unless (a) in
the case of any Lien securing any Indebtedness that is subordinate to the Notes,
the Notes are secured by a Lien on such property, assets or proceeds that is
senior in priority to such Lien and (b) in the case of any other Lien, the Notes
are equally and ratably secured with the obligation or liability secured by such
Lien.
SECTION 4.13. ADDITIONAL SUBSIDIARY GUARANTEES.
If any entity (other than an Excluded Restricted Subsidiary) shall
become a Restricted Subsidiary after the date of this Indenture, then such
Restricted Subsidiary shall execute a Subsidiary Guarantee and deliver an
opinion of counsel with respect thereto, in accordance with the terms of this
Indenture.
No Restricted Subsidiary shall consolidate with or merge with or into
(whether or not such Restricted Subsidiary is the surviving Person), another
Person (other than the Company) whether or not affiliated with such Restricted
Subsidiary unless (a) subject to the provisions of the following paragraph, the
Person formed by or surviving any such consolidation or merger (if other than
such Restricted Subsidiary) assumes all the obligations of such Restricted
Subsidiary under its Subsidiary Guarantee, if any, pursuant to a supplemental
indenture in form and substance reasonably satisfactory to the Trustee; (b)
immediately after giving effect to such transaction, no Default or Event of
Default exists; and (c) such Restricted Subsidiary, or any Person formed by or
surviving any such consolidation or merger, would be permitted to incur,
immediately after giving effect to such transaction, at least $1.00 of
additional Indebtedness pursuant to Section 4.09 hereof.
In the event of (a) a sale or other disposition of all of the assets
of any Guarantor by way of merger, consolidation or otherwise, (b) a sale or
other disposition of all of the capital stock of any Guarantor, or (c) the
designation of a Guarantor as an Unrestricted Subsidiary in accordance with the
terms of Section 4.17, then such Guarantor (in the event of a sale or other
disposition, by way of such a merger, consolidation or otherwise, of all of the
capital stock of such Guarantor, or in the event of the designation of such
Guarantor as an Unrestricted Subsidiary) or the corporation acquiring the
property (in the event of a sale or other disposition of all of the assets of
such Guarantor) shall be released and relieved of any obligations under its
Subsidiary Guarantee; provided that the Net Proceeds of such sale or other
disposition are applied in accordance with the applicable provisions of this
Indenture.
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SECTION 4.14. OFFER TO PURCHASE UPON CHANGE OF CONTROL.
Upon the occurrence of a Change of Control, each Holder of Notes will
have the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the
offer described below (the "Change of Control Offer") at an offer price in cash
equal to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages, if any, to but excluding the date of purchase
(the "Change of Control Payment"). Within 30 calendar days following any Change
of Control, the Company will mail a notice to each Holder stating:
(a) that the Change of Control Offer is being made pursuant to
this Section 4.14 and that all Notes tendered will be accepted for
payment;
(b) the purchase price and the purchase date, which will be no
earlier than 30 calendar days nor later than 60 calendar days from the
date such notice is mailed (the "Change of Control Payment Date");
(c) that any Note not tendered will continue to accrue
interest;
(d) that, unless the Company defaults in the payment of the
Change of Control Payment, all Notes accepted for payment pursuant to
the Change of Control Offer will cease to accrue interest and
Liquidated Damages, if any, on and after the Change of Control Payment
Date;
(e) that Holders electing to have any Notes purchased pursuant
to a Change of Control Offer will be required to surrender the Notes,
with the form entitled "Option of Holder to Elect Purchase" on the
reverse of the Notes completed, to the Paying Agent at the address
specified in such notice prior to the close of business on the fifth
Business Day preceding the Change of Control Payment Date;
(f) that Holders will be entitled to withdraw their election
if the Paying Agent receives, not later than the close of business on
the second Business Day preceding the Change of Control Payment Date,
facsimile transmission or letter setting forth the name of the Holder,
the principal amount of Notes delivered for purchase, and a statement
that such Holder is withdrawing his election to have such Notes
purchased; and
(g) that Holders whose Notes are being purchased only in part
will be issued new Notes equal in principal amount to the unpurchased
portion of the Notes surrendered, which unpurchased portion must be
equal to $1,000 in principal amount or an integral multiple thereof.
The Company will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable to the repurchase of the Notes in connection
with a Change of Control.
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On the Change of Control Payment Date, the Company will, to the
extent lawful, (a) accept for payment Notes or portions thereof tendered
pursuant to the Change of Control Offer, (b) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (c) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
Notes or portions thereof tendered to the Company. The Paying Agent will
promptly mail to each Holder of Notes so accepted the Change of Control Payment
for such Notes, and the Trustee will promptly authenticate and mail to each
Holder a new Note equal in principal amount to any unpurchased portion of the
Notes surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. Prior to complying
with the provisions of this Section 4.14, but in any event within 90 calendar
days following a Change of Control, the Company shall either repay all
outstanding Senior Debt or obtain the requisite consents, if any, under all
agreements governing outstanding Senior Debt to permit the repurchase of Notes
required by this Section 4.14. The Company shall publicly announce in The Wall
Street Journal, or if no longer published, a national newspaper of general
circulation, the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
SECTION 4.15. CORPORATE EXISTENCE.
Subject to Article 5 and Article 11 hereof, as the case may be, the
Company and each of the Restricted Subsidiaries shall do or cause to be done all
things necessary to preserve and keep in full force and effect (i) its corporate
existence, and the corporate, partnership or other existence of each of their
Subsidiaries, in accordance with the respective organizational documents (as the
same may be amended from time to time) of the Company, any such Restricted
Subsidiary or any such Subsidiary, as the case may be, and (ii) the rights
(charter and statutory), licenses and franchises of the Company, the Restricted
Subsidiaries and their respective Subsidiaries; provided, however, that the
Company and the Restricted Subsidiaries shall not be required to preserve any
such right, license or franchise, or the corporate, partnership or other
existence of any of their respective Subsidiaries, if an officer of the Company
shall determine that the preservation thereof is no longer desirable in the
conduct of the business of the Company, the Restricted Subsidiaries and their
Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any
material respect to the Holders of the Notes.
SECTION 4.16. CERTAIN SENIOR SUBORDINATED DEBT.
Notwithstanding the provisions of Section 4.09 hereof, (a) the
Company shall not incur any Indebtedness that is subordinated or junior in right
of payment to any Senior Debt of the Company and senior in any respect in right
of payment to the Notes, and (b) the Company shall not permit any Restricted
Subsidiary to incur any Indebtedness that is subordinated or junior in right of
payment to its Senior Debt and senior in any respect in right of payment to its
Subsidiary Guarantee.
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SECTION 4.17. DESIGNATION OF UNRESTRICTED SUBSIDIARIES.
The Board of Directors may designate any Subsidiary (including any
Restricted Subsidiary or any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary so long as: (i) neither the Company nor any Restricted
Subsidiary is directly or indirectly liable for any Indebtedness of such
Subsidiary; (ii) no default with respect to any Indebtedness of such Subsidiary
would permit (upon notice, lapse of time or otherwise) any holder of any other
Indebtedness of the Company or any Restricted Subsidiary to declare a default on
such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity; (iii) any Investment in such Subsidiary
deemed to be made as a result of designating such Subsidiary an Unrestricted
Subsidiary will not violate the provisions of Section 4.07 hereof; (iv) neither
the Company nor any Restricted Subsidiary has a contract, agreement,
arrangement, understanding or obligation of any kind, whether written or oral,
with such Subsidiary other than (A) those that might be obtained at the time
from Persons who are not Affiliates of the Company or (B) administrative, tax
sharing and other ordinary course contracts, agreements, arrangements and
understandings or obligations entered into in the ordinary course of business;
and (v) neither the Company nor any Restricted Subsidiary has any obligation to
subscribe for additional shares of Capital Stock or other Equity Interests in
such Subsidiary, or to maintain or preserve such Subsidiary's financial
condition or to cause such Subsidiary to achieve certain levels of operating
results, other than as permitted under Section 4.07 hereof. Notwithstanding the
foregoing, the Company may not designate as an Unrestricted Subsidiary any
Subsidiary which, on the date of this Indenture, is a Significant Subsidiary,
and may not sell, transfer or otherwise dispose of any properties or assets of
any such Significant Subsidiary to an Unrestricted Subsidiary, other than in the
ordinary course of business.
The Board of Directors may designate any Unrestricted Subsidiary as a
Restricted Subsidiary; provided that such designation will be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation will only be
permitted if (i) such Indebtedness is permitted under Section 4.09 hereof and
(ii) no Default or Event of Default would occur as a result of such designation.
SECTION 4.18. LIMITATION ON SALE AND LEASEBACK TRANSACTIONS.
The Company will not, and will not permit any Restricted Subsidiary
to, enter into any Sale and Leaseback Transaction unless (a) the consideration
received in such Sale and Leaseback Transaction is at least equal to the fair
market value of the property sold, as determined by a resolution of the Board of
Directors, and (b) the Company or such Restricted Subsidiary could incur the
Attributable Indebtedness in respect of such Sale and Leaseback Transaction in
compliance with Section 4.09 hereof.
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ARTICLE 5
SUCCESSORS
SECTION 5.01. MERGER, CONSOLIDATION, OR SALE OF ASSETS.
The Company shall not consolidate or merge with or into (whether or
not the Company is the surviving corporation), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions, to another Person unless (a) the
Company is the surviving corporation or the entity or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (b) the Person
formed by or surviving any such consolidation or merger (if other than the
Company) or the Person to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made assumes all the obligations
of the Company under the Notes, this Indenture (pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee) and the Registration
Rights Agreement; (c) immediately after such transaction no Default or Event of
Default exists; and (d) the Company or any Person formed by or surviving any
such consolidation or merger, or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made will, at the time of
such transaction and after giving pro forma effect thereto, be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the first paragraph
of Section 4.09 hereof.
SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED.
Upon any consolidation or merger, or any sale, assignment, transfer,
lease, conveyance or other disposition of all or substantially all of the assets
of the Company or the Company and its Subsidiaries on a consolidated basis in
accordance with Section 5.01 hereof, the successor corporation formed by such
consolidation or into or with which the Company is merged or to which such sale,
assignment, transfer, lease, conveyance or other disposition is made shall
succeed to, and be substituted for (so that from and after the date of such
consolidation, merger, sale, lease, conveyance or other disposition, the
provisions of this Indenture and the Registration Rights Agreement referring to
the "Company" shall refer instead to the successor corporation and not to the
Company), and may exercise every right and power of the Company under this
Indenture, the Notes and the Registration Rights Agreement with the same effect
as if such successor Person had been named as the Company herein; provided,
however, that the predecessor Company shall not be relieved from the obligation
to pay the principal of and interest on the Notes except in the case of a sale
of all of the Company's assets that meets the requirements of Section 5.01
hereof.
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ARTICLE 6
CERTAIN DEFAULT PROVISIONS
SECTION 6.01. EVENTS OF DEFAULT.
An "Event of Default" occurs if:
(a) the Company and the Guarantors default in the payment of
interest or Liquidated Damages on the Notes (whether or not prohibited
by the subordination provisions of Article 10 or Article 11 hereof, as
the case may be) when the same becomes due and payable and such default
continues for a period of 30 days;
(b) the Company and the Guarantors default in the payment of
principal of or premium (including any Make-Whole Amount), if any, on
the Notes (whether or not prohibited by the subordination provisions of
Article 10 or Article 11 hereof, as the case may be) when the same
becomes due and payable at maturity, upon redemption (including in
connection with an offer to purchase) or otherwise;
(c) the Company fails to comply with the provisions of Section
4.14 hereof;
(d) the Company or the Guarantors fail to comply with any of
their other respective agreements or covenants in, or provisions of,
the Notes, the Subsidiary Guarantees or this Indenture and the Default
continues for the period and after the notice specified below;
(e) a default occurs under any mortgage, indenture or
instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness for money borrowed by the Company
or any of its Restricted Subsidiaries (or the payment of which is
Guaranteed by the Company or any of its Restricted Subsidiaries),
whether such Indebtedness or Guarantee now exists or shall be created
hereafter if (i) such default results in the acceleration of such
Indebtedness prior to its express maturity or shall constitute a
default in the payment of such Indebtedness at final maturity of such
Indebtedness and (ii) the principal amount of such Indebtedness that
has been accelerated or not paid at maturity, together with the
principal amount of any other Indebtedness that has been accelerated or
not paid at maturity, exceeds $5.0 million;
(f) a final judgment or final judgments for the payment of
money are entered by a court or courts of competent jurisdiction
against the Company or any of its Restricted Subsidiaries and such
judgments remain unpaid, undischarged or unstayed for a period of 60
days, provided that the aggregate of all such unpaid, undischarged or
unstayed judgments exceeds $5.0 million;
(g) except as otherwise permitted hereunder, any Subsidiary
Guarantee issued by a Guarantor shall be held in any judicial
proceeding to be unenforceable or invalid or shall cease for any reason
to be in full force and effect or any Guarantor (or its successors or
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assigns), or any Person acting on behalf of any Guarantor (or its
successors or assigns), shall deny or disaffirm its obligations in
writing under its Subsidiary Guarantee;
(h) the Company or any of its Restricted Subsidiaries that is
a Significant Subsidiary:
(i) commences a voluntary case,
(ii) consents to the entry of an order for relief
against it in an involuntary case,
(iii) consents to the appointment of a Custodian of
it or for all or substantially all of its property,
(iv) makes a general assignment for the benefit of
its creditors, or
(v) admits in writing its inability generally to pay
its debts as the same become due,
in each case, pursuant to or within the meaning of any Bankruptcy Law;
or
(i) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(i) is for relief against the Company or any
Restricted Subsidiary that is a Significant Subsidiary of the
Company in an involuntary case,
(ii) appoints a Custodian of the Company or any
Restricted Subsidiary that is a Significant Subsidiary of the
Company or for all or substantially all of the property of the
Company or any Restricted Subsidiary that is a Significant
Subsidiary of the Company, or
(iii) orders the liquidation of the Company or any
Restricted Subsidiary that is a Significant Subsidiary of the
Company,
and such order or decree remains unstayed and in effect for 60
consecutive days.
A Default under clause (d) is not an Event of Default until the Trustee
notifies the Company, or the Holders of at least 25% in principal amount of the
then outstanding Notes notify the Company and the Trustee, of the Default and
the Company does not cure the Default within 60 days after receipt of the
notice. The notice must specify the Default, demand that it be remedied and
state that the notice is a "Notice of Default."
