PROSPECTUS SUPPLEMENT
(To Prospectus dated January 20, 1998)
3,500,000 Shares
[LOGO] IRON MOUNTAIN INCORPORATED
Common Stock
All of the shares of Common Stock, par value $.01 per share (the "Common
Stock"), offered hereby are being offered by Iron Mountain Incorporated (the
"Company" or "Iron Mountain"). The Common Stock is traded on The Nasdaq Stock
Market's National Market (the "Nasdaq National Market") under the symbol
"IMTN." On March 30, 1998, the closing sale price of the Common Stock on the
Nasdaq National Market was $35.00 per share.
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See "Risk Factors" beginning on page 1 of the accompanying Prospectus for
a discussion of certain considerations relevant to an investment in the Common
Stock.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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| Price to | Underwriting | Proceeds to
| Public | Discount (1) | Company (2)
Per Share ............... | $ 34.75 | $ 1.73 | $ 33.02
Total (3) ............... | $121,625,000 | $6,055,000 | $115,570,000
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,000,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
525,000 additional shares of Common Stock, solely to cover
over-allotments, if any. If the option is exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Company will be
$139,868,750, $6,963,250 and $132,905,500, respectively. See
"Underwriting."
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The shares of Common Stock are offered severally by the Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, subject to approval of certain legal matters by counsel for the
Underwriters and certain other conditions. The Underwriters reserve the right
to withdraw, cancel or modify such offer and to reject orders in whole or in
part. It is expected that delivery of the shares of Common Stock will be made
against payment therefor on or about April 3, 1998 at the offices of Bear,
Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167.
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Bear, Stearns & Co. Inc.
William Blair & Company
Prudential Securities Incorporated
The date of this Prospectus Supplement is March 30, 1998.
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is not intended to be complete and is qualified in
its entirety by reference to the more detailed information set forth elsewhere
or incorporated by reference in this Prospectus Supplement and in the
accompanying Prospectus dated January 20, 1998 (the "Prospectus"), which should
be reviewed carefully. Unless the context indicates otherwise, the term "Recent
Acquisitions" means the acquisitions consummated since January 1, 1997 and the
term "Pending Acquisition" means the pending acquisition of InterMation, Inc.,
as described under "Recent and Pending Acquisitions." References to "Iron
Mountain" and the "Company" include Iron Mountain Incorporated (including
predecessor entities) and its consolidated subsidiaries, unless the context
otherwise requires. Unless otherwise indicated, the information in this
Prospectus Supplement does not give effect to the exercise of the Underwriters'
over-allotment option and assumes that the net proceeds from the Offering to be
used for the repayment of indebtedness will be used to repay indebtedness
outstanding under the Credit Agreement and not to redeem a portion of the 1996
Notes (each as defined herein).
The Company
Iron Mountain is America's largest records management company, as measured
by its revenues. The Company is a national, full-service provider of records
management and related services, enabling customers to outsource records
management functions. Iron Mountain has a diversified customer base, which
includes more than half of the Fortune 500 and numerous commercial, legal,
banking, healthcare, accounting, insurance, entertainment and government
organizations. The Company provides storage for all major media, including
paper (the dominant form of records storage), computer disks and tapes,
microfilm and microfiche, master audio and video tapes, film and optical disks,
X-rays and blueprints. Iron Mountain's principal services provided to its
storage customers include courier pick-up and delivery, filing, retrieval and
destruction of records, database management, customized reporting and disaster
recovery support. The Company also sells storage materials and provides
information technology ("IT") staffing, consulting, facilities management and
other outsourcing services.
As part of its growth strategy, since mid-1994, Iron Mountain has acquired
46 records management businesses, including 16 in 1996 and 23 since January 1,
1997. The Company's recent acquisitions of 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"), have significantly increased its presence in medical records
management and off-site data security services (the management of electronic
records). In addition to being the industry leader in business records,
management believes that the Company is now the industry leader in both of
these specialized records management activities. These acquisitions also
expanded the ancillary services offered by the Company to include IT staffing
and enhanced its range of facilities management services. As of March 1, 1998,
Iron Mountain managed over 50,000 customer accounts and operated 223 records
management facilities in 54 markets. For the year ended December 31, 1997,
giving effect on a pro forma basis to the Recent Acquisitions, the Company had
revenues of $365.8 million and earnings before interest, taxes, depreciation,
amortization and extraordinary items ("EBITDA") of $89.1 million, after
adjustments for certain identified cost reductions from the integration of the
Recent Acquisitions. See "Pro Forma Condensed Consolidated Financial
Information."
Industry Overview
The records management industry stores information in a variety of media
formats, which can be broadly divided into paper and electronic records, and
provides a wide range of services related to the records stored. 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
remain available for reference for many years. Management believes the volume
of information stored on electronic media has similarly been expanding in
recent years.
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
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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.
The Company believes that it benefits from several industry fundamentals,
including: (i) the historically non-cyclical nature of the records management
industry; (ii) the continued trend towards corporate outsourcing of records
management functions; (iii) the ability of larger records management companies
to achieve economies of scale with respect to labor, real estate costs and the
utilization of management information systems; and (iv) the ongoing
consolidation of the records management industry. The Company believes that
there are only three records management providers (including the Company) with
a national operating presence, the balance being regional or, in most
instances, single-city operators. 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 is a trend
toward consolidation in the records management industry and that this trend
will continue primarily because of: (i) the opportunities to achieve economies
of scale; (ii) the industry's capital requirements for growth; (iii) customer
demands for more sophisticated technology-based solutions; (iv) the preference
on the part of certain customers to use large, sophisticated records management
companies for the storage of vital records and the support of disaster recovery
programs; and (v) the preference of certain large, national customers to
outsource a significant portion of their records management functions to one
vendor with a national presence, such as Iron Mountain.
Iron Mountain Strategy
Iron Mountain's strategy is to increase revenues and EBITDA while
maintaining a low-cost operating structure and providing premium services. The
Company seeks to generate growth 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 strategy is based on the following elements:
Growth from Existing Customers
Existing Iron Mountain customers storing paper records contribute to
storage and services revenue growth because on average they generate additional
Cartons(1) 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(2) increased at an average annual 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 account 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."
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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, which are described under "Business--Description of
Iron Mountain Records Management Services."
(2) "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
"Business--Legal Proceedings."
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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
Records Management Corporation ("Safesite") and Arcus and the decision by the
Company to significantly increase its direct selling resources. As a result of
Arcus's sales efforts, from January 1, 1993 through December 31, 1997, Arcus
realized an internal annual growth rate of approximately 11%.
Growth through Acquisitions
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 believes that it is well positioned to
continue to participate in the further consolidation of the records management
industry. As part of its growth strategy, since mid-1994, Iron Mountain has
acquired 46 records management businesses, including 16 in 1996 and 23 since
January 1, 1997. The Company has made, and intends to continue to make, fold-in
acquisitions to augment its operations 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 has also 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 Arcus and Record
Masters, Iron Mountain believes that it is now the industry leader in both
off-site data security services and medical records management.
Capitalize on Operating Efficiencies
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.
Because occupancy costs are a major component of the Company's cost of sales,
its real estate management staff aggressively seeks to minimize per unit
storage costs by designing racking systems and operating space to maximize
facility storage efficiency, negotiating favorable facility leases, contracting
for facilities to be built to its custom specifications, and leasing larger
facilities in order to reduce operating costs per unit. The Company seeks to
increase labor efficiency by offering incentive compensation to all full-time
employees based upon achieving specific operating targets. Certain operating
costs, such as the maintenance of local delivery fleets, general and
administrative costs and management information systems, offer economies of
scale, providing the Company with operating leverage and the ability to
increase its efficiency through further growth.
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.
Provide Superior Customer Service
The Company believes it has a reputation for providing reliable, quality
service based on its more than 47 years of operations, its commitment to
providing premium customer service by offering a full service approach to a
customer's record information management needs, and the continuity and depth of
its management team. The Company has
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successfully implemented a decentralized management structure that enables the
Company to respond quickly and flexibly to local customer needs. In addition,
Iron Mountain's national operating presence allows it to better service large
organizations that require multiple records management solutions across
geographically diverse locations.
Iron Mountain's proprietary Safekeeper(TM) and Safekeeper MediaLink(TM)
systems provide advanced inventory control and information access, enabling the
Company to supply customized records management solutions and to quickly respond
to marketplace trends. In addition, Iron Mountain's Safekeeper Compass(TM)
system allows national account customers to access data, run inventory reports
and order services from Iron Mountain locations nationwide.
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 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 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 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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Recent Developments
Arcus and Other 1998 Acquisitions
Since January 1, 1998, the Company has acquired five additional records
management companies for aggregate consideration equal to approximately $167
million, including the acquisition of Arcus Group for 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. Arcus
provides data security services, consisting 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, and also provides
IT staffing services. As a result of the Arcus acquisition, management believes
that the Company is the largest provider of off-site data security services in
the United States. See "Recent and Pending Acquisitions--Arcus Acquisition."
Pending Acquisition
On February 24, 1998, the Company entered into a definitive agreement to
acquire InterMation, Inc. ("InterMation") for aggregate consideration of
approximately $28 million, including Common Stock having an aggregate market
value of approximately $11 million, subject to certain adjustments (the
"InterMation Merger"). 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. As of March 1,
1998, InterMation operated four facilities, serving approximately 1,300
customer accounts. After the InterMation Merger, the Company will have a
significant presence in the records management business in both Oregon and
Washington, and in the medical records management and the data security
businesses in the greater Seattle, Washington metropolitan area. The Offering
is not conditioned upon completion of the InterMation Merger, and the
InterMation Merger is not conditioned upon the completion of the Offering. See
"Recent and Pending Acquisitions--Pending Acquisition."
The Offering
Shares of Common Stock offered ......... 3,500,000 (1)
Shares of Common Stock outstanding
after the Offering .................... 18,471,239 (1)(2)
Use of Proceeds ........................ The net proceeds of the Offering
will be used to repay outstanding
debt, to fund a portion of the
purchase price of the Pending
Acquisition and for general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol .......... IMTN
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(1) Excludes up to 525,000 shares of Common Stock which may be sold by the
Company upon exercise of the over-allotment option granted to the
Underwriters. See "Underwriting."
(2) Excludes 1,685,633 shares reserved for issuance upon the exercise of stock
options currently outstanding under the Company's existing stock option
plans. Also excludes shares of Common Stock that may be issued in
connection with the InterMation Merger.
Risk Factors
See "Risk Factors" beginning on page 1 of the accompanying Prospectus for
a discussion of certain considerations relevant to an investment in the Common
Stock.
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Iron Mountain was incorporated in Delaware in 1990 but its operations date
from 1951. The principal executive offices of the Company are located at 745
Atlantic Avenue, Boston, Massachusetts 02111. Its telephone number is (617)
357-4455.
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Summary Historical and Pro Forma Information
(In thousands, except per share data)
The following summary historical 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 summary historical and
pro forma financial data set forth below should be read in conjunction with
"Pro Forma Condensed Consolidated Financial Information" and the Notes thereto,
"Selected Consolidated Financial and Operating Information" and the Notes
thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Iron Mountain's Consolidated Financial Statements
and the Notes thereto included elsewhere in this Prospectus Supplement.
