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): March 9, 1998
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
A. InterMation Merger
On February 24, 1998, Iron Mountain Incorporated (the "Company") entered
into an Agreement and Plan of Merger with InterMation, Inc. ("InterMation"), as
a result of which InterMation will be merged with and into a subsidiary of the
Company (the "InterMation Merger"). The Company will pay aggregate consideration
equal to approximately $28 million in connection with the InterMation Merger,
which amount consists of the assumption of indebtedness and payments to
InterMation's stockholders in the form of cash and Common Stock, $.01 par value
per share, of the Company ("Common Stock"). The portion of the aggregate amount
to be paid to InterMation's stockholders in the form of Common Stock is expected
to have an aggregate market value of approximately $18 million, subject to
certain adjustments. The closing of the InterMation Merger is subject to
customary conditions and is expected to occur in the first half of 1998,
although no assurance can be given that the InterMation Merger will be
completed.
Management believes that InterMation is the leading provider of records
management services in the states of Oregon and Washington. InterMation also
provides data security services and medical records management services in the
greater Seattle, Washington metropolitan area. InterMation acquired three
companies in 1997. As of March 1, 1998, InterMation operated four facilities,
serving approximately 1,300 customer accounts. After the InterMation Merger, the
Company will have a significant presence in the records management business in
both Oregon and Washington, and in the medical records management and the data
security businesses in the greater Seattle, Washington metropolitan area.
InterMation had revenues of $7.2 million for the year ended December
31, 1997. The Company believes that as a result of the InterMation Merger, it
will recognize significant synergies with its existing operations in Portland,
Oregon and Seattle, Washington.
B. Legal Proceedings
In March 1997 the Company experienced three fires, all of which
authorities have determined were caused by arson. The fires resulted in damage
to one and destruction of the Company's other records management facility in
South Brunswick Township, New Jersey. The Company has filed several insurance
claims related to the fires, including a significant claim under its business
interruption insurance policy. The claims process is lengthy and its outcome
cannot be predicted with certainty.
Some of the Company's customers or their insurance carriers have asserted
claims as a consequence of the destruction of or damage to their records as a
result of the fires, some of which allege negligence or other culpability on
the part of the Company. On December 12, 1997, the Company received notice that
a lawsuit had been filed by one of its customers seeking up to $1 million in
damages. The action has been removed from a state court in New Jersey to the
United States District Court in New Jersey. The Company has answered the
complaint, denying liability and asserting various affirmative defenses. The
Company has since received notices that three additional lawsuits have been
filed against it and others, each seeking unspecified damages against the
Company and to rescind their written contracts with the Company. On February
26, 1998, the Company answered the complaint relating to the first of these
three lawsuits, denying any liability and asserting various affirmative
defenses, and has also counterclaimed against those three customers for
indemnification and payment of its litigation and related expenses. The Company
has also filed a motion to dismiss several of the claims asserted against it.
The Company's responses to the two other complaints are currently due to be
filed by March 16, 1998 and April 7, 1998. The four lawsuits filed to date
represent approximately 77% of the customer cartons destroyed or damaged as a
result of the fires. Iron Mountain denies any liability as a result of the
destruction of or damage to customer records as a result of the fires, which
were beyond its control, and intends to vigorously defend itself against these
and any other lawsuits that may arise. The Company is also pursuing coverage of
these claims and proceedings with its various insurers.
The outcome of these claims and proceedings cannot be predicted. Based on
its present assessment of the situation, after consultation with legal counsel,
management does not believe that the outcome of these claims and proceedings
will have a material adverse effect on Iron Mountain's financial condition or
results of operations, although there can be no assurance in this regard.
<PAGE>
On June 5, 1997, Arcus Group, Inc. ("Arcus Group") filed a complaint for a
refund of federal taxes paid for the year 1995 in the amount of $0.8 million
against the United States in the Court of Federal Claims. This claim is based on
the utilization of Arcus Group's net operating loss carryforwards for the tax
year ended December 31, 1995. On September 3, 1997, the United States filed its
answer in the case, denying Arcus Group's use of its net operating losses. The
lawsuit is in the discovery stage. If Arcus Group prevails in the litigation,
Iron Mountain will be able to use approximately $6.7 million in loss
carryforwards per year against income generated by the former Arcus group of
companies each year through at least the year 2002. If Arcus Group does not
prevail, then Iron Mountain may have to pay taxes for the years 1996 and 1997,
in which years Arcus Group did claim the benefit of its loss carryforwards.
Management does not believe that the amount of taxes which Iron Mountain would
have to pay in such event would have a material adverse effect on Iron
Mountain's financial condition or results of operations, although there can be
no assurance in this regard.
In addition to the matters discussed above, the Company is involved in
litigation from time to time in the ordinary course of business, and in the
opinion of management, no other material legal proceedings are pending to which
the Company, or any of its properties, is subject.
<PAGE>
C. Selected Consolidated Financial and Operating Information
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
(In thousands, except per share data)
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,
1993, 1994, 1995, 1996 and 1997 have been derived from the Company's audited
consolidated financial statements. 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 filing.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1993 1994 1995 1996 1997
------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Revenues:
Storage ..................................................... $ 48,892 $ 54,098 $ 64,165 $ 85,826 $ 125,968
Service and Storage Material Sales .......................... 32,781 33,520 40,271 52,892 82,797
--------- -------- -------- -------- ---------
Total Revenues ............................................ 81,673 87,618 104,436 138,718 208,765
Operating Expenses:
Cost of Sales (Excluding Depreciation) ...................... 43,054 45,880 52,277 70,747 106,879
Selling, General and Administrative ......................... 19,971 20,853 26,035 34,342 51,668
Depreciation and Amortization ............................... 6,789 8,690 12,341 16,936 27,107
--------- -------- -------- -------- ---------
Total Operating Expenses .................................. 69,814 75,423 90,653 122,025 185,654
--------- -------- -------- -------- ---------
Operating Income ............................................. 11,859 12,195 13,783 16,693 23,111
Interest Expense, Net ........................................ 8,203 8,954 11,838 14,901 27,712
--------- -------- -------- -------- ---------
Income (Loss) Before Provision (Benefit) for Income Taxes .... 3,656 3,241 1,945 1,792 (4,601)
Provision (Benefit) for Income Taxes ......................... 2,088 1,957 1,697 1,435 (80)
--------- -------- -------- -------- ---------
Income (Loss) Before Extraordinary Charge .................... 1,568 1,284 248 357 (4,521)
Extraordinary Charge, Net of Tax Benefit (1) ................. -- -- -- 2,126 --
--------- -------- -------- -------- ---------
Net Income (Loss) ............................................ 1,568 1,284 248 (1,769) (4,521)
Accretion of Redeemable Put Warrant .......................... 940 1,412 2,107 280 --
--------- -------- -------- -------- ---------
Net Income (Loss) Applicable to Common Stockholders .......... $ 628 $ (128) $ (1,859) $ (2,049) $ (4,521)
========= ======== ======== ======== =========
Income (Loss) per Common Share:
Basic:
Income (Loss) Before Extraordinary Charge ................... $ 13.65 $ (0.60) $ (48.92) $ 0.01 $ (0.39)
Extraordinary Charge, Net of Tax Benefit (1) ................ -- -- -- (0.23) --
--------- -------- -------- -------- ---------
Net Income (Loss) Applicable to Common Stockholders ......... $ 13.65 $ (0.60) $ (48.92) $ (0.22) $ (0.39)
========= ======== ======== ======== =========
Weighted Average Common Shares Outstanding .................. 46 214 38 9,274 11,448
========= ======== ======== ======== =========
Diluted:
Income (Loss) Before Extraordinary Charge ................... $ 0.08 $ (0.60) $ (48.92) $ 0.01 $ (0.39)
Extraordinary Charge, Net of Tax Benefit (1) ................ -- -- -- (0.23) --
--------- -------- -------- -------- ---------
Net Income (Loss) Applicable to Common Stockholders ......... $ 0.08 $ (0.60) $ (48.92) $ (0.22) $ (0.39)
========= ======== ======== ======== =========
Weighted Average Common Shares Outstanding .................. 8,067 214 38 9,274 11,448
========= ======== ======== ======== =========
Pro Forma (2):
Net Income (Loss) Applicable to Common Stockholders ......... $ 0.08 $ (0.02) $ (0.24) $ (0.20) $ (0.39)
========= ======== ======== ======== =========
Weighted Average Common Shares Outstanding .................. 8,067 7,984 7,784 10,137 11,448
========= ======== ======== ======== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Other Data:
EBITDA (3) ....................................... $ 18,648 $ 20,885 $ 26,124 $ 33,629 $ 50,218
EBITDA as a Percentage of Total Revenues ......... 22.8% 23.8% 25.0% 24.2% 24.1%
Capital Expenditures: ............................
Growth (4)(5) ................................... $ 13,605 $ 15,829 $ 14,395 $ 23,334 $ 37,082
Maintenance ..................................... 1,846 1,151 858 1,112 1,238
-------- -------- -------- -------- --------
Total Capital Expenditures (5) ................ $ 15,451 $ 16,980 $ 15,253 $ 24,446 $ 38,320
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
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1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and Cash Equivalents ..................... $ 591 $ 1,303 $ 1,585 $ 3,453 $ 24,510
Total Assets .................................. 125,288 136,859 186,881 281,799 636,786
Total Debt .................................... 78,460 86,258 121,874 184,733 428,018
Stockholders' Equity .......................... 24,047 22,869 21,011 52,384 137,733
</TABLE>
- ----------------------
(1) The extraordinary 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.
(2) Represents pro forma earnings per share as if the preferred stock that was
converted into Common Stock in connection with the Company's Initial
Public Offering (as defined herein) had been converted for all periods
presented.
(3) Based on its experience in the records management industry, the Company
believes that earnings before interest, taxes, depreciation, amortization
and extraordinary items ("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 of the Company's performance or to cash flow from
operations (as determined in accordance with generally accepted accounting
principles ("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.
(4) Growth capital expenditures consist primarily of investments in racking
systems, management information systems, new buildings and improvements to
existing facilities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Capital Investments."
(5) Includes $2,901 in 1994 related to the cost of constructing a records
management facility which was sold in a sale and leaseback transaction in
1994.
<PAGE>
D. Management's Discussion and Analysis of Financial Condition and Results of
Operations
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 or incorporated by reference in this filing. This
filing contains, in addition to historical information, forward-looking
statements that include risks and uncertainties, many of which are beyond the
Company's control. 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. 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 Company is proposing to undertake an offering of 3,000,000 shares of
its Common Stock pursuant to its effective shelf registration statement (the
"Offering"). Bear, Stearns & Co. Inc., William Blair & Company, L.L.C. and
Prudential Securities Incorporated will be the managing underwriters for the
Offering. The net proceeds of the Offering will be used to repay indebtedness
under the Company's bank facility, dated as of September 30, 1996, among the
Company, the lenders party thereto and The Chase Manhattan Bank, as
Administrative Agent, as amended (the "Credit Agreement"), to fund the cash
portion of the purchase price of the InterMation Merger and for general
corporate purposes. The Company may apply a portion of the net proceeds from the
Offering to redeem up to $57,750,000 aggregate principal amount of the Company's
10 1/8% Senior Subordinated Notes due 2006 (the "1996 Notes"), at a redemption
price equal to 109.125% of the principal amount thereof, plus accrued and unpaid
interest to, but excluding, the date of redemption. If the Company elects to
redeem the maximum permitted aggregate principal amount of the 1996 Notes with
the net proceeds of the Offering, then the Company would record, in the quarter
in which the redemption occurs, an extraordinary charge of approximately $7
million (before a tax benefit of approximately $3 million) from the early
retirement of debt. Such extraordinary charge would consist of a redemption
premium of approximately $5 million and the write-off of unamortized deferred
financing costs of approximately $2 million.
The primary financial objective of the Company is to increase its EBITDA,
which is a source of funds for investment in continued internal growth and
growth through acquisitions and to service indebtedness. The Company has
benefited from growth in EBITDA, which has increased from $18.6 million for
1993 to $50.2 million for 1997 (a compound annual growth rate of 28.1%).
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 1995, 1996 and 1997, the Company experienced net losses applicable to
common stockholders. Such net losses are attributable in part to significant
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 in 1995 and 1996 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 Company's initial public offering (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 consist of periodic charges related
to the storage of materials (either on a per unit or per cubic foot of records
basis) and have accounted for approximately 60% of total revenues in each of
the last five years. In certain circumstances, based upon customer
requirements, storage revenues include periodic charges associated with normal,
recurring service activities. Service and storage material sales revenues are
comprised of charges for related service activities and the sale of storage
materials and are derived primarily from the Company's courier operations
(consisting primarily of the pickup and delivery of records upon customer
request), additions of new records, 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.
EBITDA is an important financial performance measure in the records
management industry, both for determining the value of companies within the
industry and for defining standards for borrowing from institutional lenders.
For 1993, 1994, 1995, 1996 and 1997, EBITDA margins were 22.8%, 23.8%, 25.0%,
24.2% and 24.1%, respectively. The Company acquired 16 businesses in 1996 and
18 in 1997, most of which had lower EBITDA margins than the rest of the
Company. The anticipated synergies relating to such acquisitions were generally
not realized immediately. Nonetheless, the Company has been able to maintain
its recent EBITDA margins through increased overall operating efficiencies and
economies of scale and the realization of synergies in connection with earlier
acquisitions.
As a result of the acquisition by the Company of Arcus Group and its
principal operating subsidiary, Arcus Technology Services, Inc. ("Arcus"), in
January 1998, the Company now provides temporary information technology ("IT")
staffing services. The EBITDA margins of the IT staffing business are much lower
compared to those in the Company's records management business. Although the
Company believes that the Arcus data security business, when fully integrated,
<PAGE>
will have EBITDA margins consistent with the Company's, consolidated EBITDA
margins will be lower as a result of its IT staffing business. However, the
capital requirements in the IT staffing business are minimal.
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(1) 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) occupying 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
hardware and software. 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
for the redemption of a redeemable put warrant to acquire 444,385 shares of
Common Stock (the "Warrant"). For financial reporting purposes, the Company
recorded substantial charges (based on the estimated redemption value
calculated using the effective interest rate method) to net income applicable
to common stockholders over the period that 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 general corporate purposes.
In March 1997, the Company experienced three fires that resulted in damage
to one and destruction of the Company's other records management facility in
South Brunswick Township, New Jersey. The affected facilities represented less
than three percent of revenues and less than two percent of EBITDA for 1996.
The results for the year ended December 31, 1997 do not include any gain or
loss resulting from the fires. The Company has filed several insurance claims
related to the fires, 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
December 31, 1997, the Company had a receivable of approximately $5.4 million
related to various claims filed under its property and casualty insurance
policies. See Note 9 of Notes to the Company's Consolidated Financial Statements
for a description of certain claims and proceedings against the Company relating
to these fires.
- -------------
(1) The term "Carton" is defined as 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 security services.
<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 total revenues.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Storage ................................................ 61.4% 61.9% 60.3%
Service and Storage Material Sales ..................... 38.6 38.1 39.7
----- ----- -----
Total Revenues ........................................ 100.0 100.0 100.0
----- ----- -----
Operating Expenses:
Cost of Sales (Excluding Depreciation) ................. 50.1 51.0 51.2
Selling, General and Administrative .................... 24.9 24.8 24.7
Depreciation and Amortization .......................... 11.8 12.2 13.0
----- ----- -----
Total Operating Expenses .............................. 86.8 88.0 88.9
----- ----- -----
Operating Income ........................................ 13.2 12.0 11.1
Interest Expense ........................................ 11.3 10.7 13.3
----- ----- -----
Income (Loss) before Provision for Income Taxes ......... 1.9 1.3 ( 2.2)
Provision for Income Taxes .............................. 1.7 1.0 --
----- ----- -----
Income (Loss) Before Extraordinary Charge ............... 0.2 0.3 ( 2.2)
Extraordinary Charge, Net of Tax Benefit ................ -- 1.6 --
----- ----- -----
Net Income (Loss) ....................................... 0.2 ( 1.3) ( 2.2)
Accretion of Redeemable Put Warrant ..................... 2.0 0.2 --
----- ----- -----
Net Loss Applicable to Common Stockholders .............. ( 1.8)% ( 1.5)% ( 2.2)%
===== ===== =====
EBITDA .................................................. 25.0% 24.2% 24.1%
===== ===== =====
</TABLE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Storage revenues increased $40.2 million, or 46.8%, to $126.0 million for
the year ended December 31, 1997 from $85.8 million for the year ended December
31, 1996. Thirty-four acquisitions completed by the Company in 1996 and 1997
accounted for $34.0 million, or 84.7%, of such increase. The balance of such
increase resulted from net Carton growth from existing customers and from sales
to new customers.
Service and storage material sales revenues increased $29.9 million, or
56.5%, to $82.8 million for the year ended December 31, 1997 from $52.9 million
for the year ended December 31, 1996. Acquisitions completed by the Company in
1996 and 1997 accounted for $25.9 million, or 86.8%, 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 year ended December 31, 1997 was
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 $70.1 million,
or 50.5%, to $208.8 million for the year ended December 31, 1997 from $138.7
million for the year ended December 31, 1996. An increase of $59.9 million, or
42.3 percentage points, was attributable to acquisitions completed by the
Company in 1996 and 1997, and an increase of $10.2 million, or 8.2 percentage
points, was attributable to internal growth. The internal growth percentage
includes the loss of revenues resulting from the fires in South Brunswick
Township, New Jersey in March 1997. Excluding the Company's South Brunswick
operations for both years, internal growth for the year was 10.1%.
Cost of sales (excluding depreciation) increased $36.2 million, or 51.1%,
to $106.9 million (51.2% of revenues) for the year ended December 31, 1997 from
$70.7 million (51.0% of revenues) for the year ended December 31, 1996. The
dollar 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 have lower gross margins than the rest of the Company.
<PAGE>
Selling, general and administrative expenses increased $17.4 million, or
50.5%, to $51.7 million (24.7% of revenues) for the year ended December 31,
1997 from $34.3 million (24.8% of revenues) for the year ended December 31,
1996. The dollar increase was primarily attributable to: (i) increased
personnel, office and overhead costs needed to support the Company's growth;
(ii) the addition of overhead, primarily salespeople, related to the acquisition
of Safesite Records Management Corporation ("Safesite"); and (iii) the
integration, training and redeployment of personnel principally related to the
Safesite acquisition.
Depreciation and amortization increased $10.2 million, or 60.1%, to $27.1
million (13.0% of revenues) for the year ended December 31, 1997 from $16.9
million (12.2% of revenues) for the year ended December 31, 1996. The dollar
increase was primarily attributable to the additional depreciation and
amortization related to the Company's acquisitions and capital expenditures
including racking systems, information systems and improvements to existing
facilities.
As a result of the foregoing factors, operating income increased $6.4
million, or 38.4%, to $23.1 million (11.1% of revenues) for the year ended
December 31, 1997 from $16.7 million (12.0% of revenues) for the year ended
December 31, 1996.
Interest expense increased $12.8 million, or 86.0%, to $27.7 million for
the year ended December 31, 1997 from $14.9 million for the year ended December
31, 1996. The increase was primarily attributable to increased indebtedness
related to the financing of acquisitions. Such increase was partially offset by
lower effective interest rates for the year ended December 31, 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 $6.4 million to a loss of $4.6 million
(2.2% of revenues) for the year ended December 31, 1997 from income of $1.8
million (1.3% of revenues) for the year ended December 31, 1996. Provision
(credit) for income taxes was a credit of $0.1 million for the year ended
December 31, 1997 compared with a provision of $1.4 million for the year ended
December 31, 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). During the year ended December 31, 1997, the Company recorded
approximately $145 million in nondeductible goodwill, primarily related to the
acquisitions of Safesite, Data Securities International, Inc. and HIMSCORP, Inc.
(doing business under the name Record Masters) ("Record Masters").
Net loss increased $2.7 million to a net loss of $4.5 million (2.2% of
revenues) for the year ended December 31, 1997 from a net loss of $1.8 million
(1.3% of revenues) for the year ended December 31, 1996. Net loss applicable to
common stockholders increased $2.5 million to a net loss of $4.5 million (2.2%
of revenues) for the year ended December 31, 1997 from a net loss of $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 $16.6 million, or
49.3%, to $50.2 million (24.1% of revenues) for the year ended December 31,
1997 from $33.6 million (24.2% of revenues) for the year ended December 31,
1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Storage revenues increased $21.6 million, or 33.8%, to $85.8 million for
the year ended December 31, 1996 from $64.2 million for the year ended December
31, 1995. Twenty acquisitions completed by the Company in 1995 and 1996
accounted for $15.0 million or 69.1% of such increase. The balance of such
increase resulted from net Carton growth from existing customers and from sales
to new customers.
Service and storage material sales revenues increased $12.6 million, or
31.3%, to $52.9 million for the year ended December 31, 1996 from $40.3 million
for the year ended December 31, 1995. Acquisitions accounted for $9.2 million
or 72.7% of the 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 $34.3 million,
or 32.8%, to $138.7 million for the year ended December 31, 1996 from $104.4
million for the year ended December 31, 1995. Of this increase, $24.1 million,
or 70.4%, was attributable to acquisitions completed by the Company in 1995 and
1996. The monthly
<PAGE>
average Cartons stored increased approximately 33% to approximately 27.1
million Cartons for 1996 from approximately 20.4 million Cartons for 1995.
Cost of sales (excluding depreciation) increased $18.4 million, or 35.3%,
to $70.7 million (51.0% of revenues) for the year ended December 31, 1996, from
$52.3 million (50.1% of revenues) for the year ended December 31, 1995. The
dollar 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 $8.3 million, or
31.9%, to $34.3 million (24.8% of revenues) for the year ended December 31,
1996 from $26.0 million (24.9% of revenues) for the year ended December 31,
1995. The dollar 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 $4.6 million, or 37.2%, to
$16.9 million (12.2% of revenues) for the year ended December 31, 1996 from
$12.3 million (11.8% of revenues) for the year ended December 31, 1995. The
dollar 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 $2.9
million, or 21.1%, to $16.7 million (12.0% of revenues) for the year ended
December 31, 1996 from $13.8 million (13.2% of revenues) for the year ended
December 31, 1995.
Interest expense increased $3.1 million, or 25.9%, to $14.9 million for
the year ended December 31, 1996 from $11.8 million for the year ended December
31, 1995. The 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 $0.1 million, or 7.9%, to $1.8 million (1.3% of revenues) for
the year ended December 31, 1996 from $1.9 million (1.9% of revenues) for the
year ended December 31, 1995. Provision for income taxes decreased to $1.4
million (1.0% of revenues) for the year ended December 31, 1996 from $1.7
million (1.7% of revenues) for the year ended December 31, 1995. 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.
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) decreased $2.0 million to a loss of $1.8 million (1.3%
of revenues) for the year ended December 31, 1996 from income of $0.2 million
(0.2% of revenues) for the year ended December 31, 1995. Net loss applicable to
common stockholders was $2.0 million (1.5% of revenues), after accretion of
$0.3 million related to the Warrant, for the year ended December 31, 1996
compared to $1.9 million (1.8% of revenues), after accretion of $2.1 million
related to the Warrant, for the year ended December 31, 1995. 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 $7.5 million, or
28.7%, to $33.6 million (24.2% of revenues) for the year ended December 31,
1996 from $26.1 million (25.0% of revenues) for the year ended December 31,
1995.
<PAGE>
The Company acquired 16 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.
Recent Quarterly Financial Data
The following table sets forth, for the quarterly periods indicated,
information derived from the Company's consolidated statements of operations.
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
---------------------------------------------------------------------------------------
1996 1997
--------------------------------------------- -----------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
--------- -------------- ---------- --------- --------- --------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Storage ............................... $19,154 $ 20,209 $22,056 $24,407 $25,823 $27,987 $32,390 $39,768
Service and Storage Material
Sales ................................ 11,874 12,713 13,963 14,342 16,331 18,598 22,265 25,603
------- -------- ------- ------- ------- ------- ------- -------
Total Revenues ........................ 31,028 32,922 36,019 38,749 42,154 46,585 54,655 65,371
Operating Expenses:
Cost of Sales (Excluding
Depreciation) ........................ 15,668 16,715 18,708 19,656 21,764 24,108 27,870 33,137
Selling, General and
Administrative ....................... 7,807 8,260(1) 8,695 9,580 10,207 11,296 14,180 15,985
Depreciation and Amortization ......... 3,608 3,922 4,366 5,040 5,722 6,243 6,530 8,612
------- ---------- ------- ------- ------- ------- ------- -------
Total Operating Expenses .............. 27,083 28,897 31,769 34,276 37,693 41,647 48,580 57,734
------- ---------- ------- ------- ------- ------- ------- -------
Operating Income ...................... $ 3,945 $ 4,025 $ 4,250 $ 4,473 $ 4,461 $ 4,938 $ 6,075 $ 7,637
======= ========== ======= ======= ======= ======= ======= =======
EBITDA ................................ $ 7,553 $ 7,947(1) $ 8,616 $ 9,513 $10,183 $11,181 $12,605 $16,249
======= ========== ======= ======= ======= ======= ======= =======
</TABLE>
- ----------------------
(1) 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 March 1997, the Company entered into an amendment and restatement of
its prior credit agreement, which increased the size of the revolving credit
facility to $150.0 million and in October 1997, the Company entered into the
Credit Agreement, which increased such facility to $250.0 million. The Credit
Agreement as currently in effect matures on September 30, 2002.
In October 1997, the Company completed the sale of $250.0 million of 8 3/4%
Senior Subordinated Notes due 2009 (the "1997 Notes"), the net proceeds of which
were used to repay outstanding bank debt under the Credit Agreement, to fund the
cash portion of the purchase price (including assumed debt) of the acquisition
of Record Masters, to fund a portion of the purchase price of the acquisition of
Arcus Group and for general corporate purposes.
In 1997, the Company issued 3,234,227 shares of its Common Stock in
connection with certain acquisitions with an aggregate fair value of $85.9
million. On January 6, 1998, the Company issued 1,438,012 shares of Common
Stock with a fair value of $39.4 million in connection with the acquisition of
Arcus Group (the "Arcus Merger"). Because under the terms of the relevant
acquisition agreements a portion of such shares were subject to resale
restrictions, the Company obtained appraisals to determine the fair value of
such shares. The value of the stock in each transaction had originally been
determined
<PAGE>
based on the market price for the Company's Common Stock on the closing date of
each acquisition. Because the appraised value of the restricted shares was less
than the originally determined value, the Company recorded corresponding
decreases in equity, goodwill and goodwill amortization in the fourth quarter of
1997. In addition, the Company issued options to acquire approximately 146,000
and 590,000 shares of Common Stock with a value of $3.1 million and $15.7
million in connection with certain acquisitions completed in 1997 and the Arcus
Merger completed in January 1998, respectively.
Net cash provided by financing activities was: (i) $34.1 million for the
year ended December 31, 1995, substantially all of which was provided under the
Company's prior credit arrangements; (ii) $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 $33.3 million from the Initial Public
Offering, offset by $102.2 million of repayment of indebtedness and $6.6
million used to retire the Warrant; and (iii) $231.2 million for the year ended
December 31, 1997, consisting primarily of the net proceeds of $242.6 million
from the sale of the 1997 Notes, offset by $10.3 million of repayment of
indebtedness. As of December 31, 1997, there were no outstanding borrowings
under the Credit Agreement.