In the case of any Event of Default pursuant to the provisions of this
Section 6.01 occurring by reason of any willful action (or inaction) taken (or
not taken) by or on behalf of the Company with the intention of avoiding payment
of the Make-Whole Price or premium, as applicable, that the Company would have
had to pay if the Company then had elected to redeem
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the Notes pursuant to Section 3.07 hereof, the applicable Make-Whole Price, or
an equivalent premium, as the case may be, shall become and be immediately due
and payable to the extent permitted by law upon acceleration of the Notes as
provided below, anything in this Indenture or in the Notes to the contrary
notwithstanding.
SECTION 6.02. ACCELERATION.
If an Event of Default (other than an Event of Default specified in
clauses (h)(i) through (h)(v) and (i) of Section 6.01 hereof relating to the
Company or any Significant Subsidiary) occurs and is continuing, the Trustee by
notice to the Company, or the Holders of at least 25% in principal amount of the
then outstanding Notes by notice to the Company and the Trustee may declare the
unpaid principal of and any accrued interest and Liquidated Damages, if any, on
all the Notes to be due and payable. Upon such declaration the principal and
interest and Liquidated Damages, if any, shall be due and payable immediately
(together with the premium referred to in Section 6.01 hereof, if applicable);
provided, however, that if any Obligation with respect to Senior Bank Debt is
outstanding pursuant to the Credit Agreement upon a declaration of acceleration
of the Notes, the principal, premium, if any, and interest and Liquidated
Damages, if any, on the Notes will not be payable until the earlier of (1) the
day which is five Business Days after written notice of acceleration is received
by the Company and the Credit Agent, and (2) the date of acceleration of the
Indebtedness under the Credit Agreement. If an Event of Default specified in
clauses (h)(i) through (h)(v) or (i) of Section 6.01 hereof relating to the
Company or any Significant Subsidiary occurs, such an amount shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holder. In the event of a declaration of
acceleration of the Notes because an Event of Default has occurred and is
continuing as a result of the acceleration of any Indebtedness described in
Section 6.01(e) hereof, the declaration of acceleration of the Notes shall be
automatically annulled if the holders of any Indebtedness described in Section
6.01(e) have rescinded the declaration of acceleration in respect of such
Indebtedness within 30 days of the date of such declaration and if (a) the
annulment of the acceleration of the Notes would not conflict with any judgment
or decree of a competent jurisdiction, and (b) all existing Events of Default,
except non-payment of principal or interest on the Notes that became due solely
because of the acceleration of the Notes, have been cured or waived.
SECTION 6.03. OTHER REMEDIES.
If an Event of Default occurs and is continuing, the Trustee may pursue
any available remedy to collect the payment of principal, premium, if any, and
interest on the Notes or to enforce the performance of any provision of the
Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Notes or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Holder of a Note in exercising any right or
remedy upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. All remedies are
cumulative to the extent permitted by law.
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SECTION 6.04. WAIVER OF PAST DEFAULTS.
Holders of not less than a majority in aggregate principal amount of
the Notes then outstanding by notice to the Trustee may on behalf of the Holders
of all of the Notes waive any existing Default or Event of Default and its
consequences hereunder, except a continuing Default or Event of Default in the
payment of the premium, if any, interest and Liquidated Damages, if any, on, or
the principal of the Notes (including in connection with an offer to purchase)
(provided, however, that the Holders of a majority in aggregate principal amount
of the then outstanding Notes may rescind an acceleration and its consequences,
including any related payment default that resulted from such acceleration).
Upon any such waiver, such Default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured for every purpose
of this Indenture; but no such waiver shall extend to any subsequent or other
Default or impair any right consequent thereon.
SECTION 6.05. CONTROL BY MAJORITY.
Holders of a majority in principal amount of the then outstanding Notes
may direct the time, method and place of conducting any proceeding for
exercising any remedy available to the Trustee or exercising any trust or power
conferred on it. However, the Trustee may refuse to follow any direction that
conflicts with law or this Indenture that the Trustee determines may be unduly
prejudicial to the rights of other Holders of Notes or that may involve the
Trustee in personal liability.
SECTION 6.06. LIMITATION ON SUITS.
A Holder of a Note may pursue a remedy with respect to this Indenture
or the Notes if, and only if:
(a) the Holder of a Note gives to the Trustee written notice
of a continuing Event of Default or the Trustee receives such notice
from the Company;
(b) the Holders of at least 25% in principal amount of the
then outstanding Notes make a written request to the Trustee to pursue
the remedy;
(c) such Holder of a Note or Holders of Notes offer and, if
requested, provide to the Trustee indemnity satisfactory to the Trustee
against any loss, liability or expense;
(d) the Trustee does not comply with the request within 60
days after receipt of the request and the offer and, if requested, the
provision of indemnity; and
(e) during such 60-day period the Holders of a majority in
principal amount of the then outstanding Notes do not give the Trustee
a direction inconsistent with the request.
A Holder of a Note may not use this Indenture to prejudice the rights of another
Holder of a Note or to obtain a preference or priority over another Holder of a
Note. Nothing contained in this
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Section 6.06 shall affect the right of a Holder of a Note to sue for enforcement
of any overdue payment thereon.
SECTION 6.07. RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT.
Subject to Articles 10 and 11 hereof, notwithstanding any other
provision of this Indenture, the right of any Holder of a Note to receive
payment of principal of, premium, if any, and interest and Liquidated Damages,
if any, on the Note, on or after the respective due dates expressed in the Note
(including in connection with a Purchase Offer), or to bring suit for the
enforcement of any such payment on or after such respective dates, shall not be
impaired or affected without the consent of such Holder.
SECTION 6.08. COLLECTION SUIT BY TRUSTEE.
If an Event of Default specified in Section 6.01(a) or (b) hereof
occurs and is continuing, the Trustee is authorized to recover judgment in its
own name and as trustee of an express trust against the Company for the whole
amount of principal of, premium, if any, interest and Liquidated Damages, if
any, remaining unpaid on the Notes and interest on overdue principal and, to the
extent lawful, interest and such further amount as shall be sufficient to cover
the costs and expenses of collection, including the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel.
SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM.
The Trustee is authorized to file such proofs of claim and other papers
or documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Holders of the Notes allowed in any judicial proceedings relative to the Company
(or any other obligor upon the Notes, including the Guarantors), its creditors
or its property and shall be entitled and empowered to collect, receive and
distribute any money or other property payable or deliverable on any such claims
and any custodian in any such judicial proceeding is hereby authorized by each
Holder to make such payments to the Trustee, and in the event that the Trustee
shall consent to the making of such payments directly to the Holders, to pay to
the Trustee any amount due to it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under Section 7.07 hereof. To the extent that the
payment of any such compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 7.07 hereof out of the estate in any such proceeding, shall be denied
for any reason, payment of the same shall be secured by a Lien on, and shall be
paid out of, any and all distributions, dividends, money, securities and other
properties that the Holders may be entitled to receive in such proceeding
whether in liquidation or under any plan of reorganization or arrangement or
otherwise. Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Notes or
the rights of any Holder, or to authorize the Trustee to vote in respect of the
claim of any Holder in any such proceeding.
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SECTION 6.10. PRIORITIES.
If the Trustee collects any money pursuant to this Article, it shall
pay out the money in the following order:
First: to the Trustee, its agents and attorneys for amounts
due under Section 7.07 hereof, including payment of all compensation,
expense and liabilities incurred, and all advances made, by the Trustee
and the costs and expenses of collection;
Second: to the holders of Senior Debt of the Company or the
Restricted Subsidiaries, as the case may be, to the extent required by
Article 10 or Article 11 hereof, as applicable;
Third: to Holders of Notes for amounts due and unpaid on the
Notes for principal, premium, if any, interest and Liquidated Damages,
if any, ratably, without preference or priority of any kind, according
to the amounts due and payable on the Notes for principal, premium, if
any, interest and Liquidated Damages, respectively; and
Fourth: to the Company or to such party as a court of
competent jurisdiction shall direct.
The Trustee may fix a record date and payment date for any payment to
Holders of Notes pursuant to this Section 6.10.
SECTION 6.11. UNDERTAKING FOR COSTS.
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as a Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees and expenses, against any party litigant in the suit, having due
regard to the merits and good faith of the claims or defenses made by the party
litigant. This Section does not apply to a suit by the Trustee, a suit by a
Holder of a Note pursuant to Section 6.07 hereof, or a suit by Holders of more
than 10% in principal amount of the then outstanding Notes.
ARTICLE 7
TRUSTEE
SECTION 7.01. DUTIES OF TRUSTEE.
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture, and
use the same degree of care and skill in its exercise, as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
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(b) Except during the continuance of an Event of Default:
(i) the duties of the Trustee shall be determined solely by
the express provisions of this Indenture and the Trustee need perform
only those duties that are specifically set forth in this Indenture and
no others, and no implied covenants or obligations shall be read into
this Indenture against the Trustee; and
(ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture. However, in the case of any such certificates or
opinions which by any provision hereof are specifically required to be
furnished to the Trustee, the Trustee shall be under a duty to examine
the same to determine whether or not they conform to the requirements
of this Indenture (but need not confirm or investigate the accuracy of
mathematical calculations or other facts stated therein).
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(i) this paragraph does not limit the effect of paragraph (b)
of this Section;
(ii) the Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer, unless it is proved that
the Trustee was negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 6.05 hereof.
(d) Whether or not therein expressly so provided, every provision of
this Indenture that in any way relates to the Trustee is subject to paragraphs
(a), (b), and (c) of this Section.
(e) No provision of this Indenture shall require the Trustee to expend
or risk its own funds or incur any liability. The Trustee shall be under no
obligation to exercise any of its rights and powers under this Indenture at the
request of any Holders, unless such Holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
(f) The Trustee shall not be liable for interest on any money received
by it except as the Trustee may agree in writing with the Company. Money held in
trust by the Trustee need not be segregated from other funds except to the
extent required by law.
(g) Except with respect to Sections 4.01 and 4.04 herein, the Trustee
shall have no duty to inquire as to the performance of the Company's covenants
in Article 4 hereof. In addition, the Trustee shall not be deemed to have
knowledge of any Default or Event of Default except (i) any Event of Default
occurring pursuant to Sections 6.01(a), 6.01(b), 4.01 and 4.04 herein or (ii)
any
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Default or Event of Default of which a Responsible Officer of the Trustee shall
have received written notification or obtained actual knowledge.
SECTION 7.02. RIGHTS OF TRUSTEE.
(a) The Trustee may conclusively rely upon any document believed by it
to be genuine and to have been signed or presented by the proper Person. The
Trustee need not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be
liable for any action it takes or omits to take in good faith in reliance on
such Officers' Certificate or Opinion of Counsel. The Trustee may consult with
counsel of its choice and the advice of such counsel or any Opinion of Counsel
shall be full and complete authorization and protection from liability in
respect of any action taken, suffered or omitted by it hereunder in good faith
and in reliance thereon.
(c) The Trustee may act through its attorneys and agents and shall not
be responsible for the misconduct or negligence of any agent appointed with due
care.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith that it believes to be authorized or within the rights or
powers conferred upon it by this Indenture.
(e) Unless otherwise specifically provided in this Indenture, any
demand, request, direction or notice from the Company shall be sufficient if
signed by an Officer of the Company.
(f) The Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction of
any of the Holders unless such Holders shall have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that might be incurred by it in compliance with such request or direction.
SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE.
The Trustee in its individual or any other capacity may become the
owner or pledgee of Notes and may otherwise deal with the Company, any
Restricted Subsidiary or any Affiliate of the Company or any Restricted
Subsidiary with the same rights it would have if it were not Trustee. However,
in the event that the Trustee acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the SEC for permission to
continue as trustee or resign. Any Agent may do the same with like rights and
duties. The Trustee is also subject to Sections 7.10 and 7.11 hereof.
SECTION 7.04. TRUSTEE'S DISCLAIMER.
The Trustee shall not be responsible for and makes no representation as
to the validity or adequacy of this Indenture or the Notes, it shall not be
accountable for the Company's use of the proceeds from the Notes or any money
paid to the Company or upon the Company's direction
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under any provision of this Indenture, it shall not be responsible for the use
or application of any money received by any Paying Agent other than the Trustee,
and it shall not be responsible for any statement or recital herein or any
statement in the Notes or any other document in connection with the sale of the
Notes or pursuant to this Indenture other than its certificate of
authentication.
SECTION 7.05. NOTICE OF DEFAULTS.
If a Default or Event of Default occurs and is continuing and if it is
actually known to the Trustee, the Trustee shall mail to the Holders of the
Notes a notice of the Default or Event of Default within 90 days after it
occurs. Except in the case of a Default or Event of Default in payment of
principal of, premium, if any, interest or Liquidated Damages, if any, on any
Note, the Trustee may withhold the notice if and so long as a committee of its
Responsible Officers in good faith determines that withholding the notice is in
the interests of the Holders of the Notes.
SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES.
Within 60 days after each May 15 beginning with the May 15 following
the date of this Indenture, and for so long as Notes remain outstanding, the
Trustee shall mail to the Holders of the Notes a brief report dated as of such
reporting date that complies with TIA ss. 313(a) (but if no event described in
TIA ss. 313(a) has occurred within the twelve months preceding the reporting
date, no report need be transmitted). The Trustee also shall comply with TIA ss.
313(b)(2). The Trustee shall also transmit by mail all reports as required by
TIA ss. 313(c).
A copy of each report at the time of its mailing to the Holders of
Notes shall be mailed to the Company and filed with the SEC and each stock
exchange on which the Notes are listed in accordance with TIA ss. 313(d). The
Company shall promptly notify the Trustee when the Notes are listed on any stock
exchange or of any delisting thereof.
SECTION 7.07. COMPENSATION AND INDEMNITY.
The Company and the Restricted Subsidiaries shall be jointly and
severally obligated to pay to the Trustee from time to time such compensation as
the Company and the Trustee shall from time to time agree in writing for its
acceptance of this Indenture and services hereunder. The Trustee's compensation
shall not be limited by any law on compensation of a trustee of an express
trust. The Company and the Restricted Subsidiaries shall reimburse the Trustee
promptly upon request for all reasonable disbursements, advances and expenses
incurred or made by it in addition to the compensation for its services. Such
expenses shall include the reasonable compensation, disbursements and expenses
of the Trustee's agents and counsel.