<TABLE>
<CAPTION>
Year Ended December 31,
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Pro Pro Forma As
Historical Forma(1) Adjusted(1)(2)
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1993 1994 1995 1996 1997 1997 1997
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<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Revenues:
Storage ......................................... $ 48,892 $54,098 $ 64,165 $ 85,826 $125,968 $219,056 $219,056
Service and Storage Material Sales .............. 32,781 33,520 40,271 52,892 82,797 146,706 146,706
-------- ------- -------- -------- -------- -------- --------
Total Revenues ................................ 81,673 87,618 104,436 138,718 208,765 365,762 365,762
Operating Expenses:
Cost of Sales (Excluding Depreciation) .......... 43,054 45,880 52,277 70,747 106,879 187,400 186,160
Selling, General and Administrative ............. 19,971 20,853 26,035 34,342 51,668 97,000 90,492
Depreciation and Amortization ................... 6,789 8,690 12,341 16,936 27,107 42,961 42,961
-------- ------- -------- -------- -------- -------- --------
Total Operating Expenses ...................... 69,814 75,423 90,653 122,025 185,654 327,361 319,613
-------- ------- -------- -------- -------- -------- --------
Operating Income ................................. 11,859 12,195 13,783 16,693 23,111 38,401 46,149
Interest Expense, Net ............................ 8,203 8,954 11,838 14,901 27,712 40,307 40,307
-------- ------- -------- -------- -------- -------- --------
Income (Loss) Before Provision (Benefit) for
Income Taxes .................................... 3,656 3,241 1,945 1,792 (4,601) (1,906) 5,842
Provision (Benefit) for Income Taxes ............. 2,088 1,957 1,697 1,435 (80) 3,632 6,731
-------- ------- -------- -------- -------- -------- --------
Income (Loss) Before Extraordinary Charge ........ 1,568 1,284 248 357 (4,521) (5,538) (889)
Extraordinary Charge, Net of Tax Benefit (3) ..... -- -- -- 2,126 -- -- --
-------- ------- -------- -------- -------- -------- --------
Net Income (Loss) ................................ 1,568 1,284 248 (1,769) (4,521) (5,538) (889)
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) $ (5,538) $ (889)
======== ======= ======== ======== ======== ======== ========
Income (Loss) per Common Share:
Diluted:
Net Income (Loss) Applicable to Common
Stockholders ................................... $ 0.08 $ (0.60) $ (48.92) $ (0.22) $ (0.39) $ (0.30) $ (0.05)
======== ======= ======== ======== ======== ======== ========
Weighted Average Common Shares Outstanding ...... 8,067 214 38 9,274 11,448 18,338 18,338
======== ======= ======== ======== ======== ======== ========
Pro Forma (4):
Net Income (Loss) Applicable to Common
Stockholders ................................... $ 0.08 $ (0.02) $ (0.24) $ (0.20) $ (0.39) $ (0.30) $ (0.05)
======== ======= ======== ======== ======== ======== ========
Weighted Average Common Shares Outstanding ...... 8,067 7,984 7,784 10,137 11,448 18,338 18,338
======== ======= ======== ======== ======== ======== ========
</TABLE>
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<TABLE>
<CAPTION>
Year Ended December 31,
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Pro Pro Forma As
Historical Forma(1) Adjusted(1)(2)
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1993 1994 1995 1996 1997 1997 1997
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<S> <C> <C> <C> <C> <C> <C> <C>
Other Data:
EBITDA (5) ................................... $ 18,648 $ 20,885 $ 26,124 $ 33,629 $ 50,218 $ 81,362 $ 89,110
EBITDA as a Percentage of Total Revenues ..... 22.8% 23.8% 25.0% 24.2% 24.1% 22.2% 24.4%
Capital Expenditures:
Growth (6)(7) ............................... $ 13,605 $ 15,829 $ 14,395 $ 23,334 $ 37,082
Maintenance ................................. 1,846 1,151 858 1,112 1,238
-------- -------- -------- -------- --------
Total Capital Expenditures (7) ............. $ 15,451 $ 16,980 $ 15,253 $ 24,446 $ 38,320
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------------------
Pro
Historical Forma(8)
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1993 1994 1995 1996 1997 1997
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and Cash Equivalents ......... $ 591 $ 1,303 $ 1,585 $ 3,453 $ 24,510 $ 28,244
Total Assets ...................... 125,288 136,859 186,881 281,799 636,786 826,088
Total Debt ........................ 78,460 86,258 121,874 184,733 428,018 430,904
Stockholders' Equity .............. 24,047 22,869 21,011 52,384 137,733 307,355
</TABLE>
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(1) Gives effect to: (i) the Recent Acquisitions; (ii) the Credit Agreement;
(iii) the sale of the 1997 Notes (as defined herein); and (iv) the
Offering and the application of the net proceeds therefrom as described
under "Use of Proceeds," as if each had occurred as of January 1, 1997.
Certain acquisitions have been excluded as the impact of such acquisitions
would not be material. In addition, the pro forma consolidated statement
of operations data does not include results of operations, or pro forma
adjustments, for the Pending Acquisition. See "Use of Proceeds" and "Pro
Forma Condensed Consolidated Financial Information."
(2) Gives effect to certain identified cost savings that the Company believes
would have been realized had the Recent Acquisitions been fully integrated
as of January 1, 1997 relating to: (i) termination of specific employees
and related net reductions in labor expenses; (ii) closure of identified
redundant facilities and related net reductions in occupancy costs; and
(iii) elimination of related party expenses, management fees and
compensation expenses in excess of amounts that would have been incurred
by the Company. See "Pro Forma Condensed Consolidated Financial
Information" and Notes thereto.
(3) 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.
(4) 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.
(5) 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.
(6) 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."
(7) 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.
(8) Gives effect to: (i) the Recent Acquisitions consummated after December 31,
1997; and (ii) the Offering and the application of the net proceeds
therefrom as described under "Use of Proceeds," as if each had occurred as
of December 31, 1997. Does not include pro forma adjustments for the
Pending Acquisition. See "Use of Proceeds" and "Pro Forma Condensed
Consolidated Financial Information."
S-7
<PAGE>
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 for 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 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, Record Masters and Arcus Group 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. 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 for the
nine months ended September 30, 1997 and, for the same periods, giving pro
forma effect to three acquisitions by Record Masters 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.
S-8
<PAGE>
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
expense 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 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 $11 million, subject to certain adjustments. The closing of the
InterMation Merger is subject to customary conditions and is expected to occur
in the first half of 1998, although no assurance can be given that the
InterMation Merger will be completed. The Offering is not conditioned upon
completion of the InterMation Merger, and the InterMation Merger is not
conditioned upon the completion of the Offering.
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 March 1, 1998, InterMation operated four
facilities, serving approximately 1,300 customer accounts. After the
InterMation Merger, the Company will have a significant presence in the records
management business in both Oregon and Washington, and in the medical records
management and the data security businesses in the greater Seattle, Washington
metropolitan area. InterMation had revenues of $7.2 million for the year ended
December 31, 1997. The Company believes that as a result of the InterMation
Merger, it will recognize significant synergies with its existing operations in
Portland, Oregon and Seattle, Washington.
The following table presents certain information for the 1996 acquisitions
and the Recent Acquisitions.
<TABLE>
<CAPTION>
Principal State(s)
Acquisition of Operation Completion Date
- ----------------------------------------------------------------- ------------------- ----------------
<S> <C> <C>
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
</TABLE>
S-9
<PAGE>
<TABLE>
<CAPTION>
Principal State(s)
Acquisition of Operation Completion Date
- ------------------------------------------------------- --------------------- ----------------
<S> <C> <C>
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>
- ----------------------
(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.
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby (the
"Offering") are estimated to be $114.6 million (or $131.9 million if the
Underwriters over-allotment option is exercised in full), after deducting the
underwriting discounts and estimated Offering expenses, and will be used to
repay indebtedness under the Company's bank facility, dated as of September 30,
1996, among Iron Mountain, 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
Pending Acquisition and for general corporate purposes. Borrowings by the
Company under the Credit Agreement during the most recent 12 months were used
to finance acquisitions and for working capital. The Credit Agreement has a
maturity date of September 30, 2002. The weighted average interest rate as of
March 1, 1998 on indebtedness outstanding under the Credit Agreement was 7.22%.
The Company may apply a portion of the net proceeds from the Offering to redeem
up to $57,750,000 aggregate principal amount of the Company's 10-1/8% Senior
Subordinated Notes due 2006 (the "1996 Notes"), at a redemption price equal to
109.125% of the principal amount thereof, plus accrued and unpaid interest to,
but excluding, the date of redemption. Unless otherwise indicated, information
in this Prospectus Supplement assumes that the net proceeds from the Offering
to be used for the repayment of indebtedness will be used to repay indebtedness
outstanding under the Credit Agreement and not to redeem the 1996 Notes.
Pending such uses, the net proceeds from the Offering will be invested in
short-term, dividend paying or interest-bearing investment grade securities.
S-10
<PAGE>
CAPITALIZATION
(In thousands, except per share data)
The following table sets forth at December 31, 1997: (i) the actual
capitalization of the Company and (ii) the pro forma capitalization of the
Company, after giving effect to the Recent Acquisitions consummated after
December 31, 1997 and the Offering and the application of the net proceeds
therefrom as described in "Use of Proceeds." This table should be read in
conjunction with "Use of Proceeds," "Pro Forma Condensed Consolidated Financial
Information" and the Notes thereto and Iron Mountain's Consolidated Financial
Statements and the Notes thereto included elsewhere in this Prospectus
Supplement.
<TABLE>
<CAPTION>
As of December 31, 1997
---------------------------------
Actual Pro Forma (2)
---------------- --------------
<S> <C> <C>
Cash and Cash Equivalents ...................................... $ 24,510(1) $ 28,244
=========== =========
Short-term Note Payable ........................................ 3,000 3,000
Long-term Debt (Including Current Maturities):
Credit Agreement .............................................. -- --
10-1/8% Senior Subordinated Notes due 2006 .................... 165,000 165,000
8-3/4% Senior Subordinated Notes due 2009 ..................... 249,525 249,525
Real Estate Mortgages and Other ............................... 10,493 13,379
----------- ---------
Total Long-term Debt ......................................... 425,018 427,904
Stockholders' Equity:
Preferred Stock, $0.01 par value; 2,000 Shares Authorized, None
Issued or Outstanding ........................................ -- --
Common Stock, $0.01 par value; 20,000 Shares Authorized,
13,453 Issued and Outstanding; 18,391 Issued and Outstanding,
Pro Forma (3) ................................................ 135 184
Common Stock--Nonvoting, $0.01 par value; 1,000 Shares
Authorized, None Issued or Outstanding ....................... -- --
Additional Paid-in Capital .................................... 151,971 321,544
Accumulated Deficit ........................................... (14,373) (14,373)
----------- ---------
Total Stockholders' Equity ................................... 137,733 307,355
----------- ---------
Total Capitalization ........................................ $ 565,751 $ 738,259
=========== =========
</TABLE>
- ----------------------
(1) Includes excess proceeds from the sale of the 1997 Notes, which were
subsequently used to fund a portion of the purchase price for the Arcus
Merger in 1998.
