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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 0-27584
IRON MOUNTAIN INCORPORATED
(Exact name of registrant as specified in its charter)
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Delaware 04-3107342
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
745 Atlantic Avenue, Boston, Massachusetts 02111
(Address of principal executive offices) (Zip Code)
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617-357-4455
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Title of Each Class Name of Exchange on Which Registered
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Not applicable Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share ("Common Stock")
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
As of March 1, 1998, the aggregate market value of the Common
Stock of the registrant held by non-affiliates of the registrant was
$270,896,704 based on the closing price on the Nasdaq Stock Market's National
Market (the "Nasdaq National Market") on such date.
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Number of shares of the registrant's Common Stock at March 1, 1998: 14,935,507
Number of shares of the registrant's Nonvoting Common Stock at March 1, 1998: 0
</TABLE>
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IRON MOUNTAIN INCORPORATED
1997 FORM 10-K ANNUAL REPORT
Table of Contents
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PART I Page
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Item 1. Business .................................................................... 1
Item 2. Properties .................................................................. 17
Item 3. Legal Proceedings ........................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders ......................... 18
PART II
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Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters .... 19
Item 6. Selected Consolidated Financial and Operating Information ................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ...................................................... 22
Item 8. Financial Statements and Supplementary Data ................................. 31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ....................................................... 54
PART III
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Item 10. Directors and Executive Officers of the Registrant .......................... 55
Item 11. Executive Compensation ...................................................... 59
Item 12. Security Ownership of Certain Beneficial Owners and Management .............. 62
Item 13. Certain Relationships and Related Transactions .............................. 64
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............. 65
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CERTAIN IMPORTANT FACTORS
This Annual Report on Form 10-K contains statements which constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear in a number of places in
this Annual Report on Form 10-K and include statements regarding the
strategies, beliefs or current expectations of the Company and its management.
Readers are cautioned that any such forward looking statements are not
guarantees of future performance and involve risks and uncertainties, which
could cause actual results to differ materially from those in the forward
looking statements. Such factors include but are not limited to: (i) the
Company's ability or inability to complete acquisitions on satisfactory terms
and to integrate acquired companies efficiently, (ii) the cost and availability
of financing for contemplated growth, (iii) the cost and availability of
appropriate storage facilities, (iv) the possibility of a natural disaster or
other casualty disrupting operations to an extent greater than the Company is
insured for, (v) the demand and price for the Company's services, relative to
the cost of providing such services, or (vi) other trends in competitive or
economic conditions affecting the Company's financial condition or results of
operations not presently contemplated. The accompanying information contained
in this Annual Report on Form 10-K, including under the headings "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," identifies other important factors that could cause such
differences. 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.
ii
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PART I
Item 1. Business.
(a) Development of Business.
Iron Mountain Incorporated ("Iron Mountain" or the "Company") is America's
largest records management company, as measured by its revenues. The Company is
a national, full-service provider of records management and related services,
enabling customers to outsource records management functions. Iron Mountain has
a diversified customer base, which includes more than half of the Fortune 500
and numerous commercial, legal, banking, healthcare, accounting, insurance,
entertainment and government organizations. The Company provides storage for
all major media, including paper (the dominant form of records storage),
computer disks and tapes, microfilm and microfiche, master audio and video
tapes, film and optical disks, X-rays and blueprints. Iron Mountain's principal
services provided to its storage customers include courier pick-up and
delivery, filing, retrieval and destruction of records, database management,
customized reporting and disaster recovery support. The Company also sells
storage materials and provides information technology ("IT") staffing,
consulting, facilities management and other outsourcing services.
The completion of the Company's acquisitions consummated since January 1,
1997 (the "Recent Acquisitions") has significantly increased the Company's
presence in off-site data security services (the management of electronic
records) and medical records management, and, as a result, management believes
that the Company is the industry leader in both of these specialized records
management activities. The Recent Acquisitions have also expanded the ancillary
services offered by the Company to include IT staffing and enhanced its range
of facilities management services. As of December 31, 1997, giving effect to
the Recent Acquisitions, Iron Mountain managed over 50,000 customer accounts
and operated 223 records management facilities in 54 markets.
(b) Description of Business.
The Records Management Industry
Overview
The records management industry stores information in a variety of media
formats, which can broadly be divided into paper and electronic records, and
provides a wide range of services related to the records stored. Paper records
are defined to include paper documents, as well as all other non-electronic
media such as microfilm and microfiche, master audio and video tapes, film,
X-rays and blue prints. Based on publicly available information, organizations
in the United States generate an estimated four trillion documents each year,
many of which must be retained and available for reference for many years.
Electronic records primarily include computer disks and tapes and optical
disks.
Paper Records
Paper records may be broadly divided into two categories: active and
inactive. Active records relate to ongoing and recently completed activities or
contain information that is frequently referenced. Active records are usually
stored and managed on-site by the organization which originated them to ensure
ready availability. Inactive paper records are the principal focus of the
records management industry. Inactive records consist of those records which
are not needed for immediate access but which must be retained for legal
reasons or regulatory compliance or for occasional reference in support of
ongoing business operations. Based on industry studies, the Company believes
that inactive records make up approximately 80% of all paper records.
Medical records generated by healthcare providers are a large and growing
segment of the paper records market. Management believes that a substantial
portion of the medical records market is not yet vended, and that cost cutting
measures being adopted in the medical field have caused healthcare providers to
consider savings initiatives such as outsourcing medical records management.
1
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Electronic Records
Electronic records management focuses on the storage of and related
services for computer media that is either archival in nature or a back-up copy
of recently processed data. Archival data is generally not needed for access
but is retained for legal, regulatory and compliance reasons. Back-up data
exists because of the need of many businesses to maintain back-up copies of
data in order to be able to operate in the event of a system failure, casualty
loss or other disaster. It is standard operating procedure for data processing
groups to rotate back-up tapes to off-site locations on a regular basis and to
require multiple copies of such information at multiple sites.
Growth of Market
The Company believes that the volume of stored paper and electronic
records will continue to increase for a number of reasons, including: (i) the
rapid growth of inexpensive document producing technologies such as facsimile
and desktop printing; (ii) the continued proliferation of data processing
technologies such as personal computers and networks; (iii) increased
regulatory requirements; (iv) concerns over possible future litigation and the
resulting increases in volume and holding periods of documentation; (v) the
high cost of reviewing records and deciding whether to retain or destroy them;
(vi) the failure of many entities to adopt or follow policies on records
destruction; and (vii) audit requirements to keep backup copies of certain
records in off-site locations. Despite the growth of new "paperless"
technologies, such as the Internet and e-mail, management believes that stored
information remains predominantly paper-based and that such technologies have
promoted the creation of hard copies of such electronic information. In
addition, management believes that the proliferation of digital information
technologies and distributed data networks has led to increased demand for data
security services, such as the storage and off-site rotation of back-up copies
of magnetic media, and outsourcing support services that address the needs of
data center operations and disaster recovery programs.
Highly Fragmented Industry
Most records management companies serve a single local market, and are
often either owner-operated or ancillary to another business, such as a moving
company. According to Professional Records and Information Services Management
("PRISM"), a trade group of approximately 450 members, as of January 1994 (the
latest date for which such information is available), approximately 2,600 firms
offered records storage and management services in the United States. The
Company believes that there are only three national providers in the industry
(including the Company) and that the rest are regional or, in most instances,
single-city operators. In contrast, due to the specialized nature of the
services provided, the provision of data security services, medical records
management and vital records protection services have higher market
concentrations. The Company has made, and intends to make, acquisitions to
increase its presence in these markets.
Industry Consolidation
Over the past several years, there has been consolidation in the records
management industry. The Company believes that this trend will continue because
of the industry's capital requirements for growth, opportunities for large
records management providers to achieve economies of scale and customer demands
for more sophisticated technology-based solutions. In particular, the records
management business requires significant up-front capital investment for real
estate, racking systems and management information technology. Economies of
scale available in these areas can reward larger initial capital investments by
reducing per unit storage costs. However, such economies of scale are only
realized once a facility fills available capacity. Thus, larger companies with
both access to capital and the ability to quickly fill a new facility enjoy a
competitive cost advantage, thereby putting pressures on smaller competitors.
Management believes that the consolidation trend in the industry is also
due to, and will continue as a result of, the preference of certain large
organizations to contract with one vendor in multiple cities for multiple
services. In particular, customers increasingly demand a single, large,
sophisticated company to handle all of their important medical, electronic and
vital records needs. Large, national companies are better able to satisfy these
demands than smaller competitors.
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Financial Characteristics of Iron Mountain's Business
Iron Mountain's records management business has the following financial
characteristics:
[bullet] Recurring Revenues. Iron Mountain derives a majority of its revenues
from fixed periodic (usually monthly) fees charged to customers based
on the volume of records stored. Revenues from these fixed periodic
fees have grown for 36 consecutive quarters and have represented
approximately 60% of the Company's total revenues in each of the last
five years. Once a customer places paper records in storage with the
Company and until those records are destroyed or permanently removed
(for which the Company typically receives a service fee), the Company
receives recurring payments for storage fees without incurring
additional labor or marketing expenses or significant capital costs.
Similarly, contracts for the storage of electronic media consist
primarily of fixed monthly payments. The stable and growing storage
base also provides the foundation for increases in revenues and
earnings before interest, taxes, depreciation, amortization and
extraordinary items ("EBITDA") from related service activities and
sales of storage materials.
[bullet] Historically Non-Cyclical Business. Iron Mountain has not experienced a
reduction of its business as a result of past general economic
downturns, although there can be no assurance that this would be the
case in the future. Management believes that the outsourcing of records
management may accelerate during economic downturns as companies focus
on reducing costs through outsourcing non-core operating functions. In
addition, management believes that companies that have outsourced
records management are less likely during economic downturns to incur
the move-out costs and other expenses associated with switching vendors
or moving records management in-house.
[bullet] Inherent Growth from Existing Paper Records Customers. The Company's
paper records customers have on average generated additional Cartons(1)
at a faster rate than stored Cartons have been destroyed or permanently
removed. From January 1, 1993 through December 31, 1997, Net Carton
Growth From Existing Customers(2) increased at an average annual rate
of approximately 6%. The Company believes the consistent growth of its
paper storage revenues is the result of a number of factors, including:
(i) the trend toward increased records retention; (ii) customer
satisfaction with the Company's services; and (iii) the costs and
inconvenience of moving storage operations in-house or to another
provider of records management services.
[bullet] Diversified and Stable Customer Base. As of March 1, 1998, the Company
had over 50,000 customer accounts in a variety of industries. The
Company currently provides services to more than half of the Fortune
500 and numerous commercial, legal, banking, healthcare, accounting,
insurance, entertainment and government organizations. After giving
effect to the Recent Acquisitions, no customer accounted for more than
3% of revenues for the year ended December 31, 1997. From January 1,
1993 through December 31, 1997, average annual permanent removals of
Cartons represented only approximately 4% of total Cartons stored.
[bullet] Capital Expenditures Related Primarily to Growth. The Company's
business requires limited annual maintenance capital expenditures.
Maintenance capital expenditures were $0.9 million, $1.1 million and
$1.2 million in 1995, 1996 and 1997, respectively. From 1993 to 1997,
over 90% of the Company's aggregate capital expenditures were
growth-related investments, primarily in racking systems, management
information systems, new buildings and improvements to existing
facilities. These growth-related capital expenditures are primarily
discretionary and create additional capacity for increases in revenues
and EBITDA.
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(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, described below.
(2) The term "Net Carton Growth From Existing Customers" is defined as the
increase in net Cartons attributable to existing customers without giving
effect to the loss of approximately 1.0 million Cartons in fires attributed
to arson in March 1997 in two of the Company's facilities in South
Brunswick Township, New Jersey. See "Item 3. Legal Proceedings."
3
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Recent and Pending Acquisitions
As part of its growth strategy, since mid-1994, Iron Mountain has acquired
46 records management businesses, including 16 in 1996 and the 23 Recent
Acquisitions. In addition, Iron Mountain has entered into a definitive
agreement to acquire InterMation, Inc. (the "Pending Acquisition").
The total purchase price of the 1996 acquisitions was $69.0 million (not
including aggregate contingent payments of up to $4.0 million based upon the
achievement of certain revenue targets), and the 1996 acquisitions represented,
in the aggregate, total annual revenues of approximately $33 million
(calculated in each case by reference to the revenues of each such acquired
business during the year ended December 31, 1996, which calculation includes an
estimate of total revenues for the portion of 1996 during which any such
acquired business was included in Iron Mountain's results of operations). The
total purchase price of the Recent Acquisitions was approximately $447 million
(not including aggregate contingent payments of up to $1.9 million based upon
the achievement of certain revenue targets), including the issuance of shares
of the Company's Common Stock, and options to purchase Common Stock, having a
fair value of approximately $144 million. The Recent Acquisitions represented,
in the aggregate, total annual revenues of approximately $199 million
(calculated in each case by reference to the revenues of each such acquired
business during the year ended December 31, 1997, which calculation includes an
estimate of total revenues for the portion of 1997, if any, during which any
such acquired business was included in Iron Mountain's results of operations).
As of March 1, 1998, Iron Mountain operated 223 record centers in 54 markets,
servicing over 50,000 customer accounts. Among the Recent Acquisitions, the
acquisitions of Safesite Records Management Corporation ("Safesite"), HIMSCORP,
Inc. (doing business under the name Record Masters) ("Record Masters") and
Arcus Group, Inc. ("Arcus Group") and its principal operating subsidiary, Arcus
Technology Services, Inc. ("Arcus"), are the largest.
Safesite Acquisition
On June 12, 1997, Safesite merged with and into a subsidiary of the
Company. The Company paid aggregate consideration equal to $62.0 million in
connection with such merger, consisting of 1,769,712 shares of Common Stock and
options to acquire Common Stock having an aggregate fair value of $45.0 million
and cash payments of $17.0 million (which includes the purchase of certain real
estate interests from affiliates of Safesite). Safesite has a significant
presence in both data security services and business records management,
including medical records management. At the time of acquisition, Safesite had
over 7,000 customer accounts with 26 facilities in 14 markets, including four
markets in which the Company previously had no operations. With the acquisition
of Safesite, Iron Mountain added 27 new sales people, an increase of 75% to its
then existing sales force. Safesite's revenues were $19.0 million for the year
ended December 31, 1996 and approximately $11 million for the six months ended
June 30, 1997 (including approximately $1 million in revenues for the period
from the closing of the acquisition through June 30, 1997).
Record Masters Acquisition
On November 1, 1997, Record Masters merged with and into a subsidiary of
the Company (the "Record Masters Merger"). The Company paid aggregate
consideration equal to $85.3 million in connection with the Record Masters
Merger, consisting of the assumption of indebtedness and cash payments of $49.3
million and the issuance of 1,202,369 shares of Common Stock having a fair value
of $36.0 million.
As a result of the Record Masters Merger, management believes that the
Company is the leading provider of medical records management services in the
United States. In addition to storage, Record Masters also provides multiple
related services including release of information, temporary staffing, contract
coding, facilities management and imaging. When acquired, Record Masters
operated 20 facilities in 12 markets, and had over 700 customer accounts. As a
result of the Record Masters Merger, the Company now has a significant presence
in the medical records management business in 19 markets (including three in
which the Company did not have operations prior to the Record Masters Merger).
Record Masters's revenues were $15.7 million for the year ended December 31,
1996 and $20.5 million
4
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for the nine months ended September 30, 1997 and, for the same periods, giving
pro forma effect to three acquisitions by Record Masters's in each of 1996 and
1997, $23.8 million and $21.4 million, respectively.
Arcus Acquisition
On January 6, 1998, Arcus Group merged with and into the Company (the
"Arcus Merger"). The Company paid aggregate consideration equal to
approximately $154 million, consisting of 1,438,012 shares of Common Stock and
options to acquire Common Stock having an aggregate fair value of approximately
$55 million and the balance in cash and assumption of debt.
In 1996, Arcus acquired eight companies and, in 1997, one company. Arcus
had revenues of $66.0 million and $95.3 million for the years ended December
31, 1996 and 1997, respectively, and, for the same periods, giving pro forma
effect to Arcus's acquisitions, $89.2 million and $101.0 million, respectively.
As a result of the Arcus Merger, management believes that the Company is
the largest provider of off-site data security services in the United States.
Arcus's data security services consist primarily of storage and off-site
rotation of back-up copies of magnetic media, as well as disaster recovery
support and testing, media library moves and product sales. In addition to data
security services, Arcus provides IT staffing services, which represented
approximately 37% of Arcus's revenues and approximately 11% of Arcus's
operating income before depreciation, amortization and stock compensation
expenses in the year ended December 31, 1997. As of December 31, 1997, Arcus
operated 33 data storage facilities in 25 markets in the United States and one
in the United Kingdom (including five in which the Company did not previously
have operations), and had over 6,500 customer accounts.
Pending Acquisition
On February 24, 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 "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. 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 close 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 completed three
acquisitions in 1997. As of December 31, 1997, 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.
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The following table presents certain information for the 1996 acquisitions
and the Recent Acquisitions.
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Principal State(s)
Acquisition of Operation Completion Date
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Nashville Vault Company, Ltd. .................................... Tennessee January 1996
Florida Data Bank, Inc. .......................................... Florida January 1996
DataVault Corporation ............................................ Massachusetts February 1996
Data Storage Systems, Inc. ....................................... California March 1996
Brambles CRC, Inc. ............................................... Ohio April 1996
Records management business of Output
Technologies Central Region, Inc. ............................... Missouri May 1996
Records management business of The Fortress Florida and
Corporation ..................................................... Massachusetts July 1996
Data Archive Services, Inc. and Data Archive
Services of Miami, Inc. ......................................... Florida August 1996
DKA Industries, Inc. (d/b/a Systems Record Storage) .............. Florida August 1996
International Record Storage and Retrieval Service, Inc. ......... New Jersey September 1996
Security Archives Corporation .................................... California September 1996
Data Storage Company, Inc. (d/b/a DataSafe) ...................... Tennessee October 1996
Dial-A-File Storage, Inc. ........................................ Florida October 1996
Mohawk Business Record Storage, Inc. ............................. Minnesota November 1996
Magnetic Archives, Inc. .......................................... Colorado November 1996
Deliverex of Broward ............................................. Florida November 1996
Security Archives II, Inc. and Security Archives of
MSP, Inc. ....................................................... Minnesota January 1997
Records management business of Wellington Financial
Services, Inc. (d/b/a Michigan Data Storage) .................... Michigan February 1997
Data Recovery Services, Inc. ..................................... Florida February 1997
CBD Security Archives, Inc. ...................................... Louisiana and Texas March 1997
Chicago Data Destruction Corporation
(d/b/a Chicago Data Storage Systems) ............................ Illinois April 1997
Critical Files Security, Inc. .................................... Florida April 1997
Business Records Center, Inc. .................................... Wisconsin May 1997
Willamette Archives, Inc. ........................................ Oregon May 1997
Safesite Records Management Corporation .......................... Various (1) June 1997
Data Archives, Ltd. .............................................. Texas July 1997
File Pro L.C. .................................................... Texas July 1997
Archives Express, Inc. ........................................... California and Utah July 1997
Concorde Group, Inc. ............................................. New York August 1997
Data Securities International, Inc. .............................. California September 1997
Records Retention/FileSafe, L.P. ................................. California October 1997
Record Management Systems, Inc. .................................. New York October 1997
Allegiance Business Archives, Ltd. ............................... New Jersey October 1997
HIMSCORP, Inc. (d/b/a Record Masters) ............................ Various (2) November 1997
Bekins Records Management
(a division of Bekins Van & Storage, Inc.) ...................... Nebraska January 1998
Midwest Records Management (a division of I-GO
Van & Storage Co.) .............................................. Nebraska January 1998
Arcus Group, Inc. ................................................ Various (3) January 1998
Records Venture One, Inc. (d/b/a Information
Management Consultants of Arizona) .............................. Arizona January 1998
Sloan Vaults, Inc. (d/b/a The Vault) ............................. California February 1998
</TABLE>
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(1) Arizona, California, Colorado, Georgia, Illinois, Massachusetts, Michigan,
New York, North Carolina, Ohio, Virginia, and Washington.
(2) California, Louisiana, Maryland, Michigan, Missouri, New Jersey, Ohio,
Oregon, Pennsylvania and Texas.
(3) Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois,
Nevada, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania,
Texas and Washington and the United Kingdom.
6
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Growth Strategy
The Company's objective is to be one of the largest records management
service providers in each of its geographic markets and to become the largest
national provider of business records management services, including medical
records management services, data security services and vital records
protection services. The Company seeks to expand through: (i) increased
business with existing customers, including the provision of new services; (ii)
additions of new customers; and (iii) selective acquisitions in existing and
new markets. The Company's acquisition strategy includes both expanding
geographically, focusing primarily on the 60 largest U.S. markets, and
increasing its presence and scale within existing markets through "fold-in"
acquisitions. The Company has significantly increased its presence in the data
security services and medical records management markets in the last four
years. Of the acquisitions completed since mid-1994, 13 have been records
management companies that focused on the data security services market and five
have been records management companies that focused on the medical records
management market. With the completion of the acquisitions of Record Masters
and Arcus, the Company believes that it is now the largest provider of medical
records management services and off-site data security services. See "--Recent
and Pending Acquisitions."
Growth from Existing Customers
Existing Iron Mountain customers storing paper records contribute to
storage and services revenues growth because on average they generate
additional Cartons at a faster rate than old Cartons are destroyed or
permanently removed. From January 1, 1993 through December 31, 1997, Net Carton
Growth From Existing Customers increased at an average rate of approximately
6%. In order to maximize growth opportunities from existing customers, the
Company seeks to maintain high levels of customer retention by providing
premium customer service through its decentralized customer service approach
complemented by its local management staff.
Through its local account management staff, the Company leverages existing
business relationships with its customers by selling incremental services and
products. Services include records tracking, indexing, customized reporting,
vital records management, records management consulting services, and, with the
acquisitions of Arcus and Record Masters, additional temporary
staffing/outsourcing services in the IT, clerical and medical sectors. See
"--Recent and Pending Acquisitions."
Additions of New Customers
The Company's direct sales force is dedicated solely to establishing new
account relationships and draws on the Company's national marketing
organization and senior management. New customer sales efforts have resulted in
the addition of more than 900 new customer accounts in each of the years 1993
through 1995, over 1,200 new customer accounts in 1996 and over 1,600 new
customer accounts in 1997.
From December 31, 1996 through March 1, 1998, the Company's sales force
grew from 21 to 105 sales professionals, five of whom focus solely on national
accounts. The sales force growth is primarily from the acquisitions of Safesite
and Arcus and the decision by the Company to significantly increase its selling
resources. As a result of Arcus's direct sales efforts, from January 1, 1993
through December 31, 1997, Arcus realized an internal annual growth rate of
approximately 11%.
Growth through Acquisitions
Iron Mountain has a successful record of acquiring and integrating smaller
records management companies. In order to capitalize on industry consolidation,
the Company in mid-1994 adopted an active acquisition strategy and implemented
changes in its management, systems and financial infrastructure, to execute
such strategy. Since mid-1994, the Company has acquired or entered into
agreements to acquire 47 companies, 46 of which have been completed and one of
which is pending. The Company operates in 54 markets and intends to continue to
make fold-in acquisitions in existing markets and to make strategic
acquisitions in new geographic markets, with an emphasis on the 60 largest
markets in the United States and potentially in certain markets outside the
United States. The Company's corporate development staff is engaged in an
ongoing review of acquisition candidates. Management believes that
7
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Iron Mountain is well positioned to participate in the further consolidation of
the records management industry.
The Company has made, and intends to continue to make, acquisitions to
increase its presence in the data security services and medical records
management markets. Of the acquisitions completed since mid-1994, 13 have been
records management companies that focused on data security services and five
have been records management companies that focused on medical records
management. With the completion of the acquisitions of Record Masters and
Arcus, Iron Mountain believes that it is now the industry leader in both
medical records management and off-site data security services.
The Company seeks to expand its national presence, size and customer base
through new-market acquisitions. Management believes that the high start-up
costs of commencing operations make acquisitions an attractive means of
entering new markets. The Company seeks to acquire records management companies
in markets where management believes there is the potential for growth. Within
such markets, the Company uses a variety of criteria to evaluate acquisition
candidates, including the capacity and condition of existing storage
facilities, past and current operating performance and revenues and the
experience and depth of existing management.
The Company believes that it can use its expertise and central
administrative organization to leverage an acquisition candidate's local market
presence, promoting the development of underperforming facilities and enhancing
the value of the local assets. The Company believes that its new-market
acquisition strategy could have a number of benefits, including: (i) continued
growth in revenues and EBITDA and diversification across a greater number of
markets; (ii) introduction of the Company's storage, labor, transportation and
other operating efficiencies into new markets; (iii) increased utilization of
efficiencies available through the Company's central administrative and
management information functions; (iv) increased market awareness of Iron
Mountain's national scope and presence; and (v) increased overall scale, which
should broaden the range of and facilitate the Company's capital-raising
activities.
The Company also intends to continue to make fold-in acquisitions to
augment its operations in existing markets. The Company's goal in its existing
markets is to exploit economies of scale while maintaining high quality
service. Following a new-market acquisition, the Company seeks to increase its
business with the acquired customer base and to supplement that growth with new
customers and, potentially, with appropriate fold-in acquisitions so that the
Company may benefit from economies of scale.
The Company has proven its ability to successfully reduce the cost
structure of its acquired operations and believes it will realize additional
cost savings from recent acquisitions. Certain of these cost savings, including
labor reductions and certain general and administrative costs, are generally
obtained within 12 months of an acquisition. Other cost savings, including
occupancy costs, may take longer to achieve. The Company's goal is to achieve
substantially all of the targeted cost savings within 24 months of an
acquisition.
In addition, Iron Mountain may consider capitalizing upon its expertise in
the records management industry by making investments in records management
businesses outside the United States. From time to time, the Company has had
discussions concerning such investments. Such investments, if consummated,
would be subject to risks and uncertainties relating to the indigenous
political, social, regulatory, tax and economic structures of other countries,
as well as fluctuations in currency valuation, exchange controls, expropriation
and governmental policies limiting returns to foreign investors. At this time,
there can be no assurance as to whether any such investment will be made or, if
made, will be successful in achieving its objectives. As a result of the Arcus
Merger, the Company operates one data security facility in the United Kingdom.