The annual maturities of the Company's indebtedness for the years ending
December 31, 1998, 1999, 2000, 2001 and 2002 are $0.5 million, $0.4 million,
$7.8 million, $0.3 million and $0.3 million, respectively. As of March 1, 1998,
the Company had outstanding borrowings of approximately $87.8 million under the
Credit Agreement, which were used to fund, among other things, a portion of the
purchase price (including debt assumed) of the Arcus Merger, the purchase price
of four additional records management businesses and general corporate
purposes.
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 March 1, 1998, the Company had $516.2 million of total
debt, of which $428.4 million had fixed interest rates and $87.8 million had
variable interest rates. Consistent with the Credit Agreement, the Company has
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.
Net cash provided by operations was $22.4 million for the year ended
December 31, 1997 compared to $15.9 million for the same period in 1996. The
increase was primarily attributable to the increase in EBITDA, the net increase
in accounts payable and accrued expenses and other changes in asset and
liability accounts being partially offset by the increase in interest payments
and a $2.3 million net increase in expenditures related to the South Brunswick
fires which have been recorded as part of the insurance receivable.
At December 31, 1997, the Company had estimated net operating loss
carryforwards of approximately $20.5 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. The
Company is currently evaluating its ability to utilize Arcus Group's net
operating loss carryforwards for federal income tax purposes. Until such time
when the Company's ability to utilize such loss carryforwards becomes probable,
the Company will provide a full valuation allowance for the deferred tax asset
generated by such loss carryforwards.
Capital Investments
As the Company has sought to increase its EBITDA, it has made significant
capital investments, consisting primarily of acquisitions, growth-related
capital expenditures and customer acquisition costs. These investments have
been primarily funded through a portion of the net proceeds of the Initial
Public Offering, the sale of the 1996 Notes and the 1997 Notes, cash flows from
operations and borrowings under the Company's credit agreements.
As a result of the Company implementing its acquisition strategy, cash
paid for acquisitions was $33.0 million, $68.5 million and $192.2 million for
1995, 1996 and 1997, respectively. In addition, in connection with certain 1997
acquisitions, the Company issued Common Stock and options to purchase Common
Stock with an aggregate fair value of $88.9 million. In January and February
1998, the Company acquired five additional records management businesses,
including Arcus, for total consideration of approximately $167 million,
including approximately $55 million in Common Stock and options to acquire
Common Stock and the balance in cash and assumed indebtedness.
<PAGE>
In February 1998, the Company entered into a definitive agreement to
acquire all of the outstanding capital stock of InterMation, a records
management company based in Seattle, Washington with additional operations in
Portland, Oregon, for total consideration of approximately $28 million. The
consideration will consist of approximately $18 million in Common Stock
(subject to certain adjustments) and the balance in cash and assumed
indebtedness.
For 1995, 1996 and 1997, the Company's growth-related capital expenditures
were $14.4 million, $23.3 million and $37.1 million, respectively.
Growth-related capital expenditures consist primarily of investments in racking
systems, management information systems, new buildings and improvements to
existing facilities. For 1995, 1996 and 1997, the Company's maintenance capital
expenditures were $0.9 million, $1.1 million and $1.2 million, respectively.
The Company currently estimates that its capital expenditures (other than
capital expenditures related to future acquisitions, which cannot be presently
estimated) for 1998 will be approximately $45 million. The Company expects to
fund these expenditures with 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. For 1995, 1996 and 1997, the Company's additions to customer
acquisition costs were $1.4 million, $1.6 million and $1.6 million,
respectively.
The Company is addressing the Year 2000 problem, which concerns the
inability of systems, primarily computer software programs, to properly
recognize and process date sensitive information relating to the year 2000 and
beyond. Due to the long-term nature of records stored at the Company's
facilities and the need to schedule destructions of records years in the
future, the Company's Safekeeper(TM) systems are already Year 2000 compliant.
The Company currently utilizes certain other software (including its accounting
software) that is not Year 2000 compliant. The Company, in the ordinary course
of business, has for several years had several information system improvement
initiatives underway. These initiatives include conversion of acquired
businesses to Safekeeper and the installation of new accounting software.
Management believes that such initiatives will adequately address the Year 2000
problem, although there can be no assurance in this regard. The 1998 capital
expenditures related to these information systems initiatives are included in
the Company's estimate for capital expenditures in 1998. Costs related to new
information systems will be capitalized and amortized over their useful lives.
Management does not believe that the other costs associated with addressing the
Year 2000 problem will be material. The Company will continue to address the
Year 2000 issue in connection with its future acquisitions. The ability of
third parties with whom the Company transacts business to adequately address
their Year 2000 issues is outside of the Company's control. Failure of such
third parties or the Company to adequately address their respective Year 2000
issues could have a material adverse effect on the Company's financial
condition or results of operations.
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. The Company has historically
financed the cash portion of its acquisitions with borrowings under its credit
agreements in conjunction with cash flows provided by operations and a portion
of the net proceeds of the Initial Public Offering and the sale of the 1996
Notes and the 1997 Notes. The Company's future interest expense may increase
significantly as a result of the 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 such measures of liquidity as debt to equity, EBITDA
to debt and EBITDA to interest expense.
On January 20, 1998, the Company filed a Registration Statement on Form
S-4 (the "Acquisition Shelf "), which registered up to 1,000,000 shares of the
Company's Common Stock to be offered directly by the Company in connection with
acquisitions. The Acquisition Shelf will provide the Company with additional
flexibility to issue registered shares in connection with business
acquisitions. The shares of Common Stock to be issued in the InterMation Merger
are registered under the Acquisition Shelf.
In connection with its acquisition program, the Company undertakes certain
restructurings of the acquired businesses. Formalized restructuring plans for
acquisitions are completed within one year of the date of acquisition. The
restructuring activities include 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,
<PAGE>
the Company established reserves of $1.9 million and $6.3 million in 1996 and
1997, respectively. During 1996 and 1997, the Company expended $0.6 million and
$2.2 million, respectively, for restructuring costs. These expenditures
consisted primarily of severance costs, move costs and costs relating to exited
facilities. At December 31, 1997, the Company had a total of $5.4 million
accrued for restructuring costs for all of its then completed acquisitions. The
Company expects to record reserves of approximately $3 million in connection
with the acquisitions completed in January and February 1998; however, the
Company will re-evaluate its restructuring plans regarding these acquisitions
during the year following their consummation.
Future Capital Needs
The Company's ability to generate sufficient cash 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 debt financings and the net
proceeds of the Offering 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 Amended and 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. On January
5, 1998, at a Special Meeting of Stockholders, the stockholders of the Company
approved an amendment to the Company's Amended and Restated Certificate of
Incorporation to increase the number of shares of Common Stock that the Company
is authorized to issue from 20,000,000 to 100,000,000 shares.
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.
<PAGE>
Item 7. Financial Statements and Exhibits
(a) Financial Statements (see index on page F-1)
(b) Pro Forma Financial Information and other data (see index on page F-1)
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
a) (i) Consolidated Financial Statements and Supplementary Data
of Iron Mountain Incorporated ................................................ F-2
(ii) Consolidated Financial Statements of Arcus Technology Services, Inc. .......... F-23
b) Pro Forma Condensed Consolidated Financial Information ............................ F-39
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Iron Mountain Incorporated:
We have audited the accompanying consolidated balance sheets of Iron
Mountain Incorporated (a Delaware corporation) and its subsidiaries as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. 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 financial position of Iron Mountain Incorporated
and its subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 20, 1998
F-2
<PAGE>
IRON MOUNTAIN INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ............................... $ 3,453 $ 24,510
Accounts receivable (less allowances of $1,061 and
$1,929 as of 1996 and 1997, respectively) ............. 24,136 40,545
Receivable from insurance company ....................... -- 5,410
Deferred income taxes ................................... 3,378 5,896
Prepaid expenses and other .............................. 3,821 5,566
--------- ---------
Total Current Assets ................................. 34,788 81,927
Property, Plant and Equipment:
Property, plant and equipment ........................... 163,495 245,174
Less--Accumulated depreciation .......................... (45,146) (61,276)
--------- ---------
Net Property, Plant and Equipment .................... 118,349 183,898
Other Assets:
Goodwill, net ........................................... 109,363 340,852
Customer acquisition costs, net ......................... 6,334 7,319
Deferred financing costs, net ........................... 7,358 14,429
Other ................................................... 5,607 8,361
--------- ---------
Total Other Assets ................................... 128,662 370,961
--------- ---------
Total Assets ......................................... $ 281,799 $ 636,786
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt ....................... $ 396 $ 520
Note payable ............................................ -- 3,000
Accounts payable ........................................ 3,750 11,022
Accrued expenses ........................................ 17,275 28,131
Deferred income ......................................... 4,995 11,931
Other current liabilities ............................... 414 1,149
--------- ---------
Total Current Liabilities ............................ 26,830 55,753
Long-term Debt, net of current portion ................... 184,337 424,498
Other Long-Term Liabilities .............................. 6,576 5,336
Deferred Rent ............................................ 7,651 8,202
Deferred Income Taxes .................................... 4,021 5,264
Commitments and Contingencies (see Note 9)
Stockholders' Equity:
Preferred stock ......................................... -- --
Common stock ............................................ 101 135
Additional paid-in capital .............................. 62,135 151,971
Accumulated deficit ..................................... (9,852) (14,373)
--------- ---------
Total Stockholders' Equity ........................... 52,384 137,733
--------- ---------
Total Liabilities and Stockholders' Equity ........... $ 281,799 $ 636,786
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
IRON MOUNTAIN INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
Revenues:
Storage ............................................... $ 64,165 $ 85,826 $125,968
Service and storage material sales .................... 40,271 52,892 82,797
-------- -------- --------
Total Revenues ..................................... 104,436 138,718 208,765
Operating Expenses:
Cost of sales (excluding depreciation) ................ 52,277 70,747 106,879
Selling, general and administrative ................... 26,035 34,342 51,668
Depreciation and amortization ......................... 12,341 16,936 27,107
-------- -------- --------
Total Operating Expenses ........................... 90,653 122,025 185,654
-------- -------- --------
Operating Income ....................................... 13,783 16,693 23,111
Interest Expense ....................................... 11,838 14,901 27,712
-------- -------- --------
Income (Loss) Before Provision (Benefit) for
Income Taxes ..................................... 1,945 1,792 (4,601)
Provision (Benefit) for Income Taxes ................... 1,697 1,435 (80)
-------- -------- --------
Income (Loss) Before Extraordinary Charge .......... 248 357 (4,521)
Extraordinary Charge from Early Retirement of Debt
(Net of Tax Benefit of $1,413) ........................ -- 2,126 --
-------- -------- --------
Net Income (Loss) .................................. 248 (1,769) (4,521)
Accretion of Redeemable Put Warrant .................... 2,107 280 --
-------- -------- --------
Net Loss Applicable to Common Stockholders ......... $ (1,859) $ (2,049) $ (4,521)
======== ======== ========
Income (Loss) per Common Share--Basic and Diluted
(See Notes 5 and 6):
Income (loss) before extraordinary charge ............. $ (48.92) $ 0.01 $ (0.39)
Extraordinary charge (net of tax benefit) ............. -- (0.23) --
-------- -------- --------
Net Loss Applicable to Common Stockholders ............ $ (48.92) $ (0.22) $ (0.39)
======== ======== ========
Weighted Average Common Shares Outstanding ............. 38 9,274 11,448
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
IRON MOUNTAIN INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Preferred Stock
---------------------------------------------------------------------------------------
Series A1 Series A2 Series A3 Series C
--------------------- -------------------- --------------------- ----------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------------ -------- ----------- -------- ------------ -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 .......... 50,000 $ 1 100,000 $ 1 -- $-- 351,395 $ 3
Conversion of Series A1
preferred stock to Series A3
preferred stock .................... (43,500) (1) -- -- 43,500 1 -- --
Repurchase of preferred stock ....... -- -- (2,000) -- -- -- -- --
Exercise of stock options ........... -- -- -- -- -- -- -- --
Net income .......................... -- -- -- -- -- -- -- --
Warrant accretion ................... -- -- -- -- -- -- -- --
------- ----- ------- ---- ------ ---- ------- ----
Balance, December 31, 1995 .......... 6,500 -- 98,000 1 43,500 1 351,395 3
Conversion of preferred stock
to common stock--voting ............ (6,500) -- (72,679) (1) (43,500) (1) (351,395) (3)
Conversion of preferred stock
to common stock--nonvoting -- -- (25,321) -- -- -- -- --
Issuance of shares in initial
public offering .................... -- -- -- -- -- -- -- --
Exercise of stock options ........... -- -- -- -- -- -- -- --
Issuance of shares for services ..... -- -- -- -- -- -- -- --
Conversion of common stock--
nonvoting to common
stock--voting ...................... -- -- -- -- -- -- -- --
Net loss ............................ -- -- -- -- -- -- -- --
Warrant accretion ................... -- -- -- -- -- -- -- --
------- ----- ------- ----- ------- ----- -------- ----
Balance, December 31, 1996 .......... -- -- -- -- -- -- -- --
Exercise of stock options ........... -- -- -- -- -- -- -- --
Issuance of shares for services ..... -- -- -- -- -- -- -- --
Shares and options issued in
connection with acquisitions,
net of issuance costs .............. -- -- -- -- -- -- -- --
Conversion of common stock--
nonvoting to common
stock--voting ...................... -- -- -- -- -- -- -- --
Net loss ............................ -- -- -- -- -- -- -- --
------- ----- ------- ----- ------- ----- -------- ----
Balance, December 31, 1997 .......... -- $-- -- $-- -- $-- -- $--
======= ===== ======= ===== ======= ===== ======== ====
<CAPTION>
Common Stock
-----------------------------------------------------------------
Class A Voting Voting Nonvoting Additional
--------------------- --------------------- --------------------- Paid-in
Shares Amount Shares Amount Shares Amount Capital
------------ -------- ------------ -------- ------------ -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 .......... 28,912 $-- -- $ -- -- $-- $28,808
Conversion of Series A1
preferred stock to Series A3
preferred stock .................... -- -- -- -- -- -- --
Repurchase of preferred stock ....... -- -- -- -- -- -- (199)
Exercise of stock options ........... 15,976 -- -- -- -- -- 200
Net income .......................... -- -- -- -- -- -- --
Warrant accretion ................... -- -- -- -- -- -- --
------ --- -- ---- -- ---- -------
Balance, December 31, 1995 .......... 44,888 -- -- -- -- -- 28,809
Conversion of preferred stock
to common stock--voting ............ (44,888) -- 7,277,141 73 -- -- (68)
Conversion of preferred stock
to common stock--nonvoting -- -- -- -- 500,000 5 (5)
Issuance of shares in initial
public offering .................... -- -- 2,350,000 23 -- -- 33,262
Exercise of stock options ........... -- -- 6,896 -- -- -- 118
Issuance of shares for services ..... -- -- 915 -- -- -- 19
Conversion of common stock--
nonvoting to common
stock--voting ...................... -- -- 22,705 -- (22,705) -- --
Net loss ............................ -- -- -- -- -- -- --
Warrant accretion ................... -- -- -- -- -- -- --
------- --- --------- ---- ------- ---- ---------
Balance, December 31, 1996 .......... -- -- 9,657,657 96 477,295 5 62,135
Exercise of stock options ........... -- -- 82,438 1 -- -- 1,532
Issuance of shares for services ..... -- -- 1,834 -- -- -- 52
Shares and options issued in
connection with acquisitions,
net of issuance costs .............. -- -- 3,234,227 33 -- -- 88,252
Conversion of common stock--
nonvoting to common
stock--voting ...................... -- -- 477,295 5 (477,295) (5) --
Net loss ............................ -- -- -- -- -- -- --
------- --- --------- ---- -------- ----- ---------
Balance, December 31, 1997 .......... -- $-- 13,453,451 $135 -- $-- $151,971
======= === ========== ==== ======== ===== =========
<CAPTION>
Total
Accumulated Stockholders'
Deficit Equity
------------- --------------
<S> <C> <C>
Balance, December 31, 1994 .......... $ (5,944) $ 22,869
Conversion of Series A1
preferred stock to Series A3
preferred stock .................... -- --
Repurchase of preferred stock ....... -- (199)
Exercise of stock options ........... -- 200
Net income .......................... 248 248
Warrant accretion ................... (2,107) (2,107)
--------- --------
Balance, December 31, 1995 .......... (7,803) 21,011
Conversion of preferred stock
to common stock--voting ............ -- --
Conversion of preferred stock
to common stock--nonvoting -- --
Issuance of shares in initial
public offering .................... -- 33,285
Exercise of stock options ........... -- 118
Issuance of shares for services ..... -- 19
Conversion of common stock--
nonvoting to common
stock--voting ...................... -- --
Net loss ............................ (1,769) (1,769)
Warrant accretion ................... (280) (280)
--------- --------
Balance, December 31, 1996 .......... (9,852) 52,384
Exercise of stock options ........... -- 1,533
Issuance of shares for services ..... -- 52
Shares and options issued in
connection with acquisitions,
net of issuance costs .............. -- 88,285
Conversion of common stock--
nonvoting to common
stock--voting ...................... -- --
Net loss ............................ (4,521) (4,521)
--------- --------
Balance, December 31, 1997 .......... $ (14,373) $137,733
========= ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
IRON MOUNTAIN INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) ........................................... $ 248 $ (1,769) $ (4,521)
Adjustments to reconcile net income (loss) to cash
flows provided by operating activities:
Depreciation and amortization .............................. 12,341 16,936 27,107
Amortization of financing costs ............................ 1,135 857 1,095
Provision for doubtful accounts ............................ 630 639 874
Extraordinary loss on early retirement of debt ............. -- 3,539 --
Loss on sale of fixed assets ............................... 400 -- --
Income tax benefit from exercise of stock options .......... -- -- 747
Expenditures covered by insurance .......................... -- -- (6,324)
Proceeds from insurance company ............................ -- -- 4,000
Other, net ................................................. -- -- 52
Changes in Assets and Liabilities (exclusive of acquisitions):
Accounts receivable ........................................ (3,171) (4,395) (4,433)
Inventory, prepaid expenses and other assets ............... (739) (878) (625)
Deferred income taxes ...................................... 1,179 (973) 443
Accounts payable ........................................... 265 (1,278) 4,653
Accrued expenses ........................................... 4,252 3,642 (1,115)
Other long-term liabilities ................................ (527) (193) (1,240)
Deferred rent .............................................. (110) (332) 551
Deferred income ............................................ (301) 161 671
Other liabilities .......................................... 125 (56) 485
--------- ---------- ----------
Cash Flows Provided by Operating Activities ............... 15,727 15,900 22,420
--------- ---------- ----------
Cash Flows from Investing Activities:
Capital expenditures ........................................ (15,253) (24,446) (38,320)
Additions to customer acquisition costs ..................... (1,379) (1,642) (1,635)
Cash paid for acquisitions .................................. (33,048) (68,496) (192,230)
Proceeds from sale of assets ................................ 73 -- --
Other, net .................................................. 71 (25) (333)
--------- ---------- ----------
Cash Flows Used in Investing Activities ................... (49,536) (94,609) (232,518)
--------- ---------- ----------
Cash Flows from Financing Activities:
Repayment of debt ........................................... (812) (171,730) (178,181)
Net proceeds from borrowings ................................ 36,350 69,570 167,850
Net proceeds from sale of senior subordinated notes ......... -- 160,050 242,640
Net proceeds from initial public offering ................... -- 33,285 --
Retirement of redeemable put warrant ........................ -- (6,612) --
Prepayment penalties on early retirement of debt ............ -- (1,785) --
Exercise of stock options ................................... 200 66 786
Repurchase of stock ......................................... (199) -- --
Financing costs ............................................. (1,448) (2,267) (1,291)
Stock issuance costs ........................................ -- -- (649)
--------- ---------- ----------
Cash Flows Provided by Financing Activities ............... 34,091 80,577 231,155
--------- ---------- ----------
Increase in Cash and Cash Equivalents ........................ 282 1,868 21,057
Cash and Cash Equivalents, Beginning of Year ................. 1,303 1,585 3,453
--------- ---------- ----------
Cash and Cash Equivalents, End of Year ....................... $ 1,585 $ 3,453 $ 24,510
========= ========== ==========
Supplemental Information:
Cash Paid for Interest ....................................... $ 9,111 $ 11,590 $ 22,440
========= ========== ==========
Cash Paid for Income Taxes ................................... $ 1,177 $ 197 $ 1,306
========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Amounts in thousands except share data)
1. Nature of Business
The accompanying financial statements represent the consolidated accounts
of Iron Mountain Incorporated and its subsidiaries (collectively "Iron
Mountain" or the "Company"). Iron Mountain is a full-service records management
company providing storage and related services for all media in various
locations throughout the United States to Fortune 500 companies and numerous
legal, banking, health care, accounting, insurance, entertainment and
government organizations.
2. Summary of Significant Accounting Policies
a. Principles of Consolidation
The accompanying financial statements reflect the financial position and
results of operations of Iron Mountain on a consolidated basis. All significant
intercompany account balances have been eliminated.
b. 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 the
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.
c. Cash and Cash Equivalents
The Company defines cash and cash equivalents to include cash on hand and
cash invested in short-term securities which have original maturities of less
than 90 days. Cash and cash equivalents are carried at cost, which approximates
fair market value.
d. Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method with the following useful lives:
<TABLE>
<S> <C>
Buildings .............................. 40 to 50 years
Leasehold improvements ................. 8 to 10 years or the life of the
lease, whichever is shorter
Racking ................................ 10 to 20 years
Warehouse equipment/vehicles ........... 5 to 10 years
Furniture and fixtures ................. 3 to 5 years
Computer hardware and software ......... 3 years
</TABLE>
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Land and buildings ..................... $ 38,552 $ 67,870
Leasehold improvements ................. 14,918 19,583
Racking ................................ 72,854 94,960
Warehouse equipment/vehicles ........... 7,730 12,290
Furniture and fixtures ................. 3,839 4,875
Computer hardware and software ......... 19,786 29,913
Construction in progress ............... 5,816 15,683
-------- --------
$163,495 $245,174
======== ========
</TABLE>
F-7
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies (continued)
The Company develops various software applications for internal use.
Payroll and related costs for employees who are directly associated with and
who devote time to the development and conversion of internal-use computer
software projects (to the extent of the time spent directly on the project) are
capitalized and amortized over the useful life of the software. Capitalization
begins when the design stage of the application has been completed, it is
probable that the project will be completed and the application will be used to
perform the function intended. Amortization begins when the software is placed
in service.
Minor maintenance costs are expensed as incurred. Major improvements to
the leased buildings are capitalized as leasehold improvements and depreciated
as described above.
e. Goodwill
Goodwill reflects the cost in excess of fair value of the net assets of
companies acquired in purchase transactions. Goodwill is amortized using the
straight-line method from the date of acquisition over the expected period to
be benefited, currently estimated at 25 to 30 years. The Company assesses the
recoverability of goodwill, as well as other long-lived assets based upon
expectations of future undiscounted cash flows in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accumulated
amortization of goodwill was $18,858 and $26,931 as of December 31, 1996 and
1997, respectively. In 1995, the Company recorded a $900 impairment of goodwill
related to one of its subsidiaries.
f. Customer Acquisition Costs
Costs, net of revenues received for the initial transfer of the records,
related to the acquisition of large volume accounts are capitalized and
amortized for an appropriate period not exceeding 12 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 and 1997, those costs were $8,134 and $9,769, respectively,
and accumulated amortization of those costs were $1,800 and $2,450,
respectively.
g. Deferred Financing Costs
Deferred financing costs are amortized over the life of the related debt
using the effective interest rate method. If debt is retired early, unamortized
deferred financing costs are written off as an extraordinary charge in the
period the debt is retired. As of December 31, 1996 and 1997, deferred
financing costs were $7,998 and $16,163, respectively, and accumulated
amortization of those costs were $640 and $1,734, respectively.
h. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
--------- ---------
<S> <C> <C>
Incentive compensation ......... $ 2,287 $ 3,932
Interest ....................... 4,247 8,427
Workers' compensation .......... 2,949 3,022
Payroll and vacation ........... 2,642 3,432
Restructuring costs ............ 1,340 5,443
Other .......................... 3,810 3,875
------- -------
$17,275 $28,131
======= =======
</TABLE>
F-8
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies (continued)
i. Revenues
The Company's revenues consist of storage revenues and service and storage
material sales revenues. Storage revenues consist of periodic charges related
to the storage of materials (either on a per unit or per cubic foot of records
basis). In certain circumstances, based upon customer requirements, storage
revenues include periodic charges associated with normal, recurring service
activities. Service and storage material sales revenues are comprised of
charges for related service activities and the sale of storage materials. In
certain circumstances, storage material sales are recorded net of product costs
when the Company functions as a sales representative of the product
manufacturer and does not receive or take title to the products. Customers are
generally billed on a monthly basis on contractually agreed-upon terms.
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 income and amortized over
the applicable period.
j. Deferred Rent
The Company has entered into various leases for buildings used in the
storage of records. Certain leases have fixed escalation clauses or other
features which require normalization of the rental expense over the life of the
lease resulting in deferred rent being reflected in the accompanying balance
sheets. In addition, the Company has assumed various unfavorable leases in
connection with certain of its acquisitions. The discounted present value of
these lease obligations in excess of market rate at the date of the acquisition
was recorded as a deferred rent liability and is being amortized over the
remaining lives of the respective leases.
k. Stock-Based Compensation
Effective January 1, 1996, the Company adopted the provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." The Company has elected to
continue to account for stock options at intrinsic value with disclosure of the
effects of fair value accounting on net income (loss) and earnings (loss) per
share on a pro forma basis.
l. Interest Rate Caps
Premiums paid for interest rate cap agreements are amortized to interest
expense over the terms of the cap. Unamortized premiums are included in other
assets in the accompanying consolidated balance sheets. Amounts receivable, if
any, under cap agreements are accounted for as a reduction of interest expense.
m. Income (Loss) Per Common Share
During 1997, the Company adopted SFAS No. 128, "Earnings Per Share," and
restated its net income (loss) per share for the years ended 1995 and 1996 (see
Note 6).
n. Reclassifications
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform to the 1997 presentation.
F-9
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Revolving Credit Facility ............................ $ 9,000 $ --
10-1/8% Senior Subordinated Notes (the "1996 Notes").. 165,000 165,000
8-3/4% Senior Subordinated Notes (the "1997 Notes")... -- 249,525
Real Estate Mortgages ................................ 10,733 10,312
Other ................................................ -- 181
-------- --------
Long-term debt ...................................... 184,733 425,018
Less current portion ................................ (396) (520)
-------- --------
Long-term debt, net of current portion .............. $184,337 $424,498
======== ========
</TABLE>
a. Revolving Credit Facility
On September 30, 1996, Iron Mountain entered into a $100 million revolving
credit facility (the "Revolving Credit Facility"), which was scheduled to
mature on September 30, 2001. On March 3, 1997, the Revolving Credit Facility
was increased to $150 million. On September 29, 1997, the Revolving Credit
Facility was increased to $250 million and the maturity date was extended to
September 30, 2002. Both the March 3, 1997 and September 30, 1997 amendments
restated, among other terms, interest rates, commitment fees and financial
covenants. At December 31, 1997, there were no outstanding borrowings under the
Revolving Credit Facility.
The Revolving Credit Facility specifies certain minimum or maximum
relationships between operating cash flows (earnings before interest, taxes,
depreciation, amortization and extraordinary charges) and interest, total debt
and fixed charges. There are restrictions on dividends declared by the Company,
sales or pledging of assets, capital expenditures and changes in business and
ownership; cash dividends are effectively prohibited. As of December 31, 1997,
the Company was in compliance with all of its debt covenants. Loans under the
Revolving Credit Facility are secured by the capital stock of all of the
Company's subsidiaries.