(2) Assumes that the portion of the net proceeds from the Offering to be used
for the repayment of indebtedness will be used to repay indebtedness
outstanding under the Credit Agreement and not to redeem a portion of the
1996 Notes. See "Use of Proceeds."
(3) On January 5, 1998, the stockholders of the Company voted to increase the
number of authorized shares of Common Stock from 20 million to 100
million.
S-11
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Consolidated Balance Sheet as
of December 31, 1997 (the "Pro Forma Balance Sheet") has been prepared based
upon the historical condensed consolidated balance sheet of Iron Mountain as of
December 31, 1997 and the balance sheets as of December 31, 1997 of the Recent
Acquisitions consummated after December 31, 1997 (the "1998 Acquisitions"), and
gives effect to: (i) the 1998 Acquisitions and (ii) the Offering and the
application of the net proceeds therefrom as described under "Use of Proceeds"
as if each had occurred as of December 31, 1997. The Pro Forma Balance Sheet
does not give effect to the Pending Acquisition. The following Unaudited Pro
Forma Condensed Consolidated Statement of Operations for the year ended
December 31, 1997 (the "Pro Forma Statement of Operations," together with the
Pro Forma Balance Sheet, the "Pro Forma Financial Statements") gives effect to
each of the above transactions and to: (iii) the Recent Acquisitions
consummated prior to December 31, 1997 (the "1997 Acquisitions"); (iv) the
Credit Agreement; and (v) the sale by the Company of $250.0 million of its
8-3/4% Senior Subordinated Notes due 2009 (the "1997 Notes"), as if each had
occurred as of January 1, 1997. The transactions described in clauses (i)
through (v) above are collectively referred to herein as the "Transactions."
Pro forma adjustments are described in the accompanying notes.
The Pro Forma Financial Statements assume that the net proceeds from the
Offering to be used for the repayment of indebtedness will be used to repay
indebtedness outstanding under the Credit Agreement and not to redeem a portion
of the 1996 Notes. If the Company elects to redeem the maximum permitted
aggregate principal amount of the 1996 Notes with the net proceeds of the
Offering, then the Company would record, in the quarter in which the redemption
occurs, an extraordinary charge of approximately $7 million (before a tax
benefit of approximately $3 million) from the early retirement of debt. Such
extraordinary charge would consist of a redemption premium of approximately $5
million and the write-off of unamortized deferred financing costs of
approximately $2 million. The impact on the Pro Forma Balance Sheet would not
be material.
The Pro Forma As Adjusted results of operations for the year ended
December 31, 1997 gives effect to the Transactions and to integration
adjustments related to certain identified cost savings that management believes
would have been realized had the Recent Acquisitions been fully integrated as
of January 1, 1997.
The Pro Forma Statement of Operations does not include: (i) results of
operations for the year ended December 31, 1997, or pro forma adjustments, for
the Pending Acquisition, which had revenues of $7.2 million for 1997; (ii)
results of operations prior to the date of acquisition, or pro forma
adjustments, for acquisitions completed by Record Masters and Arcus in 1997,
which had aggregate revenues of $6.6 million for the period in 1997 prior to
the date of acquisition; and (iii) results of operations prior to the date of
acquisition, or pro forma adjustments, for Data Recovery Services, Inc.,
Critical Files Security, Inc. and Willamette Archives, Inc. (the "Excluded
Acquisitions") because the impact of the Excluded Acquisitions (which in the
aggregate represent less than 1% of pro forma revenues) is immaterial to such
statements. In addition, the Pro Forma Statement of Operations does not reflect
one disposition by Arcus in June 1997, which is immaterial to such statements.
See "Overview" in the accompanying Notes to Unaudited Pro Forma Condensed
Financial Statements.
The following Pro Forma Statement of Operations is not necessarily
indicative of the actual results of operations that would have been reported if
the events described above had occurred as of January 1, 1997, nor does it
purport to indicate the results of the Company's future operations.
Furthermore, the pro forma results do not give effect to all cost savings or
incremental costs that may occur as a result of the integration and
consolidation of the Recent Acquisitions. In the opinion of management, all
adjustments necessary to present fairly such pro forma financial statements
have been made.
The pro forma condensed consolidated financial information should be read
in conjunction with "Capitalization," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and with the Financial
Statements and the Notes thereto included elsewhere or incorporated by
reference in this Prospectus Supplement.
S-12
<PAGE>
IRON MOUNTAIN INCORPORATED
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Historical 1998 Acquisitions
Iron ---------------------- Pro Forma Pro Forma
Mountain Arcus Other Adjustments Iron Mountain
----------- ---------- --------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets ................................. $ 81,927 $21,147 $1,870 $ 1,287(A) $106,231
Property, Plant and Equipment, net ............. 183,898 16,191 1,362 3,124 (A) 204,575
Goodwill, net .................................. 340,852 56,862 -- 83,323 (A) 481,037
Other Long-term Assets ......................... 30,109 3,159 2 975 (A) 34,245
-------- ------- ------ ---------- --------
Total Assets ................................. $636,786 $97,359 $3,234 $ 88,709 $826,088
======== ======= ====== ========== ========
Liabilities and Stockholders' Equity
Current Liabilities ............................ $ 55,753 $20,248 $ 446 $ (5,146)(B) $ 71,301
Long-term Debt, net of Current Portion ......... 424,498 38,888 -- (36,135)(B) 427,251
Deferred Rent .................................. 8,202 -- -- -- 8,202
Deferred Income Taxes .......................... 5,264 -- -- -- 5,264
Other Long-term Liabilities .................... 5,336 379 -- 1,000 (B) 6,715
Stockholders' Equity ........................... 137,733 37,844 2,788 128,990 (B) 307,355
-------- ------- ------ ---------- --------
Total Liabilities and Stockholders' Equity $636,786 $97,359 $3,234 $ 88,709 $826,088
======== ======= ====== ========== ========
</TABLE>
The accompanying Notes are an integral part of these pro forma financial
statements.
S-13
<PAGE>
IRON MOUNTAIN INCORPORATED
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Historical
Iron Recent
Mountain Acquisitions(1)
------------ -----------------
<S> <C> <C>
Revenues:
Storage ............................ $125,968 $ 93,088
Service and Storage Material
Sales ............................. 82,797 63,909
-------- --------
Total Revenues ................... 208,765 156,997
Operating Expenses:
Cost of Sales (Excluding
Depreciation) ..................... 106,879 81,020
Selling, General and
Administrative .................... 51,668 54,199
Depreciation and
Amortization ...................... 27,107 9,995
-------- --------
Total Operating Expenses ......... 185,654 145,214
-------- --------
Operating Income .................... 23,111 11,783
Interest Expense, net ............... 27,712 5,979
-------- --------
Income (Loss) Before Provision
(Benefit) for Income Taxes ......... (4,601) 5,804
Provision (Benefit) for Income
Taxes .............................. (80) 694
-------- --------
Net Income (Loss) ................... $ (4,521) $ 5,110
======== ========
Net Loss per Common Share--
Basic and Diluted .................. $ (0.39)
========
Weighted Average Common
Shares Outstanding ................. 11,448
========
EBITDA .............................. $ 50,218 $ 21,778
<CAPTION>
Pro Forma
Pro Forma As Adjusted
Pro Forma Iron Integration Iron
Adjustments Mountain(2) Adjustments(3) Mountain(2)(3)
----------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Storage ............................ $ -- $219,056 $ -- $219,056
Service and Storage Material
Sales ............................. -- 146,706 -- 146,706
---------- -------- ---------- --------
Total Revenues ................... -- 365,762 -- 365,762
Operating Expenses:
Cost of Sales (Excluding
Depreciation) ..................... (499)(C) 187,400 (1,240)(I) 186,160
Selling, General and
Administrative .................... (8,867)(D) 97,000 (6,508)(J) 90,492
Depreciation and
Amortization ...................... 5,859 (E) 42,961 -- 42,961
---------- -------- ---------- --------
Total Operating Expenses ......... (3,507) 327,361 (7,748) 319,613
---------- -------- ---------- --------
Operating Income .................... 3,507 38,401 7,748 46,149
Interest Expense, net ............... 6,616 (F) 40,307 -- 40,307
---------- -------- ---------- --------
Income (Loss) Before Provision
(Benefit) for Income Taxes ......... (3,109) (1,906) 7,748 5,842
Provision (Benefit) for Income
Taxes .............................. 3,018 (G) 3,632 3,099 (K) 6,731
---------- -------- ---------- --------
Net Income (Loss) ................... $ (6,127) $ (5,538) $ 4,649 $ (889)
========== ======== ========== ========
Net Loss per Common Share--
Basic and Diluted .................. $ (0.30) $ (0.05)
======== ========
Weighted Average Common
Shares Outstanding ................. 6,890 (H) 18,338 18,338
========== ======== ========
EBITDA .............................. $ 9,366 $ 81,362 $ 7,748 $ 89,110
</TABLE>
- ----------------------
(1) See Schedule A for detail of the Recent Acquisitions.
(2) The Pro Forma Statement of Operations does not include: (i) results of
operations for the year ended December 31, 1997, or pro forma adjustments,
for the Pending Acquisition, which had revenues of $7.2 million for 1997,
and (ii) results of operations prior to the date of acquisition, or pro
forma adjustments, for acquisitions completed by Record Masters and Arcus
in 1997, which had aggregate revenues of $6.6 million for the period in
1997 prior to the date of acquisition. Giving effect to such acquisitions,
including the Pending Acquisition, revenues would have increased $13.8
million to $379.6 million. In addition, the Pro Forma Statement of
Operations does not include results of operations prior to the date of
acquisition, or pro forma adjustments, for the Excluded Acquisitions
(which in the aggregate represent less than 1% of pro forma revenues) or
reflect one disposition by Arcus in June 1997, because their impact is
immaterial to such statements. See "Overview--Recent Acquisitions" in the
accompanying Notes.
(3) Gives effect to certain identified cost savings that the Company believes
would have been realized had the Recent Acquisitions been fully integrated
as of January 1, 1997 relating primarily to: (i) termination of specific
employees and related net reductions in compensation expense; (ii) closure
of identified redundant facilities and related net reductions in occupancy
costs; and (iii) elimination of related party expenses, management fees
and compensation expenses in excess of amounts that would have been
incurred by the Company.
The accompanying Notes are an integral part of these pro forma financial
statements.