The Company and the Restricted Subsidiaries shall indemnify each of the
Trustee and any predecessor Trustee against any and all losses, liabilities,
damages, claims or expenses, including taxes (other than taxes based on the
income of the Trustee), incurred by it arising out of or in connection with the
acceptance or administration of its duties under this Indenture, including the
costs and expenses of enforcing this Indenture against the Company and the
Restricted Subsidiaries (including this Section 7.07), and defending itself
against any claim (whether asserted by the
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Company, any Restricted Subsidiary or any Holder or any other person) or
liability in connection with the exercise or performance of any of its powers or
duties hereunder, except to the extent any such loss, liability or expense may
be attributable to its negligence or bad faith. The Trustee shall notify the
Company promptly of any claim for which it may seek indemnity. Failure by the
Trustee to so notify the Company shall not relieve the Company and the
Restricted Subsidiaries of their obligations hereunder. The Company and the
Restricted Subsidiaries shall defend the claim and the Trustee shall cooperate
in the defense. The Trustee may have separate counsel and the Company and the
Restricted Subsidiaries shall pay the reasonable fees and expenses of such
counsel. The Company and the Restricted Subsidiaries need not pay for any
settlement made without their consent, which consent shall not be unreasonably
withheld.
The obligations of the Company and the Restricted Subsidiaries under
this Section 7.07 shall survive the satisfaction and discharge of this
Indenture.
To secure the Company's and the Restricted Subsidiaries' payment
obligations in this Section, the Trustee shall have a Lien prior to the Notes on
all money or property held or collected by the Trustee, except that held in
trust to pay principal and interest on particular Notes. Such Lien shall survive
the satisfaction and discharge of this Indenture.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.01(h) or (i) hereof occurs, the expenses and the
compensation for the services (including the fees and expenses of its agents and
counsel) are intended to constitute expenses of administration under any
Bankruptcy Law.
The Trustee shall comply with the provisions of TIA ss. 313(b)(2) to
the extent applicable.
SECTION 7.08. REPLACEMENT OF TRUSTEE.
A resignation or removal of the Trustee and appointment of a successor
Trustee shall become effective only upon the successor Trustee's acceptance of
appointment as provided in this Section.
The Trustee may resign in writing at any time and be discharged from
the trust hereby created by so notifying the Company. The Holders of Notes of a
majority in principal amount of the then outstanding Notes may remove the
Trustee by so notifying the Trustee and the Company in writing. The Company may
remove the Trustee if:
(a) the Trustee fails to comply with Section 7.10 hereof;
(b) the Trustee is adjudged a bankrupt or an insolvent or an
order for relief is entered with respect to the Trustee under any
Bankruptcy Law;
(c) a Custodian or public officer takes charge of the Trustee
or its property; or
(d) the Trustee becomes incapable of acting.
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If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in principal amount of the then outstanding Notes may appoint a
successor Trustee to replace the successor Trustee appointed by the Company.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company, any
Restricted Subsidiary, or the Holders of Notes of at least 10% in principal
amount of the then outstanding Notes may, at the expense of the Company,
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
If the Trustee, after written request by any Holder of a Note who has
been a Holder of a Note for at least six months, fails to comply with Section
7.10 hereof, such Holder of a Note may petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a successor
Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Holders of the Notes. The retiring Trustee shall promptly transfer
all property held by it as Trustee to the successor Trustee, provided all sums
owing to the Trustee hereunder have been paid and subject to the Lien provided
for in Section 7.07 hereof. Notwithstanding replacement of the Trustee pursuant
to this Section 7.08, the Company's and the Restricted Subsidiaries' obligations
under Section 7.07 hereof shall continue for the benefit of the retiring
Trustee.
SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC.
If the Trustee consolidates, merges or converts into, or transfers all
or substantially all of its corporate trust business to, another corporation,
the successor corporation without any further act shall be the successor
Trustee.
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION.
There shall at all times be a Trustee hereunder that is a corporation
organized and doing business under the laws of the United States of America or
of any state thereof that is authorized under such laws to exercise corporate
trustee power, that is subject to supervision or examination by federal or state
authorities and that has a combined capital and surplus of at least $50 million
as set forth in its most recent published annual report of condition.
This Indenture shall always have a Trustee who satisfies the
requirements of TIA ss. 310(a)(1), (2) and (5). The Trustee is subject to TIA
ss. 310(b).
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SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
The Trustee is subject to TIA ss. 311(a), excluding any creditor
relationship listed in TIA ss. 311(b). A Trustee who has resigned or been
removed shall be subject to TIA ss. 311(a) to the extent indicated therein.
ARTICLE 8
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
SECTION 8.01. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE.
The Company may, at the option of its Board of Directors evidenced by a
resolution set forth in an Officers' Certificate, at any time, elect to have
either Section 8.02 or 8.03 hereof be applied to all outstanding Notes upon
compliance with the conditions set forth below in this Article Eight.
SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE.
Upon the Company's exercise under Section 8.01 hereof of the option
applicable to this Section 8.02, each of the Company and the Guarantors, if any,
shall, subject to the satisfaction of the conditions set forth in Section 8.04
hereof, be deemed to have been discharged from its obligations with respect to
all outstanding Notes and Subsidiary Guarantees on the date the conditions set
forth below are satisfied (hereinafter, "Legal Defeasance"). For this purpose,
Legal Defeasance means that the Company shall be deemed to have paid and
discharged the entire Indebtedness represented by the outstanding Notes, which
shall thereafter be deemed to be "outstanding" only for the purposes of Section
8.05 hereof and the other Sections of this Indenture referred to in (a) and (b)
below, and to have satisfied all its other obligations under such Notes and this
Indenture (and the Trustee, on demand of and at the expense of the Company,
shall execute proper instruments acknowledging the same), except for the
following provisions which shall survive until otherwise terminated or
discharged hereunder: (a) the rights of Holders of outstanding Notes to receive
solely from the trust fund described in Section 8.04 hereof, and as more fully
set forth in such Section, payments in respect of the principal of, premium, if
any, and interest on such Notes when such payments are due, (b) the Company's
and Guarantors' obligations with respect to such Notes under Article 2 and
Section 4.02 hereof, (c) the rights, powers, trusts, duties and immunities of
the Trustee hereunder and the Company's and the Guarantors' obligations in
connection therewith and (d) this Article 8. Subject to compliance with this
Article 8, the Company may exercise its option under this Section 8.02
notwithstanding the prior exercise of its option under Section 8.03 hereof.
SECTION 8.03. COVENANT DEFEASANCE.
Upon the Company's exercise under Section 8.01 hereof of the option
applicable to this Section 8.03, each of the Company and the Guarantors, if any,
shall, subject to the satisfaction
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of the conditions set forth in Section 8.04 hereof, be released from its
obligations under the covenants contained in Sections 4.05, 4.07, 4.08, 4.09,
4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16, 4.17 and Article V hereof with respect
to the outstanding Notes and Subsidiary Guarantees on and after the date the
conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"),
and the Notes shall thereafter be deemed not "outstanding" for the purposes of
any direction, waiver, consent or declaration or act of Holders (and the
consequences of any thereof) in connection with such covenants, but shall
continue to be deemed "outstanding" for all other purposes hereunder (it being
understood that such Notes shall not be deemed outstanding for accounting
purposes). For this purpose, Covenant Defeasance means that, with respect to the
outstanding Notes, the Company may omit to comply with and shall have no
liability in respect of any term, condition or limitation set forth in any such
covenant, whether directly or indirectly, by reason of any reference elsewhere
herein to any such covenant or by reason of any reference in any such covenant
to any other provision herein or in any other document and such omission to
comply shall not constitute a Default or an Event of Default under Section 6.01
hereof, but, except as specified above, the remainder of this Indenture, such
Notes and the Subsidiary Guarantees, if any, shall be unaffected thereby. In
addition, upon the Company's exercise under Section 8.01 hereof of the option
applicable to this Section 8.03 hereof, subject to the satisfaction of the
conditions set forth in Section 8.04 hereof, Sections 6.01(c) through 6.01(f)
and Section 6.01(h) and 6.01(i) hereof shall not constitute Events of Default.
SECTION 8.04. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE.
The following shall be the conditions to the application of either
Section 8.02 or 8.03 hereof to the outstanding Notes:
In order to exercise either Legal Defeasance or Covenant Defeasance:
(a) the Company must irrevocably deposit with the Trustee, in
trust, for the benefit of the Holders, cash in United States dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the principal
of, premium, if any, and interest and Liquidated Damages, if any, on
the outstanding Notes on the stated date for payment thereof or on the
applicable redemption date, as the case may be, of such principal or
installment of principal of, premium, if any, or interest on the
outstanding Notes;
(b) in the case of an election under Section 8.02 hereof, the
Company shall have delivered to the Trustee an Opinion of Counsel in
the United States (which counsel may be an employee of the Company or
any Subsidiary of the Company) reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the
Issuance Date, there has been a change in the applicable federal income
tax law, in either case to the effect that, and based thereon such
Opinion of Counsel shall confirm that, the Holders of the outstanding
Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same
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manner and at the same times as would have been the case if such Legal
Defeasance had not occurred;
(c) in the case of an election under Section 8.03 hereof, the
Company shall have delivered to the Trustee an Opinion of Counsel in
the United States (which counsel may be an employee of the Company or
any Subsidiary of the Company) reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize
income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would
have been the case if such Covenant Defeasance had not occurred;
(d) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or, insofar as Sections 6.01(h)
and 6.01(i) hereof are concerned, at any time in the period ending on
the 91st day after the date of deposit (or greater period of time in
which any such deposit of trust funds may remain subject to Bankruptcy
Law insofar as those apply to the deposit by the Company);
(e) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under, any
material agreement or instrument (other than this Indenture) to which
the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound;
(f) the Company shall have delivered to the Trustee an Opinion
of Counsel to the effect that after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally;
(g) the Company shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of Notes over any
other creditors of the Company with the intent of defeating, hindering,
delaying or defrauding creditors of the Company or others; and
(h) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance have been complied with.
SECTION 8.05. DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN
TRUST; OTHER MISCELLANEOUS PROVISIONS.
Subject to Section 8.06 hereof, all money and non-callable Government
Securities (including the proceeds thereof) deposited with the Trustee (or other
qualifying trustee, collectively for purposes of this Section 8.05, the
"Trustee") pursuant to Section 8.04 hereof in respect of the outstanding Notes
shall be held in trust and applied by the Trustee, in accordance with the
provisions of such Notes and this Indenture, to the payment, either directly or
through any Paying Agent (including the Company acting as Paying Agent) as the
Trustee may determine,
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to the Holders of such Notes of all sums due and to become due thereon in
respect of principal, premium, if any, and interest and Liquidated Damages, if
any, but such money need not be segregated from other funds except to the extent
required by law.
The Company and the Guarantors shall pay and indemnify the Trustee
against any tax, fee or other charge imposed on or assessed against the cash or
non-callable Government Securities deposited pursuant to Section 8.04 hereof or
the principal and interest received in respect thereof other than any such tax,
fee or other charge which by law is for the account of the Holders of the
outstanding Notes.
Anything in this Article Eight to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon the request
of the Company any money or non-callable Government Securities held by it as
provided in Section 8.04 hereof which, in the opinion of a nationally recognized
firm of independent public accountants expressed in a written certification
thereof delivered to the Trustee (which may be the opinion delivered under
Section 8.04(a) hereof), are in excess of the amount thereof that would then be
required to be deposited to effect an equivalent Legal Defeasance or Covenant
Defeasance.
SECTION 8.06. REPAYMENT TO COMPANY.
Any money deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the payment of the principal of, premium, if any,
or interest, if any, on any Note and remaining unclaimed for two years after
such principal, and premium, if any, or interest, if any, have become due and
payable shall be paid to the Company on its request or (if then held by the
Company) shall be discharged from such trust; and the Holder of such Note shall
thereafter, as an unsecured general creditor, look only to the Company for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Company as trustee
thereof, shall thereupon cease; provided, however, that the Trustee or such
Paying Agent, before being required to make any such repayment, may at the
expense of the Company cause to be published once, in The New York Times and The
Wall Street Journal (national edition), notice that such money remains unclaimed
and that, after a date specified therein, which shall not be less than 30 days
from the date of such notification or publication, any unclaimed balance of such
money then remaining will be repaid to the Company.
SECTION 8.07. REINSTATEMENT.
If the Trustee or Paying Agent is unable to apply any United States
dollars or non-callable Government Securities in accordance with Section 8.02 or
8.03 hereof, as the case may be, by reason of any order or judgment of any court
or governmental authority enjoining, restraining or otherwise prohibiting such
application, then the Company's and the Restricted Subsidiaries' obligations
under this Indenture, the Notes and the Subsidiary Guarantees shall be revived
and reinstated as though no deposit had occurred pursuant to Section 8.02 or
8.03 hereof until such time as the Trustee or Paying Agent is permitted to apply
all such money in accordance with Section 8.02 or 8.03 hereof, as the case may
be; provided, however, that, if the Company and the Restricted Subsidiaries make
any payment of principal of, premium, if any, or interest, if any, on
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any Note following the reinstatement of its obligations, the Company and the
Restricted Subsidiaries shall be subrogated to the rights of the Holders of such
Notes to receive such payment from the money held by the Trustee or Paying
Agent.
ARTICLE 9
AMENDMENT, SUPPLEMENT AND WAIVER
SECTION 9.01. WITHOUT CONSENT OF HOLDERS OF NOTES.
Notwithstanding Section 9.02 of this Indenture, the Company, the
Guarantors and the Trustee may amend or supplement this Indenture or the Notes
without the consent of any Holder of a Note:
(a) to cure any ambiguity, defect or inconsistency;
(b) to provide for uncertificated Notes in addition to or in
place of certificated Notes;
(c) to provide for the assumption of the Company's or any
Guarantor's obligations to the Holders of the Notes in the case of a
merger or consolidation pursuant to Article Five or Article 11 hereof,
as the case may be;
(d) to make any change that would provide any additional
rights or benefits to the Holders of the Notes (including providing for
additional Subsidiary Guarantees pursuant to Section 4.13 hereof) or
that does not materially adversely affect the legal rights hereunder of
any Holder of the Note; or
(e) to comply with requirements of the SEC in order to effect
or maintain the qualification of this Indenture under the TIA.
Upon the request of the Company accompanied by a resolution of its
Board of Directors authorizing the execution of any such amended or supplemental
Indenture, and upon receipt by the Trustee of the documents described in Section
7.02 hereof, the Trustee shall join with the Company and the Guarantors in the
execution of any amended or supplemental Indenture authorized or permitted by
the terms of this Indenture and to make any further appropriate agreements and
stipulations that may be therein contained, but the Trustee shall not be
obligated to enter into such amended or supplemental Indenture that affects its
own rights, duties or immunities under this Indenture or otherwise.
SECTION 9.02. WITH CONSENT OF HOLDERS OF NOTES.