Premium Service Strategy
Organizations selecting a provider of records management services consider
a number of factors in addition to price. Management believes that the Company
is a "premium" brand in the marketplace based upon its reputation for
reliability, customer-oriented organization, full service approach, investment
in technology and national operating presence. The Company seeks to exploit its
strengths in each of these
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areas to maintain customer relationships and to attract new customers.
Management believes that the Arcus and Record Masters brand names are similarly
viewed as premium brands in their specific markets.
Reputation for Reliability
The Company believes it has a reputation for reliability based on its more
than 47 years of operations, the continuity and depth of its management, its
successful historical growth, the quality and diversity of its customer base,
which includes more than half the Fortune 500, its technological capabilities,
and its size and financial resources.
Customer-Oriented Organization and Locally Responsive Management
Iron Mountain has developed a decentralized, local management structure
that brings significant management experience and stability to local markets
and allows the Company to respond directly, effectively and flexibly to
customers. Broad operating authority is delegated to Vice Presidents and to
local managers. In pursuing its acquisition strategy, Iron Mountain seeks to
capitalize upon the experience and strengths of existing management. In
addition, all full-time union and non-union employees participate in
incentive-based compensation programs that provide payments based on profits or
attainment of specified objectives for the unit in which they work. Iron
Mountain believes that the experience, stability and commitment of its regional
and local management is integral to its ability to provide superior customer
service and maximize growth potential.
Full Service Approach
Iron Mountain offers a full range of records management services. The
Company provides storage for all major media, including paper (which is the
dominant form of records storage), computer disks and tapes, microfilm and
microfiche, master audio and video tapes, film and optical disks, X-rays and
blueprints. Iron Mountain's principal services provided to its storage
customers include courier pick-up and delivery, filing, retrieval and
destruction of records, database management, customized reporting and disaster
recovery support. The Company also sells storage materials and provides
consulting, facilities management and other outsourcing services. The Company
believes that its ability to provide all of these services provides numerous
competitive advantages, including: (i) cross marketing opportunities from
marketing additional services to existing customers; (ii) leverage of its
general, administrative, software development and real estate expenses; and
(iii) the selling advantage provided by offering one-stop shopping to certain
customers who prefer to use one vendor for all of their records management
services.
Investment in Technology
The Company has made significant investments in management information
systems and computer technology in order to provide faster and more flexible
solutions for its customers and to enhance the quality and lower the costs of
its own operations. The Company believes that its technological capabilities,
especially its Safekeeper[TM], Safekeeper MediaLink[TM] and Safekeeper
Compass[TM] systems, are a significant tool in attracting new customers. The
Company plans to continue to invest in its proprietary technologies in the
future. See "--Technology and Development; Management Information Systems."
National Operating Presence
The Company believes it is one of only three records management companies
with a national operating presence. Traditionally, the purchase decision for
large multi-site customers has been made at the local level. Recently, however,
the Company has found that certain large organizations have sought to obtain
operating and economic efficiencies by outsourcing a significant portion of
their records management functions with a single records management company.
The Company seeks to use its national operating presence to compete for such
large multi-site customer accounts. In addition, certain customers prefer to
use large, sophisticated records management companies for the storage of vital
records and the support of disaster recovery programs.
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<PAGE>
Low-Cost Operating Strategy
Iron Mountain pursues a low-cost operating strategy based primarily on
achieving economies of scale in the areas of storage, labor and transportation,
general and administrative functions and management information systems. The
Company believes that it is one of the few records management companies with
the size and resources to realize significant economies of scale in these
areas.
Storage Costs
Because occupancy costs are a major component of the Company's cost of
sales, reducing per unit storage costs is a primary strategic goal of the
Company and its real estate management staff. The Company seeks to minimize per
unit storage costs by: (i) designing racking systems and operating space to
maximize facility storage efficiency; (ii) negotiating favorable facility
leases and having facilities built to its custom specifications; and (iii)
leasing larger facilities, which, when filled, are less expensive per storage
unit to operate. Since 1991, the Company has acquired or leased 14 records
management facilities constructed per the Company's specifications. The average
Carton density (the ratio of standard Carton storage capacity to total square
feet of floor space) of these facilities is approximately twice that of the
Company's overall average Carton density. As a result of these practices,
average Carton density in the Company's facilities increased approximately 44%
from December 31, 1993 to December 31, 1997. Because medical records are
inherently more active, the Company stores these records in specialized
shelving systems that provide easy access to individual files, but generally
have lower storage densities than carton shelving. These lower densities are
generally offset by higher total revenues per unit. Management believes its
expertise in designing storage facilities and racking systems will lead to
improved densities and cost reductions in the storage of its medical records.
Labor and Transportation Efficiency
The Company has made significant investments in computer technologies for
its service operations, resulting in greater operating and logistics
efficiencies. In addition, by increasing the scale of its operations and
customer base in a local market area, the Company seeks to maximize its courier
delivery fleet usage and to increase delivery and routing efficiencies.
The Company's incentive structure has also contributed to labor
efficiency. Each of the Company's full-time employees participates in incentive
compensation programs based upon achievement of specific operating targets
designed to integrate the objectives and performance of records management
facility employees and managers. For the year ended December 31, 1997, the
Company's employees earned incentive compensation in an amount equal to
approximately 10% of the base wages paid by the Company.
G&A and MIS Efficiencies
The Company's corporate staff provides support to local management in the
areas of acquisitions, marketing, facility acquisition and leasing, racking
system purchasing, finance, accounting and human resource management. In
addition, the Company's corporate staff is responsible for the design and
support of all records management technology. The Company believes that central
support in these areas provides local managers with competitive advantages over
smaller, local competitors and results in significant economies of scale.
Technology and Development; Management Information Systems
The Company pioneered the application of advanced information technology
to the records management industry. Iron Mountain's proprietary Safekeeper
system, which is Year 2000 compliant, provides advanced inventory control and
information access, enabling the Company to provide faster, higher quality and
more flexible solutions to its customers and to lower the costs of its
operations. Iron Mountain's Safekeeper system exploits bar-code technology to
provide inventory integrity and a comprehensive, standardized approach to
tracking, accessing and retrieving records. Safekeeper offers state-of-the-art
records management capabilities and ease of access to customers while featuring
security functions to protect customer information from unauthorized access.
The system coordinates inventory control, order entry, billing, material sales,
service activity, accounts receivable and management reporting, and features
system-driven quality assurance and error-prevention. The
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Company has made significant investments to develop and refine its management
information systems and computer technology, including Safekeeper. Safekeeper
is built on an open systems architecture, which is fully portable and can be
implemented in small processing environments with several users and in large
processing environments with hundreds of users. This allows the Company a
substantial measure of flexibility and vendor independence and reduces the risk
of technological obsolescence.
The Company's data security operations utilize the Company's Safekeeper
MediaLink software, a state-of-the-art media management system, which provides
integrated bar-code tracking and an electronic data interface between a
customer's data center and an Iron Mountain facility, as well as audit trail
and remote inventory query capabilities. Safekeeper MediaLink assists customers
in meeting their disaster recovery standards. Safekeeper MediaLink's
interactive VoiceLink[TM] allows access to off-site inventory directly from a
touch-tone telephone.
Safekeeper has improved the Company's customer support and operating
efficiency in the following ways:
Acquisition System Integration
Safekeeper has been designed to integrate newly acquired records
management companies and offer improved levels of customer service and records
management capabilities to customers acquired through acquisitions. The
critical components of integrating acquisition systems are the abilities to
match the acquired company's carton identifiers, location identifiers, records
descriptive data, and billing data. Safekeeper is designed with flexible,
comprehensive capabilities in each of these areas. Consequently, an acquired
company's inventory can be converted to Safekeeper without having to relabel
cartons or reset and relabel inventory locations. The customers of the acquired
company retain their records data and receive similar billing rate structures.
In addition, acquisition customers experience minimal disruption during
integration and, after conversion, gain access to advanced records management
and information access capabilities. Safekeeper utilizes a suite of conversion
routines to automate the conversion process and effectively translate customer
and inventory information.
Storage Efficiency
Safekeeper enables the Company to maximize the efficient use of storage
space at its facilities. When cartons are added or returned to storage,
Safekeeper identifies available space and the location of the customer's other
records at the facility. Because there is a continual flow of cartons into and
out of the Company's facilities, Safekeeper also permits facility operators to
utilize space that becomes available as soon as cartons are removed. Safekeeper
can pinpoint the location of any carton, enabling facility operators to quickly
determine the optimal location for new or returning cartons.
Inventory Integrity
Bar-coding and scanning are used to track a carton or a record throughout
its life cycle at Iron Mountain. Safekeeper identifies inventory discrepancies
during the order processing cycle and forces their resolution before they
affect the customer. This forced discrepancy resolution means that errors must
be resolved before an order can be closed; until the order is closed, billing
cannot be processed. Management believes that this system-driven quality
assurance is a significant advantage over the "best efforts" approach used by
many of its competitors.
National Accounts Capabilities
The Safekeeper Compass system allows national account customers access to
records stored in multiple Iron Mountain locations. Customers can directly
access their consolidated data using their own PCs. The system gives customers
the ability to order services and run inventory reports and features the same
robust querying and searching tools as all other Safekeeper products. Program
managers can use its reporting function to monitor inventory, service activity
levels and quality assurance.
Customer Information Access
Customers can access their records management data through a variety of
formats, including direct access via Safekeeper Online[TM], access on their own
PCs via Safekeeper Desktop[TM], integration of their
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<PAGE>
internal system with Safekeeper via automated file transfers and paper reports.
Safekeeper Online enables a customer to place orders directly via online
access, resulting in efficiencies for Iron Mountain order processing. It
features robust querying and searching tools to enable customers to identify
records with only partial information. Safekeeper Desktop is a PC application,
run from customers' desktop or network PCs; it provides customers with an
entire set of records management data along with user-friendly tools for
querying, reporting and editing. Safekeeper's suite of file transfers enable
customers to automatically transfer records data and service requests from
their internal system to Safekeeper. The paper reports include inventory detail
and summary, service activity analysis and quality assurance.
Records Management Flexibility
Safekeeper offers full life-cycle records management, from file creation
to destruction, enabling each customer to establish schedules for records
retention and destruction as dictated by the customer's specific needs.
Safekeeper can flexibly accommodate large or small amounts of records
management data in accordance with customer requirements. A series of
customer-specific features and options allows Iron Mountain to tailor the
records management functionality and reporting to the customer's needs.
Security
Safekeeper incorporates strict security protocols and procedures for all
customers to prevent unauthorized access to a client's records information.
Advanced security features that can automatically restrict access by
departmental identification and/or type of service request are available to
customers that are internally set up to provide this information.
Description of Iron Mountain Records Management Services
Iron Mountain provides storage for all major media, including paper (the
dominant form of records storage), computer disks and tapes, microfilm and
microfiche, master audio and video tapes, film and optical disks, X-rays and
blueprints. Iron Mountain's principal services provided to its storage
customers include courier pick-up and delivery, filing, retrieval and
destruction of records, database management, customized reporting and disaster
recovery support. Iron Mountain also sells storage materials and provides
consulting, outsourcing and other services.
Paper Storage Operations
Storage revenues accounted for approximately 60% of revenues in each of
the Company's last five fiscal years. Storage charges are generally billed
monthly on a per storage unit basis (usually either per unit or per cubic foot
of records) and include the provision of space, racking, computerized inventory
and activity tracking and physical security.
The storage of a carton begins by issuing Safekeeper bar-coded labels to
the customer. The customer packs records in cartons and affixes the bar-coded
label to each carton. Customer personnel and the Iron Mountain driver conduct a
physical count of the cartons and the driver signs for the cartons, which are
then transported to the records management facility. Upon delivery to the
facility, the cartons are subjected to a second physical count. The cartons are
delivered to available space identified by Safekeeper and the bar-coded
information is scanned into the computer together with a bar-coded location
identifier. At the same time, a computer operator enters the customer's data
describing the stored material into the computer and the system confirms that
the cartons sent match the data entered in the computer. Under the Company's
computer control system, the order can only be closed out when all requisite
steps and checks have been completed and counts and locations have been
reconciled.
Data Security Services
Data security services consist of the storage and rotation of back-up and
archival computer media as part of corporate disaster and business recovery
plans. Computer tapes, cartridges and disk packs are transported off-site by
the Company's courier operations on a scheduled basis to secure, climate-
controlled facilities, where they are available to customers 24 hours a day,
365 days a year, to facilitate data recovery in the event of a disaster. This
process is managed by Iron Mountain's Safekeeper
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MediaLink software. Iron Mountain also manages tape library relocation and
supports disaster recovery testing and execution.
Medical Records Services
Medical records management services principally include the handling,
storage, filing, processing and retrieval of medical records used by hospitals,
private practitioners and other medical institutions. Medical records tend to
be more active in nature and are typically stored on specialized shelving
systems that provide access to individual files. Medical records management
services also include recurring project work and ancillary services. Recurring
project work involves the on-site removal of aged patient files and related
computerized file indexing. Ancillary medical records management services
include release of information, temporary staffing, contract coding, facilities
management and imaging.
Vital Records Services
Vital records contain critical or irreplaceable data such as master audio
and video recordings, film, software source code and other highly proprietary
information. Vital records may require special facilities or services, either
because of the data they contain or the media on which they are recorded. The
Company's charges for providing enhanced security and special
climate-controlled environments for vital records are higher than for typical
storage functions. The Company provides the same ancillary services for vital
records as it provides for its other storage operations.
Service and Courier Operations
Services operations include adding records to storage, temporary removal
of records from storage, refiling of removed records, permanent withdrawals
from storage and destruction of records. Service charges are generally assessed
for each procedure on a per unit basis. The Safekeeper system controls the
service processes from order entry through transportation and invoicing.
Courier operations consist primarily of the pickup and delivery of records
upon customer request. Courier delivery schedules can be tailored to fit
customers' needs, but generally customer orders received by 4:00 p.m. on a
business day are delivered the following business day. The Company also
provides same-day and immediate delivery during business hours and emergency
delivery at night and on weekends and holidays. Charges for courier services
are based on urgency of delivery, volume and location and are billed monthly as
incurred. The Company currently utilizes a fleet of approximately 790 owned or
leased delivery vehicles.
Staffing Services
With the completion of the Arcus and Record Masters acquisitions, the
Company now provides temporary staffing resources in the IT, clerical and
medical fields. IT staffing services include temporary or project staffing and
permanent placements for data center operations and MIS functions, including
supplying data center clerks, tape librarians, systems operators and software
programmers. Management believes that IT staffing is a high growth segment of
the temporary staffing market, complements the Company's existing services and
offers opportunities to leverage its large customer base.
Additional Services and Products
Iron Mountain offers a variety of additional services, which customers may
request or contract for on an individual basis. These services include
inventorying records, packing records into cartons or other containers, and
creating computerized indexes of files and individual documents. The Company
also provides services for the management of active records programs. The
Company can provide these services, which generally include document and file
processing and storage, both off-site at its own facilities and by supplying
its own personnel to perform management functions on-site at the customer's
premises.
In addition, the Company provides professional consulting services to
large customers, enabling them to develop and implement comprehensive records
management programs. Iron Mountain's consulting business draws on the Company's
experience in records management to analyze the practices of such companies and
assist them in creating more effective programs of records management. The
Company's consultants work with such customers to develop policies for document
review, analysis and evaluation and for scheduling of document retention and
destruction.
The Company also sells a full line of specially designed corrugated
cardboard, metal and plastic storage containers and magnetic media products.
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Customers
The Company's customer base is diversified in terms of revenues and
industry concentration. Iron Mountain tracks customer accounts, which are based
on invoices. Accordingly, depending upon how many invoices have been arranged
at the request of a customer, one organization may represent multiple customer
accounts. As of March 1, 1998, the Company had over 50,000 customer accounts in
a variety of industries. The Company currently provides services to more than
half of the Fortune 500 and numerous commercial, legal, banking, healthcare,
accounting, insurance, entertainment and government organizations. After giving
effect to the Recent Acquisitions, no customer accounted for more than 3% of
revenues for the year ended December 31, 1997.
Marketing and Sales
The Company's selling organization, which includes 105 sales
professionals, consists of telemarketing, direct sales and account management,
all supported by a corporate marketing group. Telemarketing sales people use
advanced database telemarketing techniques to identify and source account
leads. Leads are pursued by the direct sales force which is comprised of local
sales representatives and regional and national account managers. Once an
account is established, it is assigned to an account manager, who focuses on
serving the needs of new and existing customers and selling additional services
to this customer base. The corporate marketing organization provides training
and marketing communications as sales support functions.
Competition
The Company competes with two other national records management companies
as well as a large number of local and regional concerns. The Company believes
that competition for customers is based on price, reputation for reliability,
quality of service and scope and scale of technology, and believes that it
generally competes effectively based on these factors. Management believes
that, except for Pierce Leahy Corporation, all of these competitors have United
States based revenues significantly lower than those of the Company. The
Company believes that Iron Mountain is the industry leader in the specialized
records management activities of off-site data security services, medical
records management services and vital records management services. To
accommodate growth, a records management vendor must invest in incremental
storage capacity, which requires added warehouses, racking systems and related
equipment, including computer systems capable of tracking increasingly large
inventories. The amount of such investment is significant relative to the
immediate return that can be realized, and the faster a vendor grows, the more
capital is required. As a result, the industry trend toward consolidation will,
in management's opinion, continue. In addition, the Company faces competition
from the internal records management handling capability of its current and
potential customers. There can be no assurance that these organizations will
outsource more of their records management needs or that they will not bring
in-house some or all of the functions they currently outsource. The Company
also faces competition for acquisition candidates.
The substantial majority of the Company's revenues have been derived from
the storage of paper documents and from related services. Such storage requires
significant physical space. Alternative technologies for generating, capturing,
managing, transmitting and storing information have been developed, many of
which require significantly less space than paper. Such technologies include
computer media, microforms, audio/video tape, film, CD-ROM and optical disk.
None of these technologies has replaced paper as the principal means for
storing information. However, there can be no assurance that one or more
non-paper-based technologies (whether now existing or developed in the future)
may not in the future significantly reduce or supplant the use of paper as a
preferred medium, which could in turn adversely affect the Company's business.
Employees
A key feature of the Company's operating strategy is its decentralized
management structure and empowerment of local management operating in local
business environments. The Company is divided into three operational business
units: business records management (including medical records), data security
services (including escrow services) and IT staffing services. Each operational
unit is divided into geographic Areas, Regions and Districts. Generally, Areas
are managed by Executive Vice Presidents, and the Regions and Districts are
managed by Vice Presidents and General Managers,
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respectively. Management believes this structure offers responsive and superior
customer service and positions the Company to sell ancillary services and
products. The Company's headquarters staff performs a variety of central
administrative and support functions in order to maximize the time and
resources that local personnel can devote to customer service and client
development.
As of March 1, 1998, the Company employed over 4,500 full time employees,
of whom approximately 96% were employed at the field level and 4% at the
Company's headquarters.
Approximately 4% of the Company's employees are represented by various
Teamsters Union locals under four different agreements. These agreements are
scheduled to expire at various times in 1999.
All non-union employees are eligible to participate in the Company's
benefit programs, which include medical, dental, life, short and long-term
disability and accidental death and dismemberment plans. Unionized employees
receive these types of benefits through their unions. In addition to base
compensation and other usual benefits, all full-time union and non-union
employees participate in some form of incentive-based compensation program that
provides payments based on profits, collections or attainment of specified
objectives for the unit in which they work. Management believes that the
Company has good relationships with its employees and unions.
Insurance
The Company carries a comprehensive property insurance policy with
insurers that it believes to be reputable and in amounts that it believes to be
appropriate, covering replacement cost of real and personal property, including
improvements. Subject to sub-limits, the policy also covers extraordinary
expenses associated with business interruption and damage or loss from flood or
earthquake, subject to certain deductibles. Separate policies for California
earthquake insurance carry other deductibles that may be significant. Iron
Mountain also maintains general liability and excess liability insurance
covering bodily injury, property damage and personal injury.
The Company's standard form of contract sets forth an agreed maximum value
for each carton or other storage unit held by the Company as a limitation on
liability for loss or damage, as permitted under the Uniform Commercial Code.
In contracts containing such limits, such values are nominal, and the Company
believes that in typical circumstances its liability would be so limited in the
event of loss or damage relating to the value of information stored on media
held by the Company. However, certain of the Company's agreements with certain
large volume accounts and certain of the contracts assumed by the Company as a
result of its acquisitions contain no such limits or contain higher limits or
supplemental insurance arrangements. See "Item 3. Legal Proceedings" for a
description of claims by certain customers seeking to rescind their contracts,
including limitations on liability, as a result of the fires experienced in the
Company's South Brunswick Township, New Jersey facilities.
Environmental Matters
Under various environmental laws, an owner of real estate or a lessee
conducting operations thereon may become liable for the costs of investigation,
removal or remediation of soil and groundwater contaminated by certain
hazardous substances or wastes or petroleum products. Certain of such laws
impose cleanup responsibility and liability without regard to whether the owner
or operator of the real estate or operations thereon was responsible for the
contamination, and whether or not operations at the property have been
discontinued or title to the property has been transferred. In addition, the
presence of such substances, or the failure to properly remediate affected
property, may adversely affect the current property owner's or operator's
ability to sell or rent such property or to borrow using such property as
collateral. The owner or operator of contaminated real estate also may be
subject to common law claims by third parties based on damages and costs
resulting from off-site migration of the contamination.
Certain environmental laws govern the removal, encapsulation or
disturbance of asbestos- containing materials ("ACMs"). Such laws may impose
liability for the release of ACMs and may enable third parties to seek recovery
from owners or operators of real estate for personal injury associated with
exposure to such substances. The Company is aware of the presence of ACMs at
some of its facilities, but believes that such materials are in acceptable
condition at this time. The Company believes that future costs related to any
removal and disposal of ACMs at these facilities will not be material, either
on an annual basis or in the aggregate, although there can be no assurance with
respect thereto.
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In addition, certain of the properties formerly or currently owned or
operated by the Company were previously used for industrial or other purposes
that involved the use or storage of hazardous substances or petroleum products
or the generation and disposal of hazardous wastes and, in some instances,
included the operation of underground storage tanks. In addition, certain of
such properties are adjacent to or near Superfund sites or other contaminated
properties. In connection with its former and current ownership or operation of
certain properties, the Company may be potentially liable for environmental
costs such as those discussed above.
The Company has from time to time conducted environmental investigations
and remedial activities at certain of its former and current facilities, but an
in-depth environmental review of all properties has not been conducted by or on
behalf of the Company. The Company believes that it is in substantial
compliance with all applicable material environmental laws. The Company has not
received any written notice from any governmental authority or third party
asserting, and is not otherwise aware of, any material noncompliance, liability
or claim relating to hazardous substances or wastes, petroleum products or
material environmental laws applicable to Company operations in connection with
any of its present or former properties. However, no assurance can be given
that there are no environmental conditions for which the Company might be
liable in the future or that future regulatory action, as well as compliance
with future environmental laws, will not require the Company to incur costs for
or at its properties that could have a material adverse effect on the Company's
financial condition and results of operations.
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Item 2. Properties.
As of March 1, 1998, Iron Mountain conducted operations through 188 leased
and 35 owned facilities containing a total of 10.8 million square feet of
space. The leased facilities typically have initial lease terms of 10 years
with options to renew for an additional 10 years. The weighted average
remaining term of the leases on these facilities is approximately eight years.
In addition, many of the leases contain either a purchase option or a right of
first refusal upon the sale of the property. The leases include one property
leased from affiliates of the Company.
The following table sets forth the records management facilities owned or
leased by the Company (directly or through its subsidiaries) in the geographic
locations indicated below as of March 1, 1998.
<TABLE>
<CAPTION>
Location Number of Facilities
- ----------------------------------- ----------------------
<S> <C>
Arizona ................. 9
California .............. 44
Colorado ................ 7
Connecticut ............. 3
Delaware ................ 1
Florida ................. 17
Georgia ................. 10
Illinois ................ 9
Kansas .................. 1
Louisiana ............... 4
Maryland ................ 4
Massachusetts ........... 11
Michigan ................ 9
Minnesota ............... 6
Missouri ................ 3
Nebraska ................ 5
Nevada .................. 2
New Hampshire ........... 1
New Jersey .............. 11
New York ................ 16
North Carolina .......... 2
Ohio .................... 9
Oklahoma ................ 1
Oregon .................. 6
Pennsylvania ............ 5
Rhode Island ............ 1
Tennessee ............... 2
Texas ................... 13
Utah .................... 1
Virginia ................ 5
Washington .............. 2
Wisconsin ............... 2
London (U.K.) ........... 1
---
Total ................. 223
===
</TABLE>
The Company or its principal subsidiary is a guarantor of a substantial
portion of the leases to which other subsidiaries are party. See Note 9 of
Notes to Consolidated Financial Statements for information regarding the
minimum annual rental commitments of the Company.
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Item 3. 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 four additional lawsuits have been
filed. Three of those four lawsuits seek unspecified damages against the
Company and others and to rescind their written contracts with the Company. The
fourth lawsuit, which was brought by one of the Company's customers, seeks in
excess of $1 million in damages, plus punitive damages and attorney's fees,
against the Company under various legal theories. On February 26, 1998, the
Company answered the complaint relating to the first of these four 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 three other complaints are currently due to be filed by March 30, 1998,
April 7, 1998 and April 10, 1998. The five lawsuits filed to date represent
approximately 78% of the customer cartons destroyed or damaged as a result of
the fires. The Company 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 the Company's financial condition or
results of operations, although there can be no assurance in this regard.
On June 5, 1997, 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 $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, and these
additional taxes would be added to goodwill as additional purchase price.
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.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders of the
Company during the fourth quarter of the fiscal year ended December 31, 1997.
18
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
The Common Stock is traded on the Nasdaq National Market under the symbol
"IMTN." Iron Mountain first issued its Common Stock to the public in February
1996. The following table sets forth the high and low sales prices on the
Nasdaq National Market:
<TABLE>
<CAPTION>
High Low
----------- -----------
Sale Prices
-------------------------
<S> <C> <C>
1996
First Quarter (from February 1, 1996) ......... $ 16.25 $ 13.75
Second Quarter ................................ 21.00 14.50
Third Quarter ................................. 30.50 20.50
Fourth Quarter ................................ 32.00 28.50
1997
First Quarter ................................. $ 31.00 $ 21.50
Second Quarter ................................ 30.00 21.50
Third Quarter ................................. 36.25 29.25
Fourth Quarter ................................ 39.75 31.94
</TABLE>
The closing price of the Common Stock on the Nasdaq National Market on
March 1, 1998 was $32.00. As of March 1, 1998, there were 329 holders of record
of Common Stock and no holders of record of the Company's Nonvoting Common
Stock, par value $.01 per share. The Company believes that there are more than
2,200 beneficial owners of Common Stock.