S-14
<PAGE>
Schedule A
IRON MOUNTAIN INCORPORATED
SCHEDULE OF RECENT ACQUISITIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1997 Acquisitions(1) 1998 Acquisitions
--------------------------------------------------------------- --------------------- Total
Record Recent
Safesite DSI FileSafe Allegiance Masters(2) Other Arcus(3) Other Acquisitions
---------- --------- ---------- ----------- ----------- ------- ------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Storage .................. $ 4,198 $2,862 $5,254 $1,625 $18,999 $4,550 $ 51,607 $3,993 $ 93,088
Service and Storage
Material Sales .......... 6,034 595 3,419 1,132 4,012 2,831 43,738 2,148 63,909
------- ------ ------ ------ ------- ------ --------- ------ --------
Total Revenues ......... 10,232 3,457 8,673 2,757 23,011 7,381 95,345 6,141 156,997
Operating Expenses:
Cost of Sales
(Excluding
Depreciation) ........... 5,111 -- 3,019 1,378 11,813 3,124 53,323 3,252 81,020
Selling, General and
Administrative .......... 4,460 2,840 1,497 580 5,493 2,579 35,396(4) 1,354 54,199
Depreciation and
Amortization ............ 397 368 289 149 2,067 454 6,017 254 9,995
------- ------ ------ ------ ------- ------ ----------- ------ --------
Total Operating
Expenses .............. 9,968 3,208 4,805 2,107 19,373 6,157 94,736 4,860 145,214
------- ------ ------ ------ ------- ------ ----------- ------ --------
Operating Income .......... 264 249 3,868 650 3,638 1,224 609 1,281 11,783
Interest (Income) Expense 26 327 142 (31) 1,910 281 3,317 7 5,979
------- ------ ------ ------ ------- ------ ----------- ------ --------
Income (Loss) Before
Provision (Benefit) for
Income Taxes ............. 238 (78) 3,726 681 1,728 943 (2,708) 1,274 5,804
Provision (Benefit) for
Income Taxes ............. 77 -- -- 28 1,267 6 (696) 12 694
------- ------ ------ ------ ------- ------ ----------- ------ --------
Net Income (Loss) ......... $ 161 $ (78) $3,726 $ 653 $ 461 $ 937 $ (2,012) $1,262 $ 5,110
======= ====== ====== ====== ======= ====== =========== ====== ========
EBITDA .................... $ 661 $ 617 $4,157 $ 799 $ 5,705 $1,678 $ 6,626 $1,535 $ 21,778
</TABLE>
- ----------------------
(1) Represents historical results of operations for each of the 1997
Acquisitions for the period in 1997 prior to its acquisition by the
Company. See "Overview--Recent Acquisitions" in the accompanying Notes.
(2) Does not include results of operations prior to the date of acquisition, or
pro forma adjustments, for an acquisition completed by Record Masters in
1997. Giving effect to such acquisition, revenues would have increased
$0.9 million to $23.9 million. See "Overview--Recent Acquisitions" in the
accompanying Notes.
(3) Does not include results of operations prior to the date of acquisition, or
pro forma adjustments, for an acquisition completed by Arcus in 1997.
Giving effect to such acquisition, revenues would have increased $5.7
million to $101.0 million. See "Overview--Recent Acquisitions" in the
accompanying Notes.
(4) Includes $8.1 million of stock compensation expense directly attributable
to the Arcus Merger.
The accompanying Notes are an integral part of these pro forma financial
statements.
S-15
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Overview
Recent Acquisitions
In January 1997, Iron Mountain acquired Security Archives II, Inc. and
Security Archives of MSP, Inc. In February 1997, Iron Mountain acquired the
records management business of Wellington Financial Services, Inc. (d/b/a
Michigan Data Storage) and Data Recovery Services, Inc. In March 1997, Iron
Mountain acquired CBD Security Archives, Inc. ("CBD"). In April 1997, Iron
Mountain acquired Chicago Data Destruction Corporation ("CDDC") and Critical
Files Security, Inc. In May 1997, Iron Mountain acquired Business Records
Center, Inc. and Willamette Archives, Inc. In June 1997, Iron Mountain acquired
Safesite and certain related real estate for $62.0 million, including $45.0
million in aggregate fair value of Common Stock and options to purchase Common
Stock and the balance in cash. In July 1997, Iron Mountain acquired Data
Archives, Ltd. ("DAL"), Archives Express, Inc. ("AEI") and File Pro L.C. In
August 1997, Iron Mountain acquired Concorde Group, Inc. In September 1997, Iron
Mountain acquired Data Securities International, Inc. ("DSI"). In October 1997,
Iron Mountain acquired Records Retention/FileSafe, L.P. ("FileSafe") for $45.1
million in cash and assumed debt, Allegiance Business Archives, Ltd.
("Allegiance") for $8.7 million in cash and Records Management Systems, Inc. In
November 1997, Iron Mountain acquired Record Masters for $85.3 million,
including $36.0 million in fair value of Common Stock and the balance in cash
and assumed debt.(1) The aggregate purchase price of the businesses and certain
related real estate acquired in 1997, excluding Safesite, FileSafe, Allegiance
and Record Masters, was $78.7 million, including $7.9 million in aggregate fair
value of Common Stock and options to purchase Common Stock.
In January 1998, Iron Mountain acquired Arcus Group for $153.7 million,
including $55.1 million in aggregate fair value of Common Stock and options to
acquire Common Stock and the balance in cash and assumed debt.(2) Additionally,
in January 1998, Iron Mountain acquired Records Venture One, Inc. (d/b/a
Information Management Consultants of Arizona), Midwest Records Management (a
division of I-GO Van & Storage Co.) and Bekins Records Management (a division of
Bekins Van & Storage, Inc.). In February 1998, Iron Mountain acquired Sloan
Vaults, Inc. (d/b/a The Vault). The aggregate purchase price of the businesses
and certain related real estate acquired in 1998, excluding Arcus Group, was
$13.2 million.
Pending Acquisition
In February 1998, the Company entered into an Agreement and Plan of Merger
with InterMation, as a result of which InterMation will be merged with and into
a subsidiary of the Company. The Company will pay aggregate consideration equal
to approximately $28 million in connection with the InterMation Merger,
including approximately $11 million in the form of Common Stock (subject to
certain adjustments) and the balance in cash and assumed debt. InterMation had
revenues of $7.2 million for the year ended December 31, 1997. The InterMation
Merger is subject to customary conditions, and no assurance can be given that
it will be completed. The InterMation Merger, if consummated, will be accounted
for as a purchase.
- ----------------------
(1) In June 1997, Record Masters completed the acquisition of MKC, Inc. ("MKC"),
a medical records management company. The results of operations of MKC prior to
the date of acquisition are not included in the Pro Forma Statement of
Operations. For the five months ended May 31, 1997, MKC had revenues of $0.9
million.
(2) In August 1997, Arcus completed the acquisition of an IT staffing business.
The results of operations for such IT staffing business prior to the date of
acquisition are not included in the Pro Forma Statement of Operations. For the
period in 1997 prior to the date of acquisition, such IT staffing business had
revenues of $5.7 million.
S-16
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Balance Sheet
The aggregate consideration paid for the Recent Acquisitions was $446.7
million, consisting of $144.0 million in aggregate fair value of Common Stock
and options to purchase Common Stock and $302.7 million in cash and assumed
debt (not including up to $1.9 million of contingent payments based upon the
achievement of certain revenue targets). The excess of the purchase price over
the book value of the net assets acquired for each of the acquisitions has been
allocated to tangible and intangible assets, based on the Company's estimate of
the fair value of the net assets acquired. The allocation of the aggregate
purchase price is illustrated below (in millions):
<TABLE>
<S> <C> <C>
1997 Acquisitions:
Current Assets ........................................... $ 14.8
Property, Plant and Equipment ............................ 46.9
Other Long-term Assets ................................... 6.6
Current Liabilities ...................................... (21.9)
Deferred Income Taxes .................................... (1.7)
Other Long-term Liabilities .............................. (1.3)
Goodwill ................................................. 234.1
Purchase Price of Excluded Acquisitions .................. 2.3
-------
Purchase Price of 1997 Acquisitions ..................... $ 279.8
1998 Acquisitions:
Current Assets ........................................... $ 21.0
Property, Plant and Equipment ............................ 20.7
Other Long-term Assets ................................... 3.7
Current Liabilities ...................................... (15.5)
Long-term Debt, net of Current Portion ................... (2.8)
Other Long-term Liabilities .............................. (1.4)
Goodwill ................................................. 141.2
-------
Purchase Price of 1998 Acquisitions ..................... 166.9
--------
Total Purchase Price of the Recent Acquisitions ......... $ 446.7
========
</TABLE>
The Recent Acquisitions are assumed to be financed with Common Stock,
options to purchase Common Stock, the Credit Agreement, the 1997 Notes and the
Offering as follows (in millions):
<TABLE>
<S> <C> <C>
1997 Acquisitions:
Fair Value of Common Stock Issued ......................... $ 85.9
Fair Value of Options Granted ............................. 3.1
Proceeds from the 1997 Notes .............................. 190.8
-------
Purchase Price of 1997 Acquisitions ...................... $ 279.8
1998 Acquisitions:
Fair Value of Common Stock Issued ......................... $ 39.4
Fair Value of Options Granted ............................. 15.7
Proceeds from the Offering ................................ 60.0
Proceeds from the 1997 Notes .............................. 51.8
-------
Purchase Price of 1998 Acquisitions ...................... 166.9
--------
Total Purchase Price of the Recent Acquisitions ......... $ 446.7
========
</TABLE>
S-17
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Balance Sheet (continued)
The accompanying Pro Forma Balance Sheet has been prepared as if the 1998
Acquisitions and the Offering and the application of the net proceeds therefrom
as described under "Use of Proceeds" had occurred as of December 31, 1997 and
reflects the following pro forma adjustments:
(A) Pro forma adjustments to Assets consist of the following (in millions,
except share data):
<TABLE>
<CAPTION>
Property, Other
Current Plant and Long-term
Assets Equipment Goodwill Assets
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Acquisition Adjustments:
Reverse assets of acquired companies not purchased ......... $ (1.9) $ -- $ (1.0) $ --
Record estimated fair value of assets of acquired
companies ................................................ 0.4 3.1 -- 1.0
Reverse goodwill of acquired companies not
purchased ................................................ -- -- (56.9) --
Record goodwill related to acquired companies .............. -- -- 141.2 --
-------- ------ ------- -----
Total Acquisition Adjustments ............................ ( 1.5) 3.1 83.3 1.0
-------- ------ ------- -----
Use of Proceeds Adjustments:
Record estimated net proceeds from the Offering ............ 114.6 -- -- --
Record use of the net proceeds from the Offering
and the 1997 Notes to finance the 1998
Acquisitions ............................................. (111.8) -- -- --
-------- ------ ------- -----
Total Use of Proceeds Adjustments ........................ 2.8 -- -- --
-------- ------ ------- -----
Total Pro Forma Adjustments .............................. $ 1.3 $ 3.1 $ 83.3 $ 1.0
======== ====== ======= =====
</TABLE>
(B) Pro Forma adjustments to Liabilities and Stockholders' Equity consist
of the following (in millions):
<TABLE>
<CAPTION>
Other
Current Long-term Long-term Stockholders'
Liabilities Debt Liabilities Equity
------------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Acquisition Adjustments:
Reverse liabilities and equity not assumed in
connection with the 1998 Acquisitions ................. $ (6.8) $ (36.1) $ -- $ (40.7)
Record purchase reserves and estimated fair value of
liabilities of acquired companies ..................... 1.7 -- 1.0 --
Record Common Stock and options issued to finance
the 1998 Acquisitions ................................. -- -- -- 55.1
--------- ------- ------ --------
Total Acquisition Adjustments ......................... ( 5.1) (36.1) 1.0 14.4
--------- ------- ------ --------
Use of Proceeds Adjustments:
Record estimated net proceeds from the Offering ......... -- -- -- 114.6
--------- ------- ------ --------
Total Use of Proceeds Adjustments ..................... -- -- -- 114.6
--------- ------- ------ --------
Total Pro Forma Adjustments ........................... $ (5.1) $ (36.1) $ 1.0 $ 129.0
========= ======= ====== ========
</TABLE>
S-18
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Statement of Operations
Storage revenues consist of periodic charges related to the storage of
materials. Service and storage material sales revenues consist of charges for
related service activities and the sale of storage materials. In certain
circumstances, based upon customer requirements, storage revenues include
periodic charges associated with normal, recurring service activities.