The interest rate on loans under the Revolving Credit Facility varies, at
the Company's option, on a choice of base rates plus an applicable margin. The
applicable margin varies depending on the base rate selected and certain debt
ratios. The timing of interest payments also varies with the base rate
selected.
Under the Revolving Credit Facility, the Company is required to maintain
an interest rate protection program. Pursuant to this requirement, the Company
has only limited involvement with derivative financial instruments and does not
use them for trading purposes.
Interest rate cap agreements are used to reduce the potential impact of
increases in interest rates on floating rate long-term debt. At December 31,
1996, the Company was a party to three interest rate cap agreements, each
covering a notional amount of $10,000. One agreement expired on August 12, 1997
and the other two agreements expire on March 24, 1998. The agreements entitle
the Company to receive from counterparties, on a quarterly basis, certain
payments if the three month LIBOR rate exceeds 7.5%.
The Company is exposed to credit losses in the event of nonperformance by
the counterparties to its interest rate cap agreements but has no off balance
sheet risk of accounting loss.
b. 1996 Notes
On October 1, 1996, the Company issued $165 million of 101/8% Senior
Subordinated Notes due 2006. Interest on the 1996 Notes is payable semiannually
on April 1 and October 1. Payments commenced on April 1, 1997. The net proceeds
were $160.1 million after underwriting discounts and commissions. The proceeds
were used to repay
F-10
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Debt (continued)
outstanding bank debt under the Revolving Credit Facility and certain other
indebtedness, to fund the purchase price of an acquisition and for general
corporate purposes. In connection with the prepayment of such indebtedness, the
Company incurred an extraordinary charge of $3,539, not including related tax
benefit of $1,413, 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.
The 1996 Notes contain covenants and restrictions similar to, or less
restrictive than, the Revolving Credit Facility. After September 30, 2001, and
subject to certain restrictions, the Company may, at its option, redeem any or
all of the 1996 Notes at face value, plus a premium ranging from approximately
2% to 9% through September 30, 2004. Thereafter, the 1996 Notes may be redeemed
at face value. Additionally, under certain circumstances, including a change of
control or following certain asset sales, the holders of the 1996 Notes may
require the Company to repurchase the 1996 Notes.
c. 1997 Notes
On October 24, 1997, the Company issued $250 million of 83/4% Senior
Subordinated Notes due 2009. Interest on the 1997 Notes is payable semiannually
on March 31 and September 30, with payments commencing on March 31, 1998. The
net proceeds were $242.6 million after an original issue discount of $485 and
underwriting discounts and commissions. The proceeds were used to repay
outstanding bank debt and to fund the purchase prices of two acquisitions.
Prior to September 30, 2002, and subsequent to certain restrictions, the
Company may, at its option, redeem any or all of the 1997 Notes at a make-whole
price, as defined. On or after September 30, 2002, and subject to certain
restrictions, the Company may, at its option, redeem any or all of the 1997
Notes at face value, plus a premium of up to approximately 4% through September
30, 2005. Thereafter, the 1997 Notes may be redeemed at face value. Also, any
time through October 23, 2000, the Company may redeem a portion of the 1997
Notes, subject to restrictions, with the net proceeds of one or more qualified
equity offerings, as defined, at a redemption price of 108.75% of the principal
amount of such 1997 Notes. Additionally, under certain circumstances, including
a change of control or following certain asset sales, the holders of the 1997
Notes may require the Company to repurchase the 1997 Notes.
The 1996 and 1997 Notes are fully and unconditionally guaranteed, on a
joint and several basis, on a senior subordinated basis, by all of the
Company's direct and indirect subsidiaries (the "Subsidiary Guarantors"). The
Company is a holding company, substantially all of the assets of which are the
stock of the Subsidiary Guarantors, and substantially all of the operations of
which are conducted by the Subsidiary Guarantors. Accordingly, the aggregate
assets, liabilities, earnings and equity of the Subsidiary Guarantors are
substantially equivalent to the assets, liabilities, earnings and equity of the
Company on a consolidated basis. Management of the Company believes that
separate financial statements of, and other disclosures with respect to, the
Subsidiary Guarantors are not meaningful or material to investors.
d. Other
The real estate mortgages consist of an $8,037, 10 year, 11% mortgage
based on 30 year amortization with a $7,495 balloon payment due October 2000
and a $3,000, 8% note that is payable in various installments commencing in
1997 and maturing in November 2006.
F-11
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Debt (continued)
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Amount
------ ----------
<S> <C>
1998 ................ $ 520
1999 ................ 430
2000 ................ 7,796
2001 ................ 301
2002 ................ 301
Thereafter .......... 415,670
--------
$425,018
========
</TABLE>
Based on the borrowing rates currently available to the Company for loans
with similar terms and average maturities, the Company has estimated the
following fair values for its long-term debt as of December 31:
<TABLE>
<CAPTION>
1996 1997
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
10-1/8% Senior Subordinated Notes ........ $165,000 $173,602 $165,000 $179,850
8-3/4% Senior Subordinated Notes ......... -- -- 249,525 255,000
Real estate mortgages .................... 10,733 11,329 10,312 11,322
</TABLE>
4. Acquisitions
The Company purchased substantially all of the assets and assumed certain
liabilities of four, sixteen and eighteen records management businesses during
1995, 1996 and 1997, respectively. Each of these acquisitions was accounted for
using the purchase method of accounting, and accordingly, the results of
operations for each acquisition have been included in the consolidated results
of the Company from the respective acquisition dates. The excess of the
purchase price over the underlying fair value of the assets and liabilities of
each acquisition has been assigned to goodwill and is being amortized over the
estimated benefit period of 25 to 30 years. Funds used to finance the various
acquisitions were provided through the Company's Revolving Credit Facility, a
portion of the net proceeds from the initial public offering of its common
stock (the "Offering") and the issuance of the 1996 and 1997 Notes.
A summary of the cash consideration (not including contingent payments of
approximately $5,875, based on the achievement of certain revenue targets) and
allocation of the purchase price as of the acquisition dates are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Cash Paid ...................................... $ 33,048 $ 68,496 $ 192,230
Fair Value of Common Stock Issued .............. -- -- 85,863
Fair Value of Options Issued ................... -- -- 3,071
-------- -------- ---------
Total Consideration ........................ 33,048 68,496 281,164
-------- -------- ---------
Fair Value of Assets Acquired .................. 15,232 19,476 68,774
Liabilities Assumed ............................ (8,238) (4,874) (26,932)
-------- -------- ---------
Fair Value of Net Assets Acquired .......... 6,994 14,602 41,842
-------- -------- ---------
Recorded Goodwill .............................. $ 26,054 $ 53,894 $ 239,322
======== ======== =========
</TABLE>
F-12
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
4. Acquisitions (continued)
The following unaudited pro forma combined information shows the results
of the Company's operations for the years ended December 31, 1996 and 1997 as
though each of the acquisitions completed during 1996 and 1997 had occurred as
of the beginning of the period reported:
<TABLE>
<CAPTION>
1996 1997
------------- -----------
<S> <C> <C>
Revenues ............................................. $ 228,961 $264,276
========= ========
Loss Before Extraordinary Charge ..................... $ (8,634) $ (6,981)
Extraordinary Charge (Net of Tax Benefit) ............ (2,126) --
--------- --------
Net Loss Applicable to Common Stockholders ........... $ (10,760) $ (6,981)
========= ========
Loss per Common Share--Basic and Diluted:
Loss before extraordinary charge .................... $ (0.69) $ (0.52)
Extraordinary charge (net of tax benefit) ........... (0.17) --
--------- --------
Net loss applicable to common stockholders .......... $ (0.86) $ (0.52)
========= ========
</TABLE>
The pro forma results have been prepared for comparative purposes only and
are not necessarily indicative of the actual results of operations had the
acquisitions taken place as of the beginning of the period reported or the
results that may occur in the future. Furthermore, the pro forma results do not
give effect to all cost savings or incremental costs which may occur as a
result of the integration and consolidation of the companies. Certain
acquisitions completed in 1996 and 1997 are not included in the pro forma
results as their effect was immaterial.
In connection with the acquisitions completed in 1996 and 1997, the
Company has undertaken certain restructurings of the acquired businesses, which
have been, or will be, completed within one year from the date of acquisition.
The restructuring activities include certain reductions in staffing levels,
elimination of duplicate facilities, move costs and other costs associated with
exiting certain activities of the acquired businesses. In connection with these
restructuring activities, the Company established reserves of $1,883 and $6,266
in 1996 and 1997, respectively. 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 1997, the Company expended $602 and
$2,163, respectively, for restructuring costs. These expenditures consisted
primarily of severance costs, move costs and costs relating to exited
facilities. As of December 31, 1997, the Company had a total of $5,443 accrued
for restructuring costs on all of its acquisitions.
5. Capital Stock, Redeemable Put Warrant and Stock Options
a. Capital Stock
On February 6, 1996, the Company completed the Offering. Pursuant to the
Offering, the Company issued 2,350,000 shares of common stock--voting.
In connection with the Offering, the Board of Directors approved, and the
shareholders ratified, a recapitalization and the designation of three new
classes of stock as follows:
<TABLE>
<CAPTION>
Authorized
Class Shares
- --------------------------------------------------- -------------
<S> <C>
Preferred stock, $.01 par value................. 2,000,000
Common stock--voting, $.01 par value............ 13,000,000
Common stock--nonvoting, $.01 par value......... 1,000,000
</TABLE>
F-13
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Capital Stock, Redeemable Put Warrant and Stock Options (continued)
Upon consummation of the Offering, all shares of capital stock were
automatically converted into shares of common stock--voting and, in the case of
one stockholder, common stock--nonvoting. The number of common shares received
upon conversion were as follows:
<TABLE>
<CAPTION>
Common
-------------------------
Preferred Voting Nonvoting
----------- ------------ ----------
<S> <C> <C> <C>
Series A1 and Series A3 ......... 50,000 987,314 --
Series A2 ....................... 98,000 1,435,146 500,000
Series C ........................ 351,395 4,809,793 --
</TABLE>
On March 3, 1997, the Board of Directors approved, and the shareholders
ratified, an increase in the number of authorized shares of common
stock--voting, $.01 par value, from 13,000,000 shares to 20,000,000 shares.
The following table summarizes the number of shares authorized, issued and
outstanding for each issue of the Company's capital stock as of December 31:
<TABLE>
<CAPTION>
Number of Shares
----------------------------------------------------
Authorized Issued and Outstanding
------------------------- --------------------------
Par
Equity Type Value 1996 1997 1996 1997
- ------------------------------------ --------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Preferred stock ................. $ .01 2,000,000 2,000,000 -- --
Common stock--voting ............ $ .01 13,000,000 20,000,000 9,657,657 13,453,451
Common stock--nonvoting ......... $ .01 1,000,000 1,000,000 477,295 --
</TABLE>
In 1995, the Company declared a 15.4215-for-1 stock split of the Class A
and Class B common stock in the form of a stock dividend. All weighted average
common share and stock-related data in the consolidated financial statements
have been retroactively restated to reflect the stock split.
b. Redeemable Put Warrant
In connection with the issuance of certain debt, the Company also issued a
put warrant, dated December 14, 1990 (the "Warrant"), exercisable for 444,385
shares of common stock for nominal consideration upon the occurrence of certain
specified events. On February 7, 1996, in connection with the Offering, the
Warrant was redeemed for $6,612. This Warrant was accreted each year using the
effective interest rate method based on the Warrant's estimated redemption
value at its estimated redemption date of February 15, 1996.
c. Stock Options
In September 1991, the Company created a nonqualified stock option plan
pursuant to which up to 444,385 shares of Class A common stock of the Company
could be issued at the discretion of the Stock Option Committee to key
employees, consultants and directors.
Effective November 30, 1995, the Board of Directors approved the adoption
of the 1995 Stock Incentive Plan (the "Stock Option Plan"), which replaced the
previous stock option plan. A total of 1,000,000 shares of common stock were
available for grant as options and other rights under the Stock Option Plan,
including the options issued under the 1991 plan. On March 3, 1997, the number
of shares of common stock available for grant as options under the Stock Option
Plan increased to 1,400,000.
Effective December 21, 1995, the Board of Directors approved the 1995
Stock Option Plan for Non-Employee Directors (the "Non-Employee Director Plan")
that permitted non-employee directors to elect to receive all or a portion of
their compensation in the form of common stock. Directors electing to receive
common stock received, as an incentive, an amount of stock equivalent to 110%
of the director's compensation otherwise due to be paid in cash. During 1997,
the Company issued 1,484 shares under the Non-Employee Director Plan. On June
30, 1997, the Non-Employee Director Plan was terminated.
F-14
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Capital Stock, Redeemable Put Warrant and Stock Options (continued)
During 1997, the Company issued options to employees of acquired companies
to purchase 145,919 shares of the Company's common stock. The options replaced
options held by the employee for the acquired company's common stock. The
options were accounted for as additional purchase price based on the fair value
of the options when issued.
The following is a summary of stock option transactions, including those
issued to employees of acquired companies, during the applicable periods:
<TABLE>
<CAPTION>
Weighted Average
Options Exercise Price
------------ -----------------
<S> <C> <C>
Options outstanding, December 31, 1994 ......... 261,484 $ 6.89
Granted ....................................... 97,018 12.58
Exercised ..................................... (15,976) 12.58
Canceled ...................................... (8,219) 11.21
-------
Options outstanding, December 31, 1995 ......... 334,307 8.16
Granted ....................................... 453,854 16.49
Exercised ..................................... (6,896) 9.58
Canceled ...................................... (18,404) 11.76
-------
Options outstanding, December 31, 1996 ......... 762,861 13.02
Granted ....................................... 469,113 25.51
Exercised ..................................... (83,807) 9.89
Canceled ...................................... (30,802) 22.10
-------
Options outstanding, December 31, 1997 ......... 1,117,365 18.25
=========
</TABLE>
The stock options were granted with exercise prices equal to or greater
than the fair market value at the date of grant. The majority of options become
exercisable ratably over a period of five years unless the holder terminates
employment. The number of options available for grant at December 31, 1997 was
145,214.
Effective January 1, 1996, the Company adopted the provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." The Company has elected to
continue to account for stock options issued to employees at intrinsic value
with disclosure of fair value accounting on net income (loss) and earnings
(loss) per share on a pro forma basis. Had the Company elected to recognize
compensation cost based on the fair value of the options granted at grant date
as prescribed by SFAS No. 123, net loss applicable to common stockholders and
net loss per common share would have been increased to the pro forma amounts
indicated in the table below:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net loss applicable to common stockholders, as reported ........... $ (1,859) $ (2,049) $ (4,521)
Net loss applicable to common stockholders, pro forma ............. (1,978) (2,614) (5,411)
Net loss per common share--basic and diluted, as reported ......... (48.92) (0.22) (0.39)
Net loss per common share--basic and diluted, pro forma ........... (52.05) (0.28) (0.47)
</TABLE>
The weighted average fair value of options granted in 1995, 1996 and 1997
was $5.22, $7.38 and $16.59 per share, respectively. The values were estimated
on the date of grant using the Black-Scholes option pricing model. The
following table summarizes the weighted average assumptions used for grants in
the year ended December 31:
<TABLE>
<CAPTION>
Assumption 1995 1996 1997
- ----------------------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Expected volatility ............................................... 24.2% 24.2% 29.2%
Risk-free interest rate ........................................... 7.51 6.34 5.91
Expected dividend yield ........................................... N/A N/A N/A
Expected life of the option ....................................... 6.3 years 7.5 years 7.0 years
</TABLE>
F-15
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Capital Stock, Redeemable Put Warrant and Stock Options (continued)
The following table summarizes additional information regarding options
outstanding and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------ ---------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Remaining Average Remaining Average
Range of Contractual Life Exercise Contractual Life Exercise
Exercise Prices Number (in Years) Price Number (in Years) Price
- ------------------------- ------------ ------------------ ---------- ---------- ------------------ ---------
<S> <C> <C> <C> <C> <C> <C>
$1.12 to $1.31........... 25,970 4.00 $ 1.30 9,420 4.00 $ 1.30
$6.48 to $7.05........... 219,233 4.00 6.49 219,233 4.00 6.49
$9.95 to $13.65.......... 111,348 6.77 12.49 60,815 6.44 12.29
$15.38 to $16.13......... 405,844 8.22 15.50 77,835 8.22 15.50
$25.75 to $30.38......... 54,676 6.83 21.99 5,766 6.25 21.50
$31.44 to $36.50......... 300,294 9.59 32.22 -- -- --
------- ---- ------- ------- ---- ------
1,117,365 7.60 $ 18.25 373,069 5.30 $ 9.42
========= ==== ======= ======= ==== ======
</TABLE>
6. Income (Loss) Per Common Share--Basic and Diluted
In accordance with SFAS No. 128, basic income (loss) per common share is
calculated by dividing income (loss) available to common stockholders by the
weighted average number of common shares outstanding. The calculation of
diluted income (loss) per share is consistent with that of basic income (loss)
per share but gives effect to all dilutive potential common shares (that is,
securities such as options, warrants or convertible securities) that were
outstanding during the period, unless the effect is antidilutive.
Income (loss) per common share--basic and diluted has been calculated as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Income (loss) before extraordinary charge .......................... $ 248 $ 357 $ (4,521)
Accretion of redeemable put warrant ................................ (2,107) (280) --
-------- -------- --------
Income (loss) applicable to common stockholders, before
extraordinary charge .............................................. (1,859) 77 (4,521)
Extraordinary charge (net of tax benefit) .......................... -- (2,126) --
-------- -------- --------
Net loss applicable to common stockholders ......................... $ (1,859) $ (2,049) $ (4,521)
======== ======== ========
Weighted average common shares outstanding (in thousands) .......... 38 9,274 11,448
======== ======== ========
Income (loss) per common share--basic and diluted:
Income (loss) before extraordinary charge ......................... $ (48.92) $ 0.01 $ (0.39)
Extraordinary charge (net of tax benefit) ......................... -- (0.23) --
-------- -------- --------
Net loss applicable to common stockholders ........................ $ (48.92) $ (0.22) $ (0.39)
======== ======== ========
</TABLE>
The effect of adopting SFAS No. 128 on previously reported loss per share
data was as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Primary and fully diluted net loss per share (as previously reported) $ (0.24) $ (0.20)
Effect of SFAS No. 128 ............................................... (48.68) (0.02)
-------- -------
Net loss per common share--basic and diluted ......................... $ (48.92) $ (0.22)
======== =======
</TABLE>
F-16
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Income (Loss) Per Common Share--Basic and Diluted (continued)
The following potential common shares have been excluded from the above
calculations because their effects are antidilutive:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ---------- ------------
<S> <C> <C> <C>
Shares of Convertible Preferred Stock .............................. 499,395 -- --
Shares of Common Stock Subject to Outstanding Options .............. 334,337 762,861 1,117,365
Shares of Common Stock Underlying Outstanding Put Warrant .......... 444,385 -- --
------- ------- ---------
1,278,117 762,861 1,117,365
========= ======= =========
</TABLE>
Subsequent to year end, the Company issued 1,438,012 shares of common
stock and approximately 590,000 options in connection with an acquisition (see
Note 13).
7. Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
which requires the recognition of deferred tax assets and liabilities for the
expected tax consequences of temporary differences between the tax and
financial reporting bases of assets and liabilities.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997
----------- -----------
<S> <C> <C>
Accrued liabilities ................................................... $ 1,757 $ 4,726
Deferred rent ......................................................... 3,056 3,411
Net operating loss carryforwards ...................................... 4,751 7,360
AMT credit ............................................................ 587 587
Other ................................................................. 1,719 2,317
--------- ---------
Gross deferred tax assets ........................................... 11,870 18,401
--------- ---------
Other assets principally due to differences in amortization ........... (2,150) (2,693)
Plant and equipment, principally due to differences in depreciation ... (7,039) (11,217)
Customer acquisition costs ............................................ (2,337) (3,859)
--------- ---------
Gross deferred tax liabilities ...................................... (11,526) (17,769)
--------- ---------
Net deferred tax asset ............................................. $ 344 $ 632
========= =========
</TABLE>
The Company and its subsidiaries file a consolidated federal income tax
return. The provision (benefit) for income tax consists of the following
components:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1996 1997
--------- ----------- ---------
<S> <C> <C> <C>
Federal--current ...................................................... $ 422 $ 958 $ --
Federal--deferred ..................................................... 837 57 (459)
State--current ........................................................ 96 1,450 399
State--deferred ....................................................... 342 (1,030) (20)
------ -------- ------
$1,697 $ 1,435 $ (80)
====== ======== ======
</TABLE>
F-17
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. Income Taxes (continued)
A reconciliation of total income tax expense (benefit) and the amount
computed by applying the federal income tax rate of 34% to income (loss) before
income taxes is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ------------
<S> <C> <C> <C>
Computed "expected" tax provision .................. $ 661 $ 609 $ (1,564)
Increase in income taxes resulting from:
State taxes (net of federal tax benefit) .......... 289 278 250
Nondeductible goodwill amortization ............... 843 602 1,221
Other ............................................. (96) (54) 13
------ ------ --------
$1,697 $1,435 $ (80)
====== ====== ========
</TABLE>
The Company has estimated federal net operating loss carryforwards of
$20,487 at December 31, 1997 to reduce future federal income taxes, if any,
which begin to expire in 2005. The Company also has estimated state net
operating loss carryforwards of approximately $3,426 to reduce future state
income taxes, if any. Additionally, the Company has alternative minimum tax
credit carryforwards of $587, which have no expiration date and are available
to reduce future income taxes, if any.
8. Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
Quarter Ended March 31 June 30 September 30 December 31
- --------------------------------------------------------- ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
1996
Revenues ............................................. $31,028 $32,922 $36,019 $38,749
Gross profit ......................................... 15,360 16,207 17,311 19,093
Income (loss) before extraordinary charge ............ 286 411 -- (340)
Net income (loss) .................................... 6(1) 411(2) -- (2,466)(3)
Net income (loss) per common share--basic and diluted:
Income (loss) before extraordinary charge ............ 0.00 0.04 0.00 (0.03)
Net income (loss) .................................... 0.00 0.04 0.00 (0.24)
1997
Revenues ............................................. $42,154 $46,585 $54,655 $65,371
Gross profit ......................................... 20,390 22,477 26,785 32,233
Net loss ............................................. (516) (969) (325) (2,711)
Net loss per common share--basic and diluted ......... (0.05) (0.09) (0.03) (0.21)
</TABLE>
(1) Includes a charge of $280 related to the accretion of the put warrant.
(2) Includes a $193 after-tax charge related to the relocation of the
corporate accounting function from Los Angeles to Boston.
(3) Includes an extraordinary charge of $2,126, net of tax benefit, related
to the prepayment of certain indebtedness.
9. Commitments and Contingencies
a. Leases
Iron Mountain leases most of its facilities under various operating
leases. A majority of these leases have renewal options of five to ten years
and have either fixed or Consumer Price Index escalation clauses. The Company
also leases equipment under operating leases, primarily computers which have an
average lease life of three years. Trucks and office equipment are also leased
and have remaining lease lives ranging from one to seven years. Rent expense
was $15,661, $21,114 and $29,332 for the years ended December 31, 1995, 1996
and 1997, respectively.
F-18
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. Commitments and Contingencies (continued)
Minimum future lease payments are as follows:
<TABLE>
<CAPTION>
Year Operating
---- ----------
<S> <C>
1998 .................................. $ 30,641
1999 .................................. 29,799
2000 .................................. 28,830
2001 .................................. 26,919
2002 .................................. 24,452
Thereafter ............................ 117,897
--------
Total minimum lease payments .......... $258,538
========
</TABLE>
b. Facility Fire
As previously disclosed, in March 1997, the Company experienced three
fires, all of which authorities have determined were caused by arson. These
fires resulted in damage to one and destruction of the Company's other records
management facility in South Brunswick Township, New Jersey. The Company has
filed several insurance claims related to the fires, including a significant
claim under its business interruption insurance policy. The claims process is
lengthy and its outcome cannot be predicted with certainty.
Some of Iron Mountain's customers or their insurance carriers have
asserted claims as a consequence of the destruction of or damage to their
records as a result of the fires, some of which allege negligence or other
culpability on the part of Iron Mountain. On December 12, 1997, Iron Mountain
received notice that a lawsuit had been filed by one of its customers seeking
up to $1 million in damages. The action has been removed from a state court in
New Jersey to the United States District Court in New Jersey. The Company has
since received notices of additional lawsuits filed by customers seeking
unspecified damages against the Company and to rescind their written contracts
with Iron Mountain. Iron Mountain denies any liability as a result of the
destruction of or damage to customer records as a result of the fires, which
were beyond its control, and intends to vigorously defend itself against these
and any other lawsuits that may arise. The Company is also pursuing coverage of
these claims and lawsuits with its various insurers.
The outcome of these pending claims and proceedings cannot be predicted.
Based on its present assessment of the situation, management, after
consultation with legal counsel, does not believe that the fires will have a
material adverse effect on Iron Mountain's financial condition or results of
operations, although there can be no assurance in this regard.
c. Other Litigation
Iron Mountain is presently involved as a defendant in various litigation
which has occurred in the normal course of business. Management believes it has
meritorious defenses in all such actions, and in any event, the amount of
damages, if such matters were decided adversely, would not have a material
adverse effect on Iron Mountain's financial condition or results of operations.
d. Other
The Company may be responsible for environmental clean-up costs at certain
of its facilities. Estimated costs of approximately $800 to perform the
necessary remediation work are included in other liabilities in the
accompanying consolidated balance sheets. Management believes the ultimate
outcome of the above issue will not have a material adverse effect on Iron
Mountain's financial condition or results of operations.
F-19
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. Related Party Transactions
Iron Mountain leases space to an affiliated company, Schooner Capital
Corporation ("Schooner") for its corporate headquarters located in Boston,
Massachusetts. For the years ended December 31, 1995, 1996 and 1997, Schooner
paid Iron Mountain rent totaling $49, $68 and $85, respectively. Iron Mountain
leases one facility from a landlord which is a related party. Total rental
payments for the years ended December 31, 1995, 1996 and 1997, for this
facility totaled $93, $94 and $99, respectively. In the opinion of management,
both of these leases were entered into at market prices and terms.
11. Profit Sharing Retirement Plan
The Company has a defined contribution plan which covers all non-union
employees meeting certain service requirements. Eligible employees may elect to
defer from 1% to 15% of compensation per pay period up to the amount allowed by
the Internal Revenue Code. The Company makes matching contributions based on
the amount of the employee contribution and years of credited service,
according to a schedule as described in the plan documents. The Company has
expensed $276, $419 and $642 for the years ended December 31, 1995, 1996 and
1997, respectively.
12. Noncash Transactions
As part of the consideration paid for the acquisitions completed in 1997,
the Company issued common stock and options with fair values of $85,863 and
$3,071, respectively. In addition, $3,086 of property and equipment, destroyed
in a fire, was transferred to receivable from insurance company.
13. Subsequent Events
a. Completed Acquisitions
Through February 20, 1998, the Company acquired four records management
businesses for approximately $13,000 in cash. All of these acquisitions were
accounted for as purchases. In addition, the Company completed the previously
announced Arcus merger. Total consideration for the Arcus merger was
approximately $154,000, including approximately $55,000 representing the
combined value of 1,438,012 shares of common stock and options to purchase
approximately 590,000 shares of common stock. The balance consists of payments
in cash and assumed indebtedness. The Arcus merger will be accounted for as a
purchase.
b. Pending Acquisition (Unaudited)
In February 1998, the Company signed a definitive agreement to acquire
InterMation, Inc. for approximately $28,000, including shares of the Company's
common stock valued at approximately $18,000 (subject to adjustment), and the
assumption of certain debt. This acquisition of InterMation will be accounted
for as a purchase and is expected to close in the first half of 1998.
c. Increase in Authorized Shares
On January 5, 1998, the stockholders voted to increase the authorized
shares of common stock to 100 million from 20 million.