Iron Mountain does not currently pay dividends on shares of Common Stock.
Iron Mountain's Board of Directors (the "Iron Mountain Board") currently
intends to retain future earnings, if any, for the development of Iron
Mountain's businesses and does not anticipate paying cash dividends on the
Common Stock in the foreseeable future. Future determinations by the Iron
Mountain Board to pay dividends on the Common Stock would be based primarily
upon the financial condition, results of operations and business requirements
of Iron Mountain. Dividends, if any, would be payable in the sole discretion of
the Iron Mountain Board out of the funds legally available therefor. Certain
agreements, pursuant to which the Company has borrowed funds, contain
provisions that limit the amount of dividends and stock repurchases that the
Company may make. See Note 3 of Notes to Consolidated Financial Statements.
On November 1, 1997, the Company issued 1,202,369 shares of its Common
Stock to former stockholders of Record Masters as partial consideration for the
acquisition of Record Masters. The number of shares was based on a price per
share of $31.11. The fair value of the shares, based on an appraisal, was $36.0
million. Such shares were issued in reliance upon Section 4(2) of the
Securities Act of 1933, as amended.
19
<PAGE>
Item 6. Selected Consolidated Financial and Operating Information.
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.
Selected Consolidated Financial and Operating Information
(In thousands, except per share data)
<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>
20
<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,
--------------------------------------------------------------
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. See Notes 5 and 6 of Notes to Consolidated Financial
Statements.
(3) Based on its experience in the records management industry, the Company
believes that EBITDA is an important tool for measuring the performance of
records management companies (including potential acquisition targets) in
several areas, such as liquidity, operating performance and leverage. In
addition, lenders use EBITDA as a criterion in evaluating records
management companies, and substantially all of the Company's financing
agreements contain covenants in which EBITDA is used as a measure of
financial performance. However, EBITDA should not be considered an
alternative to operating or net income (as determined in accordance with
generally accepted accounting principles ("GAAP")) as an indicator of the
Company's performance or to cash flow from operations (as determined in
accordance with GAAP) as a measure of liquidity. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview" and "--Liquidity and Capital Resources" for
discussions of other measures of performance determined in accordance with
GAAP and the Company's sources and applications of cash flow.
(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.
21
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with "Item 6.
Selected Consolidated Financial and Operating Information" and the Company's
Consolidated Financial Statements and the Notes thereto and the other financial
and operating information included elsewhere in this filing.
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 and restated on September 26, 1997 (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 101/8% 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 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
22
<PAGE>
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 Arcus Merger in January 1998, the Company now provides
temporary 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, 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 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 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
23
<PAGE>
casualty insurance policies. See "Item 3. Legal Proceedings" and Note 9 of
Notes to Consolidated Financial Statements for a description of certain claims
and proceedings against the Company relating to these fires.
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
24
<PAGE>
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.
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 Safesite
acquisition; 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
(benefit) 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
(benefit) 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 nondeductible 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 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.
25
<PAGE>
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 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 revenues 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.
26
<PAGE>
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.
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
the Credit Agreement, which increased the size of the revolving credit facility
to $150.0 million and in September 1997, the Company entered into an additional
amendment and restatement of the Credit Agreement, which
27
<PAGE>
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 its
83/4% 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
Record Masters Merger, to fund a portion of the purchase price of the Arcus
Merger 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. 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 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. On
January 6, 1998, the Company issued 1,438,012 shares of Common Stock with a
fair value of approximately $39 million in connection with the Arcus Merger. 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 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.
28
<PAGE>
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.
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 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.
29
<PAGE>
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,
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.
30
<PAGE>
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Public Accountants ............................................ 32
Consolidated Balance Sheets, December 31, 1996 and 1997. ............................ 33
Consolidated Statements of Operations, Years ended December 31, 1995, 1996 and 1997. 34
Consolidated Statements of Stockholders' Equity, Years ended December 31, 1995,
1996 and 1997. ..................................................................... 35
Consolidated Statements of Cash Flows, Years ended December 31, 1995, 1996 and 1997. 36
Notes to Consolidated Financial Statements .......................................... 37
Financial Statement Schedule:
Report of Independent Public Accountants ........................................... 52
Schedule II--Valuation and Qualifying Accounts. .................................... 53
</TABLE>
31
<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
32
<PAGE>
IRON MOUNTAIN INCORPORATED CONSOLIDATED BALANCE SHEETS
(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.
33
<PAGE>
IRON MOUNTAIN INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS
(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.
34
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands except share data)
<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.
35
<PAGE>
IRON MOUNTAIN INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS
(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.
36
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(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>
37
<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.
38
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies (continued)
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>
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.
39
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies (continued)
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.
3. Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1997
----------- ------------
<S> <C> <C>
Revolving Credit Facility ........................................... $ 9,000 $ --
101/8% Senior Subordinated Notes due 2006 (the "1996 Notes") 165,000 165,000
83/4% Senior Subordinated Notes due 2009 (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 "Credit Agreement"), which was scheduled to mature on
September 30, 2001. On March 3, 1997, the Credit Agreement was increased to
$150 million. On September 26, 1997, the Credit Agreement was increased to $250
million and the maturity date was extended to September 30, 2002. Both the
March 3, 1997 and September 29, 1997 amendments amended and restated, among
other terms, interest rates, commitment fees and financial covenants. At
December 31, 1997, there were no outstanding borrowings under the Credit
Agreement.
The Credit Agreement 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 Credit
Agreement are secured by the capital stock of all of the Company's
subsidiaries.
The interest rate on loans under the Credit Agreement 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 Credit Agreement, 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
40
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Debt (continued)
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 outstanding bank debt under the Credit Agreement 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 Credit Agreement. During the first 36 months after the
date of issuance of the 1996 Notes, and subject to certain restrictions, the
Company may, with the net proceeds of one or more Qualified Equity Offerings,
as defined, redeem up to 35% of the 1996 Notes at a redemption price of
109.125% of their initial principal amount. 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 subject 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
41
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Debt (continued)
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.
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>
101/8% Senior Subordinated Notes..... $165,000 $173,602 $165,000 $179,850
83/4% 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, 16 and 18 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 Credit Agreement, a portion of the net proceeds
from the initial public offering of its common stock (the "Initial Public
Offering") and the issuance of the 1996 Notes and the 1997 Notes.
42
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
4. Acquisitions (continued)
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>
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.
43
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Capital Stock, Redeemable Put Warrant and Stock Options
a. Capital Stock
On February 6, 1996, the Company completed the Initial Public Offering.
Pursuant to the Initial Public Offering, the Company issued 2,350,000 shares of
common stock--voting.
In connection with the Initial Public 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>
Upon consummation of the Initial Public 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 its 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 Initial Public
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.
44
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Capital Stock, Redeemable Put Warrant and Stock Options (continued)
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.
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
45
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Capital Stock, Redeemable Put Warrant and Stock Options (continued)
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>
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.
46
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Income (Loss) Per Common Share--Basic and Diluted (continued)
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>
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.
47
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. Income Taxes (continued)
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>
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.
48
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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.
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>
49
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. Commitments and Contingencies (continued)
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.
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.
50
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 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.
51
<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
52
<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>
53
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
54
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Directors and executive officers of Iron Mountain are as follows (all
information is as of March 1, 1998):
<TABLE>
<CAPTION>
Names of Directors and Executive Officers Age Position
- ------------------------------------------- ----- --------------------------------------------
<S> <C> <C>
C. Richard Reese(1) ....................... 51 Chairman of the Board of Directors and
Chief Executive Officer
David S. Wendell .......................... 44 President, Chief Operating Officer and
Director
John F. Kenny, Jr. ........................ 40 Executive Vice President and Chief
Financial Officer
Eugene B. Doggett(1) ...................... 61 Executive Vice President and Director
Richard A. Drutman ........................ 55 Executive Vice President
Harold E. Ebbighausen ..................... 42 Executive Vice President
George P. Groff ........................... 48 President of Arcus Staffing Resources, Inc.
Robert G. Miller .......................... 41 Executive Vice President
Christopher Neefus ........................ 42 Executive Vice President
Kenneth F. Radtke, Jr. .................... 52 Executive Vice President
Robert P. Swift ........................... 56 Executive Vice President
Constantin R. Boden(2)(3) ................. 61 Director
Arthur D. Little(2)(3) .................... 54 Director
Vincent J. Ryan(1)(3) ..................... 61 Director
B. Thomas Golisano ........................ 56 Director
Kent P. Dauten ............................ 42 Director
Clarke H. Bailey .......................... 43 Director
</TABLE>
- ----------------
(1) Member of the Executive Committee; Mr. Ryan is the Chairman of the
Executive Committee.
(2) Member of the Audit Committee; Mr. Boden is the Chairman of the Audit
Committee.
(3) Member of the Compensation Committee; Mr. Little is the Chairman of the
Compensation Committee.
The Iron Mountain Board currently consists of nine directors. There are
three classes of directors who serve for three-year terms and are elected on a
staggered basis, one class of directors standing for election each year.
Directors of each class will thereafter hold office until the third annual
meeting of the stockholders of the Company following their election or until
their successors are elected and qualified.
The executive officers were elected by the Iron Mountain Board on May 29,
1997 with the exception of Messrs. Ebbighausen and Neefus, who were appointed
in July 1997, and Messrs. Drutman and Groff, who were elected in March 1998.
All executive officers hold office at the discretion of the Iron Mountain Board
until the first meeting of the Iron Mountain Board following the next annual
meeting of stockholders and until their successors are chosen and qualified.
Directors and Executive Officers
C. Richard Reese is the Chairman of the Board of Directors of Iron
Mountain, a position that he has held since November 1995, and the Chief
Executive Officer of Iron Mountain, a position that he has held since 1981.
Prior to November 1995, Mr. Reese was the President of Iron Mountain, a
position he had held since 1981. Mr. Reese is also a Director of Schooner
Capital Corporation ("Schooner"), which owns 12.8% of the outstanding stock of
the Company. Prior to joining Iron Mountain, he lectured at Harvard Business
School in "Entrepreneurship" and provided consulting services to small and
medium-sized emerging enterprises. Mr. Reese has also served as president and a
Director of PRISM. He holds a Master of Business Administration degree from
Harvard Business School.
David S. Wendell is the President and Chief Operating Officer and a
Director of Iron Mountain, positions that he has held since November 1995.
After practicing law with Brown & Wood, Mr. Wendell joined Iron Mountain in
1984, where he has served in a variety of positions. Prior to November 1995, he
55
<PAGE>
was Executive Vice President, Atlantic Area and prior to 1991, he was Vice
President, New England Region. He holds a Master of Business Administration
degree from Harvard Business School and a Juris Doctor degree from the
University of Virginia.
John F. Kenny, Jr. is an Executive Vice President and the Chief Financial
Officer of Iron Mountain, positions that he has held since May 1997. Mr. Kenny
joined Iron Mountain in 1991, and held operating responsibilities as regional
Vice President of New England and later Northeast operations before assuming
the position of Vice President of Corporate Development in 1995. Prior to 1991,
he was Vice President of CS First Boston Merchant Bank, New York, with
responsibility for risk capital investments. Mr. Kenny has also served as a
director and the Treasurer of PRISM. He holds a Master of Business
Administration degree from Harvard Business School.
Eugene B. Doggett is an Executive Vice President and a Director of Iron
Mountain, positions that he has held since 1990. From 1987 until May 1997, Mr.
Doggett was the Chief Financial Officer of Iron Mountain. Mr. Doggett is also a
Director of Schooner and of Mac-Gray Corporation, a provider of coin-operated
machines. Prior to joining the Company, he had extensive experience in
commercial and investment banking, as well as financial and general management
experience at senior levels. He holds a Master of Business Administration
degree from Harvard Business School.
Richard A. Drutman is an Executive Vice President of Iron Mountain, a
position that he has held since March 1998. Mr. Drutman joined the Company in
January 1998. Mr. Drutman joined Arcus Data Security, Inc. in 1976 and held
various positions, including Senior Vice President and Chief Operating Officer
from 1991 to 1996 and President and Chief Executive Officer from 1996 to
January 1998. He holds a Bachelor of Arts degree from California State
University at Los Angeles.
Harold E. Ebbighausen is an Executive Vice President of Iron Mountain, a
position that he has held since July 1997. Prior to 1997, he had been serving
as Vice President of Data Security Services since joining the Company in
September 1996. Prior to joining Iron Mountain, Mr. Ebbighausen was Vice
President of Document Management Services with INSCI Corporation, a software
provider for computer output and data storage solutions to optical and CD
technology. Previously, he held a number of field management positions with
Anacomp, Inc., a service bureau provider in the micrographics industry.
George P. Groff is the President of Arcus Staffing Resources, Inc., a
subsidiary of the Company, a position that he has held since March 1998. From
1993 to March 1998, Mr. Groff served as a Vice President of Arcus Staffing
Resources, Inc. and of Wolf Advisory International, Inc., a company which he
joined in 1989 that was acquired by Arcus in 1996. He holds a Master of
Business Administration degree from Golden Gate University.
Robert G. Miller is an Executive Vice President of Iron Mountain, a
position that he has held since December 1996. Mr. Miller joined Iron Mountain
in 1988 and held various positions including District Manager from 1988 through
1991 and regional Vice President from 1991 through 1996. Prior to 1988, Mr.
Miller was employed as a District Manager at Bell & Howell Records Management
Company.
Christopher Neefus is an Executive Vice President of Iron Mountain, a
position that he has held since July 1997. Mr. Neefus was a Vice President of
Sales and Customer Service for ASI, Inc., a software provider for the storage
of computer generated information, from 1995 until joining the Company. From
1990 to 1995, Mr. Neefus was the Region Vice President of Anacomp, Inc., a
service bureau provider in the micrographics industry. Mr. Neefus holds a
Bachelor of Arts degree in Communications Arts from Hofstra University.
Kenneth F. Radtke, Jr. is an Executive Vice President of Iron Mountain, a
position that he has held since June 1996. Prior to June 1996, Mr. Radtke was
Northeast Regional Vice President and prior to 1995 was Sales Manager, New York
Region. Mr. Radtke has worked in the records and information industry since
1988 as President and Chief Executive Officer, Dataport Company, Inc. and
Senior Vice President of a subsidiary of Arcus. He holds a graduate degree from
the University of Wisconsin, Graduate School of Banking.
Robert P. Swift is an Executive Vice President of Iron Mountain, a
position that he has held since November 1995. Prior to November 1995, Mr.
Swift was the Executive Vice President, Western Area of
56
<PAGE>
Iron Mountain and prior to 1988, Mr. Swift was employed in various positions at
Bell & Howell Records Management Company.
Constantin R. Boden is a Director of Iron Mountain, a position that he has
held since December 1990. Mr. Boden is chairman of the advisory board of Boston
Capital Ventures, a risk capital concern. For 34 years, until January 1995, Mr.
Boden was employed by Bank of Boston, most recently as Executive Vice
President, International Banking. He holds a Master of Business Administration
degree from Harvard Business School.
Arthur D. Little is a Director of Iron Mountain, a position that he has
held since November 1995. Mr. Little is a principal of The Little Investment
Company, which he founded in 1992. Prior to that, he was Managing Director of
and also a partner in Narragansett Capital, Inc., a private investment firm. He
holds a Bachelor of Arts degree in history from Stanford University.
Vincent J. Ryan is a Director of Iron Mountain. Mr. Ryan is the founder of
Schooner and has served as Chairman and Chief Executive Officer of Schooner
since 1971. Prior to November 1995, Mr. Ryan served as Chairman of the Iron
Mountain Board.
B. Thomas Golisano is a Director of Iron Mountain, a position that he has
held since June 1997, when he was appointed to the Iron Mountain Board in
accordance with the terms of the Safesite merger. He founded Paychex Inc., a
publicly held, national payroll service company, in 1971 and serves as its
Chairman, President and Chief Executive Officer. Mr. Golisano serves on the
Board of Trustees of Rochester Institute of Technology and on the boards of
several privately held companies. He has also served on the boards of numerous
non-profit organizations and is the founder of the B. Thomas Golisano
Foundation.
Kent P. Dauten is a Director of Iron Mountain, a position that he has held
since November 1997, when he was appointed to the Iron Mountain Board in
accordance with the terms of the Record Masters Merger. He has served as
President of Keystone Capital, Inc., a management and consulting advisory
service firm, since March 1994. In February 1995, Mr. Dauten founded and served
as President of HIMSCORP, Inc. until the consummation of the Record Masters
Merger. From 1993 to 1994, he was employed in various investment management
positions, most recently as Senior Vice President of Madison Dearborn Partners,
Inc. and from 1979 to 1992, he was Senior Vice President of First Chicago
Venture Capital. Mr. Dauten currently serves as a director of Health Management
Associates, Inc., a hospital management firm, and is a Trustee of ElderTrust, a
health care real estate investment trust. Mr. Dauten holds a Master of Business
Administration from Harvard Business School.
Clarke H. Bailey is a Director of Iron Mountain, a position that he has
held since January 1998, when he was apppointed to the Iron Mountain Board in
accordance with the terms of the Acrus Merger. He is Co-Chairman and Director
of Hudson River Capital LLC, a private investment company ("Hudson"). Mr.
Bailey was the Chairman and Chief Executive Officer of each of Arcus Group,
United Acquisition Company and Arcus, positions which he had held since 1995,
until the consummation of the Arcus Merger, and is a Director of Connectivity
Technologies Inc., Swiss Army Brands, Inc. and SWWT, Inc. (formerly known as
Sweetwater, Inc.). Mr. Bailey also serves as a Director and the Chairman of the
Executive Committee of Glenayre Technologies, Inc., a manufacturing company in
the telecommunications industry. Prior to joining Glenayre in 1990, Mr. Bailey
was a Managing Director at Oppenheimer & Co., Inc. He holds a Master of
Business Administration degree from The Wharton School, University of
Pennsylvania.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and Directors, and persons who own more than 10 percent of a
registered class of the Company's equity securities, to file reports of
ownership on Form 3 and changes in ownership on Form 4 or 5 with the Securities
and Exchange Commission (the "Commission"). Such officers, Directors and 10
percent stockholders are also required by Commission rules to furnish the
Company with copies of all Section 16(a) reports they file. Based solely on its
review of the copies of such forms received by it, or written representation
from certain reporting persons that they were not required to file a Form 5,
the Company believes that, during the fiscal year ended December 31, 1997, its
officers, Directors and 10 percent stockholders complied with all Section 16(a)
filing requirements applicable to such persons, except that: B. Thomas
Golisano, a Director of the Company, filed a statement of changes in beneficial
ownership on Form 4 pertaining to several gift transactions late;
57
<PAGE>
Arthur D. Little, a Director of the Company, filed a statement of changes in
beneficial ownership on Form 4 pertainingto a transaction by a trust of whose
shares he disclaims beneficial ownership late and John F. Kenny, Jr., Harold E.
Ebbighausen and Christopher Neefus, each an officer of the Company, filed their
initial statements of beneficial ownership of securities on Form 3 late.
58
<PAGE>
Item 11. Executive Compensation.
The following table provides certain information concerning compensation
earned by the Chief Executive Officer and the other four most highly
compensated executive officers who received compensation in excess of $100,000
in 1997 (the "Named Executive Officers") for the years ended December 31, 1995,
1996 and 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------ ------------------------------------
Number of Shares
Name and Underlying All Other
Principal Position Year Salary Bonus(1) Options Compensation(2)
- ----------------------------------- ------ ----------- ---------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
C. Richard Reese .................. 1997 $298,381 0 $4,000
Chairman of the Board and 1996 $268,958 $165,000 0 $1,941
Chief Executive Officer 1995 $261,765 $200,000 0 $1,790
David S. Wendell .................. 1997 $221,723 31,496 $4,000
President and Chief Operating 1996 $203,550 $125,000 40,000 $1,941
Officer 1995 $136,627 $ 62,731 35,469 $1,573
John F. Kenny, Jr. ................ 1997 $166,723 105,512 $2,400
Executive Vice President and Chief 1996 $129,723 $ 49,999 33,000 $1,618
Financial Officer 1995 $114,377 $ 36,715 39,509 $1,307
Robert P. Swift ................... 1997 $145,542 $ 54,991 0 $4,000
Executive Vice President 1996 $133,600 $ 50,800 15,000 $1,643
1995 $131,119 $ 24,397 8,096 $1,243
Robert G. Miller .................. 1997 $133,646 $ 41,875 0 $4,000
Executive Vice President 1996 $105,473 $ 35,034 20,000 $2,173
1995 $ 86,696 $ 24,569 5,072 $ 977
</TABLE>
- ----------------
(1) Bonuses for 1997 for Messrs. Reese, Wendell and Kenny have not yet been
determined. Such bonuses will not exceed amounts estimated and accrued at
December 31, 1997.
(2) Reflects the Company's matching contribution to the Iron Mountain Profit
Sharing Retirement Plan for each individual. Amounts shown for 1997 are
estimated maximum contributions; the actual contributions have not yet been
calculated.
The following table sets forth certain information concerning the grant of
options to purchase Common Stock to the Named Executive Officers. None of the
other Named Executive Officers was granted stock options in the year ended
December 31, 1997.
Option Grants in 1997
<TABLE>
<CAPTION>
Potential Realizable Value
at
Percent of Total Assumed Annual Rates of
Number of Options Granted Stock Appreciation for
Securities to Employees Exercise Option Terms (1)
Name and Underlying in Fiscal Year Price Expiration ----------------------------
Principal Position Options Granted 1997 ($/Sh) Date 5% 10%
- ------------------------------ ----------------- ----------------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
David S. Wendell ............. 31,496 6.71% $ 31.75 7/30/07 $ 629,000 $1,594,000
President and Chief Operating
Officer
John F. Kenny, Jr. ........... 105,512 22.49% $ 31.75 7/30/07 $2,107,000 $5,339,000
Executive Vice President and
Chief Financial Officer
</TABLE>
- ----------------
(1) Potential Realizable Value is based on the assumed growth rates for an
assumed 10-year option term. Five percent annual growth results in a
Common Stock price per share of $51.72, and 10 percent annual growth
results in a Common Stock price per share of $82.35, respectively, for
such term. The actual value, if any, an executive may realize will depend
on the excess of the market price of the Common Stock over the exercise
price on the date the option is exercised, so that there is no assurance
the value realized by an executive will be at or near the amounts
reflected in this table.
59
<PAGE>
The following table sets forth certain information with respect to the
exercise of stock options during the year ended December 31, 1997 by, and the
unexercised options to purchase Common Stock of, the Named Executive Officers.
Mr. Reese does not have any unexercised options.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
<TABLE>
<CAPTION>
Number of Value of
Unexercised Unexercised
Options at In-the-Money-Options at
Shares December 31, 1997 December 31, 1997(1)
Name and Acquired on Value ----------------------------- -----------------------------
Principal Position Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------- ------------- ---------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
David S. Wendell ................. 3,000 $80,634 100,967 91,872 $2,840,630 $1,357,831
President and Chief Operating
Officer
John F. Kenny, Jr. ............... 0 0 32,427 157,160 $ 806,046 $1,562,388
Executive Vice President and
Chief Financial Officer
Robert P. Swift .................. 0 0 23,895 18,477 $ 663,003 $ 376,230
Executive Vice President
Robert G. Miller ................. 0 0 9,960 19,738 $ 247,827 $ 407,703
Executive Vice President
</TABLE>
- ----------------
(1) Based on a year-end value of $36.00 per share, less the exercise price.
Director Compensation
Directors who are employees of Iron Mountain do not receive additional
compensation for serving as Directors. Each Director who is not an employee of
Iron Mountain receives an annual retainer fee of $10,000 as compensation for
his or her services as a member of the Iron Mountain Board and is also paid
$2,500 per quarter (to a maximum of $10,000 per year) for attendance at
meetings (the "Director's Compensation"). Director's Compensation is prorated
for Directors who join the Company during the year. All Directors are
reimbursed for out-of-pocket expenses incurred in attending meetings of the
Board of Directors or committees thereof, and for other expenses incurred in
their capacities as Directors. Directors may be granted options, either in lieu
of or in addition to the Director's Compensation, under the Iron Mountain
Incorporated 1995 Stock Incentive Plan (the "Stock Incentive Plan").
The Company paid a total of $54,298 in cash for Directors fees in respect
of services for 1997. In addition, in lieu of cash, Messrs. Boden and Little
each received 370 shares of Common Stock in payment of fees for the period
January 1, 1997 through June 30, 1997 pursuant to the Iron Mountain
Incorporated 1996 Stock Plan for Non-Employee Directors, which was terminated
effective June 30, 1997. Pursuant to that plan, Messrs. Boden and Little had
made irrevocable elections to receive their Director's Compensation in the form
of Common Stock equivalent to 110% of the Director's Compensation otherwise due
to be paid in cash. Messrs. Boden and Little received their Director's
Compensation for the period July 1, 1997 through December 31, 1997 in cash. The
other non-employee Directors received all of their Director's Compensation in
cash.
Change of Control Arrangement
The Stock Incentive Plan provides for acceleration of the vesting of
options and stock appreciation rights ("SARs") if the Company or any wholly
owned subsidiary of the Company is a party to a merger or consolidation
(whether or not the Company is the surviving corporation) in any transaction or
series of related transactions and there is a "Limited Change of Control" of
the Company. A Limited Change of Control occurs if after the merger or
consolidation (a) individuals who immediately prior to the merger or
consolidation served as members of the Iron Mountain Board no longer constitute
a majority of the Iron Mountain Board or the board of directors of the
surviving corporation and (b) the voting securities of the Company outstanding
immediately prior to the merger or consolidation do not represent (either by
remaining outstanding or upon conversion into securities of the surviving
corporation) more than 50% of the voting power of the securities of the Company
or the surviving corporation immediately after the merger or consolidation. In
addition, if the Company is not the surviving corporation, a holder of options
60
<PAGE>
or SARs is entitled to receive upon exercise of his or her options or SARs the
number and class of shares of stock or other securities and any other
consideration of the surviving or resulting corporation that the optionee or
holder of SARs would have been entitled to receive pursuant to the merger or
consolidation had the optionee or holder of SARs held the shares of Common
Stock subject to the option or SAR.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Iron Mountain Board consists of Mr.