Pro Forma Adjustments
The accompanying Pro Forma Statement of Operations has been prepared as if
the Transactions had occurred as of January 1, 1997 and reflects the following
pro forma adjustments:
(C) To reduce cost of sales to eliminate rent expense for facilities
purchased by the Company as part of certain acquisitions that would not have
been incurred had such acquisitions occurred as of January 1, 1997. All such
facilities had been previously owned by affiliates of the acquired companies.
(D) To reverse stock compensation expense directly attributable to the
Arcus Merger and to conform the accounting policies of certain acquired
companies to those of the Company with respect to the capitalization of costs
for software developed for internal use.
(E) To reflect additional depreciation expense based on the fair value of
the assets acquired and the remaining useful lives and the amortization of
goodwill. Property and equipment are depreciated over three to 50 years,
goodwill is amortized over 25 to 30 years, software is amortized over three
years and covenants not-to-compete are amortized over two to five years on a
straight-line basis. Such depreciation and amortization may change upon final
determination of the fair value of the net assets acquired.
(F) Pro forma adjustments to Interest Expense consist of the following (in
millions):
<TABLE>
<S> <C>
Acquisition Adjustments:
Reverse interest expense on debt retired or not assumed .......................... $ (5.8)
Use of Proceeds Adjustments:
Reverse interest expense on debt of the Company retired with proceeds of the 1997
Notes and the Offering ......................................................... (4.4)
Record interest expense relating to the 1997 Notes including amortization of
deferred financing costs ....................................................... 18.3
Record amortization of deferred financing costs related to the Credit Agreement . 0.1
Record interest income on excess cash balance of $28.2 million at an assumed rate
of 5.75% per annum ............................................................. (1.6)
------
Total Acquisition and Use of Proceeds Adjustments .............................. $ 6.6
======
</TABLE>
(G) To adjust the provision for income taxes to a 40% rate on pro forma
income before amortization related to approximately $231 million of
nondeductible goodwill and other nondeductible expenses.
S-19
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Statement of Operations (continued)
(H) To adjust the pro forma weighted average common shares outstanding as
if the Transactions had occurred as of January 1, 1997. The number of shares of
Common Stock issued, or assumed to be issued, and the adjustments are as
follows (in thousands):
<TABLE>
<CAPTION>
Total Adjustments to
Number of Weighted
Transactions Shares Issued Average Shares
- ----------------------------------------------- --------------- ---------------
<S> <C> <C>
Offering ................................. 3,500 3,500
Safesite ................................. 1,770 785
DSI ...................................... 227 152
Record Masters ........................... 1,202 998
Arcus .................................... 1,438 1,438
Other .................................... 35 17
----- -----
Total shares issued, or assumed to be
issued, for the Transactions ......... 8,172 6,890
===== =====
</TABLE>
Integration Adjustments
The integration adjustments relate to certain cost savings that management
believes would have been realized had the Recent Acquisitions been fully
integrated as of January 1, 1997. The accompanying pro forma as adjusted
statement of operations for the year ended December 31, 1997 has been prepared
as if the Transactions had occurred as of January 1, 1997 and reflect the
following adjustments:
(I) To reduce cost of sales to eliminate specific expenses that would not
have been incurred had such acquisitions occurred as of January 1, 1997. Such
cost savings relate to: (i) the termination of certain employees due to the
integration and consolidation of certain acquisitions; (ii) a reduction in
certain occupancy costs for facilities the Company will vacate following the
completion of certain acquisitions; and (iii) a reduction in rent expense to
reflect new or amended leases for certain facilities of acquired companies.
Additional cost savings that the Company expects to realize through integration
of the Recent Acquisitions into the Company's operations have not been
reflected herein.
(J) To adjust specific selling, general and administrative expenses had
such acquisitions occurred as of January 1, 1997. Such adjustments relate to:
(i) cost savings from the termination of certain employees due to the
integration and consolidation of certain acquisitions; (ii) cost savings from
the elimination of related party expenses, management fees and compensation
expenses in excess of amounts that would have been incurred by the Company; and
(iii) additional compensation and benefit expenses that would have been
incurred by the Company.
(K) To adjust the provision for income taxes to a 40% rate on pro forma
income before amortization related to approximately $231 million of
nondeductible goodwill and other nondeductible expenses.
S-20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
(In thousands, except per share data)
The following selected consolidated statements of operations and balance
sheet data of the Company as of and for each of the years ended December 31,
1993, 1994, 1995, 1996 and 1997 have been derived from the Company's audited
consolidated financial statements. The selected consolidated financial and
operating information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with Iron Mountain's Consolidated Financial Statements and the
Notes thereto included elsewhere in this Prospectus Supplement.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1993 1994
------------- -----------
<S> <C> <C>
Consolidated Statements of Operations Data:
Revenues:
Storage .......................................................... $ 48,892 $ 54,098
Service and Storage Material Sales ............................... 32,781 33,520
--------- --------
Total Revenues ................................................. 81,673 87,618
Operating Expenses:
Cost of Sales (Excluding Depreciation) ........................... 43,054 45,880
Selling, General and Administrative .............................. 19,971 20,853
Depreciation and Amortization .................................... 6,789 8,690
--------- --------
Total Operating Expenses ....................................... 69,814 75,423
--------- --------
Operating Income .................................................. 11,859 12,195
Interest Expense, Net ............................................. 8,203 8,954
--------- --------
Income (Loss) Before Provision (Benefit) for Income Taxes ......... 3,656 3,241
Provision (Benefit) for Income Taxes .............................. 2,088 1,957
--------- --------
Income (Loss) Before Extraordinary Charge ......................... 1,568 1,284
Extraordinary Charge, Net of Tax Benefit (1) ...................... -- --
--------- --------
Net Income (Loss) ................................................. 1,568 1,284
Accretion of Redeemable Put Warrant ............................... 940 1,412
--------- --------
Net Income (Loss) Applicable to Common Stockholders ............... $ 628 $ (128)
========= ========
Income (Loss) per Common Share:
Basic:
Income (Loss) Before Extraordinary Charge ........................ $ 13.65 $ (0.60)
Extraordinary Charge, Net of Tax Benefit (1) ..................... -- --
--------- --------
Net Income (Loss) Applicable to Common Stockholders .............. $ 13.65 $ (0.60)
========= ========
Weighted Average Common Shares Outstanding ....................... 46 214
========= ========
Diluted:
Income (Loss) Before Extraordinary Charge ........................ $ 0.08 $ (0.60)
Extraordinary Charge, Net of Tax Benefit (1) ..................... -- --
--------- --------
Net Income (Loss) Applicable to Common Stockholders .............. $ 0.08 $ (0.60)
========= ========
Weighted Average Common Shares Outstanding ....................... 8,067 214
========= ========
Pro Forma (2):
Net Income (Loss) Applicable to Common Stockholders .............. $ 0.08 $ (0.02)
========= ========
Weighted Average Common Shares Outstanding ....................... 8,067 7,984
========= ========
<CAPTION>
Year Ended December 31,
-------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Consolidated Statements of Operations Data:
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, Net ............................................. 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, Net of Tax Benefit (1) ...................... -- 2,126 --
-------- -------- ---------
Net Income (Loss) ................................................. 248 (1,769) (4,521)
Accretion of Redeemable Put Warrant ............................... 2,107 280 --
-------- -------- ---------
Net Income (Loss) Applicable to Common Stockholders ............... $ (1,859) $ (2,049) $ (4,521)
======== ======== =========
Income (Loss) per Common Share:
Basic:
Income (Loss) Before Extraordinary Charge ........................ $ (48.92) $ 0.01 $ (0.39)
Extraordinary Charge, Net of Tax Benefit (1) ..................... -- (0.23) --
-------- -------- ---------
Net Income (Loss) Applicable to Common Stockholders .............. $ (48.92) $ (0.22) $ (0.39)
======== ======== =========
Weighted Average Common Shares Outstanding ....................... 38 9,274 11,448
======== ======== =========
Diluted:
Income (Loss) Before Extraordinary Charge ........................ $ (48.92) $ 0.01 $ (0.39)
Extraordinary Charge, Net of Tax Benefit (1) ..................... -- (0.23) --
-------- -------- ---------
Net Income (Loss) Applicable to Common Stockholders .............. $ (48.92) $ (0.22) $ (0.39)
======== ======== =========
Weighted Average Common Shares Outstanding ....................... 38 9,274 11,448
======== ======== =========
Pro Forma (2):
Net Income (Loss) Applicable to Common Stockholders .............. $ (0.24) $ (0.20) $ (0.39)
======== ======== =========
Weighted Average Common Shares Outstanding ....................... 7,784 10,137 11,448
======== ======== =========
</TABLE>
S-21
<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 had been converted for all periods presented. See Notes 5
and 6 of Notes to the Company's 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
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.
S-22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Consolidated Financial and Operating Information and the Company's Consolidated
Financial Statements and the Notes thereto and the other financial and
operating information included elsewhere or incorporated by reference in this
Prospectus Supplement. This Prospectus Supplement contains, in addition to
historical information, forward-looking statements that include risks and
uncertainties, many of which are beyond the Company's control. The Company's
actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include
those discussed below, as well as those discussed under "Risk Factors"
contained in the accompanying Prospectus. The Company undertakes no obligation
to release publicly the result of any revision to these forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Overview
The primary financial objective of the Company is to increase its EBITDA,
which is a source of funds for investment in continued internal growth and
growth through acquisitions and to service indebtedness. The Company has
benefited from growth in EBITDA, which has increased from $18.6 million for
1993 to $50.2 million for 1997 (a compound annual growth rate of 28.1%).
However, other measures of the Company's financial performance, such as net
income and net income applicable to common stockholders, have been negatively
affected by this objective.
In 1995, 1996 and 1997, the Company experienced net losses applicable to
common stockholders. Such net losses are attributable in part to significant
charges associated with the Company's pursuit of its growth strategy, namely:
(i) increases in depreciation and amortization expenses associated with
expansion of the Company's storage capacity; (ii) increases in goodwill
amortization associated with acquisitions accounted for under the purchase
method; and (iii) increases in interest expense associated with the borrowings
used to fund its acquisitions. In addition, net income applicable to common
stockholders has been negatively affected in 1995 and 1996 by a charge for
accretion of the Warrant (as defined herein) and, in 1996 by an extraordinary
charge related to the early retirement of debt. The Warrant was redeemed in
February 1996 upon completion of the Company's initial public offering (the
"Initial Public Offering"). See Note 5 of Notes to the Company's Consolidated
Financial Statements.