F-20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Iron Mountain Incorporated:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Iron Mountain Incorporated for each of
the three years in the period ended December 31, 1997 and have issued our report
thereon dated February 20, 1998. Our audits were made for the purpose of
forming an opinion on those statements taken as a whole. The supplemental
schedule listed in the accompanying index is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and regulations under the Securities
Exchange Act of 1934 and is not a required part of the basic financial
statements. The supplemental schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated, in all material respects, in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 20, 1998
F-21
<PAGE>
Schedule II
IRON MOUNTAIN INCORPORATED
Valuation and Qualifying Accounts
(Amounts in Thousands)
<TABLE>
<CAPTION>
Balance at Balance at
Beginning of Charged to End of the
Year Ended December 31, the Year Expense Deductions Year
- -------------------------------- -------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
1995 .......................... $ 531 $630 $ (510) $ 651
1996 .......................... 651 639 (229) 1,061
1997 .......................... 1,061 874 (6) 1,929
</TABLE>
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Iron Mountain Incorporated
We have audited the consolidated balance sheets of Arcus Technology Services,
Inc. as of December 31, 1996 and 1997, and the related consolidated statements
of operations, stockholders' equity and cash flows for the five-month period
ended December 31, 1995, and each of the two years in the period ended December
31, 1997. We have also audited the consolidated statements of operations,
stockholders' equity and cash flows of Arcus, Inc. (Predecessor Company) for
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. at December 31, 1996 and 1997, and the consolidated results of
its operations and cash flows for the five-month period ended December 31,
1995, and each of the two years in the period ended December 31, 1997, and the
consolidated results of operations and cash flows of Arcus, Inc. (Predecessor
Company) for the seven-month period ended July 31, 1995, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
February 23, 1998
F-23
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1997
------------- -------------
<S> <C> <C>
ASSETS (Note 4)
Current Assets:
Cash ........................................................... $ 1,687,101 $ 1,577,047
Accounts receivable, less allowance for doubtful accounts of
$156,227 and $168,413, respectively............................ 14,008,613 18,196,492
Inventory ...................................................... 371,715 295,076
Prepaid expenses and other current assets ...................... 1,018,281 1,078,564
----------- -----------
Total Current Assets ........................................ 17,085,710 21,147,179
Property and Equipment, at cost:
Land, buildings, and leasehold improvements .................... 6,266,886 6,993,068
Vault equipment and vehicles ................................... 8,819,780 11,586,199
Furniture and other equipment .................................. 3,958,006 4,285,515
----------- -----------
19,044,672 22,864,782
Less accumulated depreciation ............................... 3,649,357 6,673,457
----------- -----------
Property and Equipment, net ..................................... 15,395,315 16,191,325
Cost In Excess of Net Assets Acquired, net of accumulated
amortization of $2,310,903 and $4,668,206, respectively......... 55,367,074 56,861,518
Deferred Income Taxes (Note 6) .................................. -- 2,212,000
Other Assets .................................................... 609,649 946,818
----------- -----------
Total Assets ................................................ $88,457,748 $97,358,840
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................... $ 5,796,844 $ 4,941,648
Accrued payroll ................................................ 2,441,433 3,540,504
Other accrued liabilities ...................................... 1,344,001 1,256,315
Deferred revenue ............................................... 3,469,265 3,626,869
Due to parent (Note 2) ......................................... 1,335,702 2,894,475
Current portion of long-term debt .............................. 3,218,794 3,988,269
----------- -----------
Total Current Liabilities ................................... 17,606,039 20,248,080
Long-Term Debt (Note 4) ......................................... 39,513,473 37,388,280
Note Payable to Parent (Note 4) ................................. -- 1,500,000
Deferred Income Taxes (Note 6) .................................. 501,000 --
Other Liabilities ............................................... 226,700 378,595
Commitments and Contingencies (Notes 3 and 9)
Stockholders' Equity:
Common stock, $.01 par value:
Authorized shares--5,000,000
Issued and outstanding shares--3,205,263 and 3,325,229,
respectively ................................................. 32,052 33,252
Capital in excess of par value ................................ 26,918,088 36,182,170
Retained earnings .............................................. 3,619,939 1,607,624
Translation adjustment ......................................... 40,457 20,839
----------- -----------
Total Stockholders' Equity .................................. 30,610,536 37,843,885
----------- -----------
Total Liabilities and Stockholders' Equity .................. $88,457,748 $97,358,840
=========== ===========
</TABLE>
See accompanying notes.
F-24
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Five-months
Seven-months Ended Year Ended Year Ended
Ended July 31, December 31, December 31, December 31,
1995 1995 1996 1997
---------------- -------------- -------------- ---------------
(Predecessor)
<S> <C> <C> <C> <C>
Revenues:
Storage and transport ....................... $21,401,465 $16,158,490 $43,671,062 $ 51,606,825
Other ....................................... 4,276,499 4,519,868 22,310,314 43,737,980
----------- ----------- ----------- ------------
Total Revenues ........................... 25,677,964 20,678,358 65,981,376 95,344,805
Operating Expenses:
Cost of services rendered ................... 11,345,153 9,450,781 32,737,753 53,322,935
Selling and administrative expenses ......... 8,730,900 6,632,234 21,591,852 27,328,667
Depreciation and amortization ............... 1,532,211 1,601,464 4,436,529 6,017,498
Stock compensation expense (Note 5) ......... -- -- -- 8,067,014
----------- ----------- ----------- ------------
Total Operating Expenses ................. 21,608,264 17,684,479 58,766,134 94,736,114
----------- ----------- ----------- ------------
Operating Income ............................. 4,069,700 2,993,879 7,215,242 608,691
Interest (Income) Expense, net ............... (336,556) 1,128,963 2,668,719 3,317,006
----------- ----------- ----------- ------------
Income (Loss) Before Income Taxes ............ 4,406,256 1,864,916 4,546,523 (2,708,315)
Provision (Benefit) for Income Taxes
(Note 6) .................................... 1,852,000 807,500 1,984,000 (696,000)
----------- ----------- ----------- ------------
Net Income (Loss) ............................ $ 2,554,256 $ 1,057,416 $ 2,562,523 $ (2,012,315)
=========== =========== =========== ============
</TABLE>
See accompanying notes.
F-25
<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>
Arcus, Inc. (Predecessor):
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
========= ======= =========== ============ ========== ============
Arcus Technology Services, Inc.:
Issue 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
(Note 3) .......................... 4,038 41 9,963 -- -- 10,004
Sales of common stock to
Parent (Note 3) ................... 115,928 1,159 1,187,105 -- -- 1,188,264
Stock compensation (Note 5) ........ -- -- 8,067,014 -- -- 8,067,014
Currency translation adjustment..... -- -- -- -- (19,618) (19,618)
Net loss ........................... -- -- -- (2,012,315) -- (2,012,315)
--------- ------- ----------- ------------ ---------- ------------
Balances at December 31, 1997 ....... 3,325,229 $33,252 $36,182,170 $ 1,607,624 $ 20,839 $ 37,843,885
========= ======= =========== ============ ========== ============
</TABLE>
See accompanying notes.
F-26
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Seven-months Five-months Ended Year Ended Year Ended
Ended July 31, December 31, December 31, December 31,
1995 1995 1996 1997
---------------- ------------------- ---------------- ----------------
(Predecessor)
<S> <C> <C> <C> <C>
Operating Activities:
Net income (loss) ............................... $ 2,554,256 $ 1,057,416 $ 2,562,523 $ (2,012,315)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization .................. 1,532,211 1,601,464 4,436,529 6,017,498
Stock compensation expense ..................... -- -- -- 8,067,014
Deferred tax provision (benefit) ............... (124,000) (47,000) 237,000 (2,823,000)
Provision for losses on accounts
receivable .................................... 21,000 15,000 56,000 12,000
(Gain) loss on disposal of assets .............. 3,961 185 (18,110) 15,816
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable .......................... (138,515) (1,614,511) (2,988,055) (2,822,514)
Inventory .................................... (64,996) (18,239) (65,232) 76,330
Prepaid expenses ............................. 42,197 (341,081) (72,961) 176,684
Other assets ................................. 11,773 (7,315) (96,822) (454,056)
Accounts payable ............................. 41,491 1,388,888 1,970,283 (1,082,938)
Accrued and other liabilities ................ 332,906 719,665 (330,112) 1,011,215
Deferred revenue ............................. 87,259 48,263 254,460 157,604
------------ ------------- ------------- -------------
Net Cash Provided by Operating Activities. ....... 4,299,543 2,802,735 5,945,503 6,339,338
Investing Activities:
Acquisitions, net of cash acquired .............. -- (48,751,173) (15,128,889) (7,078,801)
Purchase of property and equipment .............. (1,831,165) (2,290,595) (5,280,173) (4,124,643)
Funds invested with Parent ...................... (1,515,060) -- -- --
Sales of property and equipment ................. 13,087 -- 1,808,959 --
Other investing activities ...................... 293 (8,085) (68,568) (48,151)
------------ ------------- ------------- -------------
Net Cash Used for Investing Activities ........... (3,332,845) (51,049,853) (18,668,671) (11,251,595)
Financing Activities:
Proceeds from sales of common stock ............. 42,500 17,529,200 7,118,328 1,198,268
Proceeds from issuances of long-term debt ....... -- 30,000,000 9,883,000 7,919,152
Payments on long-term debt ...................... (131,071) (1,580,544) (3,540,918) (4,138,896)
Increase (decrease) in due to parent ............ -- 13,500 1,322,202 1,427,773
Net increase (decrease) in revolving line of
credit ......................................... -- 3,000,000 (1,100,000) (1,600,000)
------------ ------------- ------------- -------------
Net Cash Provided by (Used for) Financing
Activities ...................................... (88,571) 48,962,156 13,682,612 4,806,297
Effect of Exchange Rate Changes on Cash .......... 1,093 (2,220) 14,839 (4,094)
------------ ------------- ------------- -------------
Net Increase (Decrease) in Cash .................. 879,220 712,818 974,283 (110,054)
Cash at Beginning of Period ...................... 56,636 -- 712,818 1,687,101
------------ ------------- ------------- -------------
Cash at End of Period ............................ $ 935,856 $ 712,818 $ 1,687,101 $ 1,577,047
============ ============= ============= =============
</TABLE>
See accompanying notes.
F-27
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
Arcus Technology Services, Inc. (ATSI) is an 81% owned subsidiary of
United Acquisition Company (UAC or the Parent) which is an 80% owned subsidiary
of Arcus Group, Inc. (AGI). 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. 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. During 1997, through ASRI, ATSI made one acquisition for a
purchase price of approximately $4.9 million, net of cash acquired. See Note 3.
The financial statements include the accounts of ATSI and its
subsidiaries, Arcus, ADSI, ASRI, Professional Solutions, Inc., Trinity Holdings
Corp. (formerly Trinity Partners, Inc.), 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, Professional Solutions, Inc.,
Trinity Holdings Corp., 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.
On January 6, 1998, Iron Mountain Incorporated (IMTN) acquired all of the
outstanding common stock, preferred stock, common stock options and common
stock warrants of AGI, UAC and ATSI for approximately $96 million in cash,
1,438,012 shares of IMTN common stock and options to purchase 590,000 shares of
IMTN common stock. A portion of the purchase price was used to extinguish all
of ATSI's long-term debt as of the acquisition date (see Note 4). As part of
and immediately preceding the acquisition, UAC and ATSI were merged into AGI.
AGI was then merged into IMTN. Additionally, certain assets of UAC and AGI
unrelated to ATSI were distributed to the AGI stockholders immediately prior to
the sale.
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 97%, 96%, 81% and 64% of the
Company's revenue during the seven-month period ended July 31, 1995, the
five-month period ended December 31, 1995 and the years ended December 31, 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 significant portion of the Company's data security revenue is
billed monthly in advance and trade accounts receivable are due within 30 days.
Accounts receivable are not collateralized.
F-28
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 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 $588,000, $495,000, $1,228,000 and $1,290,000 for the
seven-month period ended July 31, 1995, the five-month period ended December
31, 1995 and the years ended December 31, 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 and one acquisition in 1997
(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, and
deferred organization costs. 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 $75,000, $96,000, $212,000 and $111,000
for the seven-month period ended July 31, 1995, the five-month period ended
December 31, 1995 and the years ended December 31, 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. Foreign
currency transaction gains and losses, which have not historically been
material, are charged to operations as incurred.
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 11 for revenues by business segment.
Included in other revenues are product sales, net of product costs,
totaling $834,000, $665,000, $1,800,000 and $2,259,000 for the seven-month
period ended July 31, 1995, the five-month period ended December 31, 1995 and
the years ended December 31, 1996 and 1997, respectively. Product sales are
presented on a net basis since
F-29
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies (continued)
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 $4,502,000, $4,367,000, $10,465,000 and $13,189,000
for the seven-month period ended July 31, 1995, the five-month period ended
December 31, 1995 and the years ended December 31, 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 (benefit) 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, 1996 and 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.
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 1995 and 1996 amounts have been reclassified in order to conform
to the 1997 presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. Acquisitions
In August 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of Professional Solutions, Inc. (PSI), a company
operating in the information technology staffing industry in northern
California, Oregon and Washington state for approximately $4,923,000, net of
cash acquired. The purchase price consisted of net cash payments of
approximately $3,923,000, 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
per share. The cash payment was partially financed by issuance of a $1.5
million subordinated convertible note payable to UAC (see Note 4).
Additionally, if certain profitability targets are met, the Company could be
obligated to make an additional cash
F-30
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Acquisitions (continued)
payment of up to $750,000. The acquisition was accounted for using the purchase
method. Results of operations and cash flows of the acquired company are
included in the consolidated statements of operations and cash flows for the
period from the purchase date through December 31, 1997.
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 statement of operations
and cash flows for the period from the purchase date. 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. The
purchase price was comprised of approximately $6,240,000, of net cash payments,
228,242 shares of the Company's common stock (225,111 estimated shares recorded
in 1996 and 3,131 shares recorded in 1997 upon final determination), and a
$3,156,000 obligation to the seller. Cash payment of the obligation to the
seller was made in March 1997. Approximately $1,188,000 of this obligation was
funded through a sale of common stock to UAC.
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 June 1997, the Company sold the operating
assets of the non-staffing portion of Trinity's business 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. The
Company recorded a loss of approximately $400,000 on this transaction.
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 1995 acquisition of Arcus by UAC, 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
F-31
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
4. Long-Term Debt (continued)
(Term A Loan), $12 million under a seven year term loan agreement (Term B
Loan), a commitment for a five-year $7.5 million revolving line of credit (the
Revolver), a seven-year $12.5 million acquisition loan facility (the
Acquisition Facility) and a five-year $2 million additional line of credit (the
Swingline Loan). In December 1996, the Company amended the Facility. As a
result, the total acquisition loan commitment was increased by $20 million and
the maturity date of this commitment was extended by one year. 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.
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 (8.5% at December 31, 1997) or 1/2% over the US Federal Funds
Rate (8.5% at December 31, 1997) plus an applicable margin interest rate. The
Eurodollar rate is defined as the London Interbank Offering Rate (LIBOR)
(5.6875% at December 31, 1997) 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 and
$500,000 of such prepayments made during 1996 and 1997, respectively. 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 the acquisition of PSI in 1997 (see Note 3), ATSI
issued a note payable to the Seller of $1,000,000 which remains outstanding at
December 31, 1997. Additionally, $2,793,000 of the net cash payments of
$3,923,000 for PSI were financed through the Company's Acquisition Facility and
$1,500,000 of the net cash payments were financed through a note payable to
UAC.
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 $1,886,000 is outstanding at December 31, 1996 and
1997, respectively. Of these amounts, $4,405,000 and $986,000 are due to
individuals who are shareholders, employees, or consultants of the Company at
December 31, 1996 and 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 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.
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, certain payments, if the LIBOR rate applicable to Eurodollar borrowings
exceeds 8.9375%. The interest rate cap agreement expired on September 5, 1997.
F-32
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
4. Long-Term Debt (continued)
Long-term debt is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
Term A Loan, increasing quarterly principal payments over a four-year
period beginning March 31, 1996 .................................... $14,316,000 $11,220,000
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 ................. 10,839,000 10,663,000
Acquisition Facility, increasing quarterly principal payments over a
four-year period starting September 30, 1999 ....................... 9,725,000 15,939,000
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 ................................................. 1,900,000 300,000
Acquisition notes and obligations ................................... 5,485,000 2,886,000
7% mortgage note payable in quarterly principal and interest
installments, maturing April 2001 .................................. 441,000 355,000
Capital lease obligations ........................................... 26,000 13,000
----------- -----------
42,732,000 41,376,000
Less current portion ................................................ 3,219,000 3,988,000
----------- -----------
$39,513,000 $37,388,000
=========== ===========
</TABLE>
On January 6, 1998, in connection with the acquisition of the Company by
IMTN, the Term A Loan, Term B Loan, Acquisition Facility, Revolver and mortgage
note payable were repaid in full. In addition, the $1,500,000 note payable to
UAC was cancelled. Of the $2,886,000 in acquisition obligations outstanding at
December 31, 1997, $133,000 matures in 1998, $144,000 matures in 1999, $156,000
matures in 2000, $1,993,000 matures in 2001 and $460,000 matures thereafter.
Cash payments for interest during the seven-month period ended July 31,
1995, the five-month period ended December 31, 1995 and the years ended
December 31, 1996 and 1997 were $35,000, $913,000, $3,131,000 and $3,645,000,
respectively. At December 31, 1996 and 1997, the fair value of the Company's
long-term debt approximated its carrying value.
5. Stock Option Plans
The Company's 1995 Stock Option Plan reserves 340,000 and 455,000 shares
at December 31, 1996 and 1997, respectively, of authorized but unissued common
stock for sale or award to directors, officers, and key employees as stock
options, stock appreciation rights, restricted stock awards or performance
share awards. Both nonqualified and incentive stock options (ISO's) can be
granted and in the case of an ISO, the purchase price cannot be less than the
fair market value at grant date.
Options expire on the date set by the Plan Administration Committee of the
Company's Board of Directors (the Committee), but in no case later than ten
years from the grant date and, in some cases, no later than five years from the
grant date for ISO's.
During 1995, 1996 and 1997, 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
F-33
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Stock Option Plans (continued)
becoming vested semi-annually over a four year period. 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, 1996 or 1997. As
of December 31, 1997, no shares had been exercised or canceled.
In connection with the January 6, 1998 acquisition of the Company by IMTN,
the Company's options were exchanged for IMTN options with the same intrinsic
value and with exercisability at the earlier of the original vesting dates in
the Company's option or at termination of employment, in which case they become
fully exercisable. As a result of the approval of the final acquisition
agreement in November 1997, the Company recorded $8,067,014 of compensation
expense equal to the intrinsic value in the Company's options based on the
exchange value at the acquisition date.
The following is a summary of employee stock option transactions under the
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
Granted in 1997 .......................... 150,590 $10.06 - $16.41 $12.83
Forfeited in 1997 ........................ (13,345) $ 8.00 - $11.03 $10.29
-------
Outstanding at December 31, 1997 ......... 424,245 $ 8.00 - $16.41 $10.21
=======
</TABLE>
The weighted average remaining contractual life for ATSI options
outstanding at December 31, 1996 and 1997 was approximately nine years and
eight years, respectively.
A total of 365,000 and 465,000 shares of common stock were reserved for
issuance under the 1995 Stock Option Plan and the acquisition warrant (see Note
3) at December 31, 1996 and 1997, and the acquisition options (see Note 3) at
December 31, 1996.
Pro forma information regarding net income (loss) 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, 1996 and 1997) was estimated at the date of grant using a minimum
value option pricing model with the following assumptions for 1995, 1996 and
1997: a risk-free interest rate of 5.6%, 5.6% and 6.3%, respectively; 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-34
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Income Taxes
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1997
------------- ---------------
<S> <C> <C>
Deferred tax assets:
Stock compensation .............................................. $ -- $ 3,163,000
Accrued liabilities ............................................. 166,000 409,000
Other ........................................................... 14,000 97,000
---------- ------------
180,000 3,669,000
Deferred tax liabilities:
Costs in excess of net assets acquired and other assets ......... (455,000) (875,000)
Property and equipment .......................................... (46,000) (161,000)
---------- ------------
(501,000) (1,036,000)
---------- ------------
Net deferred tax assets (liabilities) ............................ $ (321,000) $ 2,633,000
========== ============
</TABLE>
Current deferred tax assets totaling $180,000 and $421,000 as of December
31, 1996 and 1997, respectively, are included in prepaid expenses and other
current assets on the consolidated balance sheets.
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
Seven-months Five-months
Ended Ended Year Ended Year Ended
July 31, December 31, December 31, December 31,
1995 1995 1996 1997
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Current:
Federal .............................. $1,532,000 $ 678,500 $1,337,000 $ 1,648,000
State ................................ 444,000 176,000 410,000 479,000
---------- --------- ---------- ------------
1,976,000 854,500 1,747,000 2,127,000
Deferred .............................. (124,000) (47,000) 237,000 (2,823,000)
---------- --------- ---------- ------------
$1,852,000 $ 807,500 $1,984,000 $ (696,000)
========== ========= ========== ============
</TABLE>
The effective tax rates differ from the federal statutory rates primarily
as a result of the following:
<TABLE>
<CAPTION>
Seven-months Five-months
Ended Ended Year Ended Year Ended
July 31, December 31, December 31, December 31,
1995 1995 1996 1997
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Federal tax at statutory rate ......... 34.0% 34.0% 34.0% (34.0)%
State tax provision ................... 6.6 6.2 6.0 ( 3.8)
Goodwill amortization ................. -- -- -- 8.3
Other non-deductible expenses ......... 1.4 3.1 3.6 3.8
---- ---- ---- -----
42.0% 43.3% 43.6% (25.7)%
==== ==== ==== =====
</TABLE>
Cash payments for income taxes during the seven-month period ended July
31, 1995, the five-month period ended December 31, 1995, the year ended
December 31, 1996 and the year ended December 31, 1997, were $1,961,000,
$720,000, $609,000, and $804,000, respectively.
F-35
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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, and
$185,000, for the five-month period ended December 31, 1995, and the years
ended December 31, 1996 and 1997, respectively. Company matching expense
relating to a similar plan of the Predecessor's former parent was $75,000 for
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,
1996, and 1997, 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, and the years ended December
31, 1996 and 1997 was $147,000, $427,000, and $532,000, respectively. The
Predecessor had voluntary contribution expense for the seven-month period ended
July 31, 1995 of $212,000.
8. Related Party Transactions
During 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 is 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 $255,000 for the
seven-month period ended July 31, 1995. During 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.
The Company leases twelve of its facilities from its former parent, a
stockholder of the Company (Note 9). The Company paid rental expense to its
former parent of $766,000, $554,000, $1,361,000 and $1,375,000 for the
seven-month period ended July 31, 1995, the five-month period ended December
31, 1995, and the years ended December 31, 1996 and 1997, respectively.
In January 1997, an employee of the Company purchased 907 shares of the
Company's common stock for $11.03 per share.
9. Commitments and Contingencies
As of December 31, 1997, the Company leases 29 vault facilities, 14
staffing offices and certain equipment under noncancelable operating lease
agreements. Twelve of the Company's vault facilities are leased from a single
landlord of which nine have fifteen-year terms beginning January 1, 1995, with
two five-year renewal options, providing for cost of living increases every
three years based upon the Consumer Price Index, with a 3.33% ceiling per year.
The remaining vault facilities are leased under leases which commenced June
1989 or later, and have primary lease terms ranging from four to twenty years,
generally with one or two five-year renewal options. During 1997, the Company
signed leases in regard to two vault facilities that were under construction at
December 31, 1997. These two leases each have fifteen-year terms that commenced
during 1998. 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 of $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 $2,293,000, $1,578,000, $4,409,000 and
$5,844,000 for the seven-month period ended July 31, 1995, the five-month
period ended December 31, 1995, and the years ended December 31, 1996 and 1997,
respectively.
F-36
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. Commitments and Contingencies (continued)
Future minimum rentals required under operating leases having an initial
or remaining noncancelable lease term in excess of one year as of December 31,
1997 are as follows:
<TABLE>
<S> <C>
1998 ................................. $ 5,791,865
1999 ................................. 5,273,024
2000 ................................. 4,716,059
2001 ................................. 3,696,412
2002 ................................. 3,227,004
Thereafter ........................... 20,983,452
-----------
Total minimum lease payments ......... $43,687,816
===========
</TABLE>
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>
Seven-months Five-months
Ended Ended Year Ended Year Ended
July 31, December 31, December 31, December 31,
1995 1995 1996 1997
-------------- -------------- --------------- ---------------
(Predecessor)
<S> <C> <C> <C> <C>
Revenues
Data security ............................... $ 24,964,319 $ 19,867,759 $ 53,145,334 $ 60,735,198
Technical staffing .......................... 713,645 810,599 12,997,907 35,033,443
Intercompany eliminations ................... -- -- (161,865) (423,836)
------------ ------------ ------------ ------------
Total revenues .............................. $ 25,677,964 $ 20,678,358 $ 65,981,376 $ 95,344,805
============ ============ ============ ============
Cost of Services Rendered
Data security ............................... $ 10,874,499 $ 8,929,784 $ 23,554,642 $ 27,378,174
Technical staffing .......................... 470,654 520,997 9,344,976 26,368,597
Intercompany eliminations ................... -- -- (161,865) (423,836)
------------ ------------ ------------ ------------
Total costs of services rendered ............ $ 11,345,153 $ 9,450,781 $ 32,737,753 $ 53,322,935
============ ============ ============ ============
Depreciation and Amortization
Data security ............................... $ 1,431,684 $ 1,488,093 $ 3,907,825 $ 4,434,903
Technical staffing .......................... -- 1,575 219,586 1,196,860
Corporate ................................... 100,527 111,796 309,118 385,735
------------ ------------ ------------ ------------
Total depreciation and amortization ......... $ 1,532,211 $ 1,601,464 $ 4,436,529 $ 6,017,498
============ ============ ============ ============
Operating Income
Data security ............................... $ 5,958,390 $ 4,629,540 $ 12,149,565 $ 11,120,396
Technical staffing .......................... 242,991 114,709 442,812 (3,109,843)
Corporate ................................... (2,131,681) (1,750,370) (5,377,135) (7,401,862)
------------ ------------ ------------ ------------
Total operating income ...................... $ 4,069,700 $ 2,993,879 $ 7,215,242 $ 608,691
============ ============ ============ ============
</TABLE>
F-37
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. Business Segments (continued)
<TABLE>
<CAPTION>
Seven-months Five-months
Ended Ended Year Ended Year Ended
July 31, December 31, December 31, December 31,
1995 1995 1996 1997
-------------- -------------- -------------- -------------
(Predecessor)
<S> <C> <C> <C> <C>
Capital Expenditures
Data security ...................... $1,785,025 $2,115,127 $ 4,363,670 $ 3,209,003
Technical staffing ................. -- 43,662 317,302 782,593
Corporate .......................... 46,140 131,806 599,201 133,047
---------- ---------- ----------- -----------
Total Capital expenditures ......... $1,831,165 $2,290,595 $ 5,280,173 $ 4,124,643
========== ========== =========== ===========
Identifiable Assets
Data security ...................... $85,687,540 $93,126,124
Technical staffing ................. 2,041,337 3,613,296
Corporate .......................... 728,871 619,420
----------- -----------
Total identifiable assets .......... $88,457,748 $97,358,840
=========== ===========
</TABLE>
11. Supplemental Pro Forma Acquisition Information (Unaudited)
The following supplemental pro forma information has been presented as if
the 1996 and 1997 acquisitions described in Note 3 occurred on January 1, 1996.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1997
-------------- ---------------
<S> <C> <C>
Revenues ........................................................... $89,208,750 $101,006,182
=========== ============
Operating income ................................................... $ 9,524,802 $ 1,102,135
=========== ============
Net income (loss) .................................................. $ 3,377,656 $ (1,793,259)
=========== ============
</TABLE>
F-38
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 1997 (the "Pro Forma Balance Sheet") has been prepared based upon
the historical condensed consolidated balance sheet of Iron Mountain as of
December 31, 1997 and the balance sheets as of December 31, 1997 of the
acquisitions consummated after December 31, 1997 (the "1998 Acquisitions"), and
gives effect to: (i) the 1998 Acquisitions and (ii) the Offering and the
application of the net proceeds therefrom as described under "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview" as if each had occurred as of December 31, 1997. The Pro Forma
Balance Sheet does not give effect to the InterMation Merger. The following
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year
ended December 31, 1997 (the "Pro Forma Statement of Operations," together with
the Pro Forma Balance Sheet, the "Pro Forma Financial Statements") gives effect
to each of the above transactions and to: (iii) the acquisitions consummated
after December 31, 1996 and prior to December 31, 1997 (the "1997
Acquisitions"); (iv) the Credit Agreement; and (v) the sale of the 1997 Notes,
as if each had occurred as of January 1, 1997. The transactions described in
clauses (i) through (v) above are collectively referred to herein as the
"Transactions." Pro forma adjustments are described in the accompanying notes.