Little, who is the Chairman, and Messrs. Boden and Ryan. Messrs. Reese and
Doggett are executive officers and Directors of Schooner. Mr. Ryan is the
Chairman of the Board and principal stockholder of Schooner.
61
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information known to the Company
with respect to beneficial ownership of Common Stock by (i) each stockholder
known by the Company to be the beneficial owner of more than five percent of
the Common Stock, (ii) each Director, (iii) the Named Executive Officers and
(iv) all executive officers and Directors of the Company as a group. Such
information is presented as of March 1, 1998.
<TABLE>
<CAPTION>
Amount of Beneficial
Ownership(1)
--------------------------
Name Shares Percent Owned
- -------------------------------------------------- ----------- --------------
<S> <C> <C>
Directors and Executive Officers
C. Richard Reese(2) ........................... 1,127,503 7.5%
David S. Wendell(3) ........................... 119,916 *
John F. Kenny, Jr.(4) ......................... 54,539 *
Eugene B. Doggett ............................. 100,000 *
Robert G. Miller(5) ........................... 14,974 *
Robert P. Swift(6) ............................ 28,514 *
Constantin R. Boden ........................... 20,880 *
Arthur D. Little(7) ........................... 26,265 *
Vincent J. Ryan(8) ............................ 3,445,750 23.1%
B. Thomas Golisano(9) ......................... 1,013,785 6.8%
Kent P. Dauten(10) ............................ 964,449 6.5%
Clarke H. Bailey(11) .......................... 503,939 3.4%
All Directors and executive
officers as a group (17 persons)(12) ......... 6,796,429 44.5%
Five Percent Stockholders
Schooner Capital Corporation(13) .............. 1,909,384 12.8%
William Blair & Company, L.L.C.(14) ........... 1,002,329 6.7%
</TABLE>
- ----------------
* Less than 1%
(1) Except as otherwise indicated, the persons named in the table above have
sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them.
(2) Mr. Reese is a Director and Chairman of the Board and Chief Executive
Officer of Iron Mountain. Includes 14,530 shares of Common Stock held by
trusts for the benefit of Mr. Reese's children, as to which Mr. Reese
disclaims beneficial ownership. Also includes 668,166 shares of Common
Stock as to which Mr. Reese shares beneficial ownership with Schooner as a
result of a 1988 deferred compensation arrangement, as amended, between
Schooner and Mr. Reese relating to Mr. Reese's former services as
President of Schooner. Pursuant to such arrangement, upon the earlier to
occur of (i) Schooner's sale or exchange of substantially all of the
shares of Common Stock held by Schooner or (ii) the cessation of Mr.
Reese's employment with Iron Mountain, Schooner is required to transfer
such shares of Common Stock to Mr. Reese or remit to Mr. Reese cash in an
amount equal to the then current fair value of such shares of Common
Stock. Schooner has agreed to vote the shares of Common Stock subject to
such arrangement at the direction of Mr. Reese.
(3) Mr. Wendell is a Director and President and Chief Operating Officer of
Iron Mountain. Includes 116,061 shares that Mr. Wendell has the right to
acquire pursuant to currently exercisable options.
(4) Mr. Kenny is an Executive Vice President and Chief Financial Officer of
Iron Mountain. Includes 46,929 shares that Mr. Kenny has the right to
acquire pursuant to currently exercisable options.
(5) Mr. Miller is an Executive Vice President of Iron Mountain. Consists
solely of shares that Mr. Miller has the right to acquire pursuant to
currently exercisable options.
(6) Mr. Swift is an Executive Vice President of Iron Mountain. Consists solely
of shares that Mr. Swift has the right to acquire pursuant to currently
exercisable options.
(7) Mr. Little is a Director of Iron Mountain. Includes 25,000 shares held by
The Little Family Trust, as to which Mr. Little disclaims beneficial
ownership.
(8) Mr. Ryan is a Director of Iron Mountain. Mr. Ryan holds 1,536,366 shares
of Common Stock. The remaining shares of Common Stock listed as being
beneficially owned by Mr. Ryan are held by Schooner, as to which Mr. Ryan
has sole voting power and investment power as the Chairman of the Board
and principal stockholder of Schooner. See footnote (13) regarding shares
held by Schooner.
62
<PAGE>
(9) Mr. Golisano is a Director of Iron Mountain. Includes 3,618 shares that Mr.
Golisano has the right to acquire pursuant to currently exercisable
options. Also includes 82,081 shares of Common Stock held in escrow
pursuant to the terms of the Safesite merger.
(10) Mr. Dauten is a Director of Iron Mountain. Includes 87,905 shares of
Common Stock held in escrow pursuant to the terms of the Record Masters
Merger. Also includes 24,599 shares of Common Stock held in escrow by Mr.
Dauten as agent for the other former Record Masters stockholders. In
addition, includes approximately 365 shares of Common Stock, as to which
Mr. Dauten has shared voting power and investment power as a partner of
Madison Dearborn Partners IV, which has a limited partnership interest in
GKH Investments, L.P., a stockholder of the Company.
(11) Mr. Bailey is a Director of Iron Mountain. Includes 86,093 shares that Mr.
Bailey has the right to acquire pursuant to currently exercisable options.
Also includes 386,164 shares of Common Stock beneficially owned by Hudson,
of which Mr. Bailey is Co-Chairman of the Board of Directors and a member.
Hudson has sole voting and investment power with respect to such shares.
By virtue of Mr. Bailey's relationship to Hudson, Mr. Bailey may be deemed
to share voting and investment power over such shares and to be the
beneficial owner of such shares held by Hudson. Mr. Bailey disclaims
beneficial ownership of all such shares held by Hudson.
(12) Includes 334,830 shares that directors and executive officers have the
right to acquire pursuant to currently exercisable options.
(13) Mr. Ryan is the Chairman of the Board and the principal stockholder of
Schooner and, accordingly has sole voting and investment power with
respect to the shares of Common Stock held by Schooner. Includes 668,166
shares of Common Stock as to which Schooner shares beneficial ownership
with Mr. Reese as described in footnote (2). Schooner has agreed to vote
the shares of Common Stock subject to such arrangements at the direction
of Mr. Reese. The address of Schooner Capital Corporation is 745 Atlantic
Avenue, Boston, Massachusetts 02111.
(14) Includes 575,704 shares of Common Stock over which William Blair &
Company, L.L.C. has sole investment power, but over which customers of
William Blair & Company, L.L.C. have sole voting power. The address of
William Blair & Company, L.L.C. is 222 West Adams Street, Chicago,
Illinois 60606.
63
<PAGE>
Item 13. Certain Relationships and Related Transactions.
Real Estate Transactions
Iron Mountain Records Management, Inc. ("IMRM"), a subsidiary of the
Company, is the tenant under a lease dated January 1, 1991 for a 31,500
square-foot building in Houston, Texas. The owner of the building is IM Houston
(CR) Limited Partnership, a Texas limited partnership, of which Mountain
Realty, Inc., a Massachusetts corporation whose sole stockholder is Mr. Ryan,
is the sole general partner, and the limited partners of which are Messrs.
Ryan, Reese and Doggett. The term of the lease expires December 31, 2000, with
two five-year extension options exercisable by IMRM. IMRM paid annual rent of
approximately $99,326 for the year ended December 31, 1997, and currently pays
annual rent of approximately $99,326 subject to adjustment in 1999 (and in the
option periods if the term is extended) based upon percentage changes in the
consumer price index, with a floor of 3% and a ceiling of 5%, compounded
annually. As tenant, IMRM is responsible for taxes, insurance and maintenance.
The space is used by IMRM as a records management facility. The lease is, in
the opinion of management, on commercially reasonable terms, no less favorable
to IMRM than could have been obtained from an unaffiliated party at the time of
the transaction.
Schooner leases space from the Company at the Company's corporate
headquarters. Such lease is a tenancy-at-will and may be terminated by either
the Company or Schooner at any time. As consideration for such lease, Schooner
pays rent to the Company based on its pro rata share of all expenses related to
the use and occupancy of the premises. The rent paid by Schooner to Iron
Mountain under such lease was approximately $85,428 in the year ended December
31, 1997, and Schooner currently pays annual rent of approximately $85,428.
Other Transactions
The Company paid compensation of approximately $165,695 for the year ended
December 31, 1997 to Mr. T. Anthony Ryan. Mr. Ryan is Vice President, Real
Estate, of the Company and is the brother of Mr. Vincent J. Ryan, a Director of
the Company. The Company believes that the terms of Mr. Ryan's employment are
no less favorable to it than would be negotiable with an unrelated third party.
In November 1997, the Company entered into a management advisory agreement
with Keystone Capital, Inc., of which Kent P. Dauten, a Director of the
Company, is president. Keystone Capital, Inc. receives fees of approximately
$20,000 per month under such agreement, relating to consulting with respect to
medical records management services. The Company believes that the terms of the
management advisory agreement are no less favorable to it than would be
negotiable with an unrelated third party.
64
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K.
(a)(1) and (2) Financial Statements and Financial Statement Schedule filed as
part of this report:
As listed in the Index to Financial Statements and Financial Statement
Schedule on page 31 hereof.
(a)(3) Exhibits filed as part of this report:
As listed in the Exhibit Index following the signature page hereof.
(b) Reports on Form 8-K.
On October 1, 1997, the Company filed a current report on Form 8-K under
Item 5 pertaining to the Company's entrance into definitive agreements to
acquire each of Record Masters and Arcus Group, the Company's amendment of
the Credit Agreement expanding the commitments thereunder, and Iron
Mountain's intention to raise additional debt financing through an
institutional private placement of senior subordinated notes. No financial
statements were filed therewith.
On October 16, 1997, the Company filed a current report on Form 8-K under
Item 2 pertaining to the consummation of the acquisitions of each of
Allegiance Business Archives, Ltd. ("Allegiance"), Records
Retention/FileSafe, L.P. ("FileSafe") and Safesite by wholly owned
subsidiaries of the Company. On November 11, 1997, the Company filed a
current report on Form 8-K/A amending and restating its Form 8-K filed on
October 16, 1997, adding financial statements and certain pro forma
information with respect to Allegiance, FileSafe and Safesite and
describing the acquisition of Record Masters by a wholly owned subsidiary
of the Company.
On October 30, 1997, the Company filed a current report on Form 8-K under
Item 5 pertaining to the consummation of a private placement to qualified
institutional buyers of $250,000,000 of the 1997 Notes. Such Form 8-K
included certain additional information, including information relating to
the Company's risk factors, pro forma condensed consolidated financial
information, management's discussion and analysis of financial condition
and results of operations, selected consolidated financial data and
operating information, business generally, management and principal
stockholders. Financial statements were filed with respect to the completed
acquisitions of Security Archives of Minnesota, Wellington Financial
Services, Inc., Concorde Group, Inc. and Neil Tucker Trust, Data Securities
International, Inc., FileSafe and Allegiance and with respect to the then
pending acquisitions of Record Masters, Arcus and Arcus Group.
On November 25, 1997, the Company filed a current report on Form 8-K under
Item 7 pertaining to additional financial statements with respect to the
completed acquisitions of Allegiance, FileSafe and Record Masters and
pending acquisition of Arcus Group.
65
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
IRON MOUNTAIN INCORPORATED
By: /s/ C. Richard Reese
----------------------------------
C. Richard Reese, Chairman of the
Board and Chief Executive Officer
Dated: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------- ------------------------------ ---------------
<S> <C> <C>
/s/ C. Richard Reese Chairman of the Board March 27, 1998
- ------------------------- and Chief Executive Officer
C. Richard Reese
/s/ David S. Wendell President, Chief Operating March 27, 1998
- ------------------------- Officer and Director
David S. Wendell
/s/ John F. Kenny, Jr. Executive Vice President and March 27, 1998
- ------------------------- Chief Financial Officer
John F. Kenny, Jr.
/s/ Eugene B. Doggett Executive Vice President March 27, 1998
- ------------------------- and Director
Eugene B. Doggett
/s/ Jean A. Bua Vice President and Corporate March 27, 1998
- ------------------------- Controller (principal
Jean A. Bua accounting officer)
/s/ Constantin R. Boden Director March 27, 1998
- -------------------------
Constantin R. Boden
/s/ Arthur D. Little Director March 27, 1998
- -------------------------
Arthur D. Little
/s/ Vincent J. Ryan Director March 27, 1998
- -------------------------
Vincent J. Ryan
/s/ B. Thomas Golisano Director March 27, 1998
- -------------------------
B. Thomas Golisano
/s/ Kent P. Dauten Director March 27, 1998
- -------------------------
Kent P. Dauten
/s/ Clarke H. Bailey Director March 27, 1998
- -------------------------
Clarke H. Bailey
</TABLE>
66
<PAGE>
INDEX TO EXHIBITS
Exhibits indicated below are incorporated by reference to documents of the
Company on file with the Commission. Exhibit numbers in parentheses refer to
the Exhibit numbers in the applicable filing (which are identified in the
footnotes appearing at the end of this Index). All other exhibits are filed
herewith. Each exhibit marked by a pound sign (#) is a management contract or
compensatory plan.
<TABLE>
<CAPTION>
Exhibit No. Item Exhibit
- ------------- ----------------------------------------------------------------------- --------------------
<S> <C> <C>
2.1 Agreement and Plan of Merger, dated as of September 26, 1997, by (2.2)(7)
and among Iron Mountain, Arcus Group, United Acquisition
Company and Arcus (collectively, the "Arcus Parties")
2.1A Amendment No. 1 to Agreement and Plan of Merger, dated as of (2.1A)(9)
November 25, 1997, by and among Iron Mountain and each of the
Arcus Parties
2.2 Agreement and Plan of Merger, dated as of February 19, 1997, by (2)(3)
and among Iron Mountain, IM-1 Acquisition Corp. and Safesite
Records Management Corporation
2.3 Amendment No. 1 to Agreement and Plan of Merger, dated as of (2A)(5)
April 1, 1997, by and among Iron Mountain, IM-1 Acquisition Corp.
and Safesite Records Management Corporation
2.4 Amendment No. 2 to Agreement and Plan of Merger, dated as of (2B)(5)
May 7, 1997, by and among Iron Mountain, IM-1 Acquisition Corp.
and Safesite Records Management Corporation
2.5 Agreement and Plan of Merger, dated as of August 25, 1997, by (2.3)(7)
and among Iron Mountain, DSI Acquisition Corporation and Data
Securities International, Inc.
2.6 Agreement and Plan of Merger, dated as of September 17, 1997, (2.2)(8)
by and among Iron Mountain, IM-3 Acquisition Corp. and
HIMSCORP, Inc.
2.7 Agreement and Plan of Merger, dated as of February 24, 1998, by Filed herewith
and among Iron Mountain, IM-3 Acquisition Corp. and InterMation, as Exhibit 2.7
Inc. (portions of this exhibit have been omitted pursuant to a request
for confidential treatment)
3.1 Amended and Restated Certificate of Incorporation of Iron Mountain, (3.1)(10)
as amended
3.2 Amended and Restated By-Laws of Iron Mountain, as amended (3.2)(10)
10.1 Second Amended and Restated Credit Agreement, dated as of (10.1)(7)
September 26, 1997, among Iron Mountain, the lenders party thereto
and The Chase Manhattan Bank, as Administrative Agent
10.2 Indenture for 101/8% Senior Subordinated Notes due 2006 by and (10.3)(3)
among Iron Mountain, certain of its subsidiaries and First National
Association, as trustee, dated October 1, 1996
10.3 Indenture of 83/4% Senior Subordinated Notes due 2009 by and (4.1)(6)
among Iron Mountain, certain of its subsidiaries and The Bank of
New York, as trustee, dated October 24, 1997
10.4A Iron Mountain Incorporated 1995 Stock Incentive Plan, as amended# (10.1)(4)
10.4B Iron Mountain/UAC 1995 Stock Option Plan# (10.1)(11)
10.4C Iron Mountain/ATSI 1995 Stock Option Plan# (10.2)(11)
10.5 Record Center Storage Services Agreement between IMRM and (10.18)(1)
Resolution Trust Corporation, dated July 31, 1992, as renewed by
letter agreement effective July 27, 1997 between Iron Mountain and
the Federal Deposit Insurance Corporation
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Item Exhibit
- ------------- ------------------------------------------------------------------ ----------------
<S> <C> <C>
10.6 Lease between IMRM and IM Houston (CR) Limited Partnership, (10.19)(1)
dated January 1, 1991
10.7 Asset Purchase and Sale Agreement, dated July 11, 1996, among (10.20)(2)
IMRM, The Fortress Corporation and certain subsidiaries
10.8 Asset Purchase Agreement, dated as of September 6, 1996, among (10.23)(2)
IMRM, Mohawk Business Record Storage, Inc., Michael M. Rabin,
Richard K. Rabin, Herman Ladin and Sidney Ladin
10.9 Amended and Restated Registration Rights Agreement between Iron (10.2)(4)
Mountain and certain Stockholders, dated as of June 21, 1997
10.10 Joinder to Registration Rights Agreement, dated as of October 31, (10.12)(9)
1997, by and between Iron Mountain and Kent P. Dauten
10.11 Stockholders' Agreement, dated September 17, 1997, by and (10.13)(10)
between Iron Mountain and Kent P. Dauten
10.12 Stockholders' Agreement, dated as of February 19, 1997 by and (10.20)(3)
between Iron Mountain and certain stockholders of Safesite Records
Management Corporation
10.13 Asset Purchase and Sale Agreement, dated March 12, 1997, by and (10.22)(5)
among IMRM, Chicago Data Destruction Corporation, and John
Mengel and John S. Mengel
10.14 Asset Purchase and Sale Agreement, dated as of August 20, 1997, (10.2)(7)
by and between IMRM and Records Retention/FileSafe, L.P.
10.15 Stockholders' Agreement, dated as of September 26, 1977, by and (10.16)(9)
among Iron Mountain and certain stockholders of the Arcus Parties
12 Schedule of computation of ratio of earnings to fixed charges (12)(11)
21 Subsidiaries of Iron Mountain Filed herewith
as Exhibit 21
23 Consent of Arthur Andersen LLP Filed herewith
as Exhibit 23
27.1 Financial Data Schedule - December 31, 1997 (27)(11)
27.2 Financial Data Schedule - Restated March 31, 1997, June 30, 1997 Filed herewith
and September 30, 1997. as Exhibit 27.2
27.3 Financial Data Schedule - Restated June 30, 1996, September 30, 1996 Filed herewith
and December 31, 1996. as Exhibit 27.3
</TABLE>
- ----------------
(1) Filed as an Exhibit to Iron Mountain's Registration Statement No. 33-99950
filed with the Commission on December 1, 1995.
(2) Filed as an Exhibit to Iron Mountain's Registration Statement No. 333-10359
filed with the Commission on August 16, 1996.
(3) Filed as an Exhibit to Iron Mountain's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, filed with the Commission, File No.
0-27584.
(4) Filed as an Exhibit to Iron Mountain's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996, filed with the Commission, File No.
0-27584.
(5) Filed as an Exhibit to Iron Mountain's Registration Statement No. 333-24635
filed with the Commission on April 4, 1997, as amended on May 7, 1997 and
May 13, 1997.
(6) Filed as an Exhibit to Iron Mountain's Current Report on Form 8-K dated
October 30, 1997, filed with the Commission, File No. 0-27584.
(7) Filed as an Exhibit to Iron Mountain's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997, filed with the Commission, File No.
0-27584.
(8) Filed as an Exhibit to Iron Mountain's Current Report on Form 8-K/A dated
November 10, 1997, filed with the Commission, File No. 0-27584.
(9) Filed as an Exhibit to Iron Mountain's Registration Statement No. 333-41045
filed with the Commission on November 26, 1997.
(10) Filed as an Exhibit to Iron Mountain's Registration Statement No. 333-44185
filed with the Commission on January 13, 1998.
(11) Filed as an Exhibit to Iron Mountain's Current Report on Form 8-K dated
March 9, 1998, filed with the Commission, File No. 0-27584.
68
Exhibit 2.7
**Confidential portions have been omitted pursuant to a request for confidential
treatment and have been filed separately with the Securities and Exchange
Commission (the "Commission").**
AGREEMENT AND PLAN OF MERGER
AMONG
IRON MOUNTAIN INCORPORATED
IM-3 ACQUISITION CORP.
AND
INTERMATION, INC.
FEBRUARY 24, 1998
<PAGE>
TABLE OF CONTENTS
1. DEFINITIONS...........................................................1
2. BASIC TRANSACTION.....................................................7
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................14
4. REPRESENTATIONS AND WARRANTIES OF THE BUYER
AND THE TRANSACTION SUBSIDIARY.......................................23
5. PRE-CLOSING COVENANTS................................................25
6. POST-CLOSING COVENANTS...............................................30
7. CONDITIONS TO OBLIGATION TO CLOSE....................................31
8. DELIVERIES AND ACTIONS AT CLOSING....................................34
9. TERMINATION..........................................................36
10. REMEDIES FOR BREACHES OF REPRESENTATIONS
AND WARRANTIES.......................................................37
11. MISCELLANEOUS........................................................41
The following schedules and exhibits have been omitted and will be
supplementally filed with the Commission upon request.
SCHEDULES
- ---------
Schedule 1 Designated Recipients
Schedule 2 Net Operating Income
Schedule 3 Principal Stockholders
Disclosure Schedule
EXHIBITS
- --------
2(c)-1 Delaware Certificate of Merger
2(c)-2 Washington Articles of Merger
2(e)(i) Post Closing Escrow Agreement
2(e)(ii) Letter of Transmittal
3(f)-1 Articles of Incorporation of the Company
3(f)-2 Bylaws of the Company
5(e) Buyer Confidentiality Agreement
<PAGE>
MERGER AGREEMENT
Agreement entered into on February 24, 1998, by and among Iron Mountain
Incorporated, a Delaware corporation (the "Buyer"), IM-3 Acquisition Corp., a
Delaware corporation and a wholly-owned Subsidiary of the Buyer (the
"Transaction Subsidiary"), and InterMation, Inc., a Washington corporation (the
"Company"). The Buyer, the Transaction Subsidiary and the Company are referred
to collectively herein as the "Parties".
This Agreement contemplates a transaction in which the Company will be
merged into the Transaction Subsidiary, the Company Stockholders will receive
cash and shares of Common Stock, par value $.01 per share, of the Buyer ("Buyer
Common Stock") in exchange for their Company Shares and the issued and
outstanding shares of the Transaction Subsidiary will remain issued and
outstanding, all as more fully set forth below.
The Board of Directors of the Company has unanimously determined that the
Merger (as defined in ss.2(a)) is in the best interests of the Company and the
Company Stockholders; and the Board of Directors of the Buyer has unanimously
approved this Agreement and the Merger on behalf of the Buyer and the
Transaction Subsidiary as a wholly-owned subsidiary of the Buyer, and the sole
Director of the Transaction Subsidiary has approved this Agreement and the
Merger.
Now, therefore, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows:
1. DEFINITIONS. The following capitalized terms shall have the indicated
meanings as used in this Agreement, unless the context clearly otherwise
requires.
"Accredited Investor" shall have the meaning given such term in Rule 501
under the Securities Act.
"Adjusted Merger Consideration" shall mean the net amount determined
pursuant to the following formula: (a) $24,500,000, (b) less the sum of: (1) the
amount, if any, determined pursuant to ss.2(d)(vii) below, (2) the amount
determined pursuant to ss.5(k) below, and (3) the excess legal fees, if any,
described in ss.11(k), (c) plus the sum of: (1) the Net Operating Income
Adjustment, if any, and (2) the aggregate exercise price of all Vested Rights
paid in cash to the Company upon the exercise of such Vested Rights between the
date hereof and the Closing.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"Affiliate Group" means any affiliated group within the meaning of Code
ss.1504(a).
"Buyer" has the meaning set forth in the preface above.
"Buyer Common Stock" has the meaning set forth in the preface above.
<PAGE>
-2-
"Buyer Confidentiality Agreement" has the meaning set forth in ss.5(e)
below.
"Buyer Net Operating Income Calculation" has the meaning set forth in
ss.10(b)(iii)(A) below.
"Claims" has the meaning set forth in ss.10 below.
"Closing" has the meaning set forth in ss.2(b) below.
"Closing Date" has the meaning set forth in ss.2(b) below.
"COBRA" means the requirements of Part 6 of Subtitle B of Title I of ERISA
and Code ss.4980B.
"Code" means the Internal Revenue Code of 1986, as amended.
"Combined Election" has the meaning set forth in ss.2(d)(ix) below.
"Common Stock" means the common stock, $0.01 par value per share, of the
Company.
"Company" has the meaning set forth in the preface above.
"Company Meeting" means the meeting of the Company Stockholders relating to
the approval of this Agreement.
"Company Net Operating Income Calculation" has the meaning set forth in
ss.5(o) below.
"Company Share" means any of the outstanding shares of the Common Stock.
"Company Stockholder" means any Person who or which holds any Company
Shares.
"Confidential Information" means any information defined as "Evaluation
Materials" in the Confidentiality Agreement or the Buyer Confidentiality
Agreement.
"Confidentiality Agreement" means that certain letter agreement between the
Company and the Buyer dated November 3, 1997.
"Delaware Certificate of Merger" has the meaning set forth in ss.2(c)
below.
"Delaware General Corporation Law" means the General Corporation Law of the
State of Delaware, as amended.
"Designated Recipients" means those current or former Company Stockholders
identified on Schedule 1.
"Determination Price" shall mean the average closing price per share of
Buyer Common Stock for the period of 20 trading days ending two trading days
prior to the Closing Date.
<PAGE>
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Notwithstanding the foregoing, (i) if the Closing Date occurs on or before **The
confidential portion has been so omitted pursuant to a request for confidential
treatment and has been filed separately with the Commission.** and (a) the
average closing price per share of Buyer Common Stock for such period is equal
to or less than **The confidential portion has been so omitted pursuant to a
request for confidential treatment and has been filed separately with the
Commission.**, then the Determination Price shall be **The confidential portion
has been so omitted pursuant to a request for confidential treatment and has
been filed separately with the Commission.** or (b) if the average closing price
per share of Buyer Common Stock for such period is equal to or greater than
**The confidential portion has been so omitted pursuant to a request for
confidential treatment and has been filed separately with the Commission.**,
then the Determination Price shall be **The confidential portion has been so
omitted pursuant to a request for confidential treatment and has been filed
separately with the Commission.**; and (ii) if the Closing Date occurs after
**The confidential portion has been so omitted pursuant to a request for
confidential treatment and has been filed separately with the Commission.** and
(a) the average closing price per share of Buyer Common Stock for such period is
equal to or less than **The confidential portion has been so omitted pursuant to
a request for confidential treatment and has been filed separately with the
Commission.**, then the Determination Price shall be **The confidential portion
has been so omitted pursuant to a request for confidential treatment and has
been filed separately with the Commission.**, or (b) if the average closing
price per share of Buyer Common Stock for such period is equal to or greater
than **The confidential portion has been so omitted pursuant to a request for
confidential treatment and has been filed separately with the Commission.**,
then the Determination Price shall be **The confidential portion has been so
omitted pursuant to a request for confidential treatment and has been filed
separately with the Commission.**. For purposes of calculating the Determination
Price, the closing price for each such trading day shall be the last quoted sale
price or, if not so quoted, the average of the low bid and high asked prices on
the Nasdaq National Market System. The calculation of Determination Price shall
be subject to equitable adjustment in the event of any stock split, stock
dividend, reverse stock split or other similar recapitalization with respect to
the Buyer Common Stock.