The Company's revenues consist of storage revenues and service and storage
material sales revenues. Storage revenues consist of periodic charges related
to the storage of materials (either on a per unit or per cubic foot of records
basis) and have accounted for approximately 60% of total revenues in each of
the last five years. In certain circumstances, based upon customer
requirements, storage revenues include periodic charges associated with normal,
recurring service activities. Service and storage material sales revenues are
comprised of charges for related service activities and the sale of storage
materials and are derived primarily from the Company's courier operations
(consisting primarily of the pickup and delivery of records upon customer
request), additions of new records, temporary removal of records from storage,
refiling of removed records, destructions of records, permanent withdrawals
from storage and sales of specially designed storage containers and related
supplies. Customers are generally billed on a monthly basis on contractually
agreed-upon terms.
EBITDA is an important financial performance measure in the records
management industry, both for determining the value of companies within the
industry and for defining standards for borrowing from institutional lenders.
For 1993, 1994, 1995, 1996 and 1997, EBITDA margins were 22.8%, 23.8%, 25.0%,
24.2% and 24.1%, respectively. The Company acquired 16 businesses in 1996 and
18 in 1997, most of which had lower EBITDA margins than the rest of the
Company. The anticipated synergies relating to such acquisitions were generally
not realized immediately. Nonetheless, the Company has been able to maintain
its recent EBITDA margins through increased overall operating efficiencies and
economies of scale and the realization of synergies in connection with earlier
acquisitions.
As a result of the 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,
S-23
<PAGE>
will have EBITDA margins consistent with the Company's, consolidated EBITDA
margins will be lower as a result of its IT staffing business. However, the
capital requirements in the IT staffing business are minimal.
Cost of sales (excluding depreciation) consists primarily of wages and
benefits, facility occupancy costs, vehicle and other equipment costs and
supplies. Of these, the most significant are wages and benefits and facility
occupancy costs. Over the past several years, the Company has been able to
reduce per Carton storage costs by: (i) designing racking systems and operating
space to maximize facility storage efficiency; (ii) negotiating favorable
facility leases and having facilities built to its custom specifications; and
(iii) occupying larger facilities, which, when filled, are less expensive per
Carton to operate.
Selling, general and administrative expenses consist primarily of
management, administrative, sales and marketing wages and benefits, as well as
travel, communications, professional fees, bad debts, training, office
equipment and supplies expenses.
The Company's depreciation and amortization charges result primarily from
the capital-intensive nature of the records management industry and the
acquisitions the Company has completed. The principal components of
depreciation relate to racking systems and related equipment, new buildings and
leasehold improvements, equipment for new facilities and computer system
hardware and software. Amortization primarily relates to goodwill and
noncompetition agreements arising from acquisitions and customer acquisition
costs. The Company has accounted for all of its acquisitions under the purchase
method. Since the purchase price for records management companies is usually
substantially in excess of the fair value of their net assets, these purchases
have given rise to significant goodwill and, accordingly, significant levels of
amortization. Although amortization is a non-cash charge, it does decrease
reported net income.
In February 1996, the Company received net proceeds of $33.3 million from
its Initial Public Offering. The Company used $6.6 million of such net proceeds
for the redemption of a redeemable put warrant to acquire 444,385 shares of
Common Stock (the "Warrant"). For financial reporting purposes, the Company
recorded substantial charges (based on the estimated redemption value
calculated using the effective interest rate method) to net income applicable
to common stockholders over the period that the Warrant was outstanding. See
Note 5 of Notes to the Company's Consolidated Financial Statements. The
remaining net proceeds were used by the Company to fund acquisitions, to repay
indebtedness used to fund acquisitions and for general corporate purposes.
In March 1997, the Company experienced three fires that resulted in damage
to one and destruction of the Company's other records management facility in
South Brunswick Township, New Jersey. The affected facilities represented less
than three percent of revenues and less than two percent of EBITDA for 1996.
The results for the year ended December 31, 1997 do not include any gain or
loss resulting from the fires. The Company has filed several insurance claims
related to the fires, including a significant claim under its business
interruption insurance policy. Currently, the Company expects to realize a gain
from proceeds under its business interruption insurance. The claims process is
lengthy and its outcome cannot be predicted with certainty. Based on its
present assessment of the situation, management does not believe that the fires
will have a material adverse effect on the Company's financial condition or
results of operations, although there can be no assurance in this regard. At
December 31, 1997, the Company had a receivable of approximately $5.4 million
related to various claims filed under its property and casualty insurance
policies. See "Business--Legal Proceedings" and Note 9 of Notes to the
Company's Consolidated Financial Statements for a description of certain claims
and proceedings against the Company relating to these fires.
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.
S-24
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, information
derived from the Company's consolidated statements of operations, expressed as
a percentage of total revenues.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Storage ................................................ 61.4% 61.9% 60.3%
Service and Storage Material Sales ..................... 38.6 38.1 39.7
----- ----- -----
Total Revenues ........................................ 100.0 100.0 100.0
----- ----- -----
Operating Expenses:
Cost of Sales (Excluding Depreciation) ................. 50.1 51.0 51.2
Selling, General and Administrative .................... 24.9 24.8 24.7
Depreciation and Amortization .......................... 11.8 12.2 13.0
----- ----- -----
Total Operating Expenses .............................. 86.8 88.0 88.9
----- ----- -----
Operating Income ........................................ 13.2 12.0 11.1
Interest Expense ........................................ 11.3 10.7 13.3
----- ----- -----
Income (Loss) before Provision for Income Taxes ......... 1.9 1.3 ( 2.2)
Provision for Income Taxes .............................. 1.7 1.0 --
----- ----- -----
Income (Loss) Before Extraordinary Charge ............... 0.2 0.3 ( 2.2)
Extraordinary Charge, Net of Tax Benefit ................ -- 1.6 --
----- ----- -----
Net Income (Loss) ....................................... 0.2 ( 1.3) ( 2.2)
Accretion of Redeemable Put Warrant ..................... 2.0 0.2 --
----- ----- -----
Net Loss Applicable to Common Stockholders .............. ( 1.8)% ( 1.5)% ( 2.2)%
===== ===== =====
EBITDA .................................................. 25.0% 24.2% 24.1%
===== ===== =====
</TABLE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Storage revenues increased $40.2 million, or 46.8%, to $126.0 million for
the year ended December 31, 1997 from $85.8 million for the year ended December
31, 1996. Thirty-four acquisitions completed by the Company in 1996 and 1997
accounted for $34.0 million, or 84.7%, of such increase. The balance of such
increase resulted from net Carton growth from existing customers and from sales
to new customers.
Service and storage material sales revenues increased $29.9 million, or
56.5%, to $82.8 million for the year ended December 31, 1997 from $52.9 million
for the year ended December 31, 1996. Acquisitions completed by the Company in
1996 and 1997 accounted for $25.9 million, or 86.8%, of such increase. The
balance of such increase resulted from increases in service and storage
material sales to existing customers and the addition of new customer accounts.
The greater percentage increase in service and storage material sales revenues,
as compared to storage revenues, for the year ended December 31, 1997 was
primarily attributable to certain businesses acquired in 1997 that have a
higher component of service and storage material sales revenues, compared to
storage revenues, than the rest of the Company.
For the reasons discussed above, total revenues increased $70.1 million,
or 50.5%, to $208.8 million for the year ended December 31, 1997 from $138.7
million for the year ended December 31, 1996. An increase of $59.9 million, or
42.3 percentage points, was attributable to acquisitions completed by the
Company in 1996 and 1997, and an increase of $10.2 million, or 8.2 percentage
points, was attributable to internal growth. The internal growth percentage
includes the loss of revenues resulting from the fires in South Brunswick
Township, New Jersey in March 1997. Excluding the Company's South Brunswick
operations for both years, internal growth for the year was 10.1%.
Cost of sales (excluding depreciation) increased $36.2 million, or 51.1%,
to $106.9 million (51.2% of revenues) for the year ended December 31, 1997 from
$70.7 million (51.0% of revenues) for the year ended December 31, 1996. The
dollar increase was primarily attributable to the increase in Cartons stored
and expenses related to certain facility relocations. The increase as a
percentage of revenues was primarily attributable to recent acquisitions, which
initially have lower gross margins than the rest of the Company.
S-25
<PAGE>
Selling, general and administrative expenses increased $17.4 million, or
50.5%, to $51.7 million (24.7% of revenues) for the year ended December 31,
1997 from $34.3 million (24.8% of revenues) for the year ended December 31,
1996. The dollar increase was primarily attributable to: (i) increased
personnel, office and overhead costs needed to support the Company's growth;
(ii) the addition of overhead, primarily salespeople, related to the 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 benefit of $0.1 million for the year ended
December 31, 1997 compared with a provision of $1.4 million for the year ended
December 31, 1996. The Company's effective tax rate is less favorable than
statutory rates primarily due to the amortization of the non-deductible portion
of goodwill associated with certain acquisitions (the tax laws generally permit
deduction of such expenses for asset purchases, but not for acquisitions of
stock). During the year ended December 31, 1997, the Company recorded
approximately $145 million in nondeductible goodwill, primarily related to the
acquisitions of Safesite, Data Securities International, Inc. and Record
Masters.
Net loss increased $2.7 million to a net loss of $4.5 million (2.2% of
revenues) for the year ended December 31, 1997 from a net loss of $1.8 million
(1.3% of revenues) for the year ended December 31, 1996. Net loss applicable to
common stockholders increased $2.5 million to a net loss of $4.5 million (2.2%
of revenues) for the year ended December 31, 1997 from a net loss of $2.0
million (1.5% of revenues) after accretion of $0.3 million related to the
Warrant for the year ended December 31, 1996. The Warrant was redeemed in full
in February 1996, with a portion of the proceeds from the Initial Public
Offering. As a result of such redemption, there will be no future charges for
such accretion.
As a result of the foregoing factors, EBITDA increased $16.6 million, or
49.3%, to $50.2 million (24.1% of revenues) for the year ended December 31,
1997 from $33.6 million (24.2% of revenues) for the year ended December 31,
1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Storage revenues increased $21.6 million, or 33.8%, to $85.8 million for
the year ended December 31, 1996 from $64.2 million for the year ended December
31, 1995. Twenty acquisitions completed by the Company in 1995 and 1996
accounted for $15.0 million or 69.1% of such increase. The balance of such
increase resulted from net Carton growth from existing customers and from sales
to new customers.
Service and storage material sales revenues increased $12.6 million, or
31.3%, to $52.9 million for the year ended December 31, 1996 from $40.3 million
for the year ended December 31, 1995. Acquisitions accounted for $9.2 million
or 72.7% of the increase. The balance of such increase resulted from increases
in service and storage material sales to existing customers and the addition of
new customer accounts.
For the reasons discussed above, total revenues increased $34.3 million,
or 32.8%, to $138.7 million for the year ended December 31, 1996 from $104.4
million for the year ended December 31, 1995. Of this increase, $24.1 million,
or 70.4%, was attributable to acquisitions completed by the Company in 1995 and
1996. The monthly
S-26
<PAGE>
average Cartons stored increased approximately 33% to approximately 27.1
million Cartons for 1996 from approximately 20.4 million Cartons for 1995.
Cost of sales (excluding depreciation) increased $18.4 million, or 35.3%,
to $70.7 million (51.0% of revenues) for the year ended December 31, 1996, from
$52.3 million (50.1% of revenues) for the year ended December 31, 1995. The
dollar increase was primarily attributable to the increase in Cartons stored,
increased expenses related to the severe winter weather on the Atlantic coast
during the first quarter of 1996 and expenses related to certain facility
relocations. The increase as a percentage of 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. 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.