The Pro Forma Financial Statements assume that the net proceeds from the
Offering to be used for the repayment of indebtedness will be used to repay
indebtedness outstanding under the Credit Agreement and not to redeem a portion
of the 1996 Notes. If the Company elects to redeem the maximum permitted
aggregate principal amount of the 1996 Notes with the net proceeds of the
Offering, then the Company would record, in the quarter in which the redemption
occurs, an extraordinary charge of approximately $7 million (before a tax
benefit of approximately $3 million) from the early retirement of debt. Such
extraordinary charge would consist of a redemption premium of approximately $5
million and the write-off of unamortized deferred financing costs of
approximately $2 million. The impact of the Pro Forma Balance Sheet would not be
material.
The Pro Forma As Adjusted results of operations for the year ended
December 31, 1997 gives effect to the Transactions and to integration
adjustments related to certain identified cost savings that management believes
would have been realized had the Recent Acquisitions been fully integrated as
of January 1, 1997.
The Pro Forma Statement of Operations does not include: (i) results of
operations for the year ended December 31, 1997, or pro forma adjustments, for
the InterMation Merger, which had revenues of $7.2 million for 1997; (ii)
results of operations prior to the date of acquisition, or pro forma
adjustments, for acquisitions completed by Record Masters and Arcus in 1997,
which had aggregate revenues of $6.6 million for the period in 1997 prior to the
date of acquisition; and (iii) results of operations prior to the date of
acquisition, or pro forma adjustments, for Data Recovery Services, Inc.,
Critical Files Security, Inc. and Willamette Archives, Inc. (the "Excluded
Acquisitions") because the impact of the Excluded Acquisitions (which in the
aggregate represent less than 1% of pro forma revenues) is immaterial to such
statements. In addition, the Pro Forma Statement of Operations does not reflect
one disposition by Arcus in June 1997, which is immaterial to such statements.
See "Overview" in the accompanying Notes to Unaudited Pro Forma Condensed
Financial Statements.
The following Pro Forma Statement of Operations is 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, 1997, nor does it
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 consummated by the Company since January 1,
1997 (the "Recent 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 or incorporated by reference in this filing.
F-39
<PAGE>
IRON MOUNTAIN INCORPORATED
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Historical 1998 Acquisitions
Iron ---------------------- Pro Forma Pro Forma
Mountain Arcus Other Adjustments Iron Mountain
----------- ---------- --------- ------------------- --------------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets ................................. $ 81,927 $21,147 $1,870 $ (23,083)(A) $ 81,861
Property, Plant and Equipment, net ............. 183,898 16,191 1,362 3,124 (A) 204,575
Goodwill, net .................................. 340,852 56,862 -- 83,323 (A) 481,037
Other Long-term Assets ......................... 30,109 3,159 2 975 (A) 34,245
-------- ------- ------ ---------- --------
Total Assets ................................. $636,786 $97,359 $3,234 $ 64,339 $801,718
======== ======= ====== ========== ========
Liabilities and Stockholders' Equity
Current Liabilities ............................ $ 55,753 $20,248 $ 446 $ (5,146)(B) $ 71,301
Long-term Debt, net of Current Portion ......... 424,498 38,888 -- (36,135)(B) 427,251
Deferred Rent .................................. 8,202 -- -- -- 8,202
Deferred Income Taxes .......................... 5,264 -- -- -- 5,264
Other Long-term Liabilities .................... 5,336 379 -- 1,000 (B) 6,715
Stockholders' Equity ........................... 137,733 37,844 2,788 104,620 (B) 282,985
-------- ------- ------ ---------- --------
Total Liabilities and Stockholders' Equity $636,786 $97,359 $3,234 $ 64,339 $801,718
======== ======= ====== ========== ========
</TABLE>
The accompanying Notes are an integral part of these pro forma financial
statements.
F-40
<PAGE>
IRON MOUNTAIN INCORPORATED
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
Historical Pro Forma As Adjusted
Iron Recent Pro Forma Iron Integration Iron
Mountain Acquisitions(1) Adjustments Mountain(2) Adjustments(3) Mountain(2)(3)
------------ ---------------- -------------- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Storage ............................ $125,968 $ 93,088 $ -- $219,056 $ -- $219,056
Service and Storage Material
Sales ............................. 82,797 63,909 -- 146,706 -- 146,706
-------- -------- -------- -------- ------- --------
Total Revenues ................... 208,765 156,997 -- 365,762 -- 365,762
Operating Expenses:
Cost of Sales (Excluding
Depreciation) ..................... 106,879 81,020 (499)(C) 187,400 (1,240)(I) 186,160
Selling, General and
Administrative .................... 51,668 54,199 (8,867)(D) 97,000 (6,508)(J) 90,492
Depreciation and
Amortization ...................... 27,107 9,995 5,859 (E) 42,961 -- 42,961
-------- -------- -------- -------- ------- --------
Total Operating Expenses ......... 185,654 145,214 (3,507) 327,361 (7,748) 319,613
-------- -------- -------- -------- ------- --------
Operating Income .................... 23,111 11,783 3,507 38,401 7,748 46,149
Interest Expense, net ............... 27,712 5,979 8,017 (F) 41,708 -- 41,708
-------- -------- -------- -------- ------- --------
Income (Loss) Before Provision
(Benefit) for Income Taxes ......... (4,601) 5,804 (4,510) (3,307) 7,748 4,441
Provision (Benefit) for Income
Taxes .............................. (80) 694 2,458 (G) 3,072 3,099 (K) 6,171
-------- -------- -------- -------- ------- --------
Net Income (Loss) ................... $ (4,521) $ 5,110 $ (6,968) $ (6,379) $ 4,649 $ (1,730)
======== ======== ======== ======== ======= ========
Net Loss per Common Share--
Basic and Diluted .................. $ (0.39) $ (0.36) $ (0.10)
======== ======== ========
Weighted Average Common
Shares Outstanding ................. 11,448 6,390 (H) 17,838 17,838
======== ======== ======== ========
EBITDA .............................. $ 50,218 $ 21,778 $ 9,366 $ 81,362 $ 7,748 $ 89,110
</TABLE>
- ----------------------
(1) See Schedule A for detail of the Recent Acquisitions.
(2) The Pro Forma Statement of Operations does not include: (i) results of
operations for the year ended December 31, 1997, or pro forma adjustments,
for the InterMation Merger, which had revenues of $7.2 million for 1997,
and (ii) results of operations prior to the date of acquisition, or pro
forma adjustments, for acquisitions completed by Record Masters and Arcus in
1997, which had aggregate revenues of $6.6 million for the period in 1997
prior to the date of acquisition. Giving effect to such acquisitions,
including the InterMation Merger, revenues would have increased $13.8
million to $379.6 million. In addition, the Pro Forma Statement of
Operations does not include results of operations prior to the date of
acquisition, or pro forma adjustments, for the Excluded Acquisitions (which
in the aggregate represent less than 1% of pro forma revenues) or reflect
one disposition by Arcus in June 1997, because their impact is immaterial to
such statements. See "Overview--Recent Acquisitions" in the accompanying
Notes.
(3) Gives effect to certain identified cost savings that the Company believes
would have been realized had the Recent Acquisitions been fully integrated
as of January 1, 1997 relating primarily to: (i) termination of specific
employees and related net reductions in compensation expense; (ii) closure
of redundant facilities and related net reductions in occupancy costs; and
(iii) the elimination of related party expenses, management fees and
compensation expenses 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.
F-41
<PAGE>
Schedule A
IRON MOUNTAIN INCORPORATED
SCHEDULE OF RECENT ACQUISITIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1997 Acquisitions(1) 1998 Acquisitions
------------------------------------------------------------------- ----------------------- Total
Record Recent
Safesite DSI FileSafe Allegiance Masters(2) Other Arcus(3) Other Acquisitions
---------- --------- ---------- ------------ ------------ --------- --------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Storage .................. $ 4,198 $2,862 $5,254 $1,625 $18,999 $4,550 $ 51,607 $3,993 $ 93,088
Service and Storage
Material Sales .......... 6,034 595 3,419 1,132 4,012 2,831 43,738 2,148 63,909
------- ------ ------ ------ ------- ------ ---------- ------ --------
Total Revenues ......... 10,232 3,457 8,673 2,757 23,011 7,381 95,345 6,141 156,997
Operating Expenses:
Cost of Sales
(Excluding
Depreciation) ........... 5,111 -- 3,019 1,378 11,813 3,124 53,323 3,252 81,020
Selling, General and
Administrative .......... 4,460 2,840 1,497 580 5,493 2,579 35,396(4) 1,354 54,199
Depreciation and
Amortization ............ 397 368 289 149 2,067 454 6,017 254 9,995
------- ------ ------ ------ ------- ------ ------------ ------ --------
Total Operating
Expenses .............. 9,968 3,208 4,805 2,107 19,373 6,157 94,736 4,860 145,214
------- ------ ------ ------ ------- ------ ------------ ------ --------
Operating Income .......... 264 249 3,868 650 3,638 1,224 609 1,281 11,783
Interest (Income) Expense 26 327 142 (31) 1,910 281 3,317 7 5,979
------- ------ ------ ------ ------- ------ ------------ ------ --------
Income (Loss) Before
Provision (Benefit) for
Income Taxes ............. 238 (78) 3,726 681 1,728 943 (2,708) 1,274 5,804
Provision (Benefit) for
Income Taxes ............. 77 -- -- 28 1,267 6 (696) 12 694
------- ------ ------ ------ ------- ------ ------------ ------ --------
Net Income (Loss) ......... $ 161 $ (78) $3,726 $ 653 $ 461 $ 937 $ (2,012) $1,262 $ 5,110
======= ====== ====== ====== ======= ====== ============ ====== ========
EBITDA .................... $ 661 $ 617 $4,157 $ 799 $ 5,705 $1,678 $ 6,626 $1,535 $ 21,778
</TABLE>
- ----------------------
(1) Represents historical results of operations for each of the 1997
Acquisitions for the period in 1997 prior to its acquisition by the
Company. See "Overview--Recent Acquisitions" in the accompanying Notes.
(2) Does not include results of operations prior to the date of acquisition, or
pro forma adjustments, for an acquisition completed by Record Masters in
1997. Giving effect to such acquisition, revenues would have increased
$0.9 million to $23.9 million. See "Overview--Recent Acquisitions" in the
accompanying Notes.
(3) Does not include results of operations prior to the date of acquisition, or
pro forma adjustments, for an acquisition completed by Arcus in 1997.
Giving effect to such acquisition, revenues would have increased $5.7
million to $101.0 million. See "Overview--Recent Acquisitions" in the
accompanying Notes.
(4) Includes $8.1 million of stock compensation expense directly attributable
to the Arcus Merger.
The accompanying Notes are an integral part of these
pro forma financial statements.
F-42
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Overview
Recent Acquisitions
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 ("CDDC") 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 $62.0 million, including $45.0
million in aggregate fair value of Common Stock and options to purchase 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 Group, Inc. In September 1997,
Iron Mountain acquired Data Securities International, Inc. ("DSI"). In October
1997, Iron Mountain acquired Records Retention/FileSafe, L.P. ("FileSafe") for
$45.1 million in cash and assumed debt, Allegiance Business Archives, Ltd.
("Allegiance") for $8.7 million in cash and Records Management Systems, Inc. In
November 1997, Iron Mountain acquired Record Masters for $85.3 million,
including $36.0 million in fair value of Common Stock and the balance in cash
and assumed debt.(1) The aggregate purchase price of the businesses and certain
related real estate acquired in 1997, excluding Safesite, FileSafe, Allegiance
and Record Masters, was $78.7 million, including $7.9 million in aggregate fair
value of Common Stock and options to purchase Common Stock.
In January 1998, Iron Mountain acquired Arcus Group for $153.7 million,
including $55.1 million in aggregate fair value of Common Stock and options to
acquire Common Stock and the balance in cash and assumed debt.(2) Additionally,
in January 1998, Iron Mountain acquired Records Venture One, Inc. (d/b/a
Information Management Consultants of Arizona), Midwest Records Management (a
division of I-GO Van & Storage Co.) and Bekins Records Management (a division
of Bekins Van & Storage, Inc.). In February 1998, Iron Mountain acquired Sloan
Vaults, Inc. (d/b/a The Vault). The aggregate purchase price of the businesses
and certain related real estate acquired in 1998, excluding Arcus Group, was
$13.2 million.
Pending Acquisition
In February 1998, the Company entered into an Agreement and Plan of Merger
with InterMation, as a result of which InterMation will be merged with and into
a subsidiary of the Company. The Company will pay aggregate consideration equal
to approximately $28 million in connection with the InterMation Merger,
including approximately $18 million in the form of Common Stock (subject to
certain adjustments) and the balance in cash and assumed debt. InterMation had
revenues of $7.2 million for the year ended December 31, 1997. The InterMation
Merger is subject to customary conditions, and no assurance can be given that it
will be completed. The InterMation Merger, if consummated, will be accounted for
as a purchase.
- ----------------------
(1) In June 1997, Record Masters 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 Statement of
Operations. For the five months ended May 31, 1997, MKC had revenues of $0.9
million.
(2) In August 1997, Arcus completed the acquisition of an IT staffing business.
The results of operations for such IT staffing business prior to the date of
acquisition are not included in the Pro Forma Statement of Operations. For
the period in 1997 prior to the date of acquisition, such IT staffing
business had revenues of $5.7 million.
F-43
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Balance Sheet
The aggregate consideration paid for the Recent Acquisitions was $446.7
million, consisting of $144.0 million in aggregate fair value of Common Stock
and options to purchase Common Stock and $302.7 million in cash and assumed
debt (not including up to $1.9 million of contingent payments based upon the
achievement of certain revenue targets). 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 the Company's estimate of
the fair value of the net assets acquired. The allocation of the aggregate
purchase price is illustrated below (in millions):
<TABLE>
<S> <C> <C>
1997 Acquisitions:
Current Assets ........................................... $ 14.8
Property, Plant and Equipment ............................ 46.9
Other Long-term Assets ................................... 6.6
Current Liabilities ...................................... (21.9)
Deferred Income Taxes .................................... ( 1.7)
Other Long-term Liabilities .............................. ( 1.3)
Goodwill ................................................. 234.1
Purchase Price of Excluded Acquisitions .................. 2.3
-------
Purchase Price of 1997 Acquisitions ..................... $ 279.8
1998 Acquisitions:
Current Assets ........................................... $ 21.0
Property, Plant and Equipment ............................ 20.7
Other Long-term Assets ................................... 3.7
Current Liabilities ...................................... (15.5)
Long-term Debt, net of Current Portion ................... ( 2.8)
Other Long-term Liabilities .............................. ( 1.4)
Goodwill ................................................. 141.2
-------
Purchase Price of 1998 Acquisitions ..................... 166.9
--------
Total Purchase Price of the Recent Acquisitions ......... $ 446.7
========
</TABLE>
The Recent Acquisitions are assumed to be financed with Common Stock,
options to purchase Common Stock, the Credit Agreement, the 1997 Notes and the
Offering as follows (in millions):
<TABLE>
<S> <C> <C>
1997 Acquisitions:
Fair Value of Common Stock Issued ......................... $ 85.9
Fair Value of Options Granted ............................. 3.1
Proceeds from the 1997 Notes .............................. 190.8
-------
Purchase Price of 1997 Acquisitions ...................... $ 279.8
1998 Acquisitions:
Fair Value of Common Stock Issued ......................... $ 39.4
Fair Value of Options Granted ............................. 15.7
Proceeds from the Offering ................................ 90.2
Proceeds from the 1997 Notes .............................. 21.6
-------
Purchase Price of 1998 Acquisitions ...................... 166.9
--------
Total Purchase Price of the Recent Acquisitions ......... $ 446.7
========
</TABLE>
F-44
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Balance Sheet (continued)
The accompanying Pro Forma Balance Sheet has been prepared as if the 1998
Acquisitions and the Offering and the application of the net proceeds therefrom
as described under "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview" had occurred as of December 31, 1997 and
reflects the following pro forma adjustments:
(A) Pro forma adjustments to Assets consist of the following (in millions,
except share data):
<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 ......... $ (1.9) $ -- $ (1.0) $ --
Record estimated fair value of assets of acquired
companies ................................................ 0.4 3.1 -- 1.0
Reverse goodwill of acquired companies not
purchased ................................................ -- -- (56.9) --
Record goodwill related to acquired companies .............. -- -- 141.2 --
-------- ------ ------- -----
Total Acquisition Adjustments .......................... ( 1.5) 3.1 83.3 1.0
-------- ------ ------- -----
Use of Proceeds Adjustments:
Record net proceeds from the Offering (assuming
3,000,000 shares of Common Stock issued at
$32.00 per share, net of discounts and expenses
of $5.8 million) ......................................... 90.2 -- -- --
Record use of the net proceeds from the Offering
and the 1997 Notes to finance the 1998
Acquisitions ............................................. (111.8) -- -- --
-------- ------ ------- -----
Total Use of Proceeds Adjustments ...................... ( 21.6) -- -- --
-------- ------ ------- -----
Total Pro Forma Adjustments ............................ $ (23.1) $ 3.1 $ 83.3 $ 1.0
======== ====== ======= =====
</TABLE>
(B) Pro Forma adjustments to Liabilities and Stockholders' Equity consist
of the following (in millions):
<TABLE>
<CAPTION>
Other
Current Long-term Long-term Stockholders'
Liabilities Debt Liabilities Equity
------------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Acquisition Adjustments:
Reverse liabilities and equity not assumed in
connection with the 1998 Acquisitions ................. $ (6.8) $ (36.1) $ -- $ (40.7)
Record purchase reserves and estimated fair value of
liabilities of acquired companies ..................... 1.7 -- 1.0 --
Record Common Stock and options issued to finance
the 1998 Acquisitions ................................. -- -- -- 55.1
--------- ------- ------ --------
Total Acquisition Adjustments ....................... ( 5.1) (36.1) 1.0 14.4
--------- ------- ------ --------
Use of Proceeds Adjustments:
Record estimated net proceeds from the Offering ......... -- -- -- 90.2
--------- ------- ------ --------
Total Use of Proceeds Adjustments ................... -- -- -- 90.2
--------- ------- ------ --------
Total Pro Forma Adjustments ......................... $ (5.1) $ (36.1) $ 1.0 $ 104.6
========= ======= ====== ========
</TABLE>
F-45
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Statement 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.
Pro Forma Adjustments
The accompanying Pro Forma Statement of Operations has been prepared as if
the Transactions had occurred as of January 1, 1997 and reflects the following
pro forma 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, 1997. All such
facilities had been previously owned by affiliates of the acquired companies.
(D) To reverse stock compensation expense directly attributable to the
Arcus Merger and 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 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, software is amortized over three
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
determination of the fair value of the net assets acquired.
(F) Pro forma adjustments to Interest Expense consist of the following (in
millions):
<TABLE>
<S> <C>
Acquisition Adjustments:
Reverse interest expense on debt retired or not assumed .......................... $ (5.8)
Use of Proceeds Adjustments:
Reverse interest expense on debt of the Company retired with proceeds of the 1997
Notes and the Offering ......................................................... (4.4)
Record interest expense relating to the 1997 Notes including amortization of
deferred financing costs ....................................................... 18.3
Record amortization of deferred financing costs related to the Credit Agreement . 0.1
Record interest income on excess cash balance of $3.9 million at an assumed rate
of 5.75% per annum ............................................................. (0.2)
------
Total Acquisition and Use of Proceeds Adjustments .............................. $ 8.0
======
</TABLE>
(G) To adjust the provision for income taxes to a 40% rate on pro forma
income before amortization related to approximately $231 million of
nondeductible goodwill and other nondeductible expenses.
F-46
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Statement of Operations (continued)
(H) To adjust the pro forma weighted average common shares outstanding as
if the Transactions had occurred as of January 1, 1997. The number of shares of
Common Stock issued, or assumed to be issued, and the adjustments are as follows
(in thousands):
<TABLE>
<CAPTION>
Total Adjustments to
Number of Weighted
Transactions Shares Issued Average Shares
------------ --------------- ---------------
<S> <C> <C>
Offering ................................. 3,000 3,000
Safesite ................................. 1,770 785
DSI ...................................... 227 152
Record Masters ........................... 1,202 998
Arcus .................................... 1,438 1,438
Other .................................... 35 17
----- -----
Total shares issued, or assumed to be
issued, for the Transactions ......... 7,672 6,390
===== =====
</TABLE>
Integration Adjustments
The integration adjustments relate to certain cost savings that management
believes would have been realized had the Recent Acquisitions been fully
integrated as of January 1, 1997. The accompanying pro forma as adjusted
statement of operations for the year ended December 31, 1997 has been prepared
as if the Transactions had occurred as of January 1, 1997 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, 1997. 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 following the
completion of certain acquisitions; and (iii) a reduction in rent expense to
reflect new or amended leases for certain facilities of acquired companies.
Additional cost savings that the Company expects to realize through integration
of the Recent 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, 1997. 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 amortization related to approximately $231 million of
nondeductible goodwill and other nondeductible expenses.
F-47
<PAGE>
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Item
- ---------- ----
<S> <C>
10.1 Iron Mountain/UAC 1995 Stock Option Plan
10.2 Iron Mountain/ATSI 1995 Stock Option Plan
12 Statement of the Calculation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP (Iron Mountain Incorporated)
23.2 Consent of Ernst & Young LLP (Arcus Technology Services, Inc.)
27 Financial Data Schedule
</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
---------------------------------------
Jean A. Bua
Vice President and Corporate Controller
Date: March 9, 1998
Exhibit 10.1
IRON MOUNTAIN/UAC
1995 STOCK OPTION PLAN
<PAGE>
IRON MOUNTAIN/UAC
1995 STOCK OPTION PLAN
-----------------
Table of Contents
-----------------
Page
I DEFINITIONS.............................................................1
1.1 Definitions.....................................................1
II THE PLAN................................................................4
2.1 Purpose.........................................................4
2.2 Administration..................................................4
2.3 Participation...................................................5
2.4 Stock Subject to the Plan.......................................5
2.5 Grant of Awards.................................................6
2.6 Exercise of Awards..............................................6
III OPTIONS.................................................................6
3.1 Payment Methods.................................................6
3.2 Option Period...................................................8
3.3 Exercise of Options.............................................8
3.4 Substituted Options.............................................9
IV OTHER PROVISIONS........................................................9
4.1 Rights of Eligible Employees, Participants
and Beneficiaries.............................................9
4.2 Adjustments Upon Changes in Capitalization
and Other Events.............................................10
4.3 Termination of Employment......................................12
4.4 Acceleration of Awards.........................................12
4.5 Government Regulations.........................................13
4.6 Tax Withholding................................................13
4.7 Forfeiture for Dishonesty......................................14
4.8 Amendment, Termination and Suspension..........................15
4.9 Privileges of Stock Ownership; Nondistributive Intent..........15
4.10 Effective Date of the Plan.....................................16
4.11 Term of the Plan...............................................16
4.12 Governing Law..................................................16
i
<PAGE>
PREAMBLE
The United Acquisition Company 1995 Stock Option Plan is hereby amended and
restated, effective as of the date Arcus Group, Inc. merges with and into Iron
Mountain Incorporated (the "Restatement Date"), and shall thereafter be known as
the Iron Mountain/UAC 1995 Stock Option Plan (the "Plan"). As amended and
restated, the Plan shall govern all events, including without limitation the
exercise of an Option issued prior to the Restatement Date, that occur on or
after the Restatement Date. In the event Arcus Group, Inc. fails to merge with
and into Iron Mountain Incorporated, this amendment and restatement shall be
null and void and of no further force and effect.
I DEFINITIONS.
1.1 Definitions.
(a) "Award" shall mean a Nonqualified Stock Option or an Incentive
Stock Option granted under this Plan.
(b) "Award Agreement" shall mean a written agreement setting forth the
terms of an Award.
(c) "Award Date" shall mean the date upon which the Predecessor
Committee took the action granting an Award or such later date as was prescribed
by the Predecessor Committee.
(d) "Beneficiary" shall mean the person, persons, trust or trusts
entitled by will or the laws of descent and distribution to receive the benefits
specified under this Plan in the event of a Participant's death.
(e) "Board" shall mean the Board of Directors of Iron Mountain
Incorporated.
(f) "Change of Control" of Iron Mountain Incorporated shall be deemed
to have occurred if any person (as such term is used in Section 13(d) and
14(d)(2) of the Exchange Act) other than a trust related to an employee benefit
plan maintained by Iron Mountain Incorporated becomes the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of fifty percent (50%)
or more of Iron Mountain Incorporated's outstanding Common Stock, and within the
period of twenty-four (24) consecutive months immediately thereafter,
individuals other than (a) individuals who at the beginning of such period
constitute the entire Board of Directors or (b) individuals whose election, or
nomination for election by Iron Mountain Incorporated's stockholders, was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of the period, become a majority of the
Board.
(g) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
<PAGE>
(h) "Commission" shall mean the Securities and Exchange Commission.
(i) "Committee" shall mean a committee or subcommittee of the Board
appointed by the Board and composed of at least two (2) members of the Board.
(j) "Common Stock" shall mean the common stock, par value $.01 per
share, of Iron Mountain Incorporated.
(k) "Eligible Employee" shall mean an officer or employee of UAC or a
Subsidiary of UAC other than one who is, or has been during the 365 days
immediately preceding the Award Date, a member of the Predecessor Committee.