"Disclosure Schedule" has the meaning set forth in ss.3 below.
"Dissenting Share" means any Company Share with respect to which any
Company Stockholder has exercised his or its appraisal rights under the
Washington Business Corporation Act.
"Earnest Money Escrow Agent" means Chase Manhattan Bank & Trust Company,
N.A.
"Earnest Money Escrow Agreement" means that certain Escrow Agreement among
the Earnest Money Escrow Agent, the Buyer and the Company, dated December 9,
1997.
"Earnest Money Escrow Deposit" means the **The confidential portion has
been so omitted pursuant to a request for confidential treatment and has been
filed separately with the Commission.** earnest money escrow deposit deposited
by the Buyer with the Earnest Money Escrow Agent pursuant to the Earnest Money
Escrow Agreement.
"Earnest Money Escrow Fund" means the Earnest Money Escrow Deposit,
together with all interest or dividends accrued thereon.
"Effective Time" has the meaning set forth in ss.2(d)(i) below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement, (b) qualified defined contribution retirement
plan or arrangement which is an Employee Pension Benefit Plan, (c) qualified
defined benefit retirement plan or arrangement which is an Employee Pension
Benefit Plan (including any Multiemployer Plan), or (d) Employee Welfare Benefit
Plan or Material fringe benefit or other retirement, bonus or incentive plan or
program.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA ss.3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA ss.3(1).
"Enforceability Exceptions" has the meaning set forth in ss.3(c) below.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
<PAGE>
-4-
"ERISA Affiliate" means each entity which is treated as a single employer
with the Company for purposes of Code ss.414.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exchange Agent" means Chase Mellon Shareholder Services LLC, a Maryland
limited liability company.
"Fiduciary" has the meaning set forth in ERISA ss.3(21).
"Funded Indebtedness" means all indebtedness and other monetary obligations
of the Company, including all bank debt and all amounts payable to Company
Stockholders (other than amounts payable to Company Stockholders in respect of
their Company Shares), but excluding trade payables and capitalized lease
obligations. Funded Indebtedness payable as of the Closing Date will be listed
on a schedule delivered to the Buyer by the Company prior to the Closing as
further described in ss.5(l).
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"Information Statement" means the Company's Information Statement dated
November 1, 1997.
"Intellectual Property" means (a) inventions (whether patentable or
unpatentable and whether or not reduced to practice) and all improvements
thereto, (b) trademarks, service marks, trade dress, logos, trade names, and
corporate names, and including all goodwill associated therewith, and all
applications, registrations, and renewals in connection therewith, (c) trade
secrets and confidential business information (including ideas, know-how, work
processes and techniques, technical data, designs, drawings, specifications,
customer and supplier lists, pricing and cost information, and business and
marketing plans and proposals), (d) computer software (including data and
related documentation), (e) other proprietary rights, and (f) copies and
tangible embodiments thereof (in whatever form or medium).
"Knowledge" with respect to a representation or warranty by the Company
means actual knowledge of any member of the Board of Directors of the Company
after inquiry of employees of the Company whose responsibilities cover the
subject matter of the representation or warranty.
"Material" means, when used in connection with any action, representation,
warranty, covenant, inaction or undertaking, an amount or effect on the matter
so qualified in excess of **The confidential portion has been so omitted
pursuant to a request for confidential treatment and has been filed separately
with the Commission.**.
"Material Adverse Effect" means, when used in connection with any
representation, warranty or covenant, any breach or failure to comply resulting
in a loss or losses in an amount in excess of **The confidential portion has
been so omitted pursuant to a request for confidential treatment and has been
filed separately with the Commission.**.
"Merger" has the meaning set forth in ss.2(a) below.
<PAGE>
-5-
"Merger Consideration" means the aggregate Per Share Merger Consideration
payable in respect of all of the Pro Forma Outstanding Company Shares.
"Merger Documents" means the Washington Articles of Merger and the Delaware
Certificate of Merger, including all attachments thereto.
"Net Operating Income" means the total revenues of the Company less the
total operating expenses of the Company, calculated pursuant to the format set
forth in Schedule 2 in accordance with GAAP and on a basis consistent with the
past practices of the Company; provided, however, that any accruals customarily
done on an annual basis shall be done on a monthly basis; and provided, further,
that any expenses incurred by the Company (i) in the preparation of audited
financial statements that are to be borne by the Buyer pursuant to ss.5(n)
below, (ii) in connection with employee bonuses permitted under ss.5(d) below or
(iii) that relate solely to the transactions contemplated by this Agreement
shall be excluded from the calculation of Net Operating Income.
"Net Operating Income Adjustment" means the sum of (a) the product obtained
by multiplying (i) **The confidential portion has been so omitted pursuant to a
request for confidential treatment and has been filed separately with the
Commission.** by (ii) that number of whole calendar months, if any, (x) that
shall have elapsed beginning with the month of March 1998 to (but in no event
including) the month in which the Closing occurs and (y) for which the Net
Operating Income of the Company shall have been equal to or greater than **The
confidential portion has been so omitted pursuant to a request for confidential
treatment and has been filed separately with the Commission.** and (b) the
product obtained by multiplying (i) **The confidential portion has been so
omitted pursuant to a request for confidential treatment and has been filed
separately with the Commission.** and (ii) a fraction, the numerator of which is
the number of days from the first day of the month in which the Closing occurs
to and including the Closing Date and the denominator of which is the total
number of days in the month in which the Closing occurs.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency), and for the Company shall include, among other things, the
continuation of the Company's program of racking and facility relocation
projects in Seattle and the move-in of major new accounts in accordance with the
Company's existing plans.
"Party" has the meaning set forth in the preface above.
"Per Share Escrow Deposit" means the amount deposited with the Post Closing
Escrow Agent pursuant to ss.2(e)(i)(C).
"Per Share Merger Consideration" has the meaning set forth in ss.2(d)(v)(A)
below.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, an unincorporated organization,
or a governmental entity (or any department, agency, or political subdivision
thereof).
"Post Closing Escrow Agent" means Chase Manhattan Bank & Trust Company,
N.A.
"Post Closing Escrow Agreement" has the meaning set forth in ss.2(e) below.
<PAGE>
-6-
"Post Closing Escrow Deposit" means the aggregate of all Per Share Escrow
Deposits deposited with the Escrow Agent in respect of all Company Shares
outstanding immediately prior to the Effective Time.
"Post Closing Escrow Fund" means the Post Closing Escrow Deposit, plus any
interest or dividends accrued thereon from and after the Effective Time.
"Principal Stockholders" means those Company Stockholders identified on
Schedule 3.
"Pro Forma Outstanding Company Shares" has the meaning set forth in
ss.2(d)(vi) below.
"Prospectus" has the meaning set forth in ss.4(f)(i) below.
"Reportable Event" has the meaning set forth in ERISA ss.4043.
"Representatives" has the meaning set forth in Section 10(d)(v).
"Requisite Stockholders" means those Company Stockholders necessary to
effect the Requisite Stockholder Approval.
"Requisite Stockholder Approval" means the following: (i) the approval of
the Merger and this Agreement by the vote of Company Stockholders and (ii) the
approval of the Merger and this Agreement by the vote of those Company
Stockholders who are to receive Combined Stockholder Merger Consideration
hereunder as a separate voting group. The vote under each of the items described
in the preceding sentence must be by a two-thirds majority of the Company Shares
entitled to vote.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge
or other security interest, other than (a) mechanic's, materialman's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that the
taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, and (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money.
"Share Price" equals the quotient of the Adjusted Merger Consideration
divided by the Pro Forma Outstanding Company Shares.
"Stockholders Agreement" means that Stockholders Agreement dated as of the
date hereof, among the Buyer and the Principal Stockholders.
"Subsidiary" means any corporation or limited liability company with
respect to which a specified Person (or a Subsidiary thereof) owns a majority of
the common stock or other equity interest or has the power to vote or direct the
voting of sufficient securities to elect a majority of the directors or similar
managing body.
<PAGE>
-7-
"Surviving Corporation" has the meaning set forth in ss.2(a) below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code ss.59A), customs
duties, capital stock, franchise, profits, withholding, social security (or
similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest, penalty,
or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Transaction Subsidiary" has the meaning set forth in the preface above.
"Vested Rights" means all Common Stock issuable under all options,
warrants, securities convertible into Common Stock and similar rights to acquire
Common Stock exercisable at or prior to the Closing.
"Washington Articles of Merger" has the meaning set forth in ss.2(c) below.
"Washington Business Corporation Act" means the Washington Business
Corporation Act, RCW23B, et seq., as amended.
2. BASIC TRANSACTION.
(a) The Merger. On and subject to the terms and conditions of this
Agreement, the Company will merge with and into the Transaction Subsidiary (the
"Merger") at the Effective Time. The Transaction Subsidiary shall be the
corporation surviving the Merger (the "Surviving Corporation").
(b) The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Graham & James LLP,
1001 Fourth Avenue, Suite 4500, Seattle, Washington, commencing at 9:00 a.m.
local time on the date (the "Closing Date") designated by the Buyer to the
Company in writing upon not less than two business days' notice; provided,
however, that none of the Parties shall be obligated to close on a date so
designated unless all conditions to the obligations of the Parties to consummate
the transactions contemplated hereby shall have been satisfied or waived; and
provided, further, that the Closing Date shall be no earlier than March 26, 1998
nor later than June 24, 1998.
(c) Actions at the Closing. At the Closing, (i) the Company will deliver to
the Buyer and the Transaction Subsidiary the certificates, instruments, and
documents specifically listed in ss.8(a) below, (ii) the Buyer and the
Transaction Subsidiary will deliver to the Company the certificates,
instruments, and documents specifically listed in ss.8(b) below, (iii) the
Company and the Transaction Subsidiary will file with the Secretary of State of
the State of Delaware a Certificate of Merger in the form attached hereto as
Exhibit 2(c)-1 (the "Delaware Certificate of Merger") and the
<PAGE>
-8-
Transaction Subsidiary will file with the Secretary of State of the State of
Washington Articles of Merger in the form attached hereto as Exhibit 2(c)-2 (the
"Washington Articles of Merger"), (iv) the Buyer will deliver the amounts
described in ss.5(k) to the Company for payment to the Designated Recipients,
(v) the Buyer will cause the Surviving Corporation to deliver the Per Share
Escrow Deposit to the Post Closing Escrow Agent in the manner provided in
ss.2(e)(i)(B)(2) below, (vi) the Buyer will cause the Surviving Corporation to
pay the Funded Indebtedness, and (vii) the Buyer will cause the Surviving
Corporation to deliver the Merger Consideration to the Exchange Agent in the
manner provided below in this ss.2.
(d) Effect of Merger.
(i) General. The Merger shall become effective upon the filing of the
Washington Articles of Merger with the Secretary of State of the State of
Washington and the Delaware Certificate of Merger with the Secretary of State of
the State of Delaware, or at such date and time thereafter as is provided in the
Merger Documents (the "Effective Time"). The Merger shall have the effect set
forth in the Washington Business Corporation Act and the Delaware General
Corporation Law. The Surviving Corporation may, at any time after the Effective
Time, take any action (including executing and delivering any document) in the
name and on behalf of either the Company or the Transaction Subsidiary in order
to carry out and effectuate the transactions contemplated by this Agreement.
(ii) Certificate of Incorporation. The Certificate of Incorporation of
the Surviving Corporation shall be the Certificate of Incorporation of the
Transaction Subsidiary immediately prior to the Effective Time.
(iii) Bylaws. The Bylaws of the Surviving Corporation shall be the
Bylaws of the Transaction Subsidiary immediately prior to the Effective Time.
(iv) Directors and Officers. The directors and officers of the
Transaction Subsidiary immediately prior to the Effective Time shall be the
directors and officers of the Surviving Corporation as of and after the
Effective Time (retaining their respective positions and terms of office), and
the directors and officers of the Company prior to the Effective time shall not
be directors or officers of the Surviving Corporation.
(v) Conversion of Company Shares. At and as of the Effective Time:
(A) Each Company Share (other than shares of Common Stock owned
by any Subsidiary of the Company and other than Dissenting Shares) shall, by
reason of the Merger and without any action by the holders thereof, be converted
into one of the following (the "Per Share Merger Consideration"):
(1) for such Company Shares held by Company Stockholders who
have not effectively made a Combined Election or who have properly
revoked a Combined Election ("Cash Stockholders"), the right to receive
cash in an amount equal to the Share Price (the "Cash Stockholder Merger
Consideration"); or
<PAGE>
-9-
(2) for such Company Shares held by Company Stockholders who
have effectively made and not revoked a Combined Election ("Combined
Stockholders"), the right to receive:
(x) subject to the adjustments described in ss.2(d)(v)(B),
$9,500,000 (the "Original Cash Amount") less the sum of:
(i) Funded Indebtedness as of the Closing Date as described in
ss.5(l), (ii) the aggregate Cash Stockholder Merger Consideration
payable to all Cash Stockholders, (iii) the payment to Designated
Recipients described in ss.5(k) and (iv) the excess legal fees, if
any, described in ss.11(k), divided by the number of Pro Forma
Outstanding Company Shares held by Combined Stockholders (the
"Combined Stockholder Cash Amount"); plus
(y) that number of shares of Buyer Common Stock calculated
by (i) subtracting the Combined Stockholder Cash Amount from the
Share Price and (ii) dividing the resulting amount by the
Determination Price (the "Combined Stockholder Stock Amount" and,
collectively with the Combined Stockholder Cash Amount, the
"Combined Stockholder Merger Consideration").
(B) In the event the Buyer shall have consummated a public
offering of Buyer Common Stock for cash between the date hereof and the Closing
Date, the Original Cash Amount shall, subject in each instance to the proviso
below, be adjusted at Closing as follows:
(1) if the proceeds to the Buyer of such offering (net of
underwriting discounts and commissions and associated expenses) exceed
$75,000,000, the Original Cash Amount shall be changed to $12,500,000;
and
(2) if the proceeds to the Buyer of such offering (net of
underwriting discounts and commissions and associated expenses) exceed
$100,000,000, the Original Cash Amount shall be changed to $15,250,000;
provided, however, that in the event any such change in the Original Cash Amount
were to result in the value of the aggregate Combined Stockholder Stock Amount,
based on the lower of (i) the closing price of Buyer Common Stock on the Nasdaq
National Market System for the trading day immediately prior to the Closing
Date, as provided by the Nasdaq National Market System and (ii) the
Determination Price (the "Aggregate Stock Consideration Amount"), being less
than 45% of the sum of the value of the Merger Consideration based on such
closing price plus amounts payable upon Closing to Designated Recipients
pursuant to ss.5(k) (the "Aggregate Consideration Amount"), then any applicable
change in the Original Cash Amount provided for in clause (B)(1) or (B)(2) above
shall be limited to a change to the highest amount such that the Aggregate Stock
Consideration Amount would be equal to or greater than 45% of the Aggregate
Consideration Amount.
(C) Any Combined Stockholders who are Affiliates with one
another may give irrevocable written notice to the Exchange Agent and the Buyer
not less than five days prior to the Closing Date of the proportions in which
such Persons elect to allocate among themselves the
<PAGE>
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aggregate Combined Stockholder Cash Amount and aggregate Combined Stockholder
Stock Amount which they are entitled to receive upon the Merger, and the Buyer
shall instruct the Exchange Agent to pay the Combined Stockholder Merger
Consideration to be paid to such Persons in accordance with such election.
(D) In lieu of issuing fractional shares, the Buyer may convert a
Combined Stockholder's right to receive shares of the Buyer Common Stock
pursuant to Section 2(d)(v)(A)(2)(y) into a right to receive the highest whole
number of shares of the Buyer Common Stock constituting the aggregate Combined
Stockholder Stock Amount to which the Combined Stockholder is entitled plus cash
equal to the fraction of a share of the Buyer Common Stock to which the Combined
Stockholder would otherwise be entitled multiplied by the Determination Price,
and the aggregate Combined Stockholder Stock Amount to which the Combined
Stockholder is entitled shall be deemed to be such number of shares of the Buyer
Common Stock plus such cash.
After the Effective Time, no Company Share shall be deemed to be outstanding or
to have any rights other than those set forth above in this ss.2(d)(v).
(vi) Pro Forma Outstanding Company Shares; Treatment of Vested Rights.
For purposes of this ss.2(d), "Pro Forma Outstanding Company Shares" means the
aggregate number of Company Shares outstanding at or immediately prior to the
Effective Time after the cash exercise (as contemplated by the definition of
Adjusted Merger Consideration) of all Vested Rights then exercisable.
(vii) Adjustment for Dividends, Distributions, Etc. The amount payable
by the Buyer hereunder shall be decreased, as described in the definition of
Adjusted Merger Consideration above, by an amount equal to any payment or
distribution made by the Company in respect of any dividends or distributions of
cash or other assets of the Company to the Company Stockholders in respect of
their Company Shares or with respect to any redemptions of Company Shares in
contravention of the provisions of ss.3(f)(ix) or ss.5(d)(iii) below.
(viii) Capital Stock of the Transaction Subsidiary. At and as of the
Effective Time, each issued and outstanding share of common stock, $.01 par
value per share, of the Transaction Subsidiary shall continue to be an issued
and outstanding share of the common stock of the Surviving Corporation.
(ix) Procedures for Making Combined Elections.
(A) Each Person who, at the record date (the "Company Record
Date") for determining Company Stockholders eligible to vote the shares of
Common Stock at the Company Meeting, (x) is a record holder of shares of Common
Stock (other than the Company or any Subsidiary of the Company) or Vested
Rights, (y) votes such shares in favor of this Agreement, and (z) is an
Accredited Investor, shall have the right to submit an Election Form (as defined
in ss.2(d)(ix)(B)) specifying that such Person elects to have all shares of
Common Stock held by such Person as of the Company Record Date, and any
additional shares held as of the Effective Time pursuant to the exercise of
Vested Rights, converted into the right to receive the Combined Stockholder
Merger Consideration (the "Combined Election").
<PAGE>
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(B) The Company shall mail to Company Stockholders, together with
the notice of meeting, the Prospectus (if not already delivered) and the other
information to be delivered to such Stockholders, an election form (the
"Election Form") providing for such Stockholders (x) to make a Combined
Election, (y) to certify as to their status as Accredited Investors and (z) to
agree to hold shares of Buyer Common Stock received in the Merger subject to
lock-up terms identical to those contained in the Stockholders Agreement. As of
12:00 noon Seattle, Washington time on the date of the Company Meeting (the
"Election Deadline"), all Company Stockholders on the Company Record Date that
shall not have submitted to the Company or shall have properly revoked an
effective, properly completed Election Form shall be deemed not to have made a
Combined Election and, accordingly, shall receive the Cash Stockholder Merger
Consideration.
(C) Any Combined Election shall have been validly made only if
the Company shall have received by the Election Deadline, an Election Form
properly completed and executed by such Stockholder. Such Combined Election
shall be binding upon any subsequent holder of Common Stock in respect of which
a Combined Election has been made. Any Company Stockholder (other than a holder
who has submitted an irrevocable election) may at any time prior to the Election
Deadline revoke such holder's election by written notice to the Company received
by the close of business on the day prior to the Election Deadline. As soon as
practicable after the Election Deadline, the Company and the Buyer shall
determine the allocation of the cash portion of the Merger Consideration and the
stock portion of the Merger Consideration.
(D) The Company and the Buyer shall reasonably agree on such
reasonable rules, not inconsistent with the terms of this Agreement, governing
the validity of the Election Forms and the manner and extent to which Combined
Elections are to be taken into account in making the determinations prescribed
by ss.2(d).
(e) Procedure for Payment.
(i) (A) On the Closing Date, with respect to the Company Shares
which are not Dissenting Shares, the Buyer shall cause to be delivered to the
Exchange Agent the Merger Consideration (including, to the extent applicable,
certificates for shares of Buyer Common Stock), less the sum of (i) the Earnest
Money Escrow Deposit in respect of such Company Shares which are not Dissenting
Shares and (ii) the Post Closing Escrow Deposit.
(B) On the Closing Date, the Buyer and the Company shall issue
joint written instructions to the Earnest Money Escrow Agent: (1) to disburse
**The confidential portion has been so omitted pursuant to a request for
confidential treatment and has been filed separately with the Commission.** of
the Earnest Money Escrow Fund, less the Earnest Money Escrow Deposit in respect
of Company Shares which are not Dissenting Shares, to the Exchange Agent as part
of the Merger Consideration, and (2) to disburse the balance of the Earnest
Money Escrow Fund to the Buyer.
(C) On the Closing Date, with respect to the Company Shares which
are not Dissenting Shares, the Buyer shall cause an amount in cash (the "Per
Share Escrow Deposit") equal to the quotient derived by dividing **The
confidential portion has been so omitted pursuant to a request for confidential
treatment and has been filed separately with the Commission.** by the Pro Forma
Outstanding Company Shares to be paid to the Post Closing Escrow Agent pursuant
to the terms of a Post Closing Escrow Agreement substantially in the form of
Exhibit 2(e)(i) among the Buyer, the Surviving Corporation, the Post Closing
Escrow Agent and the Representatives, as agents for and representatives of the
<PAGE>
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Company Stockholders (the "Post Closing Escrow Agreement"); provided, however,
that with respect to any Combined Stockholder, the aggregate Per Share Escrow
Deposit attributable to such Stockholder in respect of all shares of Common
Stock held by such Stockholder shall be withheld from the shares of Buyer Common
Stock otherwise to be issued to such Stockholder in an amount (rounded up to the
nearest whole share) equal to the quotient obtained by dividing (x) the
aggregate Per Share Escrow Deposit otherwise attributable to such Stockholder in
respect of all shares of Common Stock held by such Stockholder by (y) the
Determination Price. The respective interests of the Company Stockholders in the
Post Closing Escrow Fund (other than those Company Stockholders holding
Dissenting Shares) shall be based on whether cash or Buyer Common Stock was
contributed to the Post Closing Escrow Fund in respect of such Stockholder.
(ii) The procedure for payment of the Cash Stockholder Merger
Consideration and Combined Stockholder Merger Consideration for all Company
Shares which are not Dissenting Shares shall be as follows:
(A) As promptly as practicable after the Effective Time, the
Exchange Agent shall mail or deliver to each Company Stockholder holding a
certificate or certificates which prior to the Effective Time represented
Company Shares a letter of transmittal substantially in the form of Exhibit
2(e)(ii) (the "Letter of Transmittal") and instructions to effect the surrender
of such certificates in exchange for such Company Stockholder's portion of the
aggregate Cash Stockholder Merger Consideration or aggregate Combined
Stockholder Merger Consideration, as applicable (minus in each case such Company
Stockholder's share of the Per Share Escrow Deposit, as stated in a schedule
given by the Company to the Exchange Agent, until disbursement thereof). The
Exchange Agent will accept the surrender of properly tendered certificates which
formerly represented the holders' Company Shares, effect payment of the Cash
Stockholder Merger Consideration or Combined Stockholder Merger Consideration,
as applicable (minus the Per Share Escrow Deposit until disbursement thereof)
allocable to each holder of Company Shares, and deliver to the Buyer such
surrendered certificates. No interest will accrue or be paid to the holder of
any outstanding Company Shares.
(B) In the event any former Company Stockholder (including
Company Stockholders with respect to Dissenting Shares) fails or refuses to
tender certificates for his Company Shares within 180 days after the Effective
Time, the Buyer may cause the Exchange Agent to pay over to the Surviving
Corporation any portion of the Merger Consideration then held in respect of such
former Company Stockholders, and thereafter all such former Company Stockholders
shall be entitled to look only to the Surviving Corporation (subject to
abandoned property, escheat and other similar laws) as general creditors thereof
with respect to the portion of the Merger Consideration payable or issuable upon
surrender of their certificates. None of the directors, officers or employees of
the Company, the Buyer or the Transaction Subsidiary or any Company Stockholder
or stockholder of the Buyer shall have any liability to any such former Company
Stockholder or to any governmental agency in respect of such payments.
(iii) The Buyer shall cause the Surviving Corporation to pay all
charges and expenses of the Exchange Agent.
<PAGE>
-13-
(f) Lost or Stolen Certificates. In the event any certificate representing
Company Shares shall have been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the Person claiming such certificate to be lost,
stolen or destroyed and the execution of an indemnity in respect thereof (all as
provided in the Letter of Transmittal), the Exchange Agent shall be authorized,
in exchange for such affidavit and indemnity, to deliver the Cash Stockholder
Merger Consideration or Combined Stockholder Merger Consideration (minus the Per
Share Escrow Deposit until disbursement thereof) in respect of such lost,
stolen, or destroyed certificate representing Company Shares.
(g) Closing of Transfer Records. After the close of business on the Closing
Date, transfers of Company Shares outstanding prior to the Effective Time shall
not be made on the stock transfer books of the Surviving Corporation.
(h) Dissenting Shares.
(i) Notwithstanding any other provision of this Agreement to the
contrary, Company Shares outstanding immediately prior to the Effective Time
that are held by Company Stockholders who have not voted such Company Shares in
favor of the Merger and who shall have demanded properly in writing appraisal
for such Company Shares in accordance with the Washington Business Corporation
Act, and who shall not have withdrawn such demand or otherwise have forfeited
appraisal rights (collectively, the "Dissenting Shares"), shall not be converted
into or represent the right to receive any portion of the Merger Consideration.