Except as provided below in this Section 9.02, the Company, the
Guarantors and the Trustee may amend or supplement this Indenture or the Notes
with the consent of the Holders of at least a majority in principal amount of
the Notes then outstanding (including consents obtained
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in connection with a tender offer or exchange offer for the Notes), and, subject
to Sections 6.04 and 6.07 hereof, any existing Default or Event of Default
(other than a Default or Event of Default in the payment of the principal of,
premium, if any, or interest on the Notes or Liquidated Damages, if any, except
a payment default resulting from an acceleration that has been rescinded) or
compliance with any provision of this Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for the Notes).
Upon the request of the Company accompanied by a resolution of its
Board of Directors authorizing the execution of any such amended or supplemental
Indenture, and upon the filing with the Trustee of evidence reasonably
satisfactory to the Trustee of the consent of the Holders of Notes as aforesaid,
and upon receipt by the Trustee of the documents described in Section 7.02
hereof, the Trustee shall join with the Company and the Guarantors in the
execution of such amended or supplemental Indenture unless such amended or
supplemental Indenture affects the Trustee's own rights, duties or immunities
under this Indenture or otherwise, in which case the Trustee may in its
discretion, but shall not be obligated to, enter into such amended or
supplemental Indenture.
It shall not be necessary for the consent of the Holders of Notes under
this Section 9.02 to approve the particular form of any proposed amendment or
waiver, but it shall be sufficient if such consent approves the substance
thereof.
After an amendment, supplement or waiver under this Section becomes
effective, the Company shall mail to Holders of Notes affected thereby a notice
briefly describing the amendment, supplement or waiver. Any failure of the
Company to mail such notice, or any defect therein, shall not, however, in any
way impair or affect the validity of any such amended or supplemental Indenture
or waiver. Subject to Sections 6.04 and 6.07 hereof, the Holders of a majority
in aggregate principal amount of the Notes then outstanding may waive compliance
in a particular instance by the Company or any Guarantor with any provision of
this Indenture, the Notes or the Subsidiary Guarantees. However, without the
consent of each Holder affected, an amendment or waiver may not (with respect to
any Notes held by a non-consenting Holder):
(a) reduce the principal amount of Notes whose Holders must
consent to an amendment, supplement or waiver;
(b) reduce the principal of or change the fixed maturity of
any Note or alter any of the provisions with respect to the redemption
of the Notes in a manner adverse to the Holders of the Notes;
(c) reduce the rate of or change the time for payment of
interest, including default interest, on any Note;
(d) waive a Default or Event of Default in the payment of
principal of or premium, if any, or interest or Liquidated Damages, if
any, on the Notes (except a rescission of acceleration of the Notes by
the Holders of at least a majority in aggregate principal amount
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of the then outstanding Notes and a waiver of the payment default that
resulted from such acceleration);
(e) make any Note payable in money other than that stated in
the Notes;
(f) make any change in the provisions of this Indenture
relating to waivers of past Defaults or the rights of Holders of Notes
to receive payments of principal of or premium, if any, or interest or
Liquidated Damages, if any, on the Notes;
(g) waive a redemption payment with respect to any Note (other
than a payment required by Section 4.10 or Section 4.14 hereof);
(h) except pursuant to Article 4, Article 8 and Article 11
hereof, release any Guarantor from its obligations under its Subsidiary
Guarantee, or change any Subsidiary Guarantee in any manner that would
materially adversely affect the Holders; or
(i) make any change in Section 6.04 or 6.07 hereof or in the
foregoing amendment and waiver provisions.
SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT.
Every amendment or supplement to this Indenture or the Notes shall be
set forth in a amended or supplemental Indenture that complies with the TIA as
then in effect.
SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS.
Until an amendment, supplement or waiver becomes effective, a consent
to it by a Holder of a Note is a continuing consent by the Holder of a Note and
every subsequent Holder of a Note or portion of a Note that evidences the same
debt as the consenting Holder's Note, even if notation of the consent is not
made on any Note. However, any such Holder of a Note or subsequent Holder of a
Note may revoke the consent as to its Note if the Trustee receives written
notice of revocation before the date the waiver, supplement or amendment becomes
effective. An amendment, supplement or waiver becomes effective in accordance
with its terms and thereafter binds every Holder.
SECTION 9.05. NOTATION ON OR EXCHANGE OF NOTES.
The Trustee may place an appropriate notation about an amendment,
supplement or waiver on any Note thereafter authenticated. The Company in
exchange for all Notes may issue and the Trustee shall authenticate new Notes
(accompanied by a notation of the Subsidiary Guarantees duly endorsed by the
Restricted Subsidiaries) that reflect the amendment, supplement or waiver.
Failure to make the appropriate notation or issue a new Note shall not
affect the validity and effect of such amendment, supplement or waiver.
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SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC.
The Trustee shall sign any amended or supplemental Indenture authorized
pursuant to this Article Nine if the amendment or supplement does not adversely
affect the rights, duties, liabilities or immunities of the Trustee. The Company
and the Guarantors may not sign an amendment or supplemental Indenture until the
Board of Directors of the Company and each of the Guarantors approves it. In
executing any amended or supplemental indenture, the Trustee shall be entitled
to receive and (subject to Section 7.01 hereof) shall be fully protected in
relying upon, an Officers' Certificate and an Opinion of Counsel stating that
the execution of such amended or supplemental indenture is authorized or
permitted by this Indenture.
ARTICLE 10
SUBORDINATION
SECTION 10.01. AGREEMENT TO SUBORDINATE.
The Company, the Trustee and each Holder by accepting a Note agrees,
that the indebtedness and obligations evidenced by the Note (a) rank pari passu
with the 1996 Notes, and (b) are subordinated in right of payment, to the extent
and in the manner provided in this Article, to the prior payment in full, in
cash, of all Obligations with respect to Senior Debt of the Company (whether
outstanding on the date hereof or hereafter created, incurred, assumed or
guaranteed), and that the subordination is for the benefit of the holders of
Senior Debt of the Company.
SECTION 10.02. LIQUIDATION; DISSOLUTION; BANKRUPTCY.
Upon any payment or distribution to creditors of the Company in a
liquidation or dissolution of the Company or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to the Company or its
property, in an assignment for the benefit of creditors or any marshaling of the
Company's assets and liabilities:
(1) holders of Senior Debt of the Company shall be entitled to
receive payment in full in cash of all Obligations due in respect of
such Senior Debt of the Company (including interest after the
commencement of any such proceeding at the rate specified in the
applicable Senior Debt of the Company, whether or not allowed as a
claim in such proceeding) before Holders shall be entitled to receive
any payment or distribution from the Company with respect to the Notes;
and
(2) until all Obligations with respect to Senior Debt of the
Company (as provided in subsection (1) above) are paid in full in cash,
any payment or distribution to which the Trustee or any Holder would be
entitled but for this Article shall be made to holders of Senior Debt
of the Company, as their interests may appear.
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SECTION 10.03. DEFAULT ON DESIGNATED SENIOR DEBT.
The Company may not make any payment or distribution upon or in respect
of the Notes, including, without limitation, by way of set-off or otherwise, or
redeem (or make a deposit in redemption of), defease or acquire any of the
Notes, for cash, properties or securities if:
(i) a default in the payment of any principal, premium, if
any, or interest or other Obligations (a "Payment Default") with
respect to Senior Debt of the Company occurs and is continuing; or
(ii) a default (other than a Payment Default) or any event
that, after notice or passage of time would become a default (a
"Non-Monetary Default"), on Senior Debt of the Company occurs and is
continuing that then permits holders of the Senior Debt of the Company
to accelerate its maturity and the Trustee receives a notice of the
default (a "Payment Blockage Notice") from a Person who may give it
pursuant to Section 10.11 hereof. Any number of such Payment Blockage
Notices may be given, provided, however, that (i) not more than one
Payment Blockage Notice may be commenced during any period of 360
consecutive days and (ii) any Non-Monetary Default that existed or was
continuing on the date of delivery of any such notice to the Trustee
(to the extent the holder of Designated Senior Debt, or such trustee or
agent, giving such Payment Blockage Notice had knowledge of the same)
shall not be the basis for a subsequent Payment Blockage Notice, unless
such default has been cured or waived for a period of not less than 90
days.
The Company may and shall resume payments on and distributions in
respect of the Notes and all Obligations with respect thereto, and may acquire
such Notes or Obligations upon the earlier of:
(1) in the case of a payment default, the date upon which such
default is cured or waived, or
(2) in the case of a Non-Monetary Default, on the earlier of
the date on which such Non-Monetary Default is cured or waived or 179
days after the date on which the applicable Payment Blockage Notice is
received, if the maturity of such Senior Debt of the Company has not
been accelerated,
if this Article 10 otherwise permits the payment, distribution or acquisition at
the time thereof.
SECTION 10.04. ACCELERATION OF NOTES.
If payment of the Notes is accelerated because of an Event of Default,
the Company shall promptly notify Representatives of the holders of Senior Debt
of the Company of the acceleration.
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SECTION 10.05. WHEN DISTRIBUTION MUST BE PAID OVER.
In the event that the Trustee or any Holder receives from the Company
any payment of any Obligations with respect to the Notes at a time when the
Trustee or such Holder, as applicable, has actual knowledge that such payment is
prohibited by Section 10.02 or 10.03 hereof, such payment shall be held by the
Trustee or such Holder in trust for the benefit of, and shall be paid forthwith
over and delivered upon written request to, the holders of Senior Debt of the
Company, as their interests may appear, or their Representative under the
indenture or other agreement (if any) pursuant to which Senior Debt of the
Company may have been issued, as their respective interests may appear, for
application to the payment of all Obligations with respect to Senior Debt of the
Company remaining unpaid to the extent necessary to pay such Obligations in full
in accordance with their terms, after giving effect to any concurrent payment or
distribution to or for the holders of Senior Debt of the Company.
With respect to the holders of Senior Debt of the Company, the Trustee
undertakes to perform only such obligations on the part of the Trustee as are
specifically set forth in this Article 10, and no implied covenants or
obligations with respect to the holders of Senior Debt of the Company shall be
read into this Indenture against the Trustee. The Trustee shall not be deemed to
owe any fiduciary duty to the holders of Senior Debt of the Company, and shall
not be liable to any such holders if the Trustee shall pay over or distribute to
or on behalf of Holders or the Company or any other Person money or assets to
which any holders of Senior Debt of the Company shall be entitled by virtue of
this Article 10, except if such payment is made as a result of the willful
misconduct or gross negligence of the Trustee.
SECTION 10.06. NOTICE BY COMPANY.
The Company shall promptly notify the Trustee and the Paying Agent of
any facts known to the Company that would cause a payment of any Obligations
with respect to the Notes to violate this Article, but failure to give such
notice shall not affect the subordination of the Notes to the Senior Debt of the
Company as provided in this Article.
SECTION 10.07. SUBROGATION.
After all Obligations with respect to Senior Debt of the Company are
paid in full, in cash, and until the Notes are paid in full, Holders shall be
subrogated (equally and ratably with all other Indebtedness pari passu with the
Notes) to the rights of holders of Senior Debt of the Company to receive
distributions applicable to Senior Debt of the Company to the extent that
distributions otherwise payable to the Holders have been applied to the payment
of Senior Debt of the Company. A distribution made under this Article to holders
of Senior Debt of the Company that otherwise would have been made to Holders is
not, as between the Company and Holders, a payment by the Company on the Notes.
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SECTION 10.08. RELATIVE RIGHTS.
This Article defines the relative rights of Holders and holders of
Senior Debt of the Company. Nothing in this Indenture shall:
(1) impair, as between the Company and Holders, the obligation
of the Company, which is absolute and unconditional, to pay principal
of and interest on the Notes in accordance with their terms;
(2) affect the relative rights of Holders and creditors of the
Company other than their rights in relation to holders of Senior Debt
of the Company; or
(3) prevent the Trustee or any Holder from exercising its
available remedies upon a Default or Event of Default, subject to the
rights of holders and owners of Senior Debt of the Company to receive
distributions and payments otherwise payable to Holders.
If the Company fails because of this Article 10 to pay principal of,
premium or interest on a Note on the due date, the failure is still a Default or
Event of Default.
SECTION 10.09. SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY.
No right of any holder of Senior Debt of the Company to enforce the
subordination of the Indebtedness evidenced by the Notes shall be impaired by
any act or failure to act by the Company or any Holder or by the failure of the
Company or any Holder to comply with this Indenture.
SECTION 10.10. DISTRIBUTION OR NOTICE TO REPRESENTATIVE.
Whenever a distribution is to be made or a notice given to holders of
Senior Debt of the Company, the distribution may be made and the notice given to
their Representative.
Upon any payment or distribution of assets of the Company referred to
in this Article 10, the Trustee and the Holders shall be entitled to rely upon
any order or decree made by any court of competent jurisdiction or upon any
certificate of such Representative or of the liquidating trustee or agent or
other Person making any distribution to the Trustee or to the Holders for the
purpose of ascertaining the Persons entitled to participate in such
distribution, the holders of the Senior Debt of the Company and other
Indebtedness of the Company, the amount or amounts thereof or payable thereon,
the amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article 10.
SECTION 10.11. RIGHTS OF TRUSTEE AND PAYING AGENT.
Notwithstanding the provisions of this Article 10 or any other
provision of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts that would prohibit the making of any payment or
distribution by the Trustee, and the Trustee and the Paying Agent
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may continue to make payments on the Notes, unless the Trustee shall have
received at its Corporate Trust Office at least one Business Day prior to the
date of such payment a Payment Blockage Notice. Only the holders or the
Representative of holders of Designated Senior Debt of the Company may give a
Payment Blockage Notice. Nothing in this Article 10 shall impair the claims of,
or payments to, the Trustee under or pursuant to Section 7.07 hereof.
The Trustee in its individual or any other capacity may hold Senior
Debt of the Company with the same rights it would have if it were not Trustee.
Any Agent may do the same with like rights.
SECTION 10.12. AUTHORIZATION TO EFFECT SUBORDINATION.
Each Holder of a Note by the Holder's acceptance thereof authorizes and
directs the Trustee on the Holder's behalf to take such action as may be
necessary or appropriate to effectuate the subordination as provided in this
Article 10, and appoints the Trustee to act as the Holder's attorney-in-fact for
any and all such purposes. If the Trustee does not file a proper proof of claim
or proof of debt in the form required in any proceeding referred to in Section
6.09 hereof at least 30 days before the expiration of the time to file such
claim, the Representatives of the Senior Debt of the Company are hereby
authorized to file an appropriate claim for and on behalf of the Holders of the
Notes.
SECTION 10.13. AMENDMENTS.
The provisions of this Article 10 shall not be amended or modified
without the written consent of the holders of all Senior Debt of the Company.
ARTICLE 11
SUBSIDIARY GUARANTEES
SECTION 11.01. SUBSIDIARY GUARANTEE.