(l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(m) "Fair Market Value" at any particular date shall be determined
according to the following rules: (i) if the Common Stock is not at the time
listed or admitted to trading on a stock exchange or the Nasdaq National Market,
the fair market value shall be the closing price of the Common Stock on the date
in question in the over-the-counter market, as such price is reported in a
publication of general circulation selected by the Board and regularly reporting
the price of the Common Stock in such market; provided, however, that if the
price of the Common Stock is not so reported, the fair market value shall be
determined in good faith by the Board, which may take into consideration (1) the
price paid for the Common Stock in the most recent trade of a substantial number
of shares known to the Board to have occurred at arm's length between willing
and knowledgeable investors, or (2) an appraisal by an independent party, or (3)
any other method of valuation undertaken in good faith by the Board, or some or
all of the above as the Board shall in its discretion elect; or (ii) if the
Common Stock is at the time listed or admitted to trading on any stock exchange
or the Nasdaq National Market, then the fair market value shall be the mean
between the lowest and highest reported sale prices (or the lowest reported bid
price and the highest reported asked price) of the Common Stock on the date in
question on the principal exchange on which the Common Stock is then listed or
admitted to trading. If no reported sale of Common Stock takes place on the date
in question on the principal exchange or the Nasdaq National Market, as the case
may be, then the reported closing sale price (or the reported closing asked
price) of the Common Stock on such prior date on the principal exchange or the
Nasdaq National Market, as the case may be, shall be determinative of fair
market value.
(n) "Incentive Stock Option" shall mean an option that is designated
as an incentive stock option within the meaning of Section 422 of the Code, the
award of which contains such provisions as are necessary to comply with that
section.
(o) "ISO" shall have the meaning set forth in Section 3.1.
2
<PAGE>
(p) "Initial Agreement" shall have the meaning set forth in Section
3.3(c).
(q) "Insiders" shall mean persons subject to Section 16 of the
Exchange Act.
(r) "Limited Change of Control" of Iron Mountain Incorporated shall be
deemed to have occurred if (i) following a merger or consolidation individuals
serving as members of the Board immediately prior to the merger or consolidation
no longer constitute a majority of the individuals serving as members of the
Board (or the board of directors of the surviving corporation) and (ii) the
voting securities of Iron Mountain Incorporated outstanding immediately prior to
the merger or consolidation fail to represent (either by remaining outstanding
or by being converted into voting securities of the surviving entity) more than
fifty percent (50%) of the voting power of the securities of Iron Mountain
Incorporated or the surviving entity outstanding immediately after the merger or
consolidation.
(s) "Nonqualified Stock Option" shall mean an option that is not
designated as an Incentive Stock Option.
(t) "Option" shall mean an option to purchase Common Stock under this
Plan. Each Option was heretofore designated by the Predecessor Committee as
either a Nonqualified Stock Option or an Incentive Stock Option.
(u) "Participant" shall mean an Eligible Employee who has been awarded
an Award.
(v) "Personal Representative" shall mean the person or persons who,
upon the disability or incompetence of a Participant, shall have acquired on
behalf of the Participant by legal proceeding or otherwise the power to exercise
the rights and receive the benefits specified in this Plan.
(w) "Plan" shall mean the Iron Mountain/UAC 1995 Stock Option Plan, as
amended from time to time.
(x) "Predecessor Committee" shall mean the Committee, as defined in
the Predecessor Plan, that was in place prior to the Restatement Date.
(y) "Predecessor Plan" shall mean the United Acquisition Company 1995
Stock Option Plan.
(z) "Restatement Date" shall have the meaning set forth in the
Preamble.
(aa) "Securities Act" shall mean the Securities Act of 1933, as
amended from time to time.
3
<PAGE>
(bb) "Subsidiary of UAC" shall mean any corporation or other entity a
majority of whose outstanding voting stock or voting power is beneficially owned
directly or indirectly through an unbroken chain of ownership by UAC.
(cc) "Subsidiary of Iron Mountain" shall mean any corporation or other
entity a majority of whose outstanding voting stock or voting power is
beneficially owned directly or indirectly through an unbroken chain of ownership
by Iron Mountain Incorporated.
(dd) "Termination for Special Cause" shall mean the termination of
employment or service caused by (i) the individual's commission of a willful
act, such as fraud, conversion, embezzlement, falsifying records or reports or a
similar act against Iron Mountain Incorporated or a Subsidiary of Iron Mountain,
intending to enrich himself at the expense of Iron Mountain Incorporated or a
Subsidiary of Iron Mountain, (ii) the individual having been guilty of willful
misconduct or gross negligence in carrying out his duties or (iii) the
individual having been convicted of, or entered a plea of guilty to, a felony
crime involving moral turpitude.
(ee) "Total Disability" shall mean a "permanent and total disability"
within the meaning of Section 22(e)(3) of the Code.
(ff) "UAC" shall mean United Acquisition Company.
II THE PLAN.
2.1 Purpose.
The purpose of this Plan is to grant Awards to promote the success
initially of UAC and any Subsidiary of UAC and after the Restatement Date of
Iron Mountain Incorporated and any Subsidiary of Iron Mountain by providing an
additional means to attract and retain key personnel through added long-term
incentives for high levels of performance and for significant efforts to improve
the financial performance initially of UAC and any Subsidiary of UAC and after
the Restatement Date of Iron Mountain Incorporated and any Subsidiary of Iron
Mountain.
2.2 Administration.
(a) This Plan shall be administered by the Board, or in the discretion
of the Board, the Committee. For so long as Section 16 of the Exchange Act is
applicable to Iron Mountain Incorporated, each member of the Committee shall be
a "non-employee director" or the equivalent within the meaning of Rule 16b-3
under the Exchange Act. In the event that a vacancy on the Committee occurs on
account of the resignation of a member or the removal of a member by vote of the
Board, a successor member shall be appointed by vote of the Board. All
references in the Plan to the "Committee" shall be understood to refer to the
Committee or the Board, whoever shall administer the Plan.
4
<PAGE>
The Committee shall select one of its members as Chairman and shall
hold meetings at such times and places as it may determine. A majority of the
Committee shall constitute a quorum, and acts of the Committee at which a quorum
is present, or acts reduced to or approved in writing by all the members of the
Committee, shall be the valid acts of the Committee. The Committee shall have
the authority to adopt, amend and rescind such rules and regulations as, in its
opinion, may be advisable in the administration of the Plan.
With respect to Insiders, transactions under the Plan are intended to
comply with all applicable conditions of Rule 16b-3 or its successor under the
Exchange Act. To the extent any provision of the Plan or action by the Committee
fails to so comply, it shall be deemed to be modified so as to be in compliance
with such Rule, or, if such modification is not possible, it shall be deemed to
be null and void, to the extent permitted by law and deemed advisable by the
Committee.
The Plan shall be administered in such a manner as to permit Incentive
Stock Options to qualify as such under Section 422 of the Code.
(b) Subject to the express provisions of this Plan, the Committee
shall have the authority to construe and interpret this Plan and any agreements
defining the rights and obligations of Iron Mountain Incorporated and
Participants under this Plan, to further define the terms used in this Plan, to
describe, amend and rescind rules and regulations relating to the administration
of this Plan, to determine the duration and purposes of leaves of absence that
may be granted to Participants without constituting a termination of their
employment for purposes of this Plan and to make all other determinations
necessary or advisable for the administration of this Plan. The determinations
of the Committee on the foregoing matters shall be final and binding.
(c) Subject only to compliance with the express provisions hereof, any
action taken by, or inaction of, Iron Mountain Incorporated, any Subsidiary of
Iron Mountain Incorporated, the Board or the Committee relating to this Plan
shall be within the absolute discretion of that entity or body and shall be
conclusive and binding upon all persons. No member of the Board or the Committee
and no officer of Iron Mountain Incorporated or a Subsidiary of Iron Mountain
shall be liable for any such action or inaction of the entity or body, of
another person or, except in circumstances involving bad faith, of himself or
herself.
2.3 Participation.
Awards may be granted to Eligible Employees.
2.4 Stock Subject to the Plan.
The stock to be offered under this Plan shall be Common Stock, from
either authorized but unissued shares or treasury shares. The aggregate amount
of Common Stock that
5
<PAGE>
may be issued or transferred pursuant to Awards granted under this Plan shall
not exceed 212,000 shares, subject to adjustment as set forth in Section 4.2.
2.5 Grant of Awards.
(a) Any Award under the Plan shall be subject to the terms and
conditions set forth in the Plan and such other terms and conditions established
by the Committee as are not inconsistent with the purpose and provisions of the
Plan. The grant of an Award to an Eligible Employee is made on the Award Date.
(b) No Awards may be made on or after the Restatement Date.
2.6 Exercise of Awards.
An Option shall be deemed to be exercised when the Chief Financial
Officer of Iron Mountain Incorporated or his designee receives written notice of
the exercise from the Participant stating the number of shares with respect to
which the Option is being exercised and accompanied by other payment or deemed
payment of the purchase price in a manner described in Section 3.1(a) (except to
the extent payment may be permitted to be made following delivery of written
notice of exercise in accordance with Section 3.1(b)). Such notice shall be
delivered in person or by facsimile transmission to the Chief Financial Officer
of Iron Mountain Incorporated or his designee or shall be sent by registered
mail, return receipt requested, to the Chief Financial Officer of Iron Mountain
Incorporated or his designee, in which case delivery shall be deemed made on the
date such notice is deposited in the mail. Notwithstanding any other provision
of this Plan, the Committee may impose, by rule and in Award Agreements, such
conditions upon the exercise of Awards (including, without limitation,
conditions limiting the time of exercise to specified periods) as may be
required, among other reasons, to satisfy applicable regulatory requirements,
including without limitation Rule 16b-3 (or any successor rule) promulgated by
the Commission pursuant to the Exchange Act.
III OPTIONS.
3.1 Payment Methods.
(a) The exercise price of any options exercised shall be paid in full
at the time of each purchase in one or a combination of the following methods:
(i) in cash or by check payable to the order of Iron Mountain Incorporated; (ii)
if authorized by the Committee or specified in the Option being exercised, by a
recourse promissory note made by the Participant in favor of Iron Mountain
Incorporated, upon the terms and conditions determined by the Committee and
secured by the Common Stock issuable upon exercise in compliance with applicable
law (including, without limitation, state corporate law and federal margin
requirements) and such other security as the Committee may require; (iii) the
exchange of Options having a value equal to such exercise price; or (iv) by
shares of Common Stock of Iron Mountain Incorporated already owned by the
Participant provided that such shares are fully
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vested and free of all liens, claims and encumbrances of any kind; and provided,
further, that the Participant may not make payment in shares of Common Stock
that he acquired upon the earlier exercise of any option designated as an
incentive stock option within the meaning of Section 422 of the Code, whether
granted pursuant to this Plan or another plan of UAC or any Subsidiary of UAC or
a plan of Iron Mountain Incorporated or any Subsidiary of Iron Mountain (an
"ISO"), unless he has held the shares until at least two (2) years after the
date the ISO was granted and at least one (1) year after the date the ISO was
exercised. If payment is made in whole or in part in shares of Common Stock,
then the Participant shall deliver to Iron Mountain Incorporated certificates
registered in his name representing a number of shares of Common Stock legally
and beneficially owned by him, fully vested and free of all liens, claims and
encumbrances of every kind and having a Fair Market Value on the date of
delivery that is not greater than the exercise price, such certificates to be
duly endorsed, or accompanied by stock powers duly endorsed, by the record
holder of the shares represented by such certificates. If the exercise price
exceeds the Fair Market Value of the shares for which certificates are
delivered, the Participant shall also deliver cash or a check payable to the
order of Iron Mountain Incorporated in an amount equal to the amount of that
excess, or, if the Award Agreement so provides, his promissory note as described
in Section 3.1(a)(ii); provided, however, that the Committee may in its absolute
discretion limit the Participant's ability to exercise an Option by delivering
shares. The value of any Option used to satisfy the exercise price of another
Option shall equal the Fair Market Value of the shares of Common Stock on the
date of exercise, minus the exercise price stated in the Option to be exchanged.
In the case of an Incentive Stock Option, any shares delivered that were
initially acquired upon exercise of an Option must have been owned by the
Participant at least six months as of the date of delivery.
(b) Alternatively, Options may be exercised by means of a "cashless
exercise" procedure in which a broker: (i) transmits the exercise price to Iron
Mountain Incorporated in cash or acceptable cash equivalents either (1) against
the Participant's notice of exercise and Iron Mountain Incorporated's
confirmation that it will deliver to the broker stock certificates issued in the
name of the broker for at least that number of shares having a Fair Market Value
equal to the exercise price or (2) as the proceeds of a margin loan to the
Participant; or (ii) agrees to pay the exercise price to Iron Mountain
Incorporated in cash or acceptable cash equivalents upon the broker's receipt
from Iron Mountain Incorporated of stock certificates issued in the name of the
broker for at least that number of shares having a Fair Market Value equal to
the exercise price.
(c) At the time specified in a Participant's notice of exercise, Iron
Mountain Incorporated shall, without issue or transfer tax to the Participant,
deliver to him at the main office of Iron Mountain Incorporated, or such other
place as shall be mutually acceptable, a certificate for the shares as to which
his Option is exercised. If the Participant fails to pay for or to accept
delivery of all or any part of the number of shares specified in his notice upon
tender of delivery thereof, his right to exercise the Option with respect to
those shares shall be terminated, unless Iron Mountain Incorporated otherwise
agrees.
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3.2 Option Period.
Each Option, and all rights and obligations thereunder, shall expire
on such date as shall be determined by the Predecessor Committee but not later
than: (i) ten (10) years after the Award Date in the case of an Incentive Stock
Option; (ii) five (5) years after the Award Date in the case of an Incentive
Stock Option awarded to a person who, at the Award Date, owned shares of
outstanding common stock of UAC possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of UAC; and (iii) in all
other cases, twenty (20) years and one (1) day after the Award Date.
Notwithstanding this Section 3.2, each Option, and all rights and obligations
thereunder, shall be subject to earlier termination as hereinafter provided.
3.3 Exercise of Options.
(a) Except as otherwise provided in Section 4.4, an Option granted to
an Eligible Employee may become exercisable, in whole or in part, on the date or
dates specified in the Award Agreement. The Committee may, at any time after
grant of the Option to an Eligible Employee and from time to time, increase the
number of shares purchasable at any time so long as the total number of shares
subject to the Option is not increased. No Option shall be exercisable except in
respect of whole shares, and fractional share interests shall be disregarded. In
the case of an Incentive Stock Option, not less than 100 shares of Common Stock
may be purchased at one time unless the total number at the time available for
purchase under the terms of the Option is less than 100 shares of Common Stock.
(b) The Participant must notify Iron Mountain Incorporated promptly in
the event that he sells, transfers, exchanges or otherwise disposes of any
shares of Common Stock issued upon exercise of an Incentive Stock Option, before
the later of (i) the second anniversary of the date of grant of the Incentive
Stock Option and (ii) the first anniversary of the date the shares were issued
upon his exercise of the Incentive Stock Option.
(c) No Option shall be exercisable if at the time of exercise the
Participant is in breach of Section 1(g) of the Proprietary and Confidentiality
Agreement by and between the Participant and Arcus Data Security, Inc. (the
"Initial Agreement") or the provisions of any other non-competition agreement
between the Participant and Iron Mountain Incorporated or any Subsidiary of Iron
Mountain that is in addition to or in lieu of the Initial Agreement.
(d) Except as provided in the following sentence, any outstanding
Option shall expire on December 31, 1998. In the case of a Participant who
becomes a director of Iron Mountain Incorporated in connection with the merger
of Arcus Group, Inc. with and into Iron Mountain Incorporated, unless sooner
terminated pursuant to the Plan or any Award Agreement, any outstanding Option
held by the Participant shall expire on the later of December 31, 1998 or ninety
(90) days following the date on which such Participant is no longer a director
of Iron Mountain Incorporated.
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3.4 Substituted Options.
With the consent of the Participant, the Committee shall have the
authority at any time and from time to time to terminate any outstanding Option
and grant in substitution for it a new Option covering the same number or a
different number of shares, provided that the exercise price under the new
Option shall be no less than the Fair Market Value of the Common Stock on the
date of grant of the new Option.
IV OTHER PROVISIONS.
4.1 Rights of Eligible Employees, Participants and Beneficiaries.
(a) Nothing contained in this Plan (or in Award Agreements or in any
other documents related to this Plan or to Awards) shall confer upon any
Eligible Employee or Participant any right to continue in the employ of Iron
Mountain Incorporated or any Subsidiary of Iron Mountain or to construe any
contract or agreement of employment, or interfere in any way with the right of
Iron Mountain Incorporated or any Subsidiary of Iron Mountain to reduce such
person's compensation or to terminate the employment of such Eligible Employee
or Participant, with or without cause, but nothing contained in this Plan or any
document related thereto shall affect any other contractual right of Iron
Mountain Incorporated or any Subsidiary of Iron Mountain or any Eligible
Employee or Participant.
(b) Amounts payable pursuant to an Award shall be paid only to the
Participant or, in the event of the Participant's death, to the Participant's
Beneficiary or, in the event of the Participant's Total Disability, to the
Participant's Personal Representative or, if there is none, to the Participant.
Except as set forth in any Award Agreement, other than by will or the laws of
descent and distribution, no Option or other benefit payable under, or interest
in, this Plan or in any Award shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or charge and any
such attempted action shall be void and no such benefit or interest shall be in
any manner liable for, or subject to debts, contracts, liabilities, engagements
or torts of any Eligible Employee, Participant or Beneficiary. The Committee
shall disregard any attempted transfer, assignment or other alienation
prohibited by the preceding sentence and shall pay or deliver such cash or
shares of Common Stock in accordance with the provisions of this Plan.
(c) No Participant, Beneficiary or other person shall have any right,
title or interest in any fund or in any specific asset (including specific
shares of Common Stock) of Iron Mountain Incorporated or any Subsidiary of Iron
Mountain by reason of any Award granted hereunder. Neither the provisions of
this Plan (or of any documents related hereto), nor the creation or adoption of
this Plan, nor any action taken pursuant to the provisions of this Plan shall
create, or be construed to create, a trust of any kind or a fiduciary
relationship between Iron Mountain Incorporated or any Subsidiary of Iron
Mountain and any Participant, Beneficiary or other person. To the extent that a
Participant, Beneficiary or other person acquires a right to
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<PAGE>
receive an Award hereunder, such right shall be no greater than the right of any
unsecured general creditor of Iron Mountain Incorporated or any Subsidiary of
Iron Mountain.
(d) A Participant shall have no rights as a stockholder with respect
to any shares covered by an Option until the date of issuance of a certificate
to him for the shares. No adjustment shall be made for dividends or other rights
for which the record date is earlier than the date the certificate is issued,
other than as required or permitted pursuant to Section 4.2.
4.2 Adjustments Upon Changes in Capitalization and Other Events.
In the event that the outstanding shares of Common Stock are hereafter
changed for a different number or kind of shares or other securities of Iron
Mountain Incorporated by reason of a reorganization, recapitalization, exchange
of shares, stock split, combination of shares or dividend payable in shares or
other securities, a corresponding adjustment shall be made by the Committee in
the number and kind of shares or other securities covered by outstanding Options
and for which Options may be granted under the Plan. Any such adjustment in
outstanding Options shall be made without change in the total price applicable
to the unexercised portion of the Option, but the price per share specified in
each Award Agreement shall be correspondingly adjusted; provided, however, that
no adjustment shall be made with respect to an Incentive Stock Option that would
constitute a modification as defined in Section 424 of the Code. Any such
adjustment made by the Committee shall be conclusive and binding upon all
affected persons, including Iron Mountain Incorporated and all Participants.
If while unexercised Options remain outstanding under the Plan Iron
Mountain Incorporated merges or consolidates with a wholly-owned subsidiary for
the purpose of reincorporating itself under the laws of another jurisdiction,
the Participants will be entitled to acquire shares of Common Stock of the
reincorporated entity upon the same terms and conditions as were in effect
immediately prior to such reincorporation (unless such reincorporation involves
a change in the number of shares or the capitalization of Iron Mountain
Incorporated, in which case proportional adjustments shall be made as provided
above) and the Plan, unless otherwise rescinded by the Board, will remain the
Plan of the reincorporated entity.
Except as otherwise provided in the preceding paragraph, if while
unexercised Options remain outstanding under the Plan Iron Mountain Incorporated
merges or consolidates with one or more corporations (whether or not the Iron
Mountain Incorporated is the surviving corporation), or is liquidated or sells
or otherwise disposes of substantially all of its assets to another entity, or
upon a Change of Control, then, except as otherwise specifically provided to the
contrary in any Participant's Award Agreement, the Committee, in its discretion,
shall amend the terms of all outstanding Options so that either:
(a) after the effective date of such merger, consolidation, sale
or Change of Control, as the case may be, each Participant shall be entitled,
upon exercise of an Option to receive in lieu of shares of Common Stock the
number and class of shares of such stock or other securities to which he would
have been entitled pursuant to the terms of the merger,
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<PAGE>
consolidation, sale or Change of Control if he had been the holder of record of
the number of shares of Common Stock as to which the Option is being exercised,
or shall be entitled to receive from the successor entity a new stock option of
comparable value; or
(b) all outstanding Options shall be cancelled as of the
effective date of any such merger, consolidation, liquidation, sale or Change of
Control, provided that each Participant shall have the right to exercise his
Option according to its terms during the period of twenty (20) days ending on
the day preceding the effective date of such merger, consolidation, liquidation,
sale or Change of Control; and in addition to the foregoing, the Committee may
in its discretion amend the terms of an Option by cancelling some or all of the
restrictions on its exercise, to permit its exercise pursuant to this paragraph
(b) to a greater extent than that permitted on its existing terms; or
(c) all outstanding Options shall be cancelled as of the
effective date of any such merger, consolidation, liquidation, sale or Change of
Control in exchange for consideration in cash or in kind, which consideration in
both cases shall be equal in value to the value of those shares of stock or
other securities the Participant would have received had the Option been
exercised (to the extent then exercisable) and no disposition of the shares
acquired upon such exercise had been made prior to such merger, consolidation,
liquidation, sale or Change in Control, less the exercise price therefor. Upon
receipt of such consideration by the Participant, his or her Option shall
immediately terminate and be of no further force and effect. The value of the
stock or other securities the Participant would have received if the Option had
been exercised shall be determined in good faith by the Committee, and in the
case of shares of the Common Stock of Iron Mountain Incorporated shall be Fair
Market Value.
Notwithstanding any provision of this Section 4.2 to the contrary, if
while unexercised Options remain outstanding under the Plan Iron Mountain
Incorporated or a wholly-owned subsidiary of Iron Mountain Incorporated merges
or consolidates with one or more corporations (whether or not Iron Mountain
Incorporated is the surviving corporation) in any transaction or series of
related transactions and there is a Limited Change of Control, then the terms of
all outstanding Options shall be amended so that any vesting restrictions on the
exercise of the Option shall be cancelled as of the effective date of the merger
or consolidation and, if Iron Mountain Incorporated is not the surviving
corporation, after the effective date of such merger or consolidation each
Participant shall be entitled, upon exercise of an Option, to receive in lieu of
shares of Common Stock the number and class of shares of such stock or other
securities and such other consideration to which he would have been entitled as
a result of the terms of the merger or consolidation if he had been the holder
of record of the number of shares of Common Stock as to which the Option is
being exercised.
Except as expressly provided to the contrary in this Section 4.2, the
issuance by Iron Mountain Incorporated of shares of stock of any class for cash
or property or for services, either upon direct sale or upon the exercise of
rights or warrants, or upon conversion of shares or obligations of Iron Mountain
Incorporated convertible into such shares or other securities, shall
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<PAGE>
not affect the number, class or price of shares of Common Stock then subject to
outstanding Options.
In adjusting Awards to reflect the changes described in this Section
4.2, or in determining that no such adjustment is necessary, the Committee may
rely upon the advice of independent counsel and accountants of Iron Mountain
Incorporated, and the determination of the Committee shall be conclusive. No
fractional shares of stock shall be issued under this Plan on account of any
such adjustment.
In no event will the merger of Arcus Group, Inc. with and into Iron
Mountain Incorporated be treated as an event described in this Section 4.2.
4.3 Termination of Employment.
(a) If the Participant's employment by Iron Mountain Incorporated or a
Subsidiary of Iron Mountain terminates for any reason other than death or Total
Disability, the Participant shall have, subject to earlier termination pursuant
to or as contemplated by Section 3.2, such period as is provided in the Award
Agreements from the date of termination of employment to exercise any Option to
the extent it shall have become vested on that date, and any Option not vested
on that date shall terminate.
(b) If the Participant's employment with Iron Mountain Incorporated or
a Subsidiary of Iron Mountain terminates as result of Total Disability or death
of the Participant, then, upon such occurrence, each Option shall become
immediately vested to the full extent theretofore not vested. The Participant or
his or her Beneficiary or Personal Representative, as the case may be shall have
twelve (12) months (or such shorter period as is contemplated by Section 3.2)
from the date of either such termination of employment to exercise any Option.
(c) In the event of termination of employment with Iron Mountain
Incorporated or a Subsidiary of Iron Mountain for any reason, other than
discharge for cause, the Committee may, in its discretion, increase the portion
of the Participant's Award available to the Participant, or the Participant's
Beneficiary or Personal Representative, as the case may be, upon such terms as
the Committee shall determine.
(d) If an entity ceases to be a Subsidiary of Iron Mountain, such
event shall be deemed for purposes of this Section 4.3 to be a termination of
employment of each employee of that entity who does not transfer employment to
Iron Mountain Incorporated or a Subsidiary of Iron Mountain.
4.4 Acceleration of Awards.
All Options granted under the Plan to an Eligible Employee are
exercisable as of the Restatement Date; provided, however, that any vesting
schedule provided in an Award Agreement shall remain in full force and effect;
and provided, further, that in the event of a
12
<PAGE>
termination of employment (other than a Termination for Special Cause) by Iron
Mountain Incorporated or a Subsidiary of Iron Mountain, there shall be immediate
vesting of any unvested portion thereof. Acceleration of Awards shall comply
with applicable regulatory requirements, including without limitation Rule 16b-3
promulgated by the Commission pursuant to the Exchange Act and Section 422 of
the Code.
4.5 Government Regulations.
This Plan, the granting of Awards under this Plan and the issuance or
transfer of shares of Common Stock (and/or the payment of money) pursuant
thereto are subject to all applicable federal and state laws, rules and
regulations and to such approvals by any regulatory or governmental agency
(including without limitation "no action" positions of the Commission) that may,
in the opinion of counsel for Iron Mountain Incorporated, be necessary or
advisable in connection therewith. Without limiting the generality of the
foregoing, Iron Mountain Incorporated shall not be required to sell or issue any
shares upon the exercise of any Option if the issuance of such shares will
result in a violation by the Participant or Iron Mountain Incorporated of any
provisions of any law, statute or regulation of any governmental authority.
Specifically, in connection with the Securities Act, upon the exercise of any
Option Iron Mountain Incorporated shall not be required to issue shares unless
the Board has received evidence satisfactory to it to the effect that the holder
of the Option will not transfer such shares except pursuant to a registration
statement in effect under the Securities Act or unless an opinion of counsel
satisfactory to Iron Mountain Incorporated has been received by Iron Mountain
Incorporated to the effect that such registration is not required. Any
determination in this connection by the Board shall be conclusive. Iron Mountain
Incorporated shall not be obligated to take any other affirmative action in
order to cause the exercise of an Option to comply with any law or regulations
of any governmental authority, including, without limitation, the Securities Act
or applicable state securities laws.