Such Company Stockholders shall be entitled to receive payment of the appraised
value of such Company Shares held by them in accordance with the provisions of
the Washington Business Corporation Act, except that all Dissenting Shares held
by Company Stockholders who shall have failed to perfect or who effectively
shall have withdrawn, forfeited or lost their rights to appraisal of such
Company Shares under the Washington Business Corporation Act shall thereupon be
deemed to have been converted into and to have become exchangeable for, as of
the Effective Time, the right to receive, without any interest thereon, the
portion of the aggregate Cash Stockholder Merger Consideration or the portion of
the aggregate Combined Stockholder Merger Consideration, as the case may be, to
which such Company Stockholder would have been entitled in respect of such
Company Shares but for such Company Stockholder's demand for an appraisal (less
the Per Share Escrow Deposit in respect of such Company Shares until
disbursement thereof), upon surrender of the certificates that formerly
evidenced such Company Shares in the manner provided in ss.2(e) (upon which
surrender the Company will cause the Per Share Escrow Deposit in respect of such
Company Shares to be paid to the Post Closing Escrow Agent pursuant to the terms
of Post Closing Escrow Agreement). The Surviving Corporation shall pay the
appraised value for any Dissenting Shares as determined in accordance with the
Washington Business Corporation Act, and no such payment shall form the basis of
a claim against the Company Stockholders under this Agreement or the Post
Closing Escrow Agreement.
(ii) The Company shall give the Buyer prompt written notice of its
receipt of any demands for appraisal, any withdrawals of such demands and any
other instruments served by Company Stockholders pursuant to the Washington
Business Corporation Act relating thereto. The Company and the Buyer shall
jointly direct all negotiations and proceedings with respect to demands for
appraisal under the Washington Business Corporation Act. The Company shall not,
except with
<PAGE>
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the prior written consent of the Buyer, settle or offer to settle, or make any
payment with respect to, any demands for appraisal.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and
warrants to the Buyer and the Transaction Subsidiary that the statements
contained in this ss.3 are correct and complete as of the date of this Agreement
and will be correct and complete as of the Closing Date (as though made as of
the Closing Date), except those statements which specify a different date (which
shall be correct and complete as of such date) and as set forth in the
disclosure schedule accompanying this Agreement (the "Disclosure Schedule"). The
Disclosure Schedule will be arranged in paragraphs corresponding to the lettered
and numbered paragraphs contained in this ss.3. The Company makes no
representations and warranties of any kind in connection with the transactions
contemplated by this Agreement except as expressly set forth in this ss.3.
(a) Organization, Qualification, and Corporate Power. The Company is a
corporation duly organized and validly existing under the laws of the State of
Washington. The Company is duly authorized to conduct business and is in good
standing as a foreign corporation under the laws of the State of Oregon, which
is the only jurisdiction where such qualification is required, except where the
lack of such qualification would not have a Material Adverse Effect on the
financial condition, business, assets or operating cash flow of the Company,
taken as a whole, or on the ability of the Company to consummate the
transactions contemplated by this Agreement. The Company has full corporate
power and authority to carry on the businesses in which it is engaged and to own
and use the properties owned and used by it.
(b) Capitalization; Subsidiaries. The entire authorized capital stock of
the Company consists of 20,000,000 shares of Common Stock, of which 10,534,063
shares are issued and outstanding as of the date of this Agreement and, upon
exercise of all Vested Rights, 10,971,863 will be issued and outstanding as of
immediately prior to the Effective Time. The Disclosure Schedule identifies each
of the Company Stockholders, and the number of Company Shares which will be held
by each after giving effect to the exercise of the Vested Rights contemplated by
this Agreement. All of the Company Shares have been duly authorized and are
validly issued, fully paid and nonassessable. The Disclosure Schedule describes
all outstanding or authorized options, warrants, purchase rights, subscription
rights, conversion rights, exchange rights, or other contracts or commitments
that could require the Company to issue, sell, or otherwise cause to become
outstanding any of the Common Stock. The Buyer and the Transaction Subsidiary
shall not be required to pay any amounts in order to terminate any such options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights or other similar contracts and commitments, all of which will have been
fully exercised or cancelled prior to or as of the Effective Time. There are no
outstanding or authorized stock appreciation, phantom stock or similar rights
with respect to the Company.
Except as set forth on the Disclosure Schedule: (i) the Company has no
Subsidiaries and has never had any Subsidiaries, and (ii) the Company does not
own, directly or indirectly, any interest in any other corporation, limited
liability company, business trust, joint stock company, partnership or other
business organization, or the right to acquire an interest in, or to control,
any such entity.
<PAGE>
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(c) Authorization of Transaction. The Company has full power and authority
(including full corporate power and authority) to execute and deliver this
Agreement and to perform its obligations hereunder; provided, however, that the
consummation of the Merger is subject to the Requisite Stockholder Approval.
This Agreement and the transactions contemplated herein have been duly
authorized by all necessary corporate action (other than the Requisite
Stockholder Approval) on the part of the Company, and in connection therewith
the board of directors of the Company has determined or will determine, in
accordance with its statutory duties, that this Agreement and the Merger are in
the best interests of the Company and the Company Stockholders and that the
board of directors will recommend approval thereof by the Company Stockholders.
Subject to receipt of the Requisite Stockholder Approval, this Agreement
constitutes the valid and legally binding obligation of the Company, enforceable
in accordance with its terms and conditions, except that enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, fraudulent
transfer, moratorium or other similar laws of general application now or
hereafter in effect relating to the enforcement of creditors' rights generally
and except that the remedies of specific performance, injunction and other forms
of equitable relief are subject to certain tests of equity jurisdiction,
equitable defenses and the discretion of the court before which any proceeding
therefor may be brought (the "Enforceability Exceptions").
(d) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the Company is subject or any provision of the articles of
incorporation or bylaws of the Company or (ii) except as set forth in the
Disclosure Schedule, conflict with, result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license or instrument to which the Company is a
party or by which it is bound or to which any of its assets is subject (or
result in the imposition of any Security Interest upon any of its assets),
except where the violation, conflict, breach, default, acceleration,
termination, modification, cancellation or failure to give notice would not have
a Material Adverse Effect on the business, financial condition, operations,
assets or operating cash flow of the Company, taken as a whole, or on the
ability of the Company to consummate the transactions contemplated by this
Agreement. To the Knowledge of the Company, other than in connection with the
provisions of the Washington Business Corporation Act, the Company does not need
to give any notice to, make any filing with, or obtain any authorization,
consent or approval of any government or governmental agency in order for the
Company to consummate the transactions contemplated by this Agreement.
(e) Financial Statements. The Company has furnished to the Buyer the
following financial statements (together, the "Financial Statements"): (i) the
unaudited balance sheet of the Company as of September 30, 1997 and (ii) the
statement of income and expenses of the Company for the nine-month period ended
September 30, 1997.
The Financial Statements have been prepared in accordance with GAAP applied
on a consistent basis throughout the period covered thereby, and present fairly
the financial condition of the Company as of such date and the results of
operations of the Company for such period, and are consistent with the books and
records of the Company; provided, however, that the Financial
<PAGE>
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Statements are subject to normal year-end adjustments (which will not be
Material individually or in the aggregate) and lack footnotes and other
presentation items.
Notwithstanding the foregoing, the Company makes no representation or
warranty of any kind as to the Financial Statements as they relate to
InterMation Software LLC ("Software LLC"). The Financial Statements do not
include any income, expense, asset or liability items related to Software LLC,
and the Company has no liability or obligation (financial or otherwise) to
Software LLC, and is not liable, directly or contingently, for any liability of
Software LLC or any lease to which Software LLC is a party.
The Disclosure Schedule identifies (i) each bank and other financial
institution to which the Company is indebted and the amount of indebtedness owed
as of January 31, 1998, (ii) each Company Stockholder to which the Company is
indebted and the amount of indebtedness owed as of January 31, 1998, and (iii)
each Company Stockholder who has guaranteed obligations of the Company (and the
obligations guaranteed).
(f) Absence of Certain Changes or Events. Since September 30, 1997 there
has not been any Material adverse change in the business, financial condition,
operations, assets or operating cash flow of the Company, taken as a whole.
Without limiting the generality of the foregoing, during such period, except as
set forth in the Disclosure Schedule, the Company has not:
(i) voluntarily incurred any obligation or liability (fixed or
contingent), except (A) normal trade or business obligations or liabilities, and
(B) increases in Funded Indebtedness, in each case incurred in the Ordinary
Course of Business, none of which would have a Material Adverse Effect on the
business, financial condition, assets or cash flow of the Company, taken as a
whole, and (C) in connection with this Agreement, the agreements contemplated
hereby and the transactions contemplated hereby and thereby;
(ii) discharged or satisfied any Material Security Interest or paid
any Material obligation or liability (fixed or contingent), other than in the
Ordinary Course of Business;
(iii) mortgaged, pledged or subjected to any Security Interest any of
its assets or properties;
(iv) transferred, leased or otherwise disposed of any of its Material
assets or properties or acquired any Material assets or properties except in
each case in the Ordinary Course of Business;
(v) made any capital investment or expenditure (or series of related
capital investments and expenditures) either involving more than **The
confidential portion has been so omitted pursuant to a request for confidential
treatment and has been filed separately with the Commission.** or outside the
Ordinary Course of Business;
(vi) delayed or postponed the payment of Material accounts payable or
other Material liabilities other than in the Ordinary Course of Business;
<PAGE>
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(vii) made or granted any wage or salary increase or bonus applicable
to any group or classification of employees generally or to any officer of the
Company, except in each case in the Ordinary Course of Business, or entered into
any written employment contract with, or made any Material loan (other than
advances in the Ordinary Course of Business) to, or entered into any Material
transaction of any other nature with, any officer or employee of the Company, or
adjusted, amended or terminated any bonus, profit-sharing, incentive, severance
or other plan, contract or commitment for the benefit of its employees or
officers (or taken any such action with respect to any other Employee Benefit
Plan);
(viii) suffered any casualty loss or damage (whether or not such loss
or damage shall have been covered by insurance) which affects in any Material
respect its ability to conduct business;
(ix) declared any dividends or distributed any cash or other assets to
Company Stockholders in respect of the Company Shares, repurchased or redeemed
any Company Shares from any Company Stockholders or engaged in any similar
transactions since September 30, 1997, except for redemptions of Company Stock
pursuant to the Company's solicitation dated on or about May 23, 1997 (the "1997
Redemption"), pursuant to which approximately 850 Company Shares were redeemed
since September 30, 1997 for an aggregate redemption price of less than $5,000;
(x) authorized or effected any amendment or restatement of the
articles of incorporation or by-laws of the Company; or
(xi) made any binding commitment to do any of the foregoing.
In addition, the Company has not amended its Articles of Incorporation or Bylaws
since the date of the Articles of Incorporation and Bylaws provided by the
Company to the Buyer pursuant to Buyer's due diligence request, copies of which
are attached hereto as Exhibits 3(f)-1 and 3(f)-2, respectively.
(g) Undisclosed Liabilities. To the Knowledge of the Company, the Company
has no liability (whether asserted or unasserted, absolute or contingent,
accrued or unaccrued, liquidated or unliquidated, or due or to become due),
including any liability for Taxes, except for (i) liabilities set forth in the
September 30, 1997 balance sheet, (ii) liabilities which have arisen after
September 30, 1997 in the Ordinary Course of Business (none of which results
from, arises out of, relates to, or was caused by any breach of contract,
intentional tort, infringement or violation of law), and (iii) liabilities set
forth in the Disclosure Schedule.
(h) Taxes. With respect to Taxes:
(i) the Company has filed, within the time and in the manner
prescribed by law, all Tax Returns, required to be filed under federal, state or
local laws by the Company;
(ii) the Company has within the time and in the manner prescribed by
law, paid (and until the Effective Time will, within the time and in the manner
prescribed by law, pay) all Taxes that are shown as due and payable on all Tax
Returns filed by the Company;
<PAGE>
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(iii) the Company has established (and until the Effective Time will
establish) on its books and records reserves (to be specifically designated as
an increase to current liabilities) that are adequate for the payment of all
Taxes accrued or accruable under GAAP for all periods prior to and including the
Closing Date;
(iv) there are no liens for Taxes upon the assets of the Company or
Software LLC except liens for Taxes not yet due;
(v) the Company has not filed (and will not file prior to the
Effective Time) any consent agreement under ss.341(f) of the Code and none of
the assets of the Company are subject to an election under ss.341(f) of the
Code. The Company has not been a United States real property holding corporation
within the meaning of ss.897(c)(2) of the Code during the applicable period
specified in ss.897(c)(1)(A)(ii) of the Code;
(vi) except as set forth in the Disclosure Schedule (which shall set
forth the type of return, date filed, and date of expiration of the statute of
limitations), no deficiency for any Taxes has been proposed, asserted or
assessed against the Company which has not been resolved and paid in full;
(vii) except as set forth in the Disclosure Schedule, there are no
outstanding written waivers or comparable written consents regarding the
application of the statute of limitations with respect to any Taxes or Tax
Returns that have been given by the Company;
(viii) except as set forth in the Disclosure Schedule, which shall set
forth the nature of the proceeding, the type of return, the deficiencies
proposed or assessed and the amount thereof, and the taxable year in question,
no federal, state or local audits or other administrative proceedings or court
proceedings are presently pending, or to the Knowledge of the Company,
threatened, with regard to any Taxes or Tax Returns;
(ix) the Company is not a party to any tax-sharing or allocation
agreement, nor does it owe any amount under any tax-sharing or allocation
agreement;
(x) the Company has no actual or potential liability for any tax
obligation of any taxpayer (including without limitation any affiliated group of
corporations or other entities that included the Company during a prior period)
other than itself;
(xi) no amounts payable by the Company will fail to be deductible for
federal income tax purposes by virtue of ss.280G of the Code;
(xii) except as set forth in the Disclosure Schedule, the Company has
complied (and until the Effective Time will comply) with all applicable laws,
rules and regulations relating to the payment of withholding Taxes (including,
without limitation, withholding of Taxes pursuant to Sections 1441 or 1442 of
the Code) and has, within the time and in the manner prescribed by law, withheld
from employees' wages and paid over to the proper governmental authorities all
Material amounts required to be so withheld and paid over under all applicable
laws;
<PAGE>
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(xiii) until March 23, 1995 the Company was a member of an Affiliate
Group of which Shurgard Incorporated ("Shurgard") was the parent company. The
Tax Returns of Shurgard for the Tax years through 1994 and for the Tax period of
January 1, 1995 through March 23, 1995 have been audited (or the statutes of
limitations with respect to such Tax Returns have expired) and all Taxes, if
any, determined pursuant to such audits to be due have been paid in full; and
(xiv) copies of all federal, state and local income Tax Returns,
examinations, reports and statements of income tax deficiencies assessed against
or agreed to by the Company and for any and all taxable periods with respect to
which the statute of limitations for the collection of any Tax has not expired
have been made available by the Company for inspection by the Buyer, other than
such materials for periods when the Company was owned by Shurgard Incorporated
or its Affiliates, which the Company has not provided to the Buyer.
(i) Title to Property and Assets. The Company has good and marketable title
to all of the properties and assets reflected on the September 30, 1997 balance
sheet as being owned by the Company except any thereof since disposed of in the
Ordinary Course of Business, and none of such properties or assets is, except as
disclosed in the Financial Statements or the Disclosure Schedule, subject to any
Security Interest.
(j) Real Property.
(i) The Company does not now own, and has never owned, any real
property.
(ii) The Company is party as tenant or subtenant to the real property
leases and subleases as described in the Disclosure Schedule. With respect to
each lease or sublease described in the Disclosure Schedule:
(A) the lease or sublease is a legal, valid, binding, enforceable
obligation of the Company, and, to the Knowledge of the Company, of the other
parties thereto, and is in full force and effect;
(B) the Company is not in breach or default, and no event has
occurred with respect to the Company which, with notice or lapse of time, would
constitute a breach or default thereunder or permit termination, modification,
or acceleration thereof;
(C) to the Knowledge of the Company, there are no disputes, oral
agreements, or forbearance programs in effect as to the lease or sublease;
(D) with respect to each sublease, the representations and
warranties set forth in subsections (A) through (C) above are true and correct
with respect to the underlying lease; and
(E) the Company has not assigned, transferred, conveyed,
mortgaged, deeded in trust, or encumbered any interest in the leasehold or
subleasehold.
<PAGE>
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(k) Intellectual Property.
(i) To the Knowledge of the Company, the Company owns or has the right
to use pursuant to license, sublicense, agreement or permission all Intellectual
Property necessary for the operation of the business of the Company as presently
conducted.
(ii) To the Knowledge of the Company, the Company has not infringed
upon or misappropriated any Intellectual Property rights of third parties, and
the Company has never received any written charge, complaint, claim, demand, or
notice alleging any such infringement or misappropriation (including any claim
that the Company must license or refrain from using any Intellectual Property
rights of any third party). To the Knowledge of the Company, no third party has
infringed upon or misappropriated any Intellectual Property rights of the
Company.
(iii) The Company has no registered trademarks, service marks, trade
dress, logos, trade names or corporate names which are used in the operation of
the Company's business as presently conducted other than as set forth in the
Disclosure Schedule, which identifies the entity in whose name each such
registered mark is held.
(l) List of Contracts and Other Data. The Disclosure Schedule sets forth a
listing of the following contracts and other data relating to the Company:
(i) all computer software used by the Company for inventory control,
billing and work management, and all licenses granted to the Company and all
other agreements to which the Company is a party and which relate, in whole or
in part, to such software;
(ii) all unregistered trade names, service marks, logos and trademarks
used by the Company;
(iii) all employment and consulting agreements, executive compensation
plans, bonus plans and other Employee Benefit Plans of the Company; and
(iv) any written agreement pursuant to which the Company has purchased
or acquired any material operating assets, as a going concern, of any entity
since December 31, 1994.
The Company has not knowingly withheld from the Buyer copies of any of the
documents referred to above or any of the following documents relating to the
Company:
(i) any written arrangement to which the Company is a party or by
which the Company or any of its property is bound or protected (or group of
related written arrangements) for the lease of personal property from or to
third parties providing for lease payments in excess of **The confidential
portion has been so omitted pursuant to a request for confidential treatment and
has been filed separately with the Commission.** per annum;
(ii) any written arrangement (or group of related written
arrangements) for the purchase by the Company of shelving, supplies, products or
other personal property or for the receipt of services which involve more than
**The confidential portion has been so omitted pursuant to a request for
confidential treatment and has been filed separately with the Commission.** or
are not cancelable on ninety days' notice or less in the ordinary course of
business;
<PAGE>
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(iii) any written arrangement to which the Company is a party or by
which the Company or any of its property is bound or protected establishing a
partnership or joint venture;
(iv) any written arrangement (or group of related written
arrangements) under which the Company has created, incurred, assumed or
guaranteed (or may create, incur, assume or guarantee) indebtedness for borrowed
money or leased property (including capitalized lease obligations) or under
which it has granted (or may grant) a security interest on any of its material
assets, tangible or intangible;
(v) any written arrangement to which the Company is a party or by
which the Company or any of its property is bound or protected concerning
confidentiality or noncompetition;
(vi) any written arrangement relating to the Company and involving any
of the Company Stockholders; and
(vii) any written agreement under which the Company has made
representations or warranties or has agreed to provide indemnification to a
third party, other than (x) any such agreement in which the aggregate
liabilities thereunder, by the terms thereof, would not exceed **The
confidential portion has been so omitted pursuant to a request for confidential
treatment and has been filed separately with the Commission.** and (y) customer
contracts (standard forms of which, as well as a description of limited
liability contract terms varying therefrom, have previously been provided to the
Buyer).
(m) Labor Matters.
(i) The Company is not a party to or bound by any collective
bargaining agreement, and has not experienced any strikes, claims of unfair
labor practices or other collective bargaining disputes. To the Knowledge of the
Company, its employees have not been the subject of a union organizing effort
since January 1, 1993.
(ii) The Company has not received written notice of any claim from the
Equal Employment Opportunity Commission or from any state or local government
agency or been served with any legal process alleging that it either has not
complied with any laws relating to the employment of labor, including any
provisions thereof relating to wages, hours, collective bargaining, equal
employment opportunity, employment discrimination and employment safety, or that
it is liable for any arrears of wages or penalties for failure to comply with
any of the foregoing.
(n) Employee Benefits.
(i) The Disclosure Schedule lists each Employee Benefit Plan that the
Company (which term, for purposes of this ss.3(n)(i), shall include a
Subsidiary) maintains or to which the Company contributes or has any obligation
to contribute or has contributed to or sponsored.
(A) Each such Employee Benefit Plan (and each related trust,
insurance contract, or fund) complies in form and in operation in all respects
with the applicable requirements of ERISA, the Code, and other applicable laws,
and the Company has not received any outstanding notice from any governmental
agency or authority questioning or challenging such compliance.
<PAGE>
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(B) All required reports, returns and descriptions (including
Form 5500 Annual Reports, summary annual reports and summary plan descriptions)
have been timely filed and distributed appropriately with respect to each such
Employee Benefit Plan and its related trust, if any. The requirements of COBRA
have been met with respect to each such Employee Benefit Plan which is an
Employee Welfare Benefit Plan and subject to COBRA.
(C) All contributions (including all employer contributions and
employee salary reduction contributions) which are due have been timely paid to
each such Employee Benefit Plan (or its related trust) which is an Employee
Pension Benefit Plan and all contributions for any period ending on or before
the Closing Date which are not yet due will, as of the Closing Date, have been
paid to each such Employee Pension Benefit Plan or accrued in accordance with
the past custom and practice of the Company. All premiums or other payments for
all periods ending on or before the Closing Date have been paid with respect to
each such Employee Benefit Plan which is an Employee Welfare Benefit Plan.
(D) Each such Employee Benefit Plan which is an Employee Pension
Benefit Plan meets the requirements of a "qualified plan" under Code ss.401(a)
in form and operation, and to the Knowledge of the Company, there are no
presently existing facts or circumstances that will or could reasonably be
expected to give rise to disqualification of any such plan under Code ss.401(a)
or to a tax under Code ss.511.
(E) The Company has delivered to the Buyer correct and complete
copies of the plan documents, including amendments, summary plan descriptions
and summaries of material modifications, if any, the three most recent Form 5500
Annual Reports, and accountant's opinion, if applicable, and all related trust
agreements, insurance contracts, and other funding agreements which implement
each such Employee Benefit Plan and all written communications, if any, to
employees to the extent the substance of the plan described therein differs
materially from the other documentation furnished.
(F) There have been no acts or omissions by the Company that have
given rise to or may reasonably be expected to give rise to material fines,
penalties, taxes or related charges under Sections 502(c), 502(i) or 4071 of
ERISA or Chapter 43 of the Code for which the Company may be liable.
(ii) With respect to each Employee Benefit Plan that the Company and
any ERISA Affiliate maintains or ever has maintained or to which any of them
contributes, ever has contributed or ever has been required to contribute, there
have been, and are, no "prohibited transactions" (as defined in ss.406 of ERISA
and Code ss.4975) with respect to any such Employee Benefit Plan. To the
Knowledge of the Company, no Fiduciary has any liability for breach of fiduciary
duty or any other failure to act or comply in connection with the administration
or investment of the assets of any such Employee Benefit Plan. No action, suit,
proceeding, hearing or investigation with respect to the administration or the
investment of the assets of any such Employee Benefit Plan (other than routine
claims for benefits) is pending or, to the Knowledge of the Company, threatened.
<PAGE>
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(iii) Neither the Company, any current ERISA Affiliate, nor, to the
Knowledge of the Company, any business or entity that has been an ERISA
Affiliate within the past five years sponsors or contributes to or has ever
sponsored or contributed to a plan subject to Title IV of ERISA or any
Multiemployer Plan or has any liability (including any withdrawal liability as
defined in ERISA ss.4201) under any Multiemployer Plan.
(iv) Except as set forth in the Disclosure Schedule, the Company does
not maintain and has never maintained or contributed, and has never been
required to contribute to, any Employee Welfare Benefit Plan providing medical,
health or life insurance or other welfare-type benefits for current or future
retired or terminated employees, their spouses or their dependents (other than
in accordance with COBRA).
(o) Litigation. There are no actions, suits or proceedings with respect to
the Company involving claims by or against the Company which are pending or, to
the Knowledge of the Company, threatened, at law or in equity, before or by any
federal or state court or any municipal or other governmental department,
commission, board, bureau, agency or instrumentality. To the Knowledge of the
Company, there are no writs, judgments, injunctions or decrees of any court or
any governmental agency with respect to which the Company has been named or to
which the Company is a party which apply, in whole or in part, to the business
of the Company or to any of the assets or properties of the Company or the
Company Shares or which would result in a Material Adverse Effect on the
business, financial condition, operations, assets, cash flow or future prospects
of the Company, taken as a whole.
(p) Certain Business Relationships with the Company. Except as set forth in
the Disclosure Schedule, none of the Company Stockholders and no Affiliate owns
any asset, tangible or intangible, which is used in the business of the Company
or has a contractual relationship with the Company that is not terminable by the
Company upon thirty days' notice.
(q) Brokers. The Company has no liability or obligation to pay any fees or
commissions to any broker, finder or agent with respect to the transactions
contemplated by this Agreement.
(r) Officers and Directors; Bank Accounts. The officers and directors of
the Company as of the date of this Agreement are as set forth in the Disclosure
Schedule. The Disclosure Schedule also sets forth the name of each bank, savings
institution or other person with which the Company has an account or safe
deposit box and the names and identification of all such accounts or safe
deposit boxes and the names and identification of all persons authorized to draw
thereon or to have access thereto.
4. REPRESENTATIONS AND WARRANTIES OF THE BUYER AND THE TRANSACTION SUBSIDIARY.
Each of the Buyer and the Transaction Subsidiary represents and warrants to the
Company that the statements contained in this ss.4 are correct and complete as
of the date of this Agreement and will be correct and complete as of the Closing
Date (as though made as of the Closing Date), except those statements which
specify a different date (which shall be correct and complete as of such date).
The Buyer and the Transaction Subsidiary make no representations and warranties
of any kind in connection with the transactions contemplated by this Agreement,
except as expressly set forth in this ss.4.
<PAGE>
-24-
(a) Organization. Each of the Buyer and the Transaction Subsidiary is a
corporation duly organized, validly existing, and in good standing under the
laws of the jurisdiction of its incorporation. The Transaction Subsidiary is, or
on the Closing Date will be, duly authorized to conduct business and in good
standing as a foreign corporation under the laws of the States of Oregon and
Washington.