Each Subsidiary that is a signatory hereto and each Restricted
Subsidiary of the Company which in accordance with Section 4.13 hereof is
required to guarantee the obligations of the Company under the Notes (each, a
"Guarantor"), upon execution of a supplemental indenture, hereby jointly and
severally unconditionally guarantees to each Holder of a Note authenticated and
delivered by the Trustee irrespective of the validity or enforceability of this
Indenture, the Notes or the obligations of the Company under this Indenture or
the Notes, that: (i) the principal of and interest on and Liquidated Damages, if
any, with respect to the Notes will be paid in full when due, whether at the
maturity or interest payment or mandatory redemption date, by acceleration, call
for redemption or otherwise, and interest on the overdue principal of and
interest, if any, on the Notes and all other obligations of the Company to the
Holders or the Trustee under this Indenture or the Notes will be promptly paid
in full or performed, all in accordance with the terms of this Indenture and the
Notes; and (ii) in case of any extension of time of payment or renewal of any
Notes or any of such other obligations, they will be paid in full when due or
performed in accordance with the
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terms of the extension or renewal, whether at maturity, by acceleration or
otherwise. Failing payment when due of any amount so guaranteed for whatever
reason, each Guarantor will be obligated to pay the same whether or not such
failure to pay has become an Event of Default which could cause acceleration
pursuant to Section 6.02 hereof. Each Guarantor agrees that this is a guarantee
of payment not a guarantee of collection.
Each Guarantor hereby agrees that its obligations with regard to this
Subsidiary Guarantee shall be joint and several and unconditional, irrespective
of the validity or enforceability of the Notes or the obligations of the Company
under this Indenture, the absence of any action to enforce the same, the
recovery of any judgment against the Company or any other obligor with respect
to this Indenture, the Notes or the obligations of the Company under this
Indenture or the Notes, any action to enforce the same or any other
circumstances (other than complete performance) which might otherwise constitute
a legal or equitable discharge or defense of a Guarantor. Each Guarantor
further, to the extent permitted by law, waives and relinquishes all claims,
rights and remedies accorded by applicable law to guarantors and agrees not to
assert or take advantage of any such claims, rights or remedies, including but
not limited to: (a) any right to require the Trustee, the Holders or the Company
(each, a "Benefitted Party") to proceed against the Company or any other Person
or to proceed against or exhaust any security held by a Benefitted Party at any
time or to pursue any other remedy in any Benefitted Party's power before
proceeding against such Guarantor; (b) the defense of the statute of limitations
in any action hereunder or in any action for the collection of any Indebtedness
or the performance of any obligation hereby guaranteed; (c) any defense that may
arise by reason of the incapacity, lack of authority, death or disability of any
other Person or the failure of a Benefitted Party to file or enforce a claim
against the estate (in administration, bankruptcy or any other proceeding) of
any other Person; (d) demand, protest and notice of any kind including but not
limited to notice of the existence, creation or incurring of any new or
additional Indebtedness or obligation or of any action or non-action on the part
of such Guarantor, the Company, any Benefitted Party, any creditor of such
Guarantor, the Company or on the part of any other Person whomsoever in
connection with any Indebtedness or obligations hereby guaranteed; (e) any
defense based upon an election of remedies by a Benefitted Party, including but
not limited to an election to proceed against such Guarantor for reimbursement;
(f) any defense based upon any statute or rule of law which provides that the
obligation of a surety must be neither larger in amount nor in other respects
more burdensome than that of the principal; (g) any defense arising because of a
Benefitted Party's election, in any proceeding instituted under Bankruptcy Law,
of the application of 11 U.S.C. Section 1111(b)(2); or (h) any defense based on
any borrowing or grant of a security interest under 11 U.S.C. Section 364. Each
Guarantor hereby covenants that its Subsidiary Guarantee will not be discharged
except by complete performance of the obligations contained in its Subsidiary
Guarantee and this Indenture.
If any Holder or the Trustee is required by any court or otherwise to
return to either the Company or any Guarantor, or any Custodian acting in
relation to either the Company or such Guarantor, any amount paid by the Company
or such Guarantor to the Trustee or such Holder, the applicable Subsidiary
Guarantees, to the extent theretofore discharged, shall be reinstated and be in
full force and effect. Each Guarantor agrees that it will not be entitled to any
right of subrogation in relation to the Holders in respect of any obligations
guaranteed hereby until payment in full of all obligations guaranteed hereby.
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Each Guarantor further agrees that, as between such Guarantor, on the
one hand, and the Holders and the Trustee, on the other hand, (i) the maturity
of the obligations guaranteed hereby may be accelerated as provided in Section
6.02 hereof for the purposes of this Subsidiary Guarantee, notwithstanding any
stay, injunction or other prohibition preventing such acceleration as to the
Company or any other obligor on the Notes of the obligations guaranteed hereby,
and (ii) in the event of any declaration of acceleration of those obligations as
provided in Section 6.02 hereof, those obligations (whether or not due and
payable) will forthwith become due and payable by such Guarantor for the purpose
of this Subsidiary Guarantee.
SECTION 11.02. SUBORDINATION.
Each Guarantor, the Trustee, and each Holder by accepting a Note
agrees, that the indebtedness and obligations under the Subsidiary Guarantees
(a) rank pari passu with the guarantees of the 1996 Notes provided under the
1996 Indenture and (b) are subordinated in right of payment, to the extent and
in the manner provided in this Article 11, to the prior payment in full, in
cash, of all Obligations with respect to Senior Debt of such Guarantor (whether
outstanding on the date hereof or hereafter created, incurred, assumed or
guaranteed), and that the subordination is for the benefit of the holders of
Senior Debt of such Guarantor.
SECTION 11.03. LIQUIDATION; DISSOLUTION; BANKRUPTCY.
Upon any payment or distribution to creditors of any Guarantor in a
liquidation or dissolution of such Guarantor or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to such Guarantor or its
property, in an assignment for the benefit of creditors or any marshaling of
such Guarantor's assets and liabilities:
(1) holders of Senior Debt of such Guarantor shall be entitled
to receive payment in full in cash of all Obligations due in respect of
such Senior Debt of such Guarantor (including interest after the
commencement of any such proceeding at the rate specified in the
applicable Senior Debt of such Guarantor, whether or not allowed as a
claim in such proceeding) before the Holders shall be entitled to
receive any payment or distribution from the Guarantor with respect to
such Guarantor's Subsidiary Guarantee; and
(2) until all Obligations with respect to Senior Debt of such
Guarantor (as provided in subsection (1) above) are paid in full in
cash, any payment or distribution to which the Trustee or any Holder
would be entitled but for this Article shall be made to holders of
Senior Debt of such Guarantor, as their interests may appear.
SECTION 11.04. DEFAULT ON SENIOR DEBT OF THE GUARANTOR.
No Guarantor shall make any payment or distribution upon or in respect
of the Notes or its Subsidiary Guarantee, including, without limitation, by way
of set-off or otherwise, or redeem (or make a deposit in redemption of), defease
or acquire any of the Notes, for cash, properties or securities if:
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(i) a Payment Default with respect to Senior Debt of such
Guarantor occurs and is continuing; or
(ii) a Non-Monetary Default on Senior Debt of such Guarantor
occurs and is continuing that then permits holders of the Senior Debt
of such Guarantor to accelerate its maturity and the Trustee receives a
Payment Blockage Notice from a Person who may give it pursuant to
Section 11.12 hereof. Any number of such Payment Blockage Notices may
be given, provided, however, that (i) not more than one Payment
Blockage Notice may be commenced during any period of 360 consecutive
days and (ii) any default or event of default that existed or was
continuing on the date of delivery of any Payment Blockage Notice to
the Trustee (to the extent the holder of Designated Senior Debt, or
such trustee or agent, giving such Payment Blockage Notice had
knowledge of the same) shall not be the basis for a subsequent Payment
Blockage Notice pursuant to Section 11.12 herein, unless such default
has been cured or waived for a period of not less than 90 consecutive
days.
Each Guarantor may and shall resume payments on and distributions in
respect of its Subsidiary Guarantee, the Notes and all Obligations with respect
thereto, and may acquire such Notes or Obligations upon the earlier of:
(1) in the case of a payment default, the date upon which such
default is cured or waived, or
(2) in the case of a Non-Monetary Default, on the earlier of
the date on which such Non-Monetary Default is cured or waived or 179
days after the date on which the applicable Payment Blockage Notice is
received, if the maturity of such Senior Debt of such Guarantor has not
been accelerated,
if this Article 11 otherwise permits the payment, distribution or acquisition at
the time thereof.
SECTION 11.05. ACCELERATION OF NOTES.
If payment of the Notes is accelerated because of an Event of Default,
each Guarantor shall promptly notify the Representative of the holders of Senior
Debt of such Guarantor of the acceleration.
SECTION 11.06. WHEN DISTRIBUTION MUST BE PAID OVER.
In the event that the Trustee or any Holder receives from a Guarantor
any payment of any Obligations with respect to the Notes or the Subsidiary
Guarantees at a time when the Trustee or such Holder, as applicable, has actual
knowledge that such payment is prohibited by Section 11.03 or 11.04 hereof, such
payment shall be held by the Trustee or such Holder, in trust for the benefit
of, and shall be paid forthwith over and delivered upon written request to, the
holders of Senior Debt of such Guarantor, as their interests may appear, or
their Representative under the indenture or other agreement (if any) pursuant to
which Senior Debt of such Guarantor may have been issued, as their respective
interests may appear, for application to the payment of all Obligations with
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respect to Senior Debt of such Guarantor remaining unpaid to the extent
necessary to pay such Obligations in full in accordance with their terms, after
giving effect to any concurrent payment or distribution to or for the holders of
Senior Debt of such Guarantor.
With respect to the holders of Senior Debt of any Guarantor, the
Trustee undertakes to perform only such obligations on the part of the Trustee
as are specifically set forth in this Article 11, and no implied covenants or
obligations with respect to the holders of Senior Debt of such Guarantor shall
be read into this Indenture against the Trustee. The Trustee shall not be deemed
to owe any fiduciary duty to the holders of Senior Debt of such Guarantor, and
shall not be liable to any such holders if the Trustee shall pay over or
distribute to or on behalf of Holders or the Company or any other Person money
or assets to which any holders of Senior Debt of such Guarantor shall be
entitled by virtue of this Article 11, except if such payment is made as a
result of the willful misconduct or gross negligence of the Trustee.
SECTION 11.07. NOTICE BY A GUARANTOR.
Each Guarantor shall promptly notify the Trustee and the Paying Agent
of any facts known to such Guarantor that would cause a payment of any
Obligations with respect to the Notes or its Subsidiary Guarantee to violate
this Article, but failure to give such notice shall not affect the subordination
of its Subsidiary Guarantee or of the Notes to the Senior Debt of such Guarantor
as provided in this Article 11.
SECTION 11.08. SUBROGATION.
With respect to any Guarantor, after all Obligations with respect to
Senior Debt of such Guarantor is paid in full, in cash, and until the Notes are
paid in full, Holders shall be subrogated (equally and ratably with all other
Indebtedness pari passu with such Guarantor's Subsidiary Guarantee) to the
rights of holders of Senior Debt of such Guarantor to receive distributions
applicable to Senior Debt of such Guarantor to the extent that distributions
otherwise payable to the Holders have been applied to the payment of Senior Debt
of such Guarantor. A distribution made under this Article to holders of Senior
Debt of such Guarantor that otherwise would have been made to Holders is not, as
between such Guarantor and Holders, a payment by such Guarantor on the Notes or
the Subsidiary Guarantee.
SECTION 11.09. RELATIVE RIGHTS.
This Article defines the relative rights of Holders and holders of
Senior Debt of each Guarantor. Nothing in this Indenture shall:
(1) impair, as between such Guarantor and the Holders, the
obligation of such Guarantor, which is absolute and unconditional, to
pay principal of and interest and Liquidated Damages, if any, on the
Notes in accordance with the terms of its Subsidiary Guarantee;
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(2) affect the relative rights of Holders and creditors of
such Guarantor other than their rights in relation to holders of Senior
Debt of such Guarantor; or
(3) prevent the Trustee or any Holder from exercising its
available remedies upon a Default or Event of Default, subject to the
rights of holders of Senior Debt of such Guarantor set forth herein to
receive distributions and payments otherwise payable to Holders.
If any Guarantor fails because of this Article 11 to pay principal of,
premium or interest or Liquidated Damages, if any, on a Note on the due date,
the failure is still a Default or Event of Default.
SECTION 11.10. SUBORDINATION MAY NOT BE IMPAIRED BY ANY GUARANTOR.
With respect to any Guarantor, no right of any holder of Senior Debt of
such Guarantor to enforce the subordination of the Indebtedness evidenced by the
Subsidiary Guarantee shall be impaired by any act or failure to act by such
Guarantor or any Holder or by failure of such Guarantor or any Holder to comply
with this Indenture.
SECTION 11.11. DISTRIBUTION OR NOTICE TO REPRESENTATIVE.
With respect to any Guarantor, whenever a distribution is to be made or
a notice given to holders of Senior Debt of such Guarantor, the distribution may
be made and the notice given to their Representative.
Upon any payment or distribution of assets of any Guarantor referred to
in this Article 11, the Trustee and the Holders shall be entitled to rely upon
any order or decree made by any court of competent jurisdiction or upon any
certificate of such Representative or of the liquidating trustee or agent or
other Person making any distribution to the Trustee or to the Holders for the
purpose of ascertaining the Persons entitled to participate in such
distribution, the holders of the Senior Debt of such Guarantor and other
Indebtedness of such Guarantor, the amount or amounts thereof or payable
thereon, the amount or amounts paid or distributed thereon and all other facts
pertinent thereto or to this Article 11.
SECTION 11.12. RIGHTS OF TRUSTEE AND PAYING AGENT.
Notwithstanding the provisions of this Article 11 or any other
provision of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts that would prohibit the making of any payment or
distribution by the Trustee, and the Trustee and the Paying Agent may continue
to make payments on the Notes, unless the Trustee shall have received at its
Corporate Trust Office at least one Business Day prior to the date of such
payment a Payment Blockage Notice. Only the Representative of holders of
Designated Senior Debt may give a Payment Blockage Notice. Nothing in this
Article 11 shall impair the claims of, or payments to, the Trustee under or
pursuant to Section 7.07 hereof.
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With respect to any Guarantor, the Trustee in its individual or any
other capacity may hold Senior Debt of such Guarantor with the same rights it
would have if it were not Trustee. Any Agent may do the same with like rights.
SECTION 11.13. AUTHORIZATION TO EFFECT SUBORDINATION.