4.6 Tax Withholding.
(a) Upon the disposition by a Participant or other person of shares of
Common Stock acquired pursuant to the exercise of an Incentive Stock Option
prior to satisfaction of the holding period requirements of Section 422 of the
Code, or upon the exercise of a Nonqualified Stock Option, Iron Mountain
Incorporated shall have the right to (i) require such Participant or such other
person to pay by cash or check payable to Iron Mountain Incorporated, the amount
of any taxes that Iron Mountain Incorporated or any Subsidiary of Iron Mountain
may be required to withhold with respect to such transactions or (ii) deduct
from amounts paid in cash the amount of any taxes that Iron Mountain
Incorporated may be required to withhold with respect to such cash amounts.
(b) The Committee may, in its discretion, permit a loan from Iron
Mountain Incorporated or any Subsidiary of Iron Mountain to a Participant in the
amount of any taxes that Iron Mountain Incorporated or any Subsidiary of Iron
Mountain may be required to withhold with respect to shares of Common Stock
received pursuant to a transaction described in
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subsection (a) above. Such a loan will be for a term, at a rate of interest and
pursuant to such other terms and rules as the Committee may establish.
(c) In connection with the exercise of a Nonqualified Stock Option,
the Committee may in its discretion also permit any Participant's withholding
obligation to be paid in whole or in part in the form of shares of Common Stock,
by withholding from the shares to be issued or by accepting delivery from the
Participant of shares already owned by him. For this purpose, the value of
Common Stock shall be its Fair Market Value. A Participant may not make any such
payment in the form of shares of Common Stock acquired upon the exercise of an
ISO until the shares have been held by him for at least two (2) years after the
date the ISO was granted and at least one (1) year after the date the ISO was
exercised. If payment of withholding taxes is made in whole or in part in shares
of Common Stock, the Participant shall deliver to Iron Mountain Incorporated
certificates registered in his name representing shares of Common Stock legally
and beneficially owned by him, fully vested and free of all liens, claims and
encumbrances of every kind, duly endorsed or accompanied by stock powers duly
endorsed by the record holder of the shares represented by such certificates. If
the Participant is subject to Section 16(a) of the Exchange Act, his ability to
pay his withholding obligation in the form of shares of Common Stock shall be
subject to such additional restrictions as may be necessary to avoid any
transaction that might give rise to liability under Section 16(b) of the
Exchange Act.
(d) The proceeds from the sale of shares pursuant to Options shall
constitute general funds of Iron Mountain Incorporated.
4.7 Forfeiture for Dishonesty. Notwithstanding anything to the contrary in
the Plan, if the Board determines, after full consideration of the facts
presented on behalf of both Iron Mountain Incorporated and a Participant, that
the Participant has been engaged in fraud, embezzlement, theft, commission of a
felony or proven dishonesty in the course of his employment by Iron Mountain
Incorporated, which damaged Iron Mountain Incorporated, or has disclosed trade
secrets or other proprietary information of Iron Mountain Incorporated, (a) the
Participant shall forfeit all unexercised Options and all exercised Options
under which Iron Mountain Incorporated has not yet delivered the certificates,
and (b) Iron Mountain Incorporated shall have the right to repurchase all or any
part of the shares of Common Stock acquired by the Participant upon the earlier
exercise of any Option, at a price equal to the amount paid to Iron Mountain
Incorporated upon such exercise, increased by an amount equal to the interest
that would have accrued in the period between the date of exercise of the Option
and the date of such repurchase upon a debt in the amount of the exercise price,
at the prime rate(s) announced from time to time during such period in the
Federal Reserve Statistical Release Selected Interest Rates. The decision of the
Board as to the cause of a Participant's discharge and the damage done to Iron
Mountain Incorporated shall be final, binding and conclusive. No decision of the
Board, however, shall affect in any manner the finality of the discharge of a
Participant by Iron Mountain Incorporated. For purposes of this Section 4.7,
references to Iron Mountain Incorporated shall, unless the context otherwise
requires, include Iron Mountain Incorporated and any Subsidiary of Iron
Mountain.
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4.8 Amendment, Termination and Suspension.
(a) The Board may, at any time, terminate or, from time to time,
amend, modify or suspend this Plan (or any part hereof). The Committee may, with
the consent of the Participant, make such modifications of the terms and
conditions of such Participant's Award as it shall deem advisable. The
Committee, with the consent of the Participant, may also amend the terms of any
Option to provide that the exercise price of the shares remaining subject to the
original Award shall be reestablished at a price not less than 100% of the Fair
Market Value of the Common Stock on the effective date of the amendment. No
modification of any other term or provision of any Option that is amended in
accordance with the foregoing shall be required, although the Committee may, in
its discretion, make such further modifications of any such Option as are not
inconsistent with or prohibited by the Plan and not adverse to the interests of
the Participants. No Awards may be granted during any suspension of this Plan or
after its termination.
(b) If an amendment would (i) materially increase the benefits
accruing to Participants within the meaning of Rule 16b-3 under the Exchange Act
or any successor thereto at a time when Iron Mountain Incorporated is subject to
Section 13(a) or 15(d) of the Exchange Act, (ii) increase the aggregate number
of shares that may be issued under this Plan at a time when Iron Mountain
Incorporated is subject to Section 13(a) or 15(d) of the Exchange Act or (iii)
modify the requirements of eligibility for participation in this Plan, the
amendment shall be approved by the Board and by a majority of the stockholders
of Iron Mountain Incorporated.
(c) In the case of Awards issued before the effective date of any
amendment, suspension or termination of this Plan, such amendment, suspension or
termination of the Plan shall not, without specific action of the Committee and
the consent of the Participant, in any way modify, amend, alter or impair any
rights or obligations under any Award previously granted under the Plan.
(d) Notwithstanding anything herein to the contrary, the Predecessor
Committee has determined that the amendments to this Plan as reflected herein
and effective as of the Restatement Date shall apply to any Award granted under
the Plan prior to its Restatement Date. The Committee may, in its discretion,
determine that a restated Award Agreement reflecting the changes to an Option
resulting from the amendment and restatement of this Plan or the merger of Arcus
Group, Inc. with and into Iron Mountain Incorporated be issued. Any such
restated Award Agreement shall supersede any existing Award Agreement and shall
recognize that the terms and conditions of the restated Award Agreement and this
Plan, as amended and restated, shall govern all events on or after the
Restatement Date.
4.9 Privileges of Stock Ownership; Nondistributive Intent.
A Participant shall not be entitled to the privilege of stock ownership
as to any shares of Common Stock not actually issued to him. No adjustment shall
be made for dividends
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or other rights for which the record date is earlier than the date the
certificate is issued, other than as required or permitted pursuant to Section
4.2.
4.10 Effective Date of the Plan.
This Plan was originally effective July 31, 1995.
4.11 Term of the Plan.
Unless previously terminated by the Board, this Plan shall terminate
at the close of business on December 31, 2005, but such termination shall not
affect any Award theretofore granted, without the consent of the Participant.
4.12 Governing Law.
This Plan and the documents evidencing Awards and all other related
documents shall be governed by, and construed in accordance with, the laws of
the State of Delaware, without regard to the principles of conflicts of law. If
any provision shall be held by a court of competent jurisdiction to be invalid
and unenforceable, the remaining provisions of this Plan shall continue to be
fully effective.
16
Exhibit 10.2
IRON MOUNTAIN/ATSI
1995 STOCK OPTION PLAN
<PAGE>
IRON MOUNTAIN/ATSI
1995 STOCK OPTION PLAN
Table of Contents
Page
I DEFINITIONS............................................................1
1.1 Definitions....................................................1
II THE PLAN...............................................................4
2.1 Purpose........................................................4
2.2 Administration.................................................5
2.3 Participation..................................................6
2.4 Stock Subject to the Plan......................................6
2.5 Grant of Awards................................................6
2.6 Exercise of Awards.............................................6
III OPTIONS................................................................7
3.1 Payment Methods................................................7
3.2 Option Period..................................................8
3.3 Exercise of Options............................................8
3.4 Substituted Options............................................9
IV OTHER PROVISIONS......................................................10
4.1 Rights of Eligible Employees, Eligible Directors,
Participants and Beneficiaries..............................10
4.2 Adjustments Upon Changes in Capitalization and Other Events...11
4.3 Termination of Employment.....................................13
4.4 Acceleration of Awards........................................14
4.5 Government Regulations........................................15
4.6 Tax Withholding...............................................15
4.7 Forfeiture for Dishonesty.....................................16
4.8 Amendment, Termination and Suspension.........................16
4.9 Privileges of Stock Ownership; Nondistributive Intent.........17
4.10 Effective Date of the Plan....................................17
4.11 Term of the Plan..............................................18
4.12 Governing Law.................................................18
<PAGE>
PREAMBLE
The UAC Holdings Corporation 1995 Stock Option Plan is hereby amended and
restated, effective as of the date Arcus Group, Inc. merges with and into Iron
Mountain Incorporated (the "Restatement Date"), and shall thereafter be known as
the Iron Mountain/ATSI 1995 Stock Option Plan (the "Plan"). As amended and
restated, the Plan shall govern all events, including without limitation the
exercise of an Option issued prior to the Restatement Date, that occur on or
after the Restatement Date. In the event Arcus Group, Inc. fails to merge with
and into Iron Mountain Incorporated, this amendment and restatement shall be
null and void and of no further force and effect.
I DEFINITIONS.
1.1 Definitions.
(a) "ATSI" shall mean Arcus Technology Services, Inc.
(b) "Award" shall mean a Nonqualified Stock Option or an Incentive
Stock Option granted under this Plan.
(c) "Award Agreement" shall mean a written agreement setting forth the
terms of an Award.
(d) "Award Date" shall mean the date upon which the Predecessor
Committee took the action granting an Award or such later date as was prescribed
by the Predecessor Committee.
(e) "Beneficiary" shall mean the person, persons, trust or trusts
entitled by will or the laws of descent and distribution to receive the benefits
specified under this Plan in the event of a Participant's death.
(f) "Board" shall mean the Board of Directors of Iron Mountain
Incorporated.
(g) "Change of Control" of Iron Mountain Incorporated shall be deemed
to have occurred if any person (as such term is used in Section 13(d) and
14(d)(2) of the Exchange Act) other than a trust related to an employee benefit
plan maintained by Iron Mountain Incorporated becomes the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of fifty percent (50%)
or more of Iron Mountain Incorporated's outstanding Common Stock, and within the
period of twenty-four (24) consecutive months immediately thereafter,
individuals other than (a) individuals who at the beginning of such period
constitute the entire Board of Directors or (b) individuals whose election, or
nomination for election by Iron Mountain Incorporated's stockholders, was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of the period, become a majority of the
Board.
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(h) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(i) "Commission" shall mean the Securities and Exchange Commission.
(j) "Committee" shall mean a committee or subcommittee of the Board
appointed by the Board and composed of at least two (2) members of the Board.
(k) "Common Stock" shall mean the common stock, par value $.01 per
share, of Iron Mountain Incorporated.
(l) "Director Participant" shall mean an Eligible Director of ATSI.
(m) "Eligible Director" shall mean a non-employee director of ATSI.
(n) "Eligible Employee" shall mean an officer or employee of ATSI or a
Subsidiary of ATSI other than one who is, or has been during the 365 days
immediately preceding the Award Date, a member of the Predecessor Committee.
(o) "Employee Participant" shall mean an Eligible Employee who has
been awarded an Award.
(p) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(q) "Fair Market Value" at any particular date shall be determined
according to the following rules: (i) if the Common Stock is not at the time
listed or admitted to trading on a stock exchange or the Nasdaq National Market,
the fair market value shall be the closing price of the Common Stock on the date
in question in the over-the-counter market, as such price is reported in a
publication of general circulation selected by the Board and regularly reporting
the price of the Common Stock in such market; provided, however, that if the
price of the Common Stock is not so reported, the fair market value shall be
determined in good faith by the Board, which may take into consideration (1) the
price paid for the Common Stock in the most recent trade of a substantial number
of shares known to the Board to have occurred at arm's length between willing
and knowledgeable investors, or (2) an appraisal by an independent party, or (3)
any other method of valuation undertaken in good faith by the Board, or some or
all of the above as the Board shall in its discretion elect; or (ii) if the
Common Stock is at the time listed or admitted to trading on any stock exchange
or the Nasdaq National Market, then the fair market value shall be the mean
between the lowest and highest reported sale prices (or the lowest reported bid
price and the highest reported asked price) of the Common Stock on the date in
question on the principal exchange on which the Common Stock is then listed or
admitted to trading. If no reported sale of Common Stock takes place on the date
in question on the principal exchange or the Nasdaq National Market, as the case
may be, then the reported closing sale price (or the reported closing asked
price) of the Common Stock on such prior date on the
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principal exchange or the Nasdaq National Market, as the case may be, shall be
determinative of fair market value.
(r) "Incentive Stock Option" shall mean an option that is designated
as an incentive stock option within the meaning of Section 422 of the Code, the
award of which contains such provisions as are necessary to comply with that
section.
(s) "Initial Agreement" shall have the meaning set forth in Section
3.3(d).
(t) "ISO" shall have the meaning set forth in Section 3.1.
(u) "Insiders" shall mean persons subject to Section 16 of the
Exchange Act.
(v) "Limited Change of Control" of Iron Mountain Incorporated shall be
deemed to have occurred if (i) following a merger or consolidation individuals
serving as members of the Board immediately prior to the merger or consolidation
no longer constitute a majority of the individuals serving as members of the
Board (or the board of directors of the surviving corporation) and (ii) the
voting securities of Iron Mountain Incorporated outstanding immediately prior to
the merger or consolidation fail to represent (either by remaining outstanding
or by being converted into voting securities of the surviving entity) more than
fifty percent (50%) of the voting power of the securities of Iron Mountain
Incorporated or the surviving entity outstanding immediately after the merger or
consolidation.
(w) "Nonqualified Stock Option" shall mean an option that is not
designated as an Incentive Stock Option.
(x) "Option" shall mean an option to purchase Common Stock under this
Plan. Each Option was heretofore designated by the Predecessor Committee as
either a Nonqualified Stock Option or an Incentive Stock Option.
(y) "Participant" shall mean an Employee Participant or Director
Participant or both, as the case may be.
(z) "Personal Representative" shall mean the person or persons who,
upon the disability or incompetence of a Participant, shall have acquired on
behalf of the Participant by legal proceeding or otherwise the power to exercise
the rights and receive the benefits specified in this Plan.
(aa) "Plan" shall mean the Iron Mountain/ATSI 1995 Stock Option Plan,
as amended from time to time.
(bb) "Predecessor Committee" shall mean the Committee, as defined in
the Predecessor Plan, that was in place prior to the Restatement Date.
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(cc) "Predecessor Plan" shall mean the UAC Holdings Corporation 1995
Stock Option Plan.
(dd) "Restatement Date" shall have the meaning set forth in the
Preamble.
(ee) "Securities Act" shall mean the Securities Act of 1933, as
amended from time to time.
(ff) "Subsidiary of ATSI" shall mean any corporation or other entity a
majority of whose outstanding voting stock or voting power is beneficially owned
directly or indirectly through an unbroken chain of ownership by ATSI.
(gg) "Subsidiary of Iron Mountain" shall mean any corporation or other
entity a majority of whose outstanding voting stock or voting power is
beneficially owned directly or indirectly through an unbroken chain of ownership
by Iron Mountain Incorporated.
(hh) "Termination for Cause" shall mean the termination of employment
or service caused by the individual's personal dishonesty, willful misconduct,
any breach of a fiduciary duty involving personal profit or intentional failure
to perform stated duties, or the conviction of the individual of a crime
involving moral turpitude or the entry of a plea of nolo contendere for such
crime (other than traffic violations or similar offenses).
(ii) "Termination for Special Cause" shall mean the termination of
employment or service caused by (i) the individual's commission of a willful
act, such as fraud, conversion, embezzlement, falsifying records or reports or a
similar act against Iron Mountain Incorporated or a Subsidiary of Iron Mountain,
intending to enrich himself at the expense of Iron Mountain Incorporated or a
Subsidiary of Iron Mountain, (ii) the individual having been guilty of willful
misconduct or gross negligence in carrying out his duties or (iii) the
individual having been convicted of, or entered a plea of guilty to, a felony
crime involving moral turpitude.
(jj) "Total Disability" shall mean a "permanent and total disability"
within the meaning of Section 22(e)(3) of the Code.
II THE PLAN.
2.1 Purpose.
The purpose of this Plan is to grant Awards to promote the success
initially of ATSI and any Subsidiary of ATSI and after the Restatement Date of
Iron Mountain Incorporated and any Subsidiary of Iron Mountain by providing an
additional means to attract and retain key personnel through added long-term
incentives for high levels of performance and for significant efforts to improve
the financial performance initially of ATSI and any Subsidiary
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of ATSI and after the Restatement Date of Iron Mountain Incorporated and any
Subsidiary of Iron Mountain.
2.2 Administration.
(a) This Plan shall be administered by the Board, or in the discretion
of the Board, the Committee. For so long as Section 16 of the Exchange Act is
applicable to Iron Mountain Incorporated, each member of the Committee shall be
a "non-employee director" or the equivalent within the meaning of Rule 16b-3
under the Exchange Act. In the event that a vacancy on the Committee occurs on
account of the resignation of a member or the removal of a member by vote of the
Board, a successor member shall be appointed by vote of the Board. All
references in the Plan to the "Committee" shall be understood to refer to the
Committee or the Board, whoever shall administer the Plan.
The Committee shall select one of its members as Chairman and shall
hold meetings at such times and places as it may determine. A majority of the
Committee shall constitute a quorum, and acts of the Committee at which a quorum
is present, or acts reduced to or approved in writing by all the members of the
Committee, shall be the valid acts of the Committee. The Committee shall have
the authority to adopt, amend and rescind such rules and regulations as, in its
opinion, may be advisable in the administration of the Plan.
With respect to Insiders, transactions under the Plan are intended to
comply with all applicable conditions of Rule 16b-3 or its successor under the
Exchange Act. To the extent any provision of the Plan or action by the Committee
fails to so comply, it shall be deemed to be modified so as to be in compliance
with such Rule, or, if such modification is not possible, it shall be deemed to
be null and void, to the extent permitted by law and deemed advisable by the
Committee.
The Plan shall be administered in such a manner as to permit Incentive
Stock Options to qualify as such under Section 422 of the Code.
(b) Subject to the express provisions of this Plan, the Committee
shall have the authority to construe and interpret this Plan and any agreements
defining the rights and obligations of Iron Mountain Incorporated and
Participants under this Plan, to further define the terms used in this Plan, to
describe, amend and rescind rules and regulations relating to the administration
of this Plan, to determine the duration and purposes of leaves of absence that
may be granted to Participants without constituting a termination of their
employment for purposes of this Plan and to make all other determinations
necessary or advisable for the administration of this Plan. The determinations
of the Committee on the foregoing matters shall be final and binding.
(c) Subject only to compliance with the express provisions hereof, any
action taken by, or inaction of, Iron Mountain Incorporated, any Subsidiary of
Iron Mountain Incorporated, the Board or the Committee relating to this Plan
shall be within the absolute
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discretion of that entity or body and shall be conclusive and binding upon all
persons. No member of the Board or the Committee and no officer of Iron Mountain
Incorporated or a Subsidiary of Iron Mountain shall be liable for any such
action or inaction of the entity or body, of another person or, except in
circumstances involving bad faith, of himself or herself.
(d) The Awards to Eligible Directors are intended to comply with Rule
16b-3 of the Exchange Act. Notwithstanding any term to the contrary appearing
herein, unless permitted by Rule 16b-3 of the Exchange Act, neither the
Committee nor the Board shall have the authority to determine the amount or
price of securities to be awarded and/or the timing of Awards to Eligible
Directors under this Plan, which terms shall be set forth herein. To the extent
any provision of the Plan or action by the Committee fails to comply with this
Section 2.2(d), such provision or action shall be null and void to the extent
permitted by law and deemed advisable by the Board.
2.3 Participation.
Awards may be granted to Eligible Employees and Eligible Directors.
Eligible Directors will not be granted Incentive Stock Options under this Plan.
2.4 Stock Subject to the Plan.
The stock to be offered under this Plan shall be Common Stock, from
either authorized but unissued shares or treasury shares. The aggregate amount
of Common Stock that may be issued or transferred pursuant to Awards granted
under this Plan shall not exceed 377,957 shares, subject to adjustment as set
forth in Section 4.2.
2.5 Grant of Awards.
(a) Any Award under the Plan shall be subject to the terms and
conditions set forth in the Plan and such other terms and conditions established
by the Committee as are not inconsistent with the purpose and provisions of the
Plan. The grant of an Award to an Eligible Employee is made on the Award Date.
(b) Awards to Eligible Directors will be set forth under the terms and
conditions of the Plan. Neither the Board nor the Committee shall have the
authority to determine the amount or price of Awards or affect the timing of any
Award granted to an Eligible Director. The grant of an Award to an Eligible
Director is made on the Award Date.
(c) No Awards may be made on or after the Restatement Date.
2.6 Exercise of Awards.
An Option shall be deemed to be exercised when the Chief Financial
Officer of Iron Mountain Incorporated or his designee receives written notice of
the exercise from the
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Participant stating the number of shares with respect to which the Option is
being exercised and accompanied by other payment or deemed payment of the
purchase price in a manner described in Section 3.1(a) (except to the extent
payment may be permitted to be made following delivery of written notice of
exercise in accordance with Section 3.1(b)). Such notice shall be delivered in
person or by facsimile transmission to the Chief Financial Officer of Iron
Mountain Incorporated or his designee or shall be sent by registered mail,
return receipt requested, to the Chief Financial Officer of Iron Mountain
Incorporated or his designee, in which case delivery shall be deemed made on the
date such notice is deposited in the mail. Notwithstanding any other provision
of this Plan, the Committee may impose, by rule and in Award Agreements, such
conditions upon the exercise of Awards (including, without limitation,
conditions limiting the time of exercise to specified periods) as may be
required, among other reasons, to satisfy applicable regulatory requirements,
including without limitation Rule 16b-3 (or any successor rule) promulgated by
the Commission pursuant to the Exchange Act.
III OPTIONS.
3.1 Payment Methods.
(a) The exercise price of any options exercised shall be paid in full
at the time of each purchase in one or a combination of the following methods:
(i) in cash or by check payable to the order of Iron Mountain Incorporated; (ii)
if authorized by the Committee or specified in the Option being exercised, by a
recourse promissory note made by the Participant in favor of Iron Mountain
Incorporated, upon the terms and conditions determined by the Committee and
secured by the Common Stock issuable upon exercise in compliance with applicable
law (including, without limitation, state corporate law and federal margin
requirements) and such other security as the Committee may require; (iii) the
exchange of Options having a value equal to such exercise price; or (iv) by
shares of Common Stock of Iron Mountain Incorporated already owned by the
Participant provided that such shares are fully vested and free of all liens,
claims and encumbrances of any kind; and provided, further, that the Participant
may not make payment in shares of Common Stock that he acquired upon the earlier
exercise of any option designated as an incentive stock option within the
meaning of Section 422 of the Code, whether granted pursuant to this Plan or
another plan of ATSI or any Subsidiary of ATSI or a plan of Iron Mountain
Incorporated or any Subsidiary of Iron Mountain (an "ISO"), unless he has held
the shares until at least two (2) years after the date the ISO was granted and
at least one (1) year after the date the ISO was exercised. If payment is made
in whole or in part in shares of Common Stock, then the Participant shall
deliver to Iron Mountain Incorporated certificates registered in his name
representing a number of shares of Common Stock legally and beneficially owned
by him, fully vested and free of all liens, claims and encumbrances of every
kind and having a Fair Market Value on the date of delivery that is not greater
than the exercise price, such certificates to be duly endorsed, or accompanied
by stock powers duly endorsed, by the record holder of the shares represented by
such certificates. If the exercise price exceeds the Fair Market Value of the
shares for which certificates are delivered, the Participant shall also deliver
cash or a check payable to the order of Iron Mountain Incorporated in an amount
equal to the amount of that excess, or, if the Award Agreement so provides, his
promissory note as
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described in Section 3.1(a)(ii); provided, however, that the Committee may in
its absolute discretion limit the Participant's ability to exercise an Option by
delivering shares. The value of any Option used to satisfy the exercise price of
another Option shall equal the Fair Market Value of the shares of Common Stock
on the date of exercise, minus the exercise price stated in the Option to be
exchanged.
(b) Alternatively, Options may be exercised by means of a "cashless
exercise" procedure in which a broker: (i) transmits the exercise price to Iron
Mountain Incorporated in cash or acceptable cash equivalents either (1) against
the Participant's notice of exercise and Iron Mountain Incorporated's
confirmation that it will deliver to the broker stock certificates issued in the
name of the broker for at least that number of shares having a Fair Market Value
equal to the exercise price or (2) as the proceeds of a margin loan to the
Participant; or (ii) agrees to pay the exercise price to Iron Mountain
Incorporated in cash or acceptable cash equivalents upon the broker's receipt
from Iron Mountain Incorporated of stock certificates issued in the name of the
broker for at least that number of shares having a Fair Market Value equal to
the exercise price.
(c) At the time specified in a Participant's notice of exercise, Iron
Mountain Incorporated shall, without issue or transfer tax to the Participant,
deliver to him at the main office of Iron Mountain Incorporated, or such other
place as shall be mutually acceptable, a certificate for the shares as to which
his Option is exercised. If the Participant fails to pay for or to accept
delivery of all or any part of the number of shares specified in his notice upon
tender of delivery thereof, his right to exercise the Option with respect to
those shares shall be terminated, unless Iron Mountain Incorporated otherwise
agrees.
3.2 Option Period.
Each Option, and all rights and obligations thereunder, shall expire
on such date as shall be determined by the Predecessor Committee but not later
than: (i) ten (10) years after the Award Date in the case of an Incentive Stock
Option; (ii) five (5) years after the Award Date in the case of an Incentive
Stock Option awarded to a person who, at the Award Date, owned shares of
outstanding common stock of ATSI possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of ATSI; and (iii) in all
other cases, twenty (20) years and one (1) day after the Award Date.
Notwithstanding this Section 3.2, each Option, and all rights and obligations
thereunder, shall be subject to earlier termination as hereinafter provided.
3.3 Exercise of Options.
(a) Except as otherwise provided in Section 4.4, an Option granted to
an Eligible Employee may become exercisable, in whole or in part, on the date or
dates specified in the Award Agreement. The Committee may, at any time after
grant of the Option to an Eligible Employee and from time to time, increase the
number of shares purchasable at any time so long as the total number of shares
subject to the Option is not increased. No Option shall be exercisable except in
respect of whole shares, and fractional share interests shall be disregarded.
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In the case of an Incentive Stock Option, not less than 100 shares of Common
Stock may be purchased at one time unless the total number at the time available
for purchase under the terms of the Option is less than 100 shares of Common
Stock.
(b) Nonqualified Stock Options granted under the Plan to an Eligible
Director are exercisable as of the Restatement Date; provided, however, that any
vesting schedule provided in an Award Agreement shall remain in full force and
effect. No Option shall be exercisable except in respect of whole shares, and
fractional share interests shall be disregarded.
(c) The Participant must notify Iron Mountain Incorporated promptly in
the event that he sells, transfers, exchanges or otherwise disposes of any
shares of Common Stock issued upon exercise of an Incentive Stock Option, before
the later of (i) the second anniversary of the date of grant of the Incentive
Stock Option and (ii) the first anniversary of the date the shares were issued
upon his exercise of the Incentive Stock Option.
(d) No Option shall be exercisable if at the time of exercise the
Participant is in breach of Section 1(g) of the Proprietary and Confidentiality
Agreement by and between the Participant and Arcus Data Security, Inc. (the
"Initial Agreement") or the provisions of any other non-competition agreement
between the Participant and Iron Mountain Incorporated or any Subsidiary of Iron
Mountain that is in addition to or in lieu of the Initial Agreement.