(b) Authorization of Transaction. Each of the Buyer and the Transaction
Subsidiary has full power and authority (including full corporate power and
authority) to execute and deliver this Agreement and to perform its obligations
hereunder. This Agreement and the transactions contemplated herein have been
duly authorized by all necessary corporate and shareholder actions on the part
of the Buyer and the Transaction Subsidiary. This Agreement constitutes the
valid and legally binding obligation of each of the Buyer and the Transaction
Subsidiary, enforceable in accordance with its terms and conditions, subject to
the Enforceability Exceptions.
(c) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which either the Buyer or the Transaction Subsidiary is subject or any
provision of the Certificate of Incorporation or bylaws of either the Buyer or
the Transaction Subsidiary or (ii) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any party
the right to accelerate, terminate, modify, or cancel, or require any notice
under any agreement, contract, lease, license, instrument, or other arrangement
to which either the Buyer or the Transaction Subsidiary is a party or by which
it is bound or to which any of its assets is subject, except where the
violation, conflict, breach, default, acceleration, termination, modification,
cancellation, or failure to give notice would not have a Material Adverse Effect
on the ability of the Buyer or the Transaction Subsidiary to consummate the
transactions contemplated by this Agreement. To the Knowledge of the Buyer,
except for the Delaware General Corporation Law and the Washington Business
Corporation Act, and except as disclosed by the Company, neither the Buyer nor
the Transaction Subsidiary needs to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or governmental
agency in order for the Buyer and the Transaction Subsidiary to consummate the
transactions contemplated by this Agreement, except where the failure to give
notice, to file, or to obtain any authorization, consent, or approval would not
have a Material Adverse Effect on the ability of the Parties to consummate the
transactions contemplated by this Agreement.
(d) Brokers' Fees. Neither the Buyer nor the Transaction Subsidiary has any
liability or obligation to pay any fees or commissions to any broker, finder, or
agent with respect to the transactions contemplated by this Agreement for which
any of the Company or the Company Stockholders could become liable or obligated.
(e) Capitalization of the Buyer. As of the date hereof, the entire
authorized capital stock of the Buyer consists of 100,000,000 shares of Buyer
Common Stock, of which 14,919,124 shares are issued and outstanding (assuming
all former stockholders of Arcus Group, Inc. have exchanged their shares of
capital stock of Arcus Group, Inc. for Buyer Common Stock); 2,000,000 shares of
Preferred Stock, $.01 par value per share, of which none are issued and
outstanding; and 1,000,000
<PAGE>
-25-
shares of Nonvoting Common Stock, $.01 par value per share, of which none are
issued and outstanding. All of such outstanding capital stock has been duly
authorized and validly issued, is fully paid and nonassessable and is not
subject to any preemptive or similar rights. When issued to the Company
Stockholders in connection with the Merger, the Buyer Common Stock will be duly
authorized, validly issued, fully paid, nonassessable, registered under the
Securities Act and will not be subject to any preemptive or similar rights, and,
subject only to (i) the lock-up provisions in the Stockholders Agreement, (ii)
applicable restrictions under Rule 145 under the Securities Act and (iii)
antifraud provisions of the Exchange Act and the rules and regulations
thereunder, will be freely tradeable.
(f) SEC Filings; Financial Statements and Other Information. The Buyer has
filed all forms, reports and documents required to be filed by it with the
Securities and Exchange Commission (the "SEC") since January 1, 1997, and has
heretofore made available to the Company, in the form filed with the SEC
(including any exhibits thereto), its Final Prospectus dated January 20, 1998
(the "Prospectus") forming part of its Registration Statement on Form S-4 (file
number 333-44187) declared effective on January 20, 1998 (the "Registration
Statement"). The Prospectus and the Registration Statement and any forms,
reports and other documents incorporated by reference into the Prospectus or
filed by the Buyer with the SEC after the date of this Agreement and until the
Closing Date, (x) complied with or will comply in all material respects with the
requirements of the Securities Act and the Exchange Act, as the case may be, and
the rules and regulations thereunder and (y) did not at the time they were filed
and (if previously filed) do not at the date hereof, or will not at the time
they are filed or at the date of the Company Meeting, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not misleading.
5. PRE-CLOSING COVENANTS. Between the execution of this Agreement and the
Closing:
(a) General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order to
consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
ss.7 below) on or before March 30, 1998. Without limiting the generality of the
foregoing, the Company, acting through its Board of Directors, shall, in
accordance with the Washington Business Corporation Act and its articles of
incorporation and bylaws: (i) as soon as reasonably practicable (and in any
event not later than March 27, 1998), duly call, give notice of, convene and
hold the Company Meeting, or to the extent permitted by the Washington Business
Corporation Act submit this Agreement and the Merger for approval and adoption
by written consent by the Company Stockholders; (ii) include in any proxy
statement the conclusion and recommendation of the Board of Directors (to the
extent consistent with its fiduciary duties) to the effect that the Board of
Directors, having determined that this Agreement and the Merger are in the best
interests of the Company and the Company Stockholders, has approved this
Agreement and the Merger and recommends that the Company Stockholders vote in
favor of the approval and adoption of this Agreement and the Merger; and (iii)
use its reasonable best efforts to obtain the necessary approval and adoption of
this Agreement and the Merger by the Company Stockholders. The Company further
agrees to deliver or cause to be delivered (to the extent it has not already
done so)
<PAGE>
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copies of the Prospectus to the Company Stockholders as soon as reasonably
practicable (and in any event not later than February 26, 1998) on behalf of the
Buyer.
(b) Notices and Consents. The Company will give any notices to third
parties, and will use its reasonable best efforts to obtain any third party
consents, which in either case are required for it to consummate the
transactions contemplated by this Agreement. The Buyer and the Transaction
Subsidiary will give any notice to third parties, and will use their respective
reasonable best efforts to obtain any third party consents, which in either case
are required for them to consummate the transactions contemplated by this
Agreement.
(c) Regulatory Matters and Approvals. Each of the Parties will give any
notices to, make any filings with, and use its reasonable best efforts to obtain
any authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in ss.3(d) and ss.4(c)
above.
(d) Operation of Business. The Company will continue to operate its
business in the Ordinary Course of Business and will not engage in any practice,
take any action or enter into any transaction outside the Ordinary Course of
Business. Without limiting the generality of the foregoing:
(i) the Company will not authorize or effect any change in its
articles of incorporation or bylaws;
(ii) the Company will not grant any options, warrants, or other rights
to purchase or obtain any of its capital stock or issue, sell, or otherwise
dispose of any of its capital stock (except upon the conversion or exercise of
options, warrants, and other rights currently issued or outstanding, all of
which the Company will cause to be fully exercised or cancelled prior to or as
of the Effective Time);
(iii) the Company will not declare, set aside or pay any dividend or
distribution with respect to its capital stock (whether in cash or in kind), or
redeem, repurchase, or otherwise acquire any of its capital stock or any
options, warrants or other rights to purchase or obtain any of its capital
stock;
(iv) the Company will not issue any note, bond or other debt security
or create, incur, assume, or guarantee any indebtedness for borrowed money
(including without limitation Funded Indebtedness) or capitalized or operating
lease obligation (other than (x) pursuant to existing contracts or arrangements
described in the Disclosure Schedule and in the Ordinary Course of Business and
(y) operating lease obligations incurred in the Ordinary Course of Business);
(v) the Company will not grant any Security Interest in any of its
assets;
(vi) the Company will not make any capital investment in, make any
loan to, or acquire the securities or assets of any other Person outside the
Ordinary Course of Business;
<PAGE>
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(vii) the Company will not delay or postpone the payment of accounts
payable or other liabilities or accelerate receivables other than in the
Ordinary Course of Business;
(viii) the Company will not make any change in employment terms for
any of its directors, officers, or employees;
(ix) the Company will not take any of the other actions set forth in
ss.3(f); and
(x) the Company will not make any binding commitment to do any of the
foregoing.
Nothing in this ss.5(d) shall be construed to prohibit the Company from
incurring obligations to pay bonuses to employees, not to exceed $500,000 in the
aggregate, in respect of such employees' performance.
(e) Full Access. The Company will permit representatives of the Buyer to
have access at all reasonable times, and in a manner so as not to interfere with
the normal business operations of the Company, to all premises, properties,
personnel, books, records (including tax records), contracts, and documents of
or pertaining to the Company; provided that all due diligence investigations
related to the Company's customers and employees shall be subject to the
exclusive control (including nature, extent and timing) of the Company, and the
identity of the Company's customers shall not be disclosed until immediately
after the Closing.
Each of the Buyer and the Transaction Subsidiary will treat and hold any
Confidential Information it receives from the Company in accordance with the
provisions of the Confidentiality Agreement, which the Transaction Subsidiary
hereby agrees to abide by as though it were a party thereto.
Subject to receipt of a confidentiality agreement in the form attached
hereto as Exhibit 5(e) (the "Buyer Confidentiality Agreement"), the Buyer will
permit representatives of the Company and the Company Stockholders that are
considering making a Combined Election to have access at all reasonable times,
and in a manner so as not to interfere with the normal business operations of
the Buyer, to all information reasonably necessary for such Company Stockholder
to make the investment decision to acquire shares of Buyer Common Stock as part
of the Combined Stockholder Merger Consideration (it being understood that,
absent a material breach of the representation set forth in Section 4(f) hereof
which would result in the failure to satisfy the condition in ss.7(b)(ii), the
results of such investigation shall not excuse performance by a Principal
Stockholder of his, her or its obligations under the Stockholders Agreement).
(f) Notice of Developments. Each Party will give prompt written notice to
the others of any action or event giving rise to a Material Adverse Effect on
the Party or causing a breach of any of its own representations and warranties
in ss.3 and ss.4 above. The Company, on the one hand, and the Buyer and the
Transaction Subsidiary, on the other hand, shall be entitled to update the
information contained in the Disclosure Schedule (or, for the Buyer and the
Transaction Subsidiary, to provide information which would be includable in a
disclosure schedule), at any time and from time to time prior to the Effective
Time for matters arising after the date of this Agreement, and the
<PAGE>
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addition of any such items shall not form the basis of any claim against the
Company Stockholders on the one hand, or the Buyer and the Transaction
Subsidiary, on the other hand, under ss.10 below. No disclosure by any Party
pursuant to this ss.5(f) which constitutes a Material change in information
originally presented in this Agreement or the Disclosure Schedule shall
constitute a waiver by the Party receiving such disclosure of any condition to
such Party's obligation to close the transactions contemplated hereby unless the
Party to which such disclosure is made agrees in writing to waive such
condition.
(g) Exclusivity. The Company will not solicit, initiate or encourage the
submission of any proposal or offer from any Person relating to the acquisition
of all or substantially all of the capital stock or assets of the Company
(including any acquisition structured as a merger, consolidation, or share
exchange), and none of its directors, officers or agents shall be permitted to
take such action. The Company shall notify the Buyer immediately if any Person
who received the Information Statement makes any such proposal, offer or
inquiry, or if any other Person makes any such proposal, offer or inquiry in
writing.
(h) Continuation of Projects. The Company will continue the racking and
facility relocation projects in Seattle and move-in of new accounts in the
Ordinary Course of Business in accordance with the Company's existing plans and
properties.
(i) Termination of 401(k) Plan. Not later than the day prior to the Closing
Date the Board of Directors of the Company and each current ERISA Affiliate will
adopt resolutions effecting the termination of the Company's 401(k) Employee
Benefit Plan and any other defined contribution plan maintained by the Company
or a current ERISA Affiliate.
(j) Release of Guaranties. The Buyer and the Transaction Subsidiary shall
use their commercially reasonable efforts to obtain the release of those Company
Stockholders identified on the Disclosure Schedule as having guaranteed any
obligations of the Company from their personal guaranties of such Company
obligations (the "Guaranties"). The Company hereby consents to such disclosure
of the transactions contemplated by this Agreement as is reasonably necessary to
request and obtain such consents.
(k) Designated Recipients. Subject to the approval of the Company
Stockholders, on the Closing Date immediately prior to the Effective Time, the
Buyer shall deliver to the Company an amount to be paid by the Company to the
Designated Recipients as additional consideration for their shares of Common
Stock which were redeemed pursuant to the 1997 Redemption, such that each
Designated Recipient shall have received from the Company in respect of his
shares of Common Stock, pursuant to the 1997 Redemption and this ss.5(k), an
aggregate cash amount per share equal to the Share Price, giving effect to all
of the adjustments hereunder, including the adjustment for the payment described
in this ss.5(k). The amount of such payment shall reduce the Adjusted Merger
Consideration as described in the definition thereof above.
(l) Funded Indebtedness. Not less than two (2) business days prior to the
Closing, the Company shall provide to the Buyer a schedule showing a true and
correct listing of all Funded Indebtedness and the amounts thereof due as of the
Closing Date, including interest, prepayment premiums and penalties. At the
Closing, the Buyer shall deliver (i) to the Company sufficient funds
<PAGE>
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for the payment of all such Funded Indebtedness that is unsecured and (ii) to a
trust account in the name of Graham & James LLP sufficient funds for the payment
of all such Funded Indebtedness that is secured. At the Closing, the Company
shall pay, with funds provided by the Buyer, all Funded Indebtedness existing as
of the Closing Date. The amount of such payment shall be in addition to the
Merger Consideration.
(m) Tax Treatment. Each of the Parties intends the Merger to qualify as a
tax-free reorganization under the provisions of Section 368(a) of the Code,
agrees to report the Merger as a tax-free reorganization under the provisions of
Section 368(a) of the Code and agrees not to take any action inconsistent with
the qualification of the Merger as a tax-free reorganization under the
provisions of Section 368(a) of the Code.
(n) Audit. At the request and the expense of the Buyer, the Company shall
cause its independent accountants to cooperate with the Buyer and shall assist
in the preparation of audited financial statements for the Company. Without
limiting the generality of the foregoing, the Company agrees that it will (i)
consent to the use of such audited financial statements in any registration
statement or other document filed by the Buyer under the Securities Act or the
Exchange Act, and (ii) execute and deliver, and cause its officers to execute
and deliver, such "representation" letters as are customarily delivered in
connection with audits and as the Buyer's independent accountants may reasonably
request under the circumstances. Notwithstanding the foregoing, the Parties
agree that it shall not be a condition to closing of the Merger that any such
audit be completed prior to the Closing Date.
(o) Net Operating Income. Immediately prior to the Effective Time, the
Company shall prepare and deliver to the Buyer a schedule showing the Company's
best estimate of the Net Operating Income of the Company for each whole calendar
month, if any, that shall have elapsed beginning with the month of March 1998 to
(but in no event including) the month in which the Closing occurs (the "Company
Net Operating Income Calculation"). The amount of the Net Operating Income
Adjustment derived from the Company Net Operating Income Calculation and from
the pro rata portion of **The confidential portion has been so omitted pursuant
to a request for confidential treatment and has been filed separately with the
Commission.** accrued, as set forth in clause (b) of the definition of Net
Operating Income Adjustment, from the first day of the month in which the
Closing occurs to and including the Closing Date, shall increase the Adjusted
Merger Consideration as described in the definition thereof above.
(p) Certain Leases. Notwithstanding any provision herein to the contrary,
the Company may negotiate and enter into a lease for additional warehouse space
in Portland, Oregon upon commercially reasonable terms and for a period not to
exceed six months. Upon request by the Company, the Buyer shall agree to
sublease a portion of the building leased by a subsidiary of the Buyer at 2116
NW 20th Avenue, Portland, Oregon, to the Company at a rent to be mutually agreed
upon by the Buyer and the Company and upon other commercially reasonable terms
and for a period not to exceed six months. If this Agreement is terminated prior
to the consummation of the Merger, (i) in addition to any other amounts payable
hereunder, the Buyer shall pay the out of pocket expenses incurred by the
Company to relocate customer boxes and other materials stored by the Company in
any such leased space (whether subleased from the Buyer or otherwise) to another
Portland area location leased by the Company and (ii) if such space is subleased
from the Buyer, the Company will have no obligation to pay rent under the
sublease with respect to any period following
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such termination and the Company shall relocate all materials stored by it in
such space by the date which is two months after the termination of this
Agreement (upon which date, the Buyer will have no further obligation to the
Company as sublessor under such sublease).
(q) Financial Information. As promptly as practicable after the end of each
month, the Company shall provide to the Buyer a balance sheet of the Company as
of the end of each such month and statements of income and expenses of the
Company for the month then ended.
(r) Stockholder Approvals. As promptly as practicable after the Company
Meeting, the Company shall provide to the Buyer a tabulation of the shares of
Company Stock voted by the Company Stockholders in favor of or against this
Agreement and the Merger and any shares not voted.
6. POST-CLOSING COVENANTS. From and after the Closing Date:
(a) Indemnification of Officers and Directors. The Surviving Corporation
agrees to defend, indemnify and hold harmless from all claims all persons who
served as directors and officers of the Company prior to the Effective Time in
respect of matters for which they would have been entitled to indemnification
under any exculpatory or indemnification provisions existing as of the date of
this Agreement in the Articles of Incorporation or Bylaws of the Company for the
benefit of any individual who served as a director or officer of the Company.
The foregoing indemnity shall be without regard to any of the limitations on
Claims (as defined in ss.10) set forth in ss.10 below. The Buyer shall, and does
hereby, indemnify the officers and directors of the Company, to the extent they
would have been entitled to indemnification under any exculpatory or
indemnification provisions existing as of the date of this Agreement in the
Articles of Incorporation or Bylaws of the Company, in respect of any
occurrences or events related to the Surviving Corporation which occur after the
Effective Time.
(b) Indemnification for Guaranties. To the extent that any of the Company
Stockholders have not been released from any Guaranties on or prior to the
Closing Date, the Buyer and the Surviving Corporation will continue to use
commercially reasonable efforts to obtain their release, and, jointly and
severally, hereby agree to defend, indemnify and hold the Company Stockholders
harmless from and against all Claims arising with respect to such Guaranties.
The foregoing indemnity shall be without regard to any of the limitations on
Claims set forth in ss.10 below.
(c) Certain Payments. The Buyer or the Surviving Corporation shall pay all
trade payables and capitalized lease obligations of the Company incurred on or
prior to the Closing Date in accordance with their respective terms.
(d) Credit for Years of Service. From and after the Closing, the Buyer and
the Surviving Corporation will cause the Employee Benefits Plans, if any,
maintained by the Buyer and the Surviving Corporation to provide that the
Company's employees will be entitled to credit, for purposes of determining
eligibility in such plans, for their years of service with the Company prior to
the Closing.
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(e) Employee Bonuses. To the extent that the Company shall have committed
prior to the Closing to pay bonuses to employees, not to exceed $500,000 in the
aggregate, in respect of such employees' performance, as permitted by ss.5(d)
above, and shall not have paid such bonuses on or prior to the Closing Date, the
Buyer and the Surviving Corporation will pay such employee bonuses, not to
exceed $500,000 in the aggregate, promptly following the Closing, and, jointly
and severally, hereby agree to defend, indemnify and hold the Company
Stockholders harmless from and against all Claims with respect to the nonpayment
of such bonuses (including the cost to the Company Stockholders of the Company
Stockholders' paying such bonuses). The foregoing indemnity shall be without
regard to any of the limitations on Claims set forth in ss.10 below, but shall
in no event exceed $500,000 in the aggregate.
7. CONDITIONS TO OBLIGATION TO CLOSE.
(a) Conditions to Obligation of the Buyer and the Transaction Subsidiary.
The obligation of each of the Buyer and the Transaction Subsidiary to consummate
the transactions to be performed by them in connection with the Closing is
subject to satisfaction of the following conditions:
(i) this Agreement and the Merger shall have received the Requisite
Stockholder Approval not later than March 27, 1998 and the Company Stockholders
who have given notice of their intent to cause their Company Shares to become
Dissenting Shares do not hold more than 3% of the Company Shares then
outstanding;
(ii) the Company shall have procured all of the following third party
consents:
(A) Consent of the landlord under the lease dated March 2, 1990
between Charles E. and Mary Walsh, as landlord, and the Company, as successor to
Shurgard Capital Management Corporation, as tenant, as amended by amendment
dated August 28, 1997;
(B) Consent of the landlord under the lease dated July 19, 1994
between Northwest Group A, as landlord, and the Company, as successor to
Professional Records Center, Inc., as tenant;
(C) Consent of the landlord under the lease dated May 31, 1996
between Boeing Mesabi Trust, as landlord, and the Company, as tenant;
(D) Consent of the landlord under the lease dated March 23, 1995
between Shurgard Storage Center, Inc., as landlord, and the Company, as tenant;
and
(E) Consent of the licensor under the software license agreement
dated November 7, 1997 between O'Neil Software, Inc., as licensor, and the
Company, as licensee.
(iii) the representations and warranties of the Company set forth in
ss.3 above shall be true and correct in all Material respects at and as of the
Closing Date;
(iv) the Company shall have performed and complied with all of its
covenants hereunder in all Material respects at and as of the Closing Date;
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(v) no action, suit or proceeding shall be pending before any court or
quasi-judicial or administrative agency of any federal, state or local
jurisdiction or before any arbitrator wherein an unfavorable injunction,
judgment, order, decree, ruling or charge would (A) prevent consummation of any
of the transactions contemplated by this Agreement, (B) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation, or (C) affect adversely the right of the Surviving Corporation to
own its assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge shall be in effect);
(vi) the Company shall have delivered to the Buyer and the Transaction
Subsidiary a certificate to the effect that each of the conditions specified in
ss.7(a)(i) through (v) is satisfied in all respects;
(vii) the Parties shall have received all authorizations, consents and
approvals of governments and governmental agencies referred to in ss.5(c) above;
(viii) the Buyer and the Transaction Subsidiary shall have received
from Graham & James LLP, counsel to the Company, an opinion in form and
substance reasonably satisfactory to the Buyer and the Transaction Subsidiary,
addressed to the Buyer and the Transaction Subsidiary, and dated as of the
Closing Date;
(ix) the Buyer and the Transaction Subsidiary shall have received the
resignations, effective as of the Closing, of each director and officer of the
Company;
(x) the Post Closing Escrow Agreement shall have been executed by the
Post Closing Escrow Agent and by the Representatives on behalf of Company
Stockholders representing not less than 90% of the Company Shares;
(xi) there shall not have occurred any Material adverse change in the
business, assets, operations or cash flow of the Company when compared to the
condition of the Company reflected in the Financial Statements; provided,
however, that after the 60th day following the date of this Agreement, so long
as the delay in the Closing Date past such 60th day is not caused by a failure
by the Company to perform or comply with its covenants hereunder, any such
adverse change shall not be deemed Material for purposes of this clause 7(a)(xi)
unless its effect exceeds **The confidential portion has been so omitted
pursuant to a request for confidential treatment and has been filed separately
with the Commission.**;
(xii) the Company shall have executed the Merger Documents to which it
is a party;
(xiii) the Company shall have liquidated Software LLC in accordance
with applicable law;
(xiv) any registered trademarks, service marks, trade names or logos
of the Company used in the operation of the Company's business as presently
conducted which are registered in the name of an entity other than the Company
shall have been assigned to the Company;
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(xv) the Company shall have delivered copies of the Prospectus to the
Company Stockholders on behalf of the Buyer not less than twenty business days
prior to the date of the Company Meeting, and the Company shall not have taken
any steps that would cause the issuance of shares of Buyer Common Stock in
accordance with the terms of this Agreement not to be exempt from registration
under the Securities Act;
(xvi) the Buyer shall have received a favorable opinion, dated the
Closing Date, of Sullivan & Worcester LLP, its special tax counsel, to the
effect that this Agreement constitutes a tax- free plan of reorganization in
accordance with the provisions of Section 368(a) of the Code and as to the
consequences thereof to the Buyer;
(xvii) the Board of Directors of the Company and each current ERISA
Affiliate shall have adopted resolutions effecting the termination of the
Company's 401(k) Employee Benefit Plan and any other defined contribution plan
maintained by the Company or a current ERISA Affiliate;
(xviii) there shall be no more than twenty Combined Stockholders, and
the Combined Stockholders shall hold in the aggregate as of immediately prior to
the Effective Time a sufficient number of Company Shares such that the aggregate
amount of the cash portion of the Merger Consideration payable at Closing shall
not exceed the amount, determined in accordance with clauses (A) and (B) of
ss.2(d)(v) above, of the Original Cash Amount; and
(xix) all Vested Rights shall have been exercised or cancelled.
The Buyer and the Transaction Subsidiary may waive any condition specified in
this ss.7(a) if they execute a writing so stating at or prior to the Closing.
(b) Conditions to Obligation of the Company. The obligation of the Company
to consummate the transactions to be performed by it in connection with the
Closing is subject to satisfaction of the following conditions:
(i) this Agreement and the Merger shall have received the Requisite
Stockholder Approval;
(ii) the representations and warranties of the Buyer and the
Transaction Subsidiary set forth in ss.4 above shall be true and correct in all
Material respects at and as of the Closing Date;
(iii) each of the Buyer and the Transaction Subsidiary shall have
performed and complied with all of its covenants hereunder in all Material
respects at and as of the Closing;
(iv) no action, suit or proceeding shall be pending before any court
or quasi-judicial or administrative agency of any federal, state or local
jurisdiction or before any arbitrator where an unfavorable injunction, judgment,
order, decree, ruling or charge would (A) prevent consummation of any of the
transactions contemplated by this Agreement, or (B) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling or charge
shall be in effect);
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(v) each of the Buyer and the Transaction Subsidiary shall have
delivered to the Company a certificate to the effect that each of the conditions
specified above in ss.7(b)(i) through (iv) is satisfied in all respects;
(vi) the Company shall have received from Sullivan & Worcester LLP,
special counsel to the Buyer, an opinion in form and substance reasonably
satisfactory to the Company, addressed to the Company and dated as of the
Closing Date.
(vii) each of the Buyer and the Transaction Subsidiary shall have
executed the Merger Documents to which it is a party;
(viii) the Parties shall have received all authorizations, consents,
and approvals of governments and governmental agencies referred to in ss.5(c)
above;
(ix) the Post Closing Escrow Agreement shall have been executed by the
Post Closing Escrow Agent and by the Buyer and the Transaction Subsidiary; and
(x) the Company shall have received a favorable opinion, dated the
Closing Date, of Graham & James LLP, its special tax counsel, to the effect that
this Agreement constitutes a tax-free plan of reorganization in accordance with
the provisions of Section 368(a) of the Code and as to the consequences thereof
to the Company Stockholders that are receiving Combined Stockholder Merger
Consideration.
The Company may waive any condition specified in this ss.7(b) if it executes a
writing so stating at or prior to the Closing.
8. DELIVERIES AND ACTIONS AT CLOSING. At the Closing the Parties shall deliver
the following documents, instruments and agreements, and shall take the
following described actions, all of which shall be deemed part of a single
transaction. No part of the described deliveries and actions shall occur unless
all shall occur.