Each Holder of a Note by the Holder's acceptance thereof authorizes and
directs the Trustee on the Holder's behalf to take such action as may be
necessary or appropriate to effectuate the subordination as provided in this
Article 11, and appoints the Trustee to act as the Holder's attorney-in-fact for
any and all such purposes. If the Trustee does not file a proper proof of claim
or proof of debt in the form required in any proceeding relative to any
Guarantor referred to in Section 6.09 hereof at least 30 days before the
expiration of the time to file such claim, the Representatives of Senior Debt of
such Guarantor are hereby authorized to file an appropriate claim for and on
behalf of the Holders of the Notes.
SECTION 11.14. AMENDMENTS.
With respect to any Guarantor, the provisions of Section 11.02 through
11.14 hereof shall not be amended or modified without the written consent of the
holders of all Senior Debt of such Guarantor.
SECTION 11.15. LIMITATION OF GUARANTOR'S LIABILITY.
Each Guarantor and, by its acceptance hereof, the Trustee and each
Holder hereby confirm that it is its intention that the Subsidiary Guarantee of
such Guarantor not constitute a fraudulent transfer or conveyance for purposes
of the Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform
Fraudulent Transfer Act or any similar federal or state law to the extent
applicable to any Subsidiary Guarantee. To effectuate the foregoing intention,
each such person hereby irrevocably agrees that the obligation of such Guarantor
under its Subsidiary Guarantee under this Article 11 shall be limited to the
maximum amount as will, after giving effect to such maximum amount and all other
(contingent or other) liabilities of such Guarantor that are relevant under such
laws, and after giving effect to any collections from, rights to receive
contribution from or payments made by or on behalf of any other Guarantor in
respect of the obligations of such other Guarantor under this Article 11, result
in the obligations of such Guarantor in respect of such maximum amount not
constituting a fraudulent transfer or conveyance under said laws. The Trustee
and each Holder by accepting the benefits hereof, confirms its intention that,
in the event of a bankruptcy, reorganization or other similar proceeding of the
Company or any Guarantor in which concurrent claims are made upon such Guarantor
hereunder, to the extent such claims will not be fully satisfied, each such
claimant with a valid claim against the Company shall be entitled to a ratable
share of all payments by such Guarantor in respect of such concurrent claims.
For all purposes of this Section 11.15, Senior Debt shall be deemed to have been
incurred prior to the incurrence of the obligations in respect of the Subsidiary
Guarantees.
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SECTION 11.16. RESTRICTED SUBSIDIARIES MAY CONSOLIDATE, ETC., ON CERTAIN TERMS.
No Guarantor shall consolidate with or merge with or into (whether or
not such Guarantor is the surviving Person), another Person whether or not it is
affiliated with such Guarantor unless (i) subject to the provisions of Section
11.17 hereof, the Person formed by or surviving any such consolidation or merger
(if other than such Guarantor) assumes all the obligations of such Guarantor
pursuant to a supplemental indenture in form reasonably satisfactory to the
Trustee, under its Subsidiary Guarantee, the Notes and this Indenture, (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists, and (iii) such Guarantor, or any Person formed by or surviving
any such consolidation or merger, will be permitted to incur, immediately after
giving effect to such transaction, at least $1.00 of additional Indebtedness
pursuant to the first paragraph of Section 4.09 hereof. In case of any such
consolidation, merger, sale or conveyance and upon the assumption by the
successor corporation, by supplemental indenture, executed and delivered to the
Trustee and satisfactory in form to the Trustee, of the Subsidiary Guarantee in
this Indenture and the due and punctual performance and observance of all of the
covenants and conditions of this Indenture to be performed by the Guarantor,
such successor corporation shall succeed to and be substituted for the Guarantor
with the same effect as if it had been named herein as a Guarantor.
SECTION 11.17. RELEASES FOLLOWING SALE OF ASSETS OR DESIGNATION AS UNRESTRICTED
SUBSIDIARY.
In the event of (a) a sale or other disposition of all or substantially
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or (b) a sale or other disposition of all of the capital stock of any
Guarantor, or (c) the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary in accordance with the terms of Section 4.17 hereof, then such
Guarantor (in the event of a sale or other disposition, by way of such a merger,
consolidation or otherwise, of all of the capital stock of such Guarantor, or in
the event of the designation of such Guarantor as an Unrestricted Subsidiary) or
the corporation acquiring the property (in the event of a sale or other
disposition of all or substantially all of the assets of such Guarantor) shall
be released and relieved of its obligations under its Subsidiary Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied in
accordance with Section 4.10 hereof.
ARTICLE 12
MISCELLANEOUS
SECTION 12.01. TRUST INDENTURE ACT CONTROLS.
If any provision of this Indenture limits, qualifies or conflicts with
the duties imposed by TIA ss.318(c), the imposed duties shall control.
SECTION 12.02. NOTICES.
Any notice or communication by the Company, any Guarantor or the
Trustee to the others is duly given if in writing and delivered in Person or
mailed by first class mail (registered or
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certified, return receipt requested), telecopier or overnight air courier
guaranteeing next day delivery, to the others' address:
If to the Company or any Guarantor:
Iron Mountain Incorporated
745 Atlantic Avenue
Boston, MA 02111
Attention: President
Telecopier No.: (617) 350-7881
With a copy to:
Sullivan & Worcester LLP
One Post Office Square
Boston, MA 02109
Telecopier No.: (617) 338-2880
Attention: William J. Curry, Esq.
If to the Trustee:
The Bank of New York
101 Barclay Street
21W
New York, NY 10286
Telecopier No.: (212) 815-5915
Attention: Corporate Trust Trustee Administration
The Company, any Guarantor or the Trustee, by notice to the others may
designate additional or different addresses for subsequent notices or
communications.
All notices and communications (other than those sent to Holders) shall
be deemed to have been duly given: at the time delivered by hand, if personally
delivered; five Business Days after being deposited in the mail, postage
prepaid, if mailed; when receipt acknowledged, if telecopied; and the next
Business Day after timely delivery to the courier, if sent by overnight air
courier guaranteeing next day delivery.
Any notice or communication to a Holder shall be mailed by first class
mail, or by overnight air courier guaranteeing next day delivery to its address
shown on the register kept by the Registrar. Any notice or communication shall
also be so mailed to any Person described in TIA ss. 313(c), to the extent
required by the TIA. Failure to mail a notice or communication to a Holder or
any defect in it shall not affect its sufficiency with respect to other Holders.
If a notice or communication is mailed in the manner provided above
within the time prescribed, it is duly given, whether or not the addressee
receives it.
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If the Company or any Guarantor mails a notice or communication to
Holders, it shall mail a copy to the Trustee and each Agent at the same time.
SECTION 12.03. COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES.
Holders may communicate pursuant to TIA ss. 312(b) with other Holders
with respect to their rights under this Indenture or the Notes. The Company, the
Restricted Subsidiaries, the Trustee, the Registrar and anyone else shall have
the protection of TIA ss. 312(c).
SECTION 12.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
Upon any request or application by the Company or any Guarantor to the
Trustee to take any action under this Indenture, the Company or such Guarantor
shall furnish to the Trustee:
(a) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set
forth in Section 12.05 hereof) stating that, in the opinion of the
signers, all conditions precedent and covenants provided for in this
Indenture relating to the proposed action have been satisfied; and
(b) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set
forth in Section 12.05 hereof) stating that, in the opinion of such
counsel, all such conditions precedent and covenants have been
satisfied.
SECTION 12.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.
Each certificate or opinion with respect to compliance with a condition
or covenant provided for in this Indenture (other than a certificate provided
pursuant to TIA ss. 314(a)(4)) shall comply with the provisions of TIA ss.
314(e) and shall include:
(a) a statement that the Person making such certificate or
opinion has read such covenant or condition;
(b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(c) a statement that, in the opinion of such Person, he or she
has made such examination or investigation as is necessary to enable
him to express an informed opinion as to whether or not such covenant
or condition has been satisfied; and
(d) a statement as to whether or not, in the opinion of such
Person, such condition or covenant has been satisfied.
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SECTION 12.06. RULES BY TRUSTEE AND AGENTS.
The Trustee may make reasonable rules for action by or at a meeting of
Holders. The Registrar or Paying Agent may make reasonable rules and set
reasonable requirements for its functions.
SECTION 12.07. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND
STOCKHOLDERS.
No past, present or future director, officer, employee, incorporator or
stockholder of the Company or any Guarantor, as such, shall have any liability
for any obligations of the Company or any Guarantor under the Notes, the
Subsidiary Guarantees, this Indenture, the Registration Rights Agreement or for
any claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder of Notes by accepting a Note and the related Subsidiary
Guarantees waives and releases all such liability. The waiver and release are
part of the consideration for issuance of the Notes and the Subsidiary
Guarantees.
SECTION 12.08. GOVERNING LAW.
THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO
CONSTRUE THIS INDENTURE, THE NOTES AND THE SUBSIDIARY GUARANTEES.
SECTION 12.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.
This Indenture may not be used to interpret any other indenture, loan
or debt agreement of the Company or its Subsidiaries or of any other Person. Any
such indenture, loan or debt agreement may not be used to interpret this
Indenture.
SECTION 12.10. SUCCESSORS.
All agreements of the Company and the Guarantors in this Indenture and
the Notes and the Subsidiary Guarantees, as the case may be, shall bind their
respective successors. All agreements of the Trustee in this Indenture shall
bind its successors.
SECTION 12.11. SEVERABILITY.
In case any provision in this Indenture, in the Notes or in the
Subsidiary Guarantees shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
SECTION 12.12. COUNTERPART ORIGINALS.
The parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together represent the same
agreement.
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SECTION 12.13. TABLE OF CONTENTS, HEADINGS, ETC.
The Table of Contents, Cross-Reference Table and Headings of the
Articles and Sections of this Indenture have been inserted for convenience of
reference only, are not to be considered a part of this Indenture and shall in
no way modify or restrict any of the terms or provisions hereof.
[Signatures on following page]
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<PAGE>
SIGNATURES
Dated as of October 24, 1997 IRON MOUNTAIN INCORPORATED
By: /s/ C. Richard Reese
Name: C. Richard Reese
Title: Chairman and CEO
Dated as of October 24, 1997 Iron Mountain Records Management,
Inc., Metro Business Archives, Inc.,
Criterion Atlantic Property, Inc.,
Criterion Property, Inc., Hollywood
Property, Inc., IM San Diego, Inc.,
Iron Mountain Consulting Services,
Inc., Iron Mountain Data Protection
Services, Inc., Iron Mountain Records
Management of Maryland, Inc., Iron
Mountain Records Management of Ohio,
Inc., Iron Mountain Wilmington, Inc.,
Iron Mountain Records Management of
Missouri LLC, Iron Mountain Records
Management of Boston, Inc., Iron
Mountain Records Management of
Minnesota, Inc., Iron Mountain Records
Management of Michigan, Inc., Iron
Mountain Records Management of
Wisconsin, Inc., Iron Mountain Records
Management of San Antonio, Inc., Iron
Mountain Records Management of San
Antonio-FP, Inc., Iron Mountain
Records Management of the Northwest,
Inc., Iron Mountain/Critical Files,
Inc., Iron Mountain/Safesite, Inc.,
IM-AEI Acquisition Corp., Archives
Express, Incorporated, IM Billerica,
Inc., IM Earhart, Inc., Iron Mountain
Records Management of Florida, Inc.,
Data Securities International, Inc.,
IM-3 Acquisition Corp., and Allegiance
Business Archives, Ltd.
By: /s/ C. Richard Reese
Name: C. Richard Reese
Title: Chairman and CEO
Dated as of October 24, 1997 THE BANK OF NEW YORK, as Trustee
By: /s/ C. Richard Reese
Name: C. Richard Reese
Title: Chairman and CEO
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EXHIBIT A
(Face of Note)
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE
FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITORY TRUST
COMPANY (THE "DEPOSITARY") TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE
DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE
DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH
SUCCESSOR DEPOSITARY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITARY TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE REQUESTED BY AN AUTHORIZED REPRE
SENTATIVE OF DEPOSITARY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR SUCH
OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DEPOSITARY),
ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY
PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN
INTEREST HEREIN.1
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THESE SECURITIES MAY NOT BE
OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND, IN EACH CASE, IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES
OR ANY OTHER JURISDICTION.
EACH HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO (A) OFFER, SELL,
PLEDGE OR OTHERWISE TRANSFER THIS SECURITY ONLY (1) TO THE COMPANY, (2) PURSUANT
TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE
SECURITIES ACT, (3) TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, (4) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS
THAT OCCUR OUTSIDE THE UNITED STATES IN A TRANSACTION MEETING THE REQUIREMENTS
OF RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (5) TO AN INSTITUTIONAL
"ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) OF
REGULATION D UNDER THE SECURITIES ACT (AN "IAI") THAT, PRIOR TO SUCH TRANSFER,
EXECUTES AND DELIVERS TO THE COMPANY AND THE TRUSTEE A LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS RELATING TO THE TRANSFER OF THIS SECURITY (THE
FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE) AND AN OPINION OF COUNSEL
IF THE COMPANY OR THE TRUSTEE SO REQUESTS OR (6) PURSUANT TO ANY OTHER AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT (AND BASED
ON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), SUBJECT IN EACH OF THE
FOREGOING CASES TO APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES
OR ANY OTHER APPLICABLE JURISDICTION AND (B) THAT IT WILL, AND EACH SUBSEQUENT
HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THIS SECURITY OF THE
RESALE RESTRICTIONS SET FORTH IN (A) ABOVE.
- --------
1 This paragraph should be included only if the Note is issued in global
form.
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<PAGE>
8 3/4% Senior Subordinated Notes due 2009
No. $__________
IRON MOUNTAIN INCORPORATED
promises to pay to _______________________________________ or registered
assigns, the principal sum of _____________________________________ Dollars on
______, 2009.
Interest Payment Dates: March 31 and September 30.
Record Dates: March 15 and September 15.
CUSIP No. 46284PAB0
[Every Global Note authenticated and delivered hereunder will bear a legend in
substantially the following form:](2)
[This Note is a Global Note within the meaning of the Indenture
hereinafter referred to and is registered in the name of a Depositary or a
nominee thereof. This Note may not be transferred to, or registered or exchanged
for Notes registered in the name of, any Person other than the Depositary or a
nominee thereof, and no such transfer may be registered, except in the limited
circumstances described in the Indenture. Every Note authenticated and delivered
upon registration of transfer of, or in exchange for, or in lieu of, this Note
will be a Global Note subject to the foregoing, except in such limited
circumstances.]2
IRON MOUNTAIN INCORPORATED
By:____________________________________
Name:
Title:
By:____________________________________
[SEAL] Name:
Title:
Dated:
This is one of the Notes referred to in the within-mentioned Indenture:
THE BANK OF NEW YORK, as Trustee
By:_______________________________
Authorized Signatory
- ---------------
(2) This paragraph should be included only if the Note is issued in global
form.