S-27
<PAGE>
The Company acquired 16 records management businesses in 1996 compared to
four records management businesses in 1995. Primarily as a result of the
Company's acquisition activity, EBITDA margins were lower for the year ended
December 31, 1996 compared to the prior year. The decrease was primarily
attributable to the fact that the acquired businesses are initially less
operationally efficient than the Company and the anticipated margin increases
are generally not realized immediately.
Recent Quarterly Financial Data
The following table sets forth, for the quarterly periods indicated,
information derived from the Company's consolidated statements of operations.
The unaudited quarterly information has been prepared on the same basis as the
annual financial information and, in management's opinion, includes all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the information for the quarters presented. The operating results for
any quarter are not necessarily indicative of results for the year or for any
future period.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------------------
1996 1997
--------------------------------------------- -----------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
--------- -------------- ---------- --------- --------- --------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Storage ........................... $19,154 $ 20,209 $22,056 $24,407 $25,823 $27,987 $32,390 $39,768
Service and Storage Material
Sales ............................ 11,874 12,713 13,963 14,342 16,331 18,598 22,265 25,603
------- -------- ------- ------- ------- ------- ------- -------
Total Revenues ................... 31,028 32,922 36,019 38,749 42,154 46,585 54,655 65,371
Operating Expenses:
Cost of Sales (Excluding
Depreciation) .................... 15,668 16,715 18,708 19,656 21,764 24,108 27,870 33,137
Selling, General and
Administrative ................... 7,807 8,260(1) 8,695 9,580 10,207 11,296 14,180 15,985
Depreciation and Amortization ..... 3,608 3,922 4,366 5,040 5,722 6,243 6,530 8,612
------- ---------- ------- ------- ------- ------- ------- -------
Total Operating Expenses ......... 27,083 28,897 31,769 34,276 37,693 41,647 48,580 57,734
------- ---------- ------- ------- ------- ------- ------- -------
Operating Income ................... $ 3,945 $ 4,025 $ 4,250 $ 4,473 $ 4,461 $ 4,938 $ 6,075 $ 7,637
======= ========== ======= ======= ======= ======= ======= =======
EBITDA ............................. $ 7,553 $ 7,947(1) $ 8,616 $ 9,513 $10,183 $11,181 $12,605 $16,249
======= ========== ======= ======= ======= ======= ======= =======
</TABLE>
- ----------------------
(1) Includes a charge of $321 relating to the relocation of the Company's
corporate accounting function.
Liquidity and Capital Resources
Recent Financings and Sources of Funds
In March 1997, the Company entered into an amendment and restatement of
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 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 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
S-28
<PAGE>
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 the Company's Consolidated Financial
Statements.
Net cash provided by operations was $22.4 million for the year ended
December 31, 1997 compared to $15.9 million for the same period in 1996. The
increase was primarily attributable to the increase in EBITDA, the net increase
in accounts payable and accrued expenses and other changes in asset and
liability accounts being partially offset by the increase in interest payments
and a $2.3 million net increase in expenditures related to the South Brunswick
fires which have been recorded as part of the insurance receivable.
At December 31, 1997, the Company had estimated net operating loss
carryforwards of approximately $20.5 million for federal income tax purposes.
As a result of such loss carryforwards, cash paid for income taxes has
historically been substantially lower than the provision for income taxes. The
Company is currently evaluating its ability to utilize Arcus Group's net
operating loss carryforwards for federal income tax purposes. Until such time
when the Company's ability to utilize such loss carryforwards becomes probable,
the Company will provide a full valuation allowance for the deferred tax asset
generated by such loss carryforwards.
Capital Investments
As the Company has sought to increase its EBITDA, it has made significant
capital investments, consisting primarily of acquisitions, growth-related
capital expenditures and customer acquisition costs. These investments have
been primarily funded through a portion of the net proceeds of the Initial
Public Offering, the sale of the 1996 Notes and the 1997 Notes, cash flows from
operations and borrowings under the Company's credit agreements.
As a result of the Company implementing its acquisition strategy, cash
paid for acquisitions was $33.0 million, $68.5 million and $192.2 million for
1995, 1996 and 1997, respectively. In addition, in connection with certain 1997
acquisitions, the Company issued Common Stock and options to purchase Common
Stock with an aggregate fair value of $88.9 million. In January and February
1998, the Company acquired five additional records management businesses,
including Arcus, for total consideration of approximately $167 million,
including approximately $55 million in Common Stock and options to acquire
Common Stock and the balance in cash and assumed indebtedness.
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
S-29
<PAGE>
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. 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
S-30
<PAGE>
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 this 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.
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BUSINESS
Introduction
Iron Mountain is America's largest records management company, as measured
by its revenues. The Company is a national, full-service provider of records
management and related services, enabling customers to outsource records
management functions. Iron Mountain has a diversified customer base, which
includes more than half of the Fortune 500 and numerous commercial, legal,
banking, healthcare, accounting, insurance, entertainment and government
organizations. The Company provides storage for all major media, including
paper (the dominant form of records storage), computer disks and tapes,
microfilm and microfiche, master audio and video tapes, film and optical disks,
X-rays and blueprints. Iron Mountain's principal services provided to its
storage customers include courier pick-up and delivery, filing, retrieval and
destruction of records, database management, customized reporting and disaster
recovery support. The Company also sells storage materials and provides IT
staffing, consulting, facilities management and other outsourcing services.
The completion of 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 March 1, 1998,
Iron Mountain managed over 50,000 customer accounts and operated 223 records
management facilities in 54 markets.
The Records Management Industry
Overview
The records management industry stores information in a variety of media
formats, which can broadly be divided into paper and electronic records, and
provides a wide range of services related to the records stored. Paper records
are defined to include paper documents, as well as all other non-electronic
media such as microfilm and microfiche, master audio and video tapes, film,
X-rays and blue prints. Based on publicly available information, organizations
in the United States generate an estimated four trillion documents each year,
many of which must be retained and available for reference for many years.
Electronic records primarily include computer disks and tapes and optical
disks.
Paper Records
Paper records may be broadly divided into two categories: active and
inactive. Active records relate to ongoing and recently completed activities or
contain information that is frequently referenced. Active records are usually
stored and managed on-site by the organization which originated them to ensure
ready availability. Inactive paper records are the principal focus of the
records management industry. Inactive records consist of those records which
are not needed for immediate access but which must be retained for legal
reasons or regulatory compliance or for occasional reference in support of
ongoing business operations. Based on industry studies, the Company believes
that inactive records make up approximately 80% of all paper records.
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.
Electronic Records
Electronic records management focuses on the storage of and related
services for computer media that is either archival in nature or a back-up copy
of recently processed data. Archival data is generally not needed for access
but is retained for legal, regulatory and compliance reasons. Back-up data
exists because of the need of many businesses to maintain back-up copies of
data in order to be able to operate in the event of a system failure, casualty
loss or other disaster. It is standard operating procedure for data processing
groups to rotate back-up tapes to off-site locations on a regular basis and to
require multiple copies of such information at multiple sites.
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Growth of Market
The Company believes that the volume of stored paper and electronic
records will continue to increase for a number of reasons, including: (i) the
rapid growth of inexpensive document producing technologies such as facsimile
and desktop printing; (ii) the continued proliferation of data processing
technologies such as personal computers and networks; (iii) increased
regulatory requirements; (iv) concerns over possible future litigation and the
resulting increases in volume and holding periods of documentation; (v) the
high cost of reviewing records and deciding whether to retain or destroy them;
(vi) the failure of many entities to adopt or follow policies on records
destruction; and (vii) audit requirements to keep backup copies of certain
records in off-site locations. Despite the growth of new "paperless"
technologies, such as the Internet and e-mail, management believes that stored
information remains predominantly paper-based and that such technologies have
promoted the creation of hard copies of such electronic information. In
addition, management believes that the proliferation of digital information
technologies and distributed data networks has led to increased demand for data
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 PRISM, as of January 1994 (the latest date for which such
information is available), approximately 2,600 firms offered records storage
and management services in the United States. The Company believes that there
are only three national providers in the industry (including the Company) and
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.
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 EBITDA
from related service activities and sales of storage materials.
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[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 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 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.
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 revenue 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 annual 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 account 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
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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 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.
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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 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, Safekeeper MediaLink and Safekeeper Compass 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."
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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.
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
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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 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.
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Customer Information Access
Customers can access their records management data through a variety of
formats, including direct access via Safekeeper Online(TM), access on their own
PCs via Safekeeper Desktop(TM), integration of their internal system with
Safekeeper via automated file transfers and paper reports. Safekeeper Online
enables a customer to place orders directly via online access, resulting in
efficiencies for Iron Mountain order processing. It features robust querying
and searching tools to enable customers to identify records with only partial
information. Safekeeper Desktop is a PC application, run from customers'
desktop or network PCs; it provides customers with an entire set of records
management data along with user-friendly tools for querying, reporting and
editing. Safekeeper's suite of file transfers enable customers to automatically
transfer records data and service requests from their internal system to
Safekeeper. The paper reports include inventory detail and summary, service
activity analysis 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 MediaLink software. Iron
Mountain also manages tape library relocation and supports disaster recovery
testing and execution.
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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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<PAGE>
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.
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.
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<PAGE>
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 the Company's Audited Consolidated Financial Statements for
information regarding the minimum annual rental commitments of the Company.
Employees
A key feature of the Company's operating strategy is its decentralized
management structure and 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, 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.
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<PAGE>
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 "--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.
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
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<PAGE>
or third party asserting, and is not otherwise aware of, any material
noncompliance, liability or claim relating to hazardous substances or wastes,
petroleum products or material environmental laws applicable to Company
operations in connection with any of its present or former properties. However,
no assurance can be given that there are no environmental conditions for which
the Company might be liable in the future or that future regulatory action, as
well as compliance with future environmental laws, will not require the Company
to incur costs for or at its properties that could have a material adverse
effect on the Company's financial condition and results of operations.
Legal Proceedings
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. The Company has answered the
complaints relating to the first two of these four lawsuits, denying any
liability and asserting various affirmative defenses, and has also
counterclaimed against certain customers for indemnification and payment of its
litigation and related expenses. The Company has also filed motions to dismiss
several of the claims asserted against it. The Company's responses to the two
other complaints are currently due to be filed by 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, 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.
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<PAGE>
MANAGEMENT
Directors, Executive Officers and Certain Other Officers
The Directors, executive officers and certain other 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
Names of Certain Other Officers Age Position
- -------------------------------------------- -- ------------------------------------------------
Jean A. Bua ............................... 39 Vice President and Corporate Controller
Michael Karp .............................. 33 Vice President, Sales and Marketing
Joseph J. Larizza ......................... 55 Vice President and Chief Information Officer
Van M. Latham ............................. 40 Vice President, Human Resources
John P. Lawrence .......................... 46 Vice President and Treasurer
Donald P. Richards ........................ 33 Vice President, Mergers and Acquisitions
Kenneth A. Rubin .......................... 36 Vice President, Business Development
T. Anthony Ryan ........................... 57 Vice President, Real Estate
</TABLE>
- ----------------------
(1) Member of the Executive Committee; Mr. Ryan is the Chairman of the
Executive Committee.