(a) Deliveries and Actions by the Company. The Company shall deliver or
cause to be delivered to the Buyer and the Transaction Subsidiary, or to other
persons, as appropriate, the following documents, instruments and agreements,
and shall take the following actions:
(i) a copy of the Articles of Incorporation of the Company, certified
by the Secretary of State of the State of Washington;
(ii) a certificate of legal existence for the Company issued by the
appropriate officer of the state of Washington and a certificate of
authorization for the Company issued by the appropriate officer of the state of
Oregon;
(iii) a certificate of the Company to the effect that each of the
conditions specified in ss.7(a)(i) through (v) has been satisfied in all
Material respects;
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(iv) originals or copies of each consent, authorization and approval
referred to in ss.ss.7(a)(ii) and 7(a)(vii);
(v) the opinion of Graham & James LLP, referred to in ss.7(a)(viii);
(vi) the resignations described in ss.7(a)(ix), effective as of the
Closing, of each director and officer of the Company;
(vii) the Post Closing Escrow Agreement, executed by the Post Closing
Escrow Agent and by the Representatives on behalf of Company Stockholders
representing not less than 90% of the Company Shares;
(viii) originals of the Merger Documents executed by the Company;
(ix) a certificate of the Secretary of the Company certifying as to
the Articles of Incorporation and Bylaws of the Company and resolutions adopted
by the Board of Directors and Company Stockholders in connection with the
transactions contemplated by this Agreement; and
(x) joint written instructions to the Earnest Money Escrow Agent, as
provided in ss.2(e)(i)(B).
(b) Deliveries and Actions by the Buyer and the Transaction Subsidiary. The
Buyer and the Transaction Subsidiary shall deliver, or cause to be delivered to
the Company, or to other persons, as appropriate, the following documents,
instruments and agreements, and shall take the following actions:
(i) a copy of the Certificate of Incorporation for the Buyer and the
Transaction Subsidiary, certified by the Secretary of State of the State of
Delaware;
(ii) certificates of good standing for the Buyer and the Transaction
Subsidiary issued by the Delaware Secretary of State;
(iii) certificates of authorization for the Transaction Subsidiary
issued by the appropriate officers of the states of Washington and Oregon;
(iv) certificate of the Buyer and the Transaction Subsidiary to the
effect that each of the conditions specified in ss.7(b)(i) through (iv) has been
satisfied in all Material respects;
(v) originals or copies of each consent, authorization or approval
referred to in ss.7(b)(viii);
(vi) the Post Closing Escrow Agreement, executed by the Post Closing
Escrow Agent and by the Buyer and the Transaction Subsidiary;
(vii) a copy of the Exchange Agent Agreement, executed by the Buyer
and the Exchange Agent;
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(viii) originals of the Merger Documents, executed by the Transaction
Subsidiary;
(ix) the opinion of Sullivan & Worcester LLP, special counsel to the
Buyer, referred to in ss.7(b)(vi);
(x) a certificate of the Secretary of the Buyer and the Transaction
Subsidiary certifying as to resolutions adopted by the Board of Directors of
each in connection with the transactions contemplated by this Agreement; and
(xi) joint written instructions to the Earnest Money Escrow Agent, as
provided in ss.2(e)(i)(B)(1).
(c) Other Actions. The actions described in ss.2(c) will be taken by the
Parties.
9. TERMINATION.
(a) Termination of Agreement. Any of the Parties may terminate this
Agreement as provided below:
(i) the Parties may terminate this Agreement by mutual written consent
at any time prior to the Effective Time;
(ii) the Buyer and the Transaction Subsidiary may terminate this
Agreement by giving written notice to the Company at any time prior to the
Effective Time: (A) in the event the Company has breached any representation,
warranty, or covenant contained in this Agreement in any Material respect, the
Buyer or the Transaction Subsidiary has notified the Company of the breach, and
the breach has continued without cure for a period of 30 days after the notice
of breach, or (B) if the Closing shall not have occurred on or before June 24,
1998 (the "Termination Date"), by reason of the failure of any condition
precedent under ss.7(a) hereof (unless the failure results primarily from the
Buyer or the Transaction Subsidiary breaching any representation, warranty, or
covenant contained in this Agreement); or
(iii) the Company may terminate this Agreement by giving written
notice to the Buyer and the Transaction Subsidiary at any time prior to the
Effective Time: (A) in the event the Buyer or the Transaction Subsidiary has
breached any representation, warranty, or covenant contained in this Agreement
in any Material respect, the Company has notified the Buyer and the Transaction
Subsidiary of the breach, and the breach has continued without cure for a period
of 30 days after the notice of breach, or (B) if the Closing shall not have
occurred on or before the Termination Date, by reason of the failure of any
condition precedent under ss.7(b) hereof (unless the failure results primarily
from the Company breaching any representation, warranty, or covenant contained
in this Agreement).
(b) Effect of Termination. If any Party terminates this Agreement pursuant
to ss.9(a) above, all rights and obligations of the Parties hereunder shall
terminate without any liability of any Party to any other Party (except for any
liability of any Party then in breach); provided, however,
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the Confidentiality Agreement and any Buyer Confidentiality Agreement shall
survive any such termination.
Upon any termination of this Agreement, the Earnest Money Escrow Fund shall
be paid to the Company, except in the following circumstances, in which the
Earnest Money Escrow Fund shall be paid to the Buyer:
(i) the Company's representations and warranties contained in ss.3 of
this Agreement are determined prior to the Closing to be Materially inaccurate
when taken as a whole; or
(ii) the Company Stockholders fail or refuse to carry out the
transactions contemplated hereby without a legal excuse therefor (including any
failure of the Company Stockholders to provide the Requisite Stockholders
Approval).
10. REMEDIES FOR BREACHES OF REPRESENTATIONS AND WARRANTIES.
(a) Survival of Representations and Warranties. All of the representations
and warranties of the Company, the Buyer and the Transaction Subsidiary
contained in this Agreement shall survive the Closing hereunder and continue in
full force and effect for a period of one year thereafter (the "Survival
Period").
(b) Indemnification by Company Stockholders.
(i) The Company Stockholders, pursuant to the terms of this Agreement
and the Post Closing Escrow Agreement, severally, and not jointly, shall
indemnify the Buyer and the Surviving Corporation from and against any costs,
losses or expenses, including attorneys' fees (together, the "Claims") the Buyer
or the Surviving Corporation may suffer from and after the Closing Date
resulting from, arising out of or caused by:
(A) any breach by the Company of (1) its representations and
warranties contained in ss.3 above or (2) its covenants contained in clause
(ii), (iii) or (iv) of ss.5(d) above; provided that the Company Stockholders
shall not have any obligation to indemnify the Buyer or the Surviving
Corporation from and against any liability for Claims resulting from, arising
out of or caused by any breach described in clause (A)(1) of this ss.10(b)(i)
until the Buyer or the Surviving Corporation has suffered Claims by reason of
all such breaches in excess of **The confidential portion has been so omitted
pursuant to a request for confidential treatment and has been filed separately
with the Commission.** (the "Threshold") (at which point the Company
Stockholders will be obligated to indemnify the Buyer from and against such
Claims only to the extent they exceed the Threshold in the aggregate); and
provided further, that the Buyer makes a written claim for indemnification
against the Company Stockholders pursuant to the terms of the Post Closing
Escrow Agreement within fifteen days after the end of the Survival Period; or
(B) that portion of the Net Operating Income Adjustment derived
from the Company Net Operating Income Calculation exceeding that portion of the
Net Operating Income Adjustment derived from the final determination (whether as
a result of the Representatives failing to give notice of the Representatives'
disagreement with the Buyer Net Operating Income
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Calculation within the time period prescribed below, a resolution by the Buyer
and the Representatives of any such disagreement, or a determination by an
accounting firm selected pursuant to ss.10(b)(iii)(B) below to resolve any
disagreement among the parties) of the Net Operating Income of the Company for
each whole calendar month, if any, that shall have elapsed from March 1998 to
(but in no event including) the month in which the Closing occurs in accordance
with ss.10(b)(iii) below, which right to indemnification shall, notwithstanding
anything to the contrary contained herein, be without regard to the Threshold;
provided, however, that the Buyer makes a written claim for indemnification
against the Company Stockholders pursuant to the terms of the Post Closing
Escrow Agreement concurrently with the delivery of the Buyer Net Operating
Income Calculation to the Representatives in accordance with ss.10(b)(iii)(A)
below;
and provided, further, in the case of both clause (A) and clause (B) of this
ss.10(b)(i), that the Buyer's and the Surviving Corporation's right to
indemnification under this ss.10(b)(i) shall, except to the extent otherwise set
forth herein, be subject to and limited by each of the other provisions of this
ss.10.
(ii) Notwithstanding any provision to the contrary, the Company
Stockholders shall have no liability to the Buyer and the Surviving Corporation,
whether in respect of the indemnification obligations described in ss.10(b)(i)
or otherwise, except for their respective interests in the Post Closing Escrow
Fund. The Buyer's and the Surviving Corporation's sole and only recourse in
respect of any Claims hereunder shall be against the Post Closing Escrow Fund,
in the maximum amount thereof as shall exist from time to time, subject to the
procedures described in the Post Closing Escrow Agreement.
(iii) (A) As promptly as practicable after the Effective Time,
but in any event within 60 days thereafter, the Buyer shall prepare and deliver
(x) to the Representatives a schedule showing the Buyer's determination of the
Net Operating Income of the Company (which shall be calculated pursuant to the
format set forth in Schedule 2 in accordance with GAAP and on a basis consistent
with the past practices of the Company; provided, however, that any accruals
customarily done on an annual basis shall be done on a monthly basis; and
provided, further, that any expenses incurred by the Company (i) in the
preparation of audited financial statements that are to be borne by the Buyer
pursuant to ss.5(n) above, (ii) in connection with employee bonuses permitted
under ss.5(d) above or (iii) that relate solely to the transactions contemplated
by this Agreement shall be excluded from the calculation of Net Operating
Income) for each whole calendar month, if any, that shall have elapsed beginning
with the month of March 1998 to (but in no event including) the month in which
the Closing occurs (the "Buyer Net Operating Income Calculation") and (y) if
applicable, to the Representatives and the Post Closing Escrow Agent a written
claim for indemnification under ss.10(b)(i)(B) above against the Company
Stockholders pursuant to the terms of the Post Closing Escrow Agreement. If the
Representatives disagree with the Buyer Net Operating Income Calculation, the
Representatives shall give notice thereof to the Buyer within 20 days after
delivery of the Buyer Net Operating Income Calculation to the Representatives.
(B) The Buyer and the Representatives shall attempt to
settle any such dispute; and any such settlement shall be final and binding upon
the Buyer, the Company Stockholders and the Representatives. If, however, the
Buyer and the Representatives are unable to settle such dispute within 20 days
after receipt of such notice of dispute by the Buyer, the dispute
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shall be submitted to an independent certified public accounting firm mutually
acceptable to the Buyer and the Representatives for resolution, and the decision
of such independent certified public accountants shall be final and binding upon
the Buyer and the Representatives. All costs incurred in connection with the
resolution of said dispute by such independent public accountants, including
expenses and fees for services rendered, shall be paid (x) by the
Representatives, as agents for the Company Stockholders, if the Buyer Net
Operating Income Calculation for the month or months, if any, preceding the
month in which the Closing occurs is closer to the accountants' final
determination, pursuant to this ss.10(b)(iii)(B), of Net Operating Income for
such period than is the Company Net Operating Income Calculation for such
period, (y) by the Buyer if the Company Net Operating Income Calculation for
such period is closer to the accountants' final determination, pursuant to this
ss.10(b)(iii)(B), of Net Operating Income for such period than is the Buyer Net
Operating Income Calculation for such period, and (z) otherwise, one half by the
Buyer and one half by the Representatives. The Buyer and the Representatives
shall use reasonable best efforts to have the dispute resolved within 60 days
after such dispute is submitted to said independent public accountants, but
neither the Buyer nor the Representatives shall have any liability to any party
hereto for the delay in the resolution of such dispute if such dispute is not
resolved within such 60-day period.
(c) Indemnification by Buyer. The Buyer and the Surviving Corporation shall
indemnify the Company Stockholders from and against any Claims the Company
Stockholders may suffer from and after the Closing Date resulting from or
arising out of any breach by the Buyer or the Transaction Subsidiary of their
representations and warranties contained in ss.4 above; provided, that the Buyer
and the Surviving Corporation shall not have any obligation to indemnify the
Company Stockholders from and against any liability for Claims resulting from,
arising out of or caused by any breach by the Buyer or the Transaction
Subsidiary of any of their representations and warranties contained in ss.4(a),
ss.4(b), ss.4(c) or ss.4(d) above until the Company Stockholders have suffered
Claims by reason of all such breaches in excess of **The confidential portion
has been so omitted pursuant to a request for confidential treatment and has
been filed separately with the Commission.** (at which point the Buyer and the
Surviving Corporation will be obligated to indemnify the Company Stockholders
from and against such Claims only to the extent they exceed **The confidential
portion has been so omitted pursuant to a request for confidential treatment and
has been filed separately with the Commission.** in the aggregate); and provided
further, that the Company Stockholders make a written claim for indemnification
against the Buyer or the Surviving Corporation pursuant to the terms of the Post
Closing Escrow Agreement within fifteen days after the Survival Period; and
provided further, that the Company Stockholders' right to indemnification under
this ss.10(c) shall be subject to and limited by each of the other provisions of
this ss.10.
(d) Matters Involving Third Parties.
(i) If any third party shall notify any Person (the "Indemnified
Party") with respect to any matter (a "Third Party Claim") which may give rise
to a claim for indemnification against any other Person (the "Indemnifying
Party") under this ss.10, then the Indemnified Party shall promptly notify the
Indemnifying Party or its representative, as applicable, thereof in writing;
provided, however, that no delay on the part of the Indemnified Party in
notifying any Indemnifying Party shall relieve the Indemnifying Party from any
obligation hereunder unless (and then solely to the extent) the Indemnifying
Party thereby is prejudiced.
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(ii) Any Indemnifying Party will have the right to defend the
Indemnified Party against the Third Party Claim with counsel of its choice
reasonably satisfactory to the Indemnified Party so long as (A) the Indemnifying
Party notifies the Indemnified Party in writing within 15 days after the
Indemnified Party has given notice of the Third Party Claim that the
Indemnifying Party will indemnify the Indemnified Party from and against the
entirety of any costs, losses and expenses the Indemnified Party may suffer
resulting from, arising out of or caused by the Third Party Claim, (subject to
the limits of liability described in this ss.10), (B) the Third Party Claim
involves only money damages and does not seek an injunction or other equitable
relief, (C) settlement of, or an adverse judgment with respect to, the Third
Party Claim is not, in the good faith judgment of the Indemnified Party, likely
to establish a precedential custom or practice adverse to the continuing
business interests of the Indemnified Party, and (D) the Indemnifying Party
conducts the defense of the Third Party Claim actively and diligently.
(iii) So long as the Indemnifying Party is conducting the defense of
the Third Party Claim in accordance with ss.10(d)(ii) above, (A) the Indemnified
Party may retain separate co-counsel at its sole cost and expense and
participate in the defense of the Third Party Claim, (B) the Indemnified Party
will not consent to the entry of any judgment or enter into any settlement with
respect to the Third Party Claim without the prior written consent of the
Indemnifying Party (not to be withheld unreasonably), and (C) the Indemnifying
Party will not consent to the entry of any judgment or enter into any settlement
with respect to the Third Party Claim without the prior written consent of the
Indemnified Party (not to be withheld unreasonably); provided, that the
Indemnified Party shall consent to any settlement with respect to a Third Party
Claim where the settlement involves only the payment of money damages and the
amount thereof is fully paid by the Indemnifying Party;
(iv) In the event any of the conditions in ss.10(d)(ii) above is or
becomes unsatisfied, however: (A) the Indemnified Party may defend against, and
consent to the entry of any judgment or enter into any settlement with respect
to, the Third Party Claim in any manner it reasonably may deem appropriate (and
the Indemnified Party need not consult with, or obtain any consent from, any
Indemnifying Party in connection therewith), (B) the Indemnifying Party will
reimburse the Indemnified Party promptly and periodically for the costs of
defending against the Third Party Claim (including reasonable attorneys' fees
and expenses), subject to the limitations of its liability authorized in this
ss.10, and (C) the Indemnifying Party will remain responsible for any Claims the
Indemnified Party may suffer resulting from, arising out of or caused by the
Third Party Claim, subject to the limitations of its liability contained in this
ss.10.
(v) The Company shall cause the Company Stockholders, through the
Letter of Transmittal, irrevocably to appoint three Persons (the
"Representatives"), to act as their agent and attorneys-in-fact, with full power
of substitution, to execute the Post Closing Escrow Agreement in their name and
to take all actions called for by this ss.10 and the Post Closing Escrow
Agreement on their behalf, all in accordance with the terms of this ss.10 and
the Post Closing Escrow Agreement.
(e) Determination of Adverse Consequences. The amount payable by an
Indemnifying Party with respect to any Claim under this ss.10 shall be reduced
by the amount of any insurance proceeds and tax benefits received by an
Indemnified Party with respect to any insurance or tax
<PAGE>
-41-
claim made with respect thereto. All indemnification payments under this ss.10
shall be deemed adjustments to the Merger Consideration.
11. MISCELLANEOUS.
(a) Press Releases and Public Announcements. Until the Closing or, in the
event of termination of this Agreement, until the date of such termination, each
Party or its Affiliates shall consult with the other before issuing any press
release or otherwise making any public statements (including statements
contained in public securities filings) with respect to this Agreement or the
Merger and shall not issue any such press release or make any such public
statement without the prior consent of the other, which consent shall not be
unreasonably withheld or delayed. Notwithstanding the foregoing, the Buyer may,
without the prior consent of the Company, issue such press releases or make such
public statements which the Buyer determines to be necessary or appropriate
(including, without limitation, any such statements that it believes are
required by applicable law, or by the terms of any agreement or instrument with
any exchange, including without limitation the Nasdaq National Market System, on
which the Company's securities are listed), in which case the Buyer shall make
reasonable best efforts to advise the Company and afford it the opportunity to
review and comment upon its contents (it being understood that the form and
substance of any such press release or public statement shall be in the Buyer's
sole discretion).
(b) No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns; provided, however, that this Agreement is
intended for the benefit of the Company Stockholders.
(c) Entire Agreement. This Agreement, the Exhibits and Schedules, the
Earnest Money Escrow Agreement, the Post Closing Escrow Agreement, the Exchange
Agreement and the Confidentiality Agreement constitute the entire agreement
among the Parties and collectively supersede any prior understandings,
agreements, or representations by or among the Parties, written or oral, to the
extent they related in any way to the subject matter hereof.
(d) Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Parties; provided that the Buyer may cause a wholly owned
Subsidiary of the Buyer to be substituted for the Transaction Subsidiary as the
party to the Merger and may, in addition, assign the other rights, but not its
obligations, including, without limitation, its obligation to pay the Merger
Consideration, under this Agreement to such Subsidiary.
(e) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(f) Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
<PAGE>
-42-
(g) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if it is sent by
registered or certified mail, return receipt requested, postage prepaid, and
addressed to the intended recipient as set forth below:
If to the Company:
InterMation, Inc.
1201 Third Avenue, Suite 2200
Seattle, Washington 98101
Attention: Charles K. Barbo
Fax: (206) 623-0968
Copy to:
Mark A. Maghie, Esq.
Graham & James LLP
1001 Fourth Avenue, Suite 4500
Seattle, Washington 98154
Fax: (206) 389-1708
If to the Buyer and/or the Transaction Subsidiary:
Iron Mountain Incorporated
745 Atlantic Avenue
Boston, Massachusetts 02111
Attention: John F. Kenny, Jr.
Fax: (617) 350-7881
Copies to:
Garry B. Watzke, Esq.
745 Atlantic Avenue
Boston, Massachusetts 02111
Fax: (617) 350-7881
and
William J. Curry, Esq.
Sullivan & Worcester LLP
One Post Office Square
Boston, Massachusetts 02109
Fax: (617) 338-2880
Notice shall be deemed received: if by personal delivery, upon actual receipt;
if by national overnight courier, on the business day following the sender's
delivery to such courier; if by facsimile, upon electric confirmation of
delivery by the sender's facsimile machine; and if by certified mail, on the
fifth (5th) business day after deposit in the U.S. Mail. Any Party may change
the address to which notices, requests, demands, claims, and other
communications hereunder are to be delivered by giving the other Parties notice
in the manner herein set forth.
<PAGE>
-43-
(h) Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of Washington without giving
effect to any choice or conflict of law provision or rule (whether of the State
of Washington or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Washington.
(i) Amendments and Waivers. The Parties may mutually amend any provision of
this Agreement at any time prior to the Effective Time; provided, however, that
any amendment effected subsequent to stockholder approval will be subject to the
restrictions contained in the Washington Business Corporation Act. No amendment
of any provision of this Agreement shall be valid unless the same shall be in
writing and signed by all of the Parties. No waiver by any Party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
(j) Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(k) Expenses. Each of the Parties will bear its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby; provided, that if the transactions
contemplated by this Agreement close, the legal fees and expenses of the Company
which exceed **The confidential portion has been so omitted pursuant to a
request for confidential treatment and has been filed separately with the
Commission.**, if any, will be deducted from the Merger Consideration payable by
the Buyer in connection with such transactions in the manner set forth in the
definition of Adjusted Merger Consideration above and ss.2(d)(v)(A)(2)(x).
(l) Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context otherwise requires. The
word "including" shall mean "including without limitation".
(m) Jurisdiction; Venue. The Parties, to the extent they may lawfully do
so, hereby consent to the jurisdiction of the courts of the State of Washington,
King County, and the United States District Court of Washington, as well as to
the jurisdiction of all courts from which an appeal may be taken from such
courts, for the purpose of any suit, action or other proceeding arising out of
any of their obligations arising hereunder or with respect to the transactions
contemplated hereby and expressly waive any and all objections they any have as
to venue in any of such courts.
(n) Litigation Costs. The prevailing party in any legal proceeding arising
from this Agreement shall be entitled to an award of reasonable attorneys' fees
incurred in connection with the litigation. The non-prevailing party shall pay
such fees, together with the costs and expenses of the litigation.
<PAGE>
-44-
(o) Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
[Remainder of page intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
IRON MOUNTAIN INCORPORATED
By: /s/ C. Richard Reese
------------------------
Name: C. Richard Reese
Title: Chairman and Chief Executive Officer
IM-3 ACQUISITION CORP.
By: /s/ C. Richard Reese
----------------------
Name: C. Richard Reese
Title: President
INTERMATION, INC.
By: /s/ Gregory L. Beary
----------------------
Name: Gregory L. Beary
Title: President
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. CA
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
Iron Mountain Records Management of Utah, Inc. DE
Data Securities International, Inc. DE
IM-3 Acquisition Corp. DE
Iron Mountain Records Management of the Northwest, Inc. DE
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K, into the Company's
previously filed registration statements on Forms S-3 (File No. 333-44185), S-4
(File No. 333-44187) and S-8 (File Nos. 333-24803, 333-33191 and 333-43901).
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS OF MARCH 31, 1997, JUNE 30, 1997
AND SEPTEMBER 30, 1997 AND THE UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997, THE SIX MONTHS ENDED JUNE
30, 1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<EXCHANGE-RATE> 1.00 1.00 1.00
<CASH> 1,767 585 2,242
<SECURITIES> 0 0 0
<RECEIVABLES> 26,585 30,700 36,704
<ALLOWANCES> (1,076) (1,098) (1,332)
<INVENTORY> 923 920 989
<CURRENT-ASSETS> 36,166 39,525 50,836
<PP&E> 170,776 193,428 207,617
<DEPRECIATION> (48,939) 53,032 (56,996)
<TOTAL-ASSETS> 301,797 395,647 451,099
<CURRENT-LIABILITIES> 29,856 32,156 44,175
<BONDS> 201,465 241,967 274,368
0 0 0
0 0 0
<COMMON> 101 119 122
<OTHER-SE> 51,823 104,303 113,823
<TOTAL-LIABILITY-AND-EQUITY> 301,797 395,647 451,099
<SALES> 42,154 88,739 143,394
<TOTAL-REVENUES> 42,154 88,739 143,394
<CGS> 21,764 45,872 73,742
<TOTAL-COSTS> 37,693 79,340 127,919
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 5,140 11,080 17,631
<INCOME-PRETAX> (679) (1,681) (2,156)
<INCOME-TAX> (163) (196) (346)
<INCOME-CONTINUING> (516) (1,485) (1,810)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (516) (1,485) (1,810)
<EPS-PRIMARY> (0.05) (0.14) (0.17)
<EPS-DILUTED> (0.05) (0.14) (0.17)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1996 AND SEPTEMBER
30, 1996, THE AUDITED CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996,
THE UNAUDITED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996,
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND THE AUDITED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 SEP-30-1996 DEC-31-1996
<EXCHANGE-RATE> 1.00 1.00 1.00
<CASH> 2,232 3,812 3,453
<SECURITIES> 0 0 0
<RECEIVABLES> 20,546 22,069 25,197
<ALLOWANCES> (790) (875) (1,061)
<INVENTORY> 523 688 767
<CURRENT-ASSETS> 25,865 28,447 34,788
<PP&E> 141,601 153,426 163,495
<DEPRECIATION> (38,597) (42,201) (45,146)
<TOTAL-ASSETS> 212,630 247,149 281,799
<CURRENT-LIABILITIES> 23,129 21,728 26,830
<BONDS> 118,894 151,977 184,733
0 0 0
0 0 0
<COMMON> 101 101 101
<OTHER-SE> 54,628 54,647 52,283
<TOTAL-LIABILITY-AND-EQUITY> 212,630 247,149 281,799
<SALES> 63,950 99,969 138,718
<TOTAL-REVENUES> 63,950 99,969 138,718
<CGS> 32,383 51,091 70,747
<TOTAL-COSTS> 55,980 87,749 122,025
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 6,385 9,981 14,901
<INCOME-PRETAX> 1,585 2,239 1,792
<INCOME-TAX> 888 1,542 1,435
<INCOME-CONTINUING> 697 697 357
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 2,126
<CHANGES> 0 0 0
<NET-INCOME> 697 697 (1,769)
<EPS-PRIMARY> 0.05 0.05 (0.22)
<EPS-DILUTED> 0.04 0.04 (0.22)
</TABLE>