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<PAGE>
(Back of Note)
8 3/4% SENIOR SUBORDINATED NOTE
DUE 2009
Capitalized terms used herein have the meanings assigned to them in the
Indenture (as defined below) unless otherwise indicated.
1. Interest. Iron Mountain Incorporated, a Delaware corporation (the
"Company"), promises to pay interest on the principal amount of this Note at the
rate and in the manner specified below.
The Company shall pay in cash interest on the principal amount of this
Note at the rate per annum of 8 3/4%. The Company will pay interest
semi-annually in arrears on March 31 and September 30 of each year, commencing
on March 31, 1998 or if any such day is not a Business Day (as defined in the
Indenture), on the next succeeding Business Day (each an "Interest Payment
Date"), to Holders of record on the immediately preceding March 15 and September
15.
Interest will be computed on the basis of a 360-day year consisting of
twelve 30-day months. Interest shall accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of the
original issuance of the Notes. To the extent lawful, the Company shall pay
interest on overdue principal at the rate of 1% per annum in excess of the then
applicable interest rate on the Notes; it shall pay interest on overdue
installments of interest (without regard to any applicable grace periods) at the
same rate to the extent lawful.
2. Method of Payment. The Company will pay interest on the Notes
(except defaulted interest) to the Persons who are registered Holders of Notes
at the close of business on the record date next preceding the Interest Payment
Date, even if such Notes are canceled after such record date and on or before
such Interest Payment Date. The Company will pay principal and interest in money
of the United States that at the time of payment is legal tender for payment of
public and private debts. The Company, however, may pay principal, premium, if
any, and interest by check payable in such money. It may mail an interest check
to a Holder's registered address.
3. Paying Agent and Registrar. Initially, the Trustee will act as
Paying Agent and Registrar. The Company may change any Paying Agent, Registrar
or co-registrar without notice to any Holder. The Company or any Restricted
Subsidiary may act in any such capacity.
4. Indenture. The Company issued the Notes under an Indenture dated as
of October 24, 1997 (the "Indenture") between the Company, the Restricted
Subsidiaries named therein and the Trustee. The terms of the Notes include those
stated in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939 (15 U.S. Code ss.ss. 77aaa-77bbbb) as in effect on
the date of the Indenture. The Notes are subject to all such terms, and Holders
of the Notes are referred to the Indenture and such act for a statement of such
terms. The terms of the Indenture shall govern any inconsistencies between the
Indenture and the
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<PAGE>
Notes. The Notes are unsecured general obligations of the Company limited to
$250,000,000 in aggregate principal amount.
5. Optional Redemption. Prior to September 30, 2002, the Notes will be
subject to redemption at any time at the option of the Company, in whole or in
part, upon not less than 30 nor more than 60 days' notice, at the Make-Whole
Price, plus accrued and unpaid interest and Liquidated Damages, if any, thereon
to the applicable redemption date. On and after September 30, 2002, the Notes
will be subject to redemption at any time at the option of the Company, in whole
or in part, upon not less than 30 nor more than 60 days' notice, at the
redemption prices (expressed as percentages of principal amount) set forth
below, plus accrued and unpaid interest and Liquidated Damages, if any, thereon
to the applicable redemption date, if redeemed during the twelve-month period
beginning on September 30 of the years indicated below:
Year Percentage
2002.................................. 104.375%
2003.................................. 102.916%
2004.................................. 101.458%
2005 and thereafter................... 100.000%
Notwithstanding the foregoing, at any time during the first 36 months
after the date of issuance of the Notes, the Company may redeem up to 35% of the
initial principal amount of the Notes originally issued with the net proceeds of
one or more Qualified Equity Offerings at a redemption price equal to 108.75% of
the principal amount of such Notes, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of redemption; provided, that at least
65% of the principal amount of Notes originally issued remains outstanding
immediately after the occurrence of any such redemption and that such redemption
occurs within 60 days following the closing of any such Qualified Equity
Offering.
6. Mandatory Redemption. Except as described in paragraph 7 below, the
Company shall not be required to make sinking fund or redemption payments with
respect to the Notes.
7. Redemption or Repurchase at Option of Holder. This Note is subject
to purchase at the option of the Holder upon the circumstances set forth in
Section 3.09 and 4.14 of the Indenture.
8. Notice of Redemption. Notice of redemption shall be mailed at least
30 days but not more than 60 days before the redemption date to each Holder of
Notes to be redeemed at its registered address. Notes may be redeemed in part
but only in whole multiples of $1,000, unless all of the Notes held by a Holder
are to be redeemed. On and after the redemption date, interest ceases to accrue
on Notes or portions of them called for redemption.
9. Subordination. The Notes (a) rank pari passu with the 1996 Notes (as
defined in the Indenture) and (b) are subordinated to Senior Debt (as defined in
the Indenture)
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<PAGE>
(whether outstanding on the date of the Indenture or thereafter created,
incurred, assumed or guaranteed) and all Obligations (as defined in the
Indenture) with respect thereto. To the extent provided in the Indenture, Senior
Debt must be paid in full in cash before the Notes may be paid. The Company
agrees, and each Holder by accepting a Note agrees, to the subordination and
authorizes the Trustee to give it effect.
10. Denominations, Transfer, Exchange. The Notes are in registered form
without coupons in denominations of $1,000 and integral multiples of $1,000. The
transfer of Notes may be registered and Notes may be exchanged as provided in
the Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and to pay
any taxes and fees required by law or permitted by the Indenture. The Registrar
need not exchange or register the transfer of any Note or portion of a Note
selected for redemption. Also, it need not exchange or register the transfer of
any Notes for a period of 15 days before the mailing of a notice of redemption
of Notes, or during the period between a record date and the corresponding
Interest Payment Date.
11. Persons Deemed Owners. Prior to due presentment to the Trustee for
registration of the transfer of this Note, the Trustee, any Agent, the Company
and the Guarantors may deem and treat the Person in whose name this Note is
registered as its absolute owner for the purpose of receiving payment of
principal of, premium, if any, and interest on this Note and for all other
purposes whatsoever, whether or not this Note is overdue, and none of the
Trustee, any Agent, the Company or any Guarantor shall be affected by notice to
the contrary. The registered holder of a Note shall be treated as its owner for
all purposes.
12. Amendments and Waivers. Subject to certain exceptions, the
Indenture or the Notes may be amended with the consent of the Holders of at
least a majority in principal amount of the then outstanding Notes (including
consents obtained in connection with a tender offer or exchange offer for
Notes), and any existing default or compliance with any provision of the
Indenture or the Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer or exchange offer for Notes). Without
the consent of any Holder, the Indenture or the Notes may be amended to cure any
ambiguity, defect or inconsistency, to provide for uncertificated Notes in
addition to or in place of certificated Notes, to provide for assumption of the
Company's or any Restricted Subsidiary's obligations to Holders in the case of a
merger or consolidation or to make any change that would provide any additional
rights or benefits to the Holders or that does not adversely affect the rights
of any Holder under the Indenture or to comply with the requirements of the
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
13. Defaults and Remedies. Events of Default include: default for 30
days in the payment when due of interest or Liquidated Damages (as defined in
the Indenture) on the Notes (whether or not prohibited by the subordination
provisions of the Indenture); default in payment when due of principal of or
premium, if any, on the Notes (whether or not prohibited by the subordination
provisions of the Indenture); failure by the Company to comply with Section 4.14
of the Indenture; failure by the Company or the Restricted Subsidiaries for 60
days after notice
A - 5
<PAGE>
from the Trustee or the Holders of not less than 25% of the aggregate principal
amount of the Notes outstanding to comply with any of its other agreements in
the Indenture or the Notes; default under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any of its
Restricted Subsidiaries) whether such Indebtedness or Guarantee now exists, or
is created after the date of the Indenture, if (a) such default results in the
acceleration of such Indebtedness prior to its express maturity or shall
constitute a default in the payment of such Indebtedness at final maturity of
such Indebtedness and (b) the principal amount of such Indebtedness that has
been accelerated or not paid at maturity, together with the principal amount of
any other Indebtedness that has been accelerated or not paid at maturity,
exceeds $5.0 million; failure by the Company or any of its Subsidiaries to pay
final judgments aggregating in excess of $5.0 million, which judgments remain
unpaid, undischarged or unstayed for a period of 60 days; except as permitted by
the Indenture, any Subsidiary Guarantee issued by a Restricted Subsidiary shall
be held in any judicial proceeding to be unenforceable or invalid or shall cease
for any reason to be in full force and effect or any Restricted Subsidiary, or
any Person acting on behalf of any Restricted Subsidiary, shall deny or
disaffirm its obligations under its Subsidiary Guarantees; and certain events of
bankruptcy or insolvency with respect to the Company or any of its Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders of
at least 25% in principal amount of the then outstanding Notes may declare all
the Notes to be due and payable immediately, except that in the case of an Event
of Default arising from certain events of bankruptcy or insolvency, relating to
the Company or any Significant Subsidiary, all outstanding Notes will become due
and payable without further action or notice; provided, however, that if any
Obligation with respect to Senior Bank Debt is outstanding pursuant to the
Credit Agreement upon a declaration of acceleration of the Notes, the principal,
premium, if any, and interest on the Notes will not be payable until the earlier
of (1) the day which is five Business Days after written notice of acceleration
is received by the Company and the Credit Agent, and (2) the date of
acceleration of the Indebtedness under the Credit Agreement. Holders of the
Notes may not enforce the Indenture or the Notes except as provided in the
Indenture. Subject to certain limitations, Holders of a majority in principal
amount of the then outstanding Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from Holders of the Notes notice of
any continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal, interest or Liquidated Damages) if it
determines that withholding notice is in their interest. The Company must
furnish an annual compliance certificate to the Trustee.
14. Subsidiary Guarantees. Payment of principal of, premium, if any,
and interest (including interest on overdue principal, premium, if any, and
interest, if lawful) on the Notes is guaranteed on an unsecured, senior
subordinated basis by the Guarantors pursuant to Article 11 of the Indenture.
15. Trustee Dealings with Company. The Trustee under the Indenture, in
its individual or any other capacity, may make loans to, accept deposits from,
and perform services for the Company, any Restricted Subsidiary or their
respective Affiliates, and may otherwise deal with the Company, any Restricted
Subsidiary or their respective Affiliates, as if it were not Trustee.
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<PAGE>
16. No Recourse Against Others. No past, present or future director,
officer, employee, incorporator or stockholder, as such, of the Company or any
Guarantor shall have any liability for any obligations of the Company or any
Guarantor under the Notes, the Subsidiary Guarantees, the Indenture or the
Registration Rights Agreement or for any claim based on, in respect of or by
reason of such obligations or their creation. Each Holder by accepting a Note
and the related Subsidiary Guarantees, if any, waives and releases all such
liability. The waiver and release are part of the consideration for the issuance
of the Notes.
17. Authentication. This Note shall not be valid until authenticated by
the manual signature of the Trustee or an authenticating agent.
18. Abbreviations. Customary abbreviations may be used in the name of a
Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
19. CUSIP Numbers. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes and has directed the Trustee to use
CUSIP numbers in notices of redemption as a convenience to Holders. No
representation is made as to the accuracy of such numbers either as printed on
the Notes or as contained in any notice of redemption and reliance may be placed
only on the other identification numbers placed thereon.(3)
20. Holders' Compliance with Registration Rights Agreement. Each Holder
of a Note, by his acceptance thereof, acknowledges and agrees to the provisions
of the Registration Rights Agreement, dated as of October 21, 1997, among the
Company and the parties named on the signature page thereof (the "Registration
Rights Agreement"), including but not limited to the obligations of the Holders
with respect to a registration and the indemnification of the Company and the
Purchasers (as defined therein) to the extent provided therein.
21. Governing Law. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL
GOVERN AND BE USED TO CONSTRUE THE INDENTURE, THE NOTES AND THE SUBSIDIARY
GUARANTEES.
The Company will furnish to any Holder upon written request and without
charge a copy of the Indenture and/or the Registration Rights Agreement. Request
may be made to:
Iron Mountain Incorporated
745 Atlantic Avenue
Boston, MA 602111
Telecopier No.: (617) 350-7881
Attention: President
- ------------
(3) This paragraph should be included only if the Note is issued in
global form.
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<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and
transfer this Note to
________________________________________________________________________________
(Insert assignee's soc. sec. or tax I.D. no.)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type assignee's name, address and zip code)
and irrevocably appoint______________________________________________________
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
Date:____________________ Your Signature:________________________________
(Sign exactly as your name appears on the Note)
Signature Guarantee:
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<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company
pursuant to Section 4.10 or 4.14 of the Indenture, check the box below:
[ ] Section 4.10 [ ] Section 4.14
If you want to elect to have only part of the Note purchased by the
Company pursuant to Section 4.10 or Section 4.14 of the Indenture, state the
amount you elect to have purchased:
$_____________
Date:____________________ Your Signature:________________________________
(Sign exactly as your name appears on the Note)
Tax Identification No.:_________________________
Signature Guarantee:
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<PAGE>
SCHEDULE OF EXCHANGES OF DEFINITIVE NOTES(4)
The following exchanges of a part of this Global Note for Definitive
Notes have been made:
Principal
Amount of Amount of Amount of this
decrease in increase in Global Note Signature of
Principal Principal following such authorized
Date of Amount of this Amount of this decrease (or signatory of
Exchange Global Note Global Note increase) Trustee
-------- ----------- ----------- --------- -----------
- -----------------
(4) This should be included only if the Note is issued in global form.
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<PAGE>
EXHIBIT B
FORM OF SUPPLEMENTAL INDENTURE TO BE DELIVERED BY FUTURE GUARANTORS
SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated as of
________________, between __________________ (the "Guarantor"), a subsidiary of
Iron Mountain Incorporated (or its successor), a Delaware corporation (the
"Company"), and The Bank of New York, a New York banking corporation, as trustee
under the Indenture referred to below (the "Trustee").
W I T N E S S E T H
WHEREAS, the Company has heretofore executed and delivered to the
Trustee an indenture (the "Indenture"), dated as of ________, 1997, providing
for the issuance of an aggregate principal amount of $250,000,000 of 8 3/4%
Senior Subordinated Notes due 2009 (the "Notes");
WHEREAS, Section 4.13 of the Indenture provides that under certain
circumstances the Company is required to cause the Guarantor to execute and
deliver to the Trustee a supplemental indenture pursuant to which the Guarantor
shall unconditionally guarantee all of the Company's obligations under the Notes
pursuant to a Subsidiary Guarantee on the terms and conditions set forth herein;
and
WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is
authorized to execute and deliver this Supplemental Indenture.