(e) In the event of a breach described in Section 3.3(d), the
Participant shall, in the case of an unvested Option as of the Restatement Date
that is later exercised, pay to Iron Mountain Incorporated with respect to such
exercised Option an amount equal to the excess of the Fair Market Value of the
Common Stock as of the date of exercise over the price paid for such stock;
provided, however, that the Committee in its discretion may release the
Participant from the requirement to make such payment if the Committee
determines that the Participant's acceptance of such employment or performance
of such services is not inimical to the best interests of Iron Mountain
Incorporated or a Subsidiary of Iron Mountain. Iron Mountain Incorporated or any
Subsidiary of Iron Mountain may deduct the amount of payment due under the
preceding sentence from any compensation or other amount payable to the
Participant.
3.4 Substituted Options.
With the consent of the Participant, the Committee shall have the
authority at any time and from time to time to terminate any outstanding Option
and grant in substitution for it a new Option covering the same number or a
different number of shares, provided that the exercise price under the new
Option shall be no less than the Fair Market Value of the Common Stock on the
date of grant of the new Option.
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IV OTHER PROVISIONS.
4.1 Rights of Eligible Employees, Eligible Directors, Participants and
Beneficiaries.
(a) Nothing contained in this Plan (or in Award Agreements or in any
other documents related to this Plan or to Awards) shall confer upon any
Eligible Employee or Employee Participant any right to continue in the employ of
Iron Mountain Incorporated or any Subsidiary of Iron Mountain or to construe any
contract or agreement of employment, or interfere in any way with the right of
Iron Mountain Incorporated or any Subsidiary of Iron Mountain to reduce such
person's compensation or to terminate the employment of such Eligible Employee
or Employee Participant, with or without cause, but nothing contained in this
Plan or any document related thereto shall affect any other contractual right of
Iron Mountain Incorporated or any Subsidiary of Iron Mountain or any Eligible
Employee or Employee Participant.
(b) Nothing contained in this Plan (or in Award Agreements or in any
other document related to this Plan or to Awards) shall confer upon any Eligible
Director or Director Participant any right to be, or continue as a member of the
board of directors of Iron Mountain Incorporated or any Subsidiary of Iron
Mountain or to construe any contract or agreement, or interfere in any way with
the right of Iron Mountain Incorporated or any Subsidiary of Iron Mountain to
reduce such person's fees or to terminate the service of such Eligible Director
or Director Participant, with or without cause, and nothing contained in this
Plan or any document related thereto shall affect any other contractual right of
Iron Mountain Incorporated or any Subsidiary of Iron Mountain or any Eligible
Director or Director Participant.
(c) Amounts payable pursuant to an Award shall be paid only to the
Participant or, in the event of the Participant's death, to the Participant's
Beneficiary or, in the event of the Participant's Total Disability, to the
Participant's Personal Representative or, if there is none, to the Participant.
Except as set forth in any Award Agreement, other than by will or the laws of
descent and distribution, no Option or other benefit payable under, or interest
in, this Plan or in any Award shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or charge and any
such attempted action shall be void. The Committee shall disregard any attempted
transfer, assignment or other alienation prohibited by the preceding sentence
and shall pay or deliver such cash or shares of Common Stock in accordance with
the provisions of this Plan.
(d) No Participant, Beneficiary or other person shall have any right,
title or interest in any fund or in any specific asset (including specific
shares of Common Stock) of Iron Mountain Incorporated or any Subsidiary of Iron
Mountain by reason of any Award granted hereunder. Neither the provisions of
this Plan (or of any documents related hereto), nor the creation or adoption of
this Plan, nor any action taken pursuant to the provisions of this Plan shall
create, or be construed to create, a trust of any kind or a fiduciary
relationship between Iron Mountain Incorporated or any Subsidiary of Iron
Mountain and any Participant, Beneficiary or other person. To the extent that a
Participant, Beneficiary or other person acquires a right to
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receive an Award hereunder, such right shall be no greater than the right of any
unsecured general creditor of Iron Mountain Incorporated or any Subsidiary of
Iron Mountain.
(e) A Participant shall have no rights as a stockholder with respect
to any shares covered by an Option until the date of issuance of a certificate
to him for the shares. No adjustment shall be made for dividends or other rights
for which the record date is earlier than the date the certificate is issued,
other than as required or permitted pursuant to Section 4.2.
4.2 Adjustments Upon Changes in Capitalization and Other Events.
In the event that the outstanding shares of Common Stock are hereafter
changed for a different number or kind of shares or other securities of Iron
Mountain Incorporated by reason of a reorganization, recapitalization, exchange
of shares, stock split, combination of shares or dividend payable in shares or
other securities, a corresponding adjustment shall be made by the Committee in
the number and kind of shares or other securities covered by outstanding Options
and for which Options may be granted under the Plan. Any such adjustment in
outstanding Options shall be made without change in the total price applicable
to the unexercised portion of the Option, but the price per share specified in
each Award Agreement shall be correspondingly adjusted; provided, however, that
no adjustment shall be made with respect to an Incentive Stock Option that would
constitute a modification as defined in Section 424 of the Code. Any such
adjustment made by the Committee shall be conclusive and binding upon all
affected persons, including Iron Mountain Incorporated and all Participants.
If while unexercised Options remain outstanding under the Plan Iron
Mountain Incorporated merges or consolidates with a wholly-owned subsidiary for
the purpose of reincorporating itself under the laws of another jurisdiction,
the Participants will be entitled to acquire shares of Common Stock of the
reincorporated entity upon the same terms and conditions as were in effect
immediately prior to such reincorporation (unless such reincorporation involves
a change in the number of shares or the capitalization of Iron Mountain
Incorporated, in which case proportional adjustments shall be made as provided
above) and the Plan, unless otherwise rescinded by the Board, will remain the
Plan of the reincorporated entity.
Except as otherwise provided in the preceding paragraph, if while
unexercised Options remain outstanding under the Plan Iron Mountain Incorporated
merges or consolidates with one or more corporations (whether or not the Iron
Mountain Incorporated is the surviving corporation), or is liquidated or sells
or otherwise disposes of substantially all of its assets to another entity, or
upon a Change of Control, then, except as otherwise specifically provided to the
contrary in any Participant's Award Agreement, the Committee, in its discretion,
shall amend the terms of all outstanding Options so that either:
(a) after the effective date of such merger, consolidation, sale or
Change of Control, as the case may be, each Participant shall be entitled, upon
exercise of an Option to receive in lieu of shares of Common Stock the number
and class of shares of such stock or other securities to which he would have
been entitled pursuant to the terms of the merger,
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consolidation, sale or Change of Control if he had been the holder of record of
the number of shares of Common Stock as to which the Option is being exercised,
or shall be entitled to receive from the successor entity a new stock option of
comparable value; or
(b) all outstanding Options shall be cancelled as of the effective
date of any such merger, consolidation, liquidation, sale or Change of Control,
provided that each Participant shall have the right to exercise his Option
according to its terms during the period of twenty (20) days ending on the day
preceding the effective date of such merger, consolidation, liquidation, sale or
Change of Control; and in addition to the foregoing, the Committee may in its
discretion amend the terms of an Option by cancelling some or all of the
restrictions on its exercise, to permit its exercise pursuant to this paragraph
(b) to a greater extent than that permitted on its existing terms; or
(c) all outstanding Options shall be cancelled as of the effective
date of any such merger, consolidation, liquidation, sale or Change of Control
in exchange for consideration in cash or in kind, which consideration in both
cases shall be equal in value to the value of those shares of stock or other
securities the Participant would have received had the Option been exercised (to
the extent then exercisable) and no disposition of the shares acquired upon such
exercise had been made prior to such merger, consolidation, liquidation, sale or
Change in Control, less the exercise price therefor. Upon receipt of such
consideration by the Participant, his or her Option shall immediately terminate
and be of no further force and effect. The value of the stock or other
securities the Participant would have received if the Option had been exercised
shall be determined in good faith by the Committee, and in the case of shares of
the Common Stock of Iron Mountain Incorporated shall be Fair Market Value.
Notwithstanding any provision of this Section 4.2 to the contrary, if
while unexercised Options remain outstanding under the Plan Iron Mountain
Incorporated or a wholly-owned subsidiary of Iron Mountain Incorporated merges
or consolidates with one or more corporations (whether or not Iron Mountain
Incorporated is the surviving corporation) in any transaction or series of
related transactions and there is a Limited Change of Control, then the terms of
all outstanding Options shall be amended so that any vesting restrictions on the
exercise of the Option shall be cancelled as of the effective date of the merger
or consolidation and, if Iron Mountain Incorporated is not the surviving
corporation, after the effective date of such merger or consolidation each
Participant shall be entitled, upon exercise of an Option, to receive in lieu of
shares of Common Stock the number and class of shares of such stock or other
securities and such other consideration to which he would have been entitled as
a result of the terms of the merger or consolidation if he had been the holder
of record of the number of shares of Common Stock as to which the Option is
being exercised.
Except as expressly provided to the contrary in this Section 4.2, the
issuance by Iron Mountain Incorporated of shares of stock of any class for cash
or property or for services, either upon direct sale or upon the exercise of
rights or warrants, or upon conversion of shares or obligations of Iron Mountain
Incorporated convertible into such shares or other securities, shall
12
<PAGE>
not affect the number, class or price of shares of Common Stock then subject to
outstanding Options.
In adjusting Awards to reflect the changes described in this Section
4.2, or in determining that no such adjustment is necessary, the Committee may
rely upon the advice of independent counsel and accountants of Iron Mountain
Incorporated, and the determination of the Committee shall be conclusive. No
fractional shares of stock shall be issued under this Plan on account of any
such adjustment.
In no event will the merger of Arcus Group, Inc. with and into Iron
Mountain Incorporated be treated as an event described in this Section 4.2.
4.3 Termination of Employment.
(a) If the Employee Participant's employment by Iron Mountain
Incorporated or a Subsidiary of Iron Mountain terminates for any reason other
than death or Total Disability, the Employee Participant shall have, subject to
earlier termination pursuant to or as contemplated by Section 3.2, such period
as is provided in the Award Agreements from the date of termination of
employment to exercise any Option to the extent it shall have become vested on
that date, and any Option not vested on that date shall terminate.
Notwithstanding the preceding sentence, in the event the Employee Participant is
Terminated for Cause as determined by the Committee, in its sole discretion, at
the option of the Committee all Options shall lapse and be forfeited immediately
upon such termination of employment.
(b) If the Director Participant's service with Iron Mountain
Incorporated or a Subsidiary of Iron Mountain terminates for any reason other
than death or Total Disability, the Director Participant shall have, subject to
earlier termination pursuant to or as contemplated by Section 3.2, ninety (90)
days from the date of termination of service to exercise any Option.
Notwithstanding the preceding sentence, in the event the Director Participant is
Terminated for Cause, at the option of the Committee all Options shall lapse and
be forfeited immediately upon such termination of service.
(c) If the Employee Participant's employment with Iron Mountain
Incorporated or a Subsidiary of Iron Mountain terminates as result of Total
Disability, the Employee Participant or the Employee Participant's Personal
Representative, as the case may be, shall have, subject to earlier termination
pursuant to or as contemplated by Section 3.2, one (1) year or such shorter
period as is provided in the Award Agreements from the date of termination of
employment to exercise any Option to the extent it shall have become vested by
such date of termination, and any Option not vested on such date shall
terminate.
(d) If the Director Participant's service with Iron Mountain
Incorporated or a Subsidiary of Iron Mountain terminates as a result of Total
Disability, the Director Participant or the Director Participant's Personal
Representative, as the case may be, shall have, subject to
13
<PAGE>
earlier termination pursuant to or as contemplated by Section 3.2, one (1) year
from the date of termination of service to exercise any Option.
(e) If the Employee Participant's employment by Iron Mountain
Incorporated or a Subsidiary of Iron Mountain terminates as a result of death
while employed or during the period referred to in subsection (a) above, the
Employee Participant's Option shall be exercisable by the Employee Participant's
Beneficiary, subject to earlier termination pursuant to or as contemplated by
Section 3.2, during the one (1) year period or such shorter period as is
provided in the Award Agreements following the Employee Participant's death, as
to all or any part of the shares of Common Stock covered thereby including all
shares covered by the nonvested portion of such Option (except as otherwise
provided in the Award Agreement).
(f) If the Director Participant's service with Iron Mountain
Incorporated or a Subsidiary of Iron Mountain terminates as a result of death
while the Director Participant is still a member of the Board or during the
period referred to in (b) above, the Director Participant's Option shall be
exercisable by the Director Participant's Beneficiary, subject to earlier
termination pursuant to or as contemplated by Section 3.2, during the one (1)
year period following the Director Participant's death, as to all or any part of
the shares of Common Stock covered thereby.
(g) In the event of termination of employment with Iron Mountain
Incorporated or a Subsidiary of Iron Mountain for any reason, other than
Termination for Cause, the Committee may, in its discretion, increase the
portion of the Employee Participant's Award available to the Employee
Participant, or the Employee Participant's Beneficiary or Personal
Representative, as the case may be, upon such terms as the Committee shall
determine.
(h) If an entity ceases to be a Subsidiary of Iron Mountain, such
event shall be deemed for purposes of this Section 4.3 to be a termination of
employment of each employee of that entity who does not transfer employment to
Iron Mountain Incorporated or a Subsidiary of Iron Mountain.
4.4 Acceleration of Awards.
All Options granted under the Plan to an Eligible Employee are
exercisable as of the Restatement Date; provided, however, that any vesting
schedule provided in an Award Agreement shall remain in full force and effect;
and provided, further, that in the event of a termination of employment (other
than a Termination for Special Cause) by Iron Mountain Incorporated or a
Subsidiary of Iron Mountain, there shall be immediate vesting of any unvested
portion thereof. Acceleration of Awards shall comply with applicable regulatory
requirements, including without limitation Rule 16b-3 promulgated by the
Commission pursuant to the Exchange Act and Section 422 of the Code.
14
<PAGE>
4.5 Government Regulations.
This Plan, the granting of Awards under this Plan and the issuance or
transfer of shares of Common Stock (and/or the payment of money) pursuant
thereto are subject to all applicable federal and state laws, rules and
regulations and to such approvals by any regulatory or governmental agency
(including without limitation "no action" positions of the Commission) that may,
in the opinion of counsel for Iron Mountain Incorporated, be necessary or
advisable in connection therewith. Without limiting the generality of the
foregoing, Iron Mountain Incorporated shall not be required to sell or issue any
shares upon the exercise of any Option if the issuance of such shares will
result in a violation by the Participant or Iron Mountain Incorporated of any
provisions of any law, statute or regulation of any governmental authority.
Specifically, in connection with the Securities Act, upon the exercise of any
Option Iron Mountain Incorporated shall not be required to issue shares unless
the Board has received evidence satisfactory to it to the effect that the holder
of the Option will not transfer such shares except pursuant to a registration
statement in effect under the Securities Act or unless an opinion of counsel
satisfactory to Iron Mountain Incorporated has been received by Iron Mountain
Incorporated to the effect that such registration is not required. Any
determination in this connection by the Board shall be conclusive. Iron Mountain
Incorporated shall not be obligated to take any other affirmative action in
order to cause the exercise of an Option to comply with any law or regulations
of any governmental authority, including, without limitation, the Securities Act
or applicable state securities laws.
4.6 Tax Withholding.
(a) Upon the disposition by an Employee Participant or other person of
shares of Common Stock acquired pursuant to the exercise of an Incentive Stock
Option prior to satisfaction of the holding period requirements of Section 422
of the Code, or upon the exercise of a Nonqualified Stock Option, Iron Mountain
Incorporated shall have the right to (i) require such Employee Participant or
such other person to pay by cash or check payable to Iron Mountain Incorporated,
the amount of any taxes that Iron Mountain Incorporated or any Subsidiary of
Iron Mountain may be required to withhold with respect to such transactions or
(ii) deduct from amounts paid in cash the amount of any taxes that Iron Mountain
Incorporated may be required to withhold with respect to such cash amounts.
(b) The Committee may, in its discretion, permit a loan from Iron
Mountain Incorporated or any Subsidiary of Iron Mountain to an Employee
Participant in the amount of any taxes that Iron Mountain Incorporated or any
Subsidiary of Iron Mountain may be required to withhold with respect to shares
of Common Stock received pursuant to a transaction described in subsection (a)
above. Such a loan will be for a term, at a rate of interest and pursuant to
such other terms and rules as the Committee may establish.
(c) The Committee may in its discretion also permit any Participant's
withholding obligation to be paid in whole or in part in the form of shares of
Common Stock, by withholding from the shares to be issued or by accepting
delivery from the Participant of shares
15
<PAGE>
already owned by him. For this purpose, the value of Common Stock shall be its
Fair Market Value. A Participant may not make any such payment in the form of
shares of Common Stock acquired upon the exercise of an ISO until the shares
have been held by him for at least two (2) years after the date the ISO was
granted and at least one (1) year after the date the ISO was exercised. If
payment of withholding taxes is made in whole or in part in shares of Common
Stock, the Participant shall deliver to Iron Mountain Incorporated certificates
registered in his name representing shares of Common Stock legally and
beneficially owned by him, fully vested and free of all liens, claims and
encumbrances of every kind, duly endorsed or accompanied by stock powers duly
endorsed by the record holder of the shares represented by such certificates. If
the Participant is subject to Section 16(a) of the Exchange Act, his ability to
pay his withholding obligation in the form of shares of Common Stock shall be
subject to such additional restrictions as may be necessary to avoid any
transaction that might give rise to liability under Section 16(b) of the
Exchange Act.
(d) The proceeds from the sale of shares pursuant to Options shall
constitute general funds of Iron Mountain Incorporated.
4.7 Forfeiture for Dishonesty. Notwithstanding anything to the contrary in
the Plan, if the Board determines, after full consideration of the facts
presented on behalf of both Iron Mountain Incorporated and a Participant, that
the Participant has been engaged in fraud, embezzlement, theft, commission of a
felony or proven dishonesty in the course of his employment by Iron Mountain
Incorporated, which damaged Iron Mountain Incorporated, or has disclosed trade
secrets or other proprietary information of Iron Mountain Incorporated, (a) the
Participant shall forfeit all unexercised Options and all exercised Options
under which Iron Mountain Incorporated has not yet delivered the certificates,
and (b) Iron Mountain Incorporated shall have the right to repurchase all or any
part of the shares of Common Stock acquired by the Participant upon the earlier
exercise of any Option, at a price equal to the amount paid to Iron Mountain
Incorporated upon such exercise, increased by an amount equal to the interest
that would have accrued in the period between the date of exercise of the Option
and the date of such repurchase upon a debt in the amount of the exercise price,
at the prime rate(s) announced from time to time during such period in the
Federal Reserve Statistical Release Selected Interest Rates. The decision of the
Board as to the cause of a Participant's discharge and the damage done to Iron
Mountain Incorporated shall be final, binding and conclusive. No decision of the
Board, however, shall affect in any manner the finality of the discharge of a
Participant by Iron Mountain Incorporated. For purposes of this Section 4.7,
references to Iron Mountain Incorporated shall, unless the context otherwise
requires, include Iron Mountain Incorporated and any Subsidiary of Iron
Mountain.
4.8 Amendment, Termination and Suspension.
(a) The Board may, at any time, terminate or, from time to time,
amend, modify or suspend this Plan (or any part hereof). The Committee may, with
the consent of the Employee Participant, make such modifications of the terms
and conditions of such Employee Participant's Award as it shall deem advisable.
The Committee, with the consent of the
16
<PAGE>
Employee Participant, may also amend the terms of any Option to provide that the
exercise price of the shares remaining subject to the original Award shall be
reestablished at a price not less than 100% of the Fair Market Value of the
Common Stock on the effective date of the amendment. No modification of any
other term or provision of any Option that is amended in accordance with the
foregoing shall be required, although the Committee may, in its discretion, make
such further modifications of any such Option as are not inconsistent with or
prohibited by the Plan and not adverse to the interests of the Employee
Participants. No Awards may be granted during any suspension of this Plan or
after its termination.
(b) If an amendment would (i) materially increase the benefits
accruing to Participants within the meaning of Rule 16b-3 under the Exchange Act
or any successor thereto at a time when Iron Mountain Incorporated is subject to
Section 13(a) or 15(d) of the Exchange Act, (ii) increase the aggregate number
of shares that may be issued under this Plan at a time when Iron Mountain
Incorporated is subject to Section 13(a) or 15(d) of the Exchange Act or (iii)
modify the requirements of eligibility for participation in this Plan, the
amendment shall be approved by the Board and by a majority of the stockholders
of Iron Mountain Incorporated.
(c) In the case of Awards issued before the effective date of any
amendment, suspension or termination of this Plan, such amendment, suspension or
termination of the Plan shall not, without specific action of the Committee and
the consent of the Participant, in any way modify, amend, alter or impair any
rights or obligations under any Award previously granted under the Plan.
(d) Notwithstanding anything herein to the contrary, the Predecessor
Committee has determined that the amendments to this Plan as reflected herein
and effective as of the Restatement Date shall apply to any Award granted under
the Plan prior to its Restatement Date. The Committee may, in its discretion,
determine that a restated Award Agreement reflecting the changes to an Option
resulting from the amendment and restatement of this Plan or the merger of Arcus
Group, Inc. with and into Iron Mountain Incorporated be issued. Any such
restated Award Agreement shall supersede any existing Award Agreement and shall
recognize that the terms and conditions of the restated Award Agreement and this
Plan, as amended and restated, shall govern all events on or after the
Restatement Date.
4.9 Privileges of Stock Ownership; Nondistributive Intent.
A Participant shall not be entitled to the privilege of stock
ownership as to any shares of Common Stock not actually issued to him. No
adjustment shall be made for dividends or other rights for which the record date
is earlier than the date the certificate is issued, other than as required or
permitted pursuant to Section 4.2.
4.10 Effective Date of the Plan.
This Plan was originally effective November 1, 1995.
17
<PAGE>
4.11 Term of the Plan.
Unless previously terminated by the Board, this Plan shall terminate
at the close of business on December 31, 2005, but such termination shall not
affect any Award theretofore granted, without the consent of the Participant.
4.12 Governing Law.
This Plan and the documents evidencing Awards and all other related
documents shall be governed by, and construed in accordance with, the laws of
the State of Delaware, without regard to the principles of conflicts of law. If
any provision shall be held by a court of competent jurisdiction to be invalid
and unenforceable, the remaining provisions of this Plan shall continue to be
fully effective.
18
Exhibit 12
IRON MOUNTAIN INCORPORATED
STATEMENT OF THE CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Earnings:
Income (loss) from operations before provision
(benefit) for income taxes ..................... $ 3,656 $ 3,241 $ 1,945 $ 1,792 $ (4,601)
Add: Fixed charges ............................... 12,430 13,472 17,058 21,939 37,488
-------- -------- -------- -------- --------
$ 16,086 $ 16,713 $ 19,003 $ 23,731 $ 32,967
======== ======== ======== ======== ========
Fixed charges:
Interest expense ................................. $ 8,203 $ 8,954 $ 11,838 $ 14,901 $ 27,712
Interest portion of rent expense ................. 4,227 4,518 5,220 7,038 9,777
-------- -------- -------- -------- --------
$ 12,430 $ 13,472 $ 17,058 $ 21,939 $ 37,488
======== ======== ======== ======== ========
Ratio of earnings to fixed charges ................ 1.3x 1.2x 1.1x 1.1x 0.9x
======== ======== ======== ======== ========
</TABLE>
For 1997, the Company would have needed to generate additional income from
operations before provision for income taxes of $4,601 to cover its fixed
charges of $37,488.
Exhibit 21
Jurisdiction
Subsidiaries of Organization
------------ ---------------
Iron Mountain Incorporated DE
Iron Mountain Records Management, Inc. DE
Criterion Atlantic Property, Inc. DE
IM San Diego, Inc. DE
Hollywood Property, Inc. CA
Iron Mountain Consulting Services, Inc. DE
Iron Mountain Data Protection Services, Inc. MA
Iron Mountain Records Management of Maryland, Inc. DE
Iron Mountain Records Management of Ohio, Inc. DE
Iron Mountain Records Management of Missouri, LLC DE
Iron Mountain Records Management of Michigan, Inc. DE
Iron Mountain Records Management of Florida, Inc. DE
Iron Mountain Records Management of San Antonio, Inc. DE
Iron Mountain Records Management of San Antonio-FP,
Inc. DE
Iron Mountain/Critical Files, Inc. DE
Iron Mountain/Safesite, Inc. DE
IM-AEI Acquisition Corp. DE
Archives Express, Incorporated UT
IM Billerica, Inc. MA
Iron Mountain Safe Deposit Corporation MI
IM Earhart, Inc. DE
HIMSCORP of Philadelphia, Inc. DE
Recordkeepers, Inc. MD
HIMSCORP of Pittsburgh, Inc. DE
HIMSCORP of Cleveland, Inc. DE
HIMSCORP of New Orleans, Inc. DE
HIMSCORP of Portland, Inc. DE
HIMSCORP of San Diego, Inc. DE
<PAGE>
Jurisdiction
Subsidiaries of Organization
------------ ---------------
HIMSCORP of Detroit, Inc. DE
HIMSCORP of Los Angeles, Inc. DE
HIMSCORP of Houston, Inc. DE
Copyright, Inc. DE
Arcus, Inc. DE
Arcus Data Security, Inc. DE
Towler Data Services, Inc. OK
Arcus Data Security, Ltd. UK
Arcus Staffing Resources, Inc. DE
Wolf Advisory International, Inc. FL
Wolf Advisory International, Ltd. PA
Trinity Holdings Corp. CA
Exhibit 23.1
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our
reports dated February 20, 1998 included in this Form 8-K and to the
incorporation by reference in the registration statement on Form S-3 (File No.
333-44185), the registration statement on Form S-4 (File No. 333-44187), and the
registration statements on Form S-8 (File Nos. 333-24803, 333-33191 and
333-43901) and to all references to our Firm included in the registration
statement on Form S-3 (File No. 333-44185).
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 6, 1998
Exhibit 23.2
Consent of Independent Public Accountants
We consent to the reference to our firm under the caption "Experts" in the
Prospectus Supplement to the Registration Statements on Form S-3 (File No.
333-44185), Form S-4 (File No. 333-44187), and Form S-8 (File No. 333-24803,
No. 333-33191 and No. 333-43901) of Iron Mountain Incorporated and to the
incorporation by reference therein of our report dated February 23, 1998, with
respect to the consolidated financial statements of Arcus Technology Services,
Inc. for the year ended December 31, 1997, included in this Current Report on
Form 8-K filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Dallas, Texas
March 4, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND THE AUDITED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.000
<CASH> 24,510
<SECURITIES> 0
<RECEIVABLES> 42,474
<ALLOWANCES> (1,929)
<INVENTORY> 0
<CURRENT-ASSETS> 81,927
<PP&E> 183,898
<DEPRECIATION> (61,276)
<TOTAL-ASSETS> 636,786
<CURRENT-LIABILITIES> 55,753
<BONDS> 424,498
0
0
<COMMON> 135
<OTHER-SE> 137,598
<TOTAL-LIABILITY-AND-EQUITY> 636,786
<SALES> 208,765
<TOTAL-REVENUES> 208,765
<CGS> 106,879
<TOTAL-COSTS> 185,654
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,712
<INCOME-PRETAX> (4,601)
<INCOME-TAX> (80)
<INCOME-CONTINUING> (4,521)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,521)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