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the
Guarantor and the Trustee mutually covenant and agree for the equal and ratable
benefit of the Holders of the Notes as follows:
1. CAPITALIZED TERMS. Capitalized terms used herein without definition
shall have the meanings assigned to them in the Indenture.
2. AGREEMENT TO GUARANTEE. The Guarantor hereby agrees that its
obligations to the Holder and the Trustee pursuant to this Subsidiary Guarantee
shall be as expressly set forth in Article 11 of the Indenture and in such other
provisions of the Indenture as are applicable to the Guarantors, and reference
is made to the Indenture for the precise terms of this Supplemental Indenture.
The terms of Article 11 of the Indenture and such other provisions of the
Indenture as are applicable to the Guarantors are incorporated herein by
reference.
3. EXECUTION AND DELIVER OF SUBSIDIARY GUARANTEES
(a) To evidence its Subsidiary Guarantee set forth in this
Supplemental Indenture, the Guarantor hereby agrees that a notation of
such Subsidiary Guarantee substantially in the form of Exhibit C to the
Indenture shall be endorsed by an Officer of such Guarantor on each
Note authenticated and delivered by the Trustee after the date hereof.
B - 1
<PAGE>
(b) Notwithstanding the foregoing, the Guarantor hereby agrees
that its Subsidiary Guarantee set forth herein shall remain in full
force and effect notwithstanding any failure to endorse on each Note a
notation of such Subsidiary Guarantee.
(c) If an Officer whose signature is on this Supplemental
Indenture or on the Subsidiary Guarantee no longer holds that office at
the time the Trustee authenticates the Note on which a Subsidiary
Guarantee is endorsed, the Subsidiary Guarantee shall be valid
nevertheless.
(d) The delivery of any Note by the Trustee, after the
authentication thereof under the Indenture, shall constitute due
delivery of the Subsidiary Guarantee set forth in this Supplemental
Indenture on behalf of the Guarantor.
4. NO RECOURSE AGAINST OTHERS. No past, present or future director,
officer, employee, incorporator, stockholder of the Guarantor, as such, shall
have any liability for any obligations of the Company or any Guarantor under the
Notes, any Subsidiary Guarantee, the Indenture or this Supplemental Indenture or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder of the Notes by accepting a Note waives and releases
all such liability. The waiver and release are part of the consideration for
issuance of the Notes.
5. NEW YORK LAW TO GOVERN. The internal law of the State of New York
shall govern and be used to construe this Supplemental Indenture and the
Subsidiary Guarantee.
6. COUNTERPARTS. The parties may sign any number of copies of this
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
7. EFFECT OF HEADINGS. The Section headings herein are for convenience
only and shall not affect the construction hereof.
B - 2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed, all as of the date first above written.
Dated: ____________, ____ [Guarantor]
By: ___________________________
Name:
Title:
Dated: ____________, ____ THE BANK OF NEW YORK,
as Trustee
By: ___________________________
Name:
Title:
B - 3
<PAGE>
EXHIBIT C
FORM OF NOTATION ON SENIOR SUBORDINATED NOTE
RELATING TO SUBSIDIARY GUARANTEE
Each Guarantor set forth below and each Restricted Subsidiary of the
Company which in accordance with Section 4.13 of the Indenture is required to
guarantee the obligations of the Company under the Notes, upon execution of a
Supplemental Indenture, jointly and severally unconditionally guarantees (i) the
due and punctual payment of the principal of and interest and Liquidated
Damages, if any, on the Notes, whether at the maturity or interest payment or
mandatory redemption date, by acceleration, call for redemption or otherwise,
and of interest on the overdue principal of and interest, if any, on the Notes
and all other obligations of the Company to the Holders or the Trustee under the
Indenture or the Notes and (ii) in case of any extension of time of payment or
renewal of any Notes or any of such other obligations, that the same will be
promptly paid in full when due or performed in accordance with the terms of the
extension or renewal, whether at maturity, by acceleration or otherwise.
The obligations of each Guarantor to the Holder and to the Trustee
pursuant to this Subsidiary Guarantee and the Indenture are as expressly set
forth in Article 11 of the Indenture and in such other provisions of the
Indenture as are applicable to Guarantors, and reference is hereby made to such
Indenture for the precise terms of this Subsidiary Guarantee. The terms of
Article 11 of the Indenture and such other provisions of the Indenture as are
applicable to Guarantors are incorporated herein by reference. This Subsidiary
Guaranty is subject to release as described in Sections 4.13 and 11.17 of the
Indenture, and the obligations of each Guarantor under this Subsidiary Guaranty
and the Indenture are limited as provided in Section 11.15 of the Indenture.
This is a continuing guarantee and shall remain in full force and
effect and shall be binding upon each Guarantor and its successors and assigns
until full and final payment of all of the Company's obligations under the Notes
and the Indenture and shall inure to the benefit of the successors and assigns
of the Trustee and the Holders and, in the event of any transfer or assignment
of rights by any Holder or the Trustee, the rights and privileges herein
conferred upon that party shall automatically extend to and be vested in such
transferee or assignee, all subject to the terms and conditions hereof. This is
a guarantee of payment and not a guarantee of collection.
This Subsidiary Guarantee shall not be valid or obligatory for any
purpose until the certificate of authentication on the Note upon which this
Subsidiary Guarantee is noted shall have been executed by the Trustee under the
Indenture by the manual signature of one of its authorized officers.
[RESTRICTED SUBSIDIARY]
By:___________________________________
Name:
Title:
C - 1
<PAGE>
EXHIBIT D
CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER OF NOTES
Re: [Series A] [Series B] 8 3/4% Senior Subordinated Notes due 2009 (the
"Notes") of Iron Mountain Incorporated.
This Certificate relates to $______ principal amount of Notes held in *
[ ] book-entry or * [ ] definitive form by _______________________ (the
"Transferor").
The Transferor, by written order, has requested the Trustee to exchange or
register the transfer of a Note or Notes. In connection with such request and in
respect of each such Note, the Transferor does hereby certify that Transferor is
familiar with the Indenture relating to the above captioned Notes and the
transfer of this Note does not require registration under the Securities Act of
1933, as amended (the "Securities Act") because such Note:
[ ] is being acquired for the Transferor's own account, without transfer;
[ ] is being transferred pursuant to an effective registration statement;
[ ] is being transferred to a "qualified institutional buyer" (as defined
in Rule 144A under the Securities Act), in reli ance on such Rule 144A;
[ ] is being transferred pursuant to an exemption from registration in
accordance with Rule 904 under the Securities Act;**
[ ] is being transferred pursuant to Rule 144 under the Securities Act;**
or
[ ] is being transferred pursuant to another exemption from the
registration requirements of the Securities Act (explain:
_______________________________________________________________________
______________________________________________________________________.)**
[INSERT NAME OF TRANSFEROR]
By:_______________________________
Date:_____________________
* Check applicable box.
** If this box is checked, this certificate must be accompanied by an
opinion of counsel to the effect that such transfer is in compliance
with the Securities Act.
D-1
<PAGE>
EXHIBIT E
FORM OF PURCHASER LETTER
[DATE]
THE BANK OF NEW YORK, as Trustee
101 Barclay Street, 21st Floor
New York, New York 10286
IRON MOUNTAIN INCORPORATED
745 Atlantic Avenue
Boston, Massachusetts 02111
[NAME OF SELLER ]
Re: Iron Mountain Incorporated 8 3/4% Senior Subordinated Notes due 2009
We are delivering this letter in connection with our proposed purchase
of $_______ aggregate principal amount of 8 3/4 % Senior Subordinated Notes due
2009 (the "Notes") of Iron Mountain Incorporated (the "Company").
We hereby confirm that:
1. We have received all information relating to the Notes as
we deem necessary in order to make our investment decision.
2. We are an institutional "accredited investor" (as defined
in Rule 501 (a)(1), (2), (3) or (7) under the Securities Act of 1933,
as amended (the "Securities Act")) purchasing for our own account or
for the account of such an institutional "accredited investor," and we
are acquiring the Notes for investment purposes and not with a view to,
or for offer or sale in connection with, any distribution in violation
of the Securities Act or the laws of any state or other jurisdiction,
and we have such knowledge and experience in financial and business
matters as to be capable of evaluating the merits and risks of our
investment in the Notes, and we and any accounts for which we are
acting are each able to bear the economic risk of our or its
investment.
3. We understand that any subsequent transfer of the Notes is
subject to certain restrictions and conditions set forth in the
Indenture relating to the Notes (the "Indenture") and the undersigned
agrees to be bound by, and not to resell, pledge or otherwise transfer
the Notes except in compliance with, such restrictions and conditions
of the Securities Act.
4. We understand that the offer and sale of the Notes have not
been registered under the Securities Act, and that the Notes may not be
offered or sold except as described below. We agree, on our own behalf
and on behalf of any account for which we are purchasing the Notes, and
each subsequent holder of the Notes by its acceptance thereof will
agree, not to offer, sell or otherwise transfer such Notes prior to the
date which is two years (or such shorter period as may be promulgated
by the Securities and Exchange Commission pursuant to Rule 144 under
the Securities Act) after the later of the date of original issue of
such Notes and the last date on which the Company or any affiliate of
the Company was the owner of such Notes (the "Resale Restriction
Termination Date"), except (1) to the Company, (2) pursuant to a
registration statement which has been declared effective under the
Securities Act, (3) to a person we reasonably believe is a "qualified
institutional buyer" as defined in Rule 144A in a transaction meeting
the requirements of Rule 144A, (4) pursuant to offers and sales to
non-U.S. persons that occur outside the United States in a transaction
meeting the requirements of Rule 904
E-1
<PAGE>
of Regulation S under the Securities Act, (5) to an institutional
"accredited investor" (as defined above) that prior to such transfer,
executes and delivers to the Company and the Trustee (as defined in the
Indenture) a signed letter, substantially identical to this letter,
containing certain representations and agreements relating to the
transfer of the Notes (the form of which letter can be obtained from
the Trustee), and, if requested by the Company or the Trustee, an
opinion of counsel (6) pursuant to the exemption from registration
provided by Rule 144 under the Securities Act if available, or (7)
pursuant to any other available exemption from the registration
requirements of the Securities Act (based upon an opinion of counsel
reasonably acceptable to the Company if the Company so requests),
subject in each of the foregoing cases, to any requirement of law that
the disposition of our property or the property of such investor
account or accounts be at all times within our or their control and to
compliance with applicable securities laws of any state or other
jurisdiction. The foregoing restrictions on resale will not apply
subsequent to the Resale Restriction Termination Date, and we further
agree to provide to any person purchasing any of the Notes from us a
notice advising such purchaser that resales of the Notes are restricted
as stated herein. We understand that any Notes acquired by us (other
than pursuant to Rule 144A) will be in the form of definitive physical
certificates and that such certificates will bear a legend reflecting
the substance of this paragraph.
5. We understand that, on any proposed offer, sale or other
transfer of any Notes prior to the Resale Restriction Termination Date,
we will be required to furnish to the Trustee and the Company such
certifications, legal opinions, and other information as either of them
may reasonably require to confirm that the proposed transaction
complies with the foregoing restrictions. We further understand that
the Notes purchased by us will bear a legend reflecting the substance
of this and the preceding paragraph.
We acknowledge that you, the Trustee and others are entitled to rely upon
this letter and are irrevocably authorized to produce this letter or a copy
hereof to any interested party in any administrative or legal proceedings or
official inquiry with respect to the matters covered hereby. We agree to notify
you promptly in writing if any of our representations or warranties herein
ceases to be accurate and complete.
E-2
<PAGE>
THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK.
_____________________________________
(Name of Purchaser)
By:___________________________________
Name:
Title:
Address:
E-3
Consent of Independent Public Accountants
We consent to the incorporation of our report dated April 30, 1997 (except Note
15, as to which the date is September 26, 1997) with respect to the financial
statements of Arcus Group, Inc. 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.
Ernst & Young LLP
Dallas, Texas
October 29, 1997
Consent of Independent Public Accountants
We consent to the incorporation of our report dated February 28, 1997 (except
Note 12, as to which the date is September 26, 1997) with respect to the
financial statements of Arcus Technology Services, Inc. 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.
Ernst & Young LLP
Dallas, Texas
October 29, 1997
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of
our reports dated August 15, 1997, April 25, 1997, September 12, 1997 and April
4, 1995 for Security Archives of Minnesota, Wellington Financial Services,
Inc., Data Securities International, Inc. and Arcus Group, Inc. (formerly
United Gas Holding Corporation), respectively, 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
Minneapolis, Minnesota
Detroit, Michigan
San Jose, California
Houston, Texas
October 29, 1997
Consent of Independent Auditors
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 October 29, 1997 filed by Iron Mountain
Corporation with the Securities and Exchange Commission.
Ernst & Young LLP
Chicago, Illinois
October 29, 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
October 29, 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
October 29, 1997
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of
our reports dated August 8, 1997 for Concorde Group, Inc. and Neil Tucker Trust
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.
Fisher, Schacht & Oliver, LLP
Rochester, New York
October 29, 1997
Exhibit 99.1
FOR IMMEDIATE RELEASE
Contact: Judith R. Brackley
Director of Corporate Communications
(617) 357-4455 ext. 208
e-mail: [email protected]
Iron Mountain Completes $250 Million Private Placement
Boston, MA -- (October 27, 1997) -- Iron Mountain Incorporated (NASDAQ:IMTN)
announced today the completion of its previously-announced private placement of
$250 million in aggregate principal amount of 8 3/4% Senior Subordinated Notes
due in 2009 to qualified institutional buyers.
The initial purchasers in the transaction were Bear, Stearns & Co. Inc.; Chase
Securities Inc., Donaldson, Lufkin & Jenrette Securities Corporation; William
Blair & Company; and Prudential Securities Incorporated.
The issuance of the Notes has not been registered under the Securities Act of
1933, and the Notes may not be offered or resold in the United States absent
registration or an applicable exemption from registration.
The Company will use net proceeds of the offering initially to pay down existing
bank debt and thereafter to fund the cash portion of the purchase price of two
previously announced pending acquisitions and for general corporate purposes.
Those acquisitions include HIMSCORP, Inc. (dba Record Masters), believed to be
the nation's leading medical records management company, which is scheduled to
close in November, 1997, and Arcus Group, Inc., believed to be the nation's
largest provider of off-site data protection services, which is expected to
close early in the first quarter of 1998.
Iron Mountain operates in 43 markets nationwide, providing business records
storage and management services, medical records services, data protection
services for electronic records, vital records protection and records management
consulting services. The Company stores and manages billions of paper documents
and electronic records for more than 43,000 customers, including more than half
of the Fortune 500 companies.