(2) Member of the Audit Committee; Mr. Boden is the Chairman of the Audit
Committee.
(3) Member of the Compensation Committee; Mr. Little is the Chairman of the
Compensation Committee.
The Board of Directors 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 and other officers were elected by the Board of
Directors on May 29, 1997 with the exception of Messrs. Ebbighausen and Neefus,
who were appointed in July 1997, and Messrs. Drutman, Groff and Richards, who
were elected in March 1998. All executive officers and other officers hold
office at the discretion of the Board of Directors until the first meeting of
the Board of Directors following the next annual meeting of stockholders and
until their successors are chosen and qualified.
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
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<PAGE>
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
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
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<PAGE>
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 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 The First National 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 Board of
Directors of Iron Mountain.
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 of
Directors 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 of
Directors 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 Senior Vice President of Madison
Dearborn Partners, Inc. and from 1979 to 1992, he was employed in various
investment management positions, most recently as 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 appointed to the Iron Mountain Board of
Directors in accordance with the terms of the Arcus 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.
Certain Other Officers
Jean A. Bua is Vice President and Corporate Controller of Iron Mountain.
Ms. Bua joined Iron Mountain in such capacity in March 1996. From 1993 to 1996,
Ms. Bua was the Corporate Controller for Duracraft Corp., a consumer products
manufacturer. Prior to that, Ms. Bua was the accounting manager for a high-tech
manufacturer and was a management consultant for Ernst & Young. She holds a
Master of Business Administration degree from the University of Rhode Island.
Ms. Bua is a certified public accountant.
Michael Karp is Vice President, Sales and Marketing of Iron Mountain. Mr.
Karp joined Iron Mountain in June 1997 as a result of the Safesite merger. From
1988 until June 1997, he was employed by Safesite in various
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<PAGE>
positions, including as branch manager, regional manager and director of
national sales. Mr. Karp holds a Bachelors degree in business from Arizona
State University.
Joseph J. Larizza is Vice President and Chief Information Officer of Iron
Mountain, with responsibility for all information technology, including
managing the development of Iron Mountain's Safekeeper systems. Prior to
joining Iron Mountain in 1996, Mr. Larizza was co-founder of DataEase
International, a relational database software company, was chief information
officer for ISC Bunker Ramo, a banking system provider, and Service America, a
large food service corporation. Prior to these positions Mr. Larizza was the
chief information officer at the Advertising Checking Bureau, with
responsibility for information systems and development of client-server
products. He holds a Bachelors degree in management from Post College.
Van M. Latham is Vice President of Human Resources of Iron Mountain. Mr.
Latham joined Iron Mountain in 1997. For the preceding ten years he was
employed by PepsiCola and Pizza Hut, most recently as Human Resources Director
of PepsiCola East. He holds a Ph.D. in Industrial and Organizational Psychology
from Wayne State University.
John P. Lawrence is Vice President and Treasurer of Iron Mountain, with
responsibility for acquisition integration, internal audit, risk management and
purchasing and contracting. Mr. Lawrence has been associated with Iron Mountain
since 1988. Prior to 1988, he worked for Hewlett Packard for nine years in
various management positions in finance, control, marketing and manufacturing.
He holds a Master of Business Administration degree from Harvard Business
School.
Donald P. Richards is Vice President, Mergers & Acquisitions of Iron
Mountain, a position he has held since December 1997. Prior to joining Iron
Mountain, Mr. Richards practiced corporate law with Bingham Dana LLP from 1992
through 1997. He holds a Juris Doctor degree from Cornell University.
Kenneth A. Rubin is Vice President of Business Development of Iron
Mountain. Mr. Rubin joined Iron Mountain in 1989 and served as Vice President
of Marketing through mid-1997. Mr. Rubin is currently serving as the Managing
Director of Iron Mountain Consulting Services, Inc., a subsidiary of the
Company that provides records and information consulting services. Prior to
1989, Mr. Rubin worked for Leahy Business Archives (formally Instar Inc.) in
various sales and sales management roles. He holds a Bachelors degree in
political science from Drew University.
T. Anthony Ryan is Vice President of Real Estate of Iron Mountain. Mr.
Ryan manages the real estate of Iron Mountain and is responsible for
identifying and evaluating new facility opportunities and negotiating long-term
leases. He has been involved in real estate development for 22 years. His work
experience includes positions as Director of Development for Gilbane Property,
Vice President of CRJ Investments and, more recently, Vice President and
Partner at the Linpro Company. He holds a Bachelors degree in history from The
George Washington University.
Compensation Developments
In February 1998, the Company's Board of Directors approved the
establishment of an employee stock purchase plan. The Company intends to seek
approval of such plan from its stockholders at the 1998 Annual Meeting.
S-48
<PAGE>
PRINCIPAL STOCKHOLDERS
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 Chief Executive Officer and the
four highest paid executive officers serving in such capacity at December 31,
1997 and (iv) all executive officers and Directors of the Company as a group.
Such information is presented as of March 1, 1998. The table also reflects
ownership of Common Stock after the Offering, without giving effect to the
Pending Acquisition or the possible exercise of the over-allotment option
granted to the Underwriters.
<TABLE>
<CAPTION>
Amount of Beneficial Amount of Beneficial
Ownership Ownership
Before the Offering After the Offering
----------------------- ----------------------
Percent Percent
Name(1) Shares Owned Shares Owned
- ---------------------------------------------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C>
Directors and Executive Officers
C. Richard Reese(2) ......................... 1,127,503 7.5% 1,127,503 6.1%
David S. Wendell(3) ......................... 119,916 * 119,916 *
John F. Kenny, Jr.(4) ....................... 54,539 * 54,539 *
Eugene B. Doggett ........................... 100,000 * 100,000 *
Robert G. Miller(5) ......................... 14,974 * 14,974 *
Robert P. Swift(6) .......................... 28,514 * 28,514 *
Constantin R. Boden ......................... 20,880 * 20,880 *
Arthur D. Little(7) ......................... 26,265 * 26,265 *
Vincent J. Ryan(8) .......................... 3,445,750 23.1% 3,445,750 18.7%
B. Thomas Golisano(9) ....................... 1,013,785 6.8% 1,013,785 5.5%
Kent P. Dauten(10) .......................... 964,449 6.5% 964,449 5.2%
Clarke H. Bailey(11) ........................ 503,939 3.4% 503,939 2.7%
All Directors and executive officers as a
group (17 persons)(12) .................... 6,796,429 44.5% 6,796,429 36.2%
Five Percent Stockholders
Schooner Capital Corporation(13) ............ 1,909,384 12.8% 1,909,384 10.4%
William Blair & Company, L.L.C.(14) ......... 1,002,329 6.7% 1,002,329 5.4%
</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. Mr. Little's address is c/o The Little Investment Company, 33
Broad Street, Boston, Massachusetts 02109.
(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.
(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.
S-49
<PAGE>
(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.
S-50
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, to purchase
from the Company the number of shares of Common Stock set forth opposite their
respective names below. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent,
and that the Underwriters are committed to purchase all such shares if any are
purchased.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
- ------------------------------------------------------------ ------------
<S> <C>
Bear, Stearns & Co. Inc. ................................... 992,000
William Blair & Company, L.L.C. ............................ 991,500
Prudential Securities Incorporated ......................... 991,500
Allen & Company Incorporated ............................... 70,000
Chase Securities Inc. ...................................... 70,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated ......... 70,000
PaineWebber Incorporated ................................... 70,000
Wasserstein Perella Securities, Inc. ....................... 70,000
Blackford Securities Corp. ................................. 35,000
Cantor, Weiss & Friedner, Inc. ............................. 35,000
John Dawson & Associates ................................... 35,000
First Analysis Securities Corporation ...................... 35,000
Sanders Morris Mundy Inc. .................................. 35,000
---------
Total .................................................... 3,500,000
=========
</TABLE>
The Underwriters have advised the Company that the Underwriters propose to
offer the Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus Supplement and to certain dealers at that
price less a concession not in excess of $1.04 per share. The Underwriters may
allow, and such dealers may reallow, a discount not in excess of $.10 per share
on sales to certain other dealers. After the initial offering to the public,
the public offering price, concession and discount may be changed.
The Company has granted to the Underwriters an option, exercisable for 30
days after the date of this Prospectus Supplement, to purchase up to 525,000
additional shares of Common Stock (the "Option Shares") to cover
over-allotments, if any, at the public offering price per share set forth on
the cover page of this Prospectus Supplement, less the underwriting discount.
If the Underwriters exercise this option, each of the Underwriters will have a
firm commitment, subject to certain conditions, to purchase approximately the
same percentage of the total Option Shares that the number of shares of Common
Stock to be purchased by it shown in the foregoing table bears to the shares of
Common Stock offered hereby.
In the Underwriting Agreement, the Company has agreed to indemnify the
several Underwriters against certain civil liabilities, including liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
Underwriters may be required to make in respect thereof.
The Company, its directors, executive officers, certain other officers and
Schooner have agreed, subject to certain exceptions, not to offer, sell,
contract to sell, swap, make any short sale, pledge, establish an open "put
equivalent position" within the meaning of Rule 16a-1(h) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), grant any option to
purchase or otherwise dispose (or publicly announce his or its intention to do
any of the foregoing) of any shares of Common Stock, or any securities
convertible into, or exercisable or exchangeable for, any shares of Common
Stock for a period of 90 days after the date of the final prospectus supplement
relating to the Offering without the prior written consent of Bear, Stearns &
Co. Inc. ("Bear Stearns").
In order to facilitate the Offering, certain persons participating in the
Offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the Common Stock during and after the Offering.
Specifically, the Underwriters may over-allot or otherwise create a short
position in the Common Stock for their own account by selling more shares of
Common Stock than have been sold to them by the Company. The Underwriters may
elect to cover any such short position by purchasing shares of Common Stock in
the open market or by exercising the over-allotment option granted to the
Underwriters. In addition, such persons may stabilize or maintain the price
S-51
<PAGE>
of the Common Stock by bidding for or purchasing shares of Common Stock in the
open market and may impose penalty bids, under which selling concessions
allowed to syndicate members or other broker-dealers participating in the
Offering are reclaimed if shares of Common Stock previously distributed in the
Offering are repurchased in connection with stabilizing transactions or
otherwise. The effect of these transactions may be to stabilize or maintain the
market price of the Common Stock at a level above that which might otherwise
prevail in the open market. The imposition of a penalty bid may also affect the
price of the Common Stock to the extent that it discourages resales thereof. No
representation is made as to the magnitude or effect of any such stabilization
or other transactions. Such transactions may be effected on the Nasdaq National
Market and, if commenced, may be discontinued at any time.
Certain persons participating in this Offering may engage in passive
market making transactions in the Common Stock on the Nasdaq National Market in
accordance with Rule 103 of Regulation M under the Exchange Act. Rule 103
permits, upon the satisfaction of certain conditions, underwriting and selling
group members participating in a distribution that are also registered Nasdaq
market makers in the security being distributed (or a related security) to
engage in limited passive market making transactions during the period when
Regulation M would otherwise prohibit such activity. In general, a passive
market maker may not bid for or purchase a security at a price that exceeds the
highest independent bid for those securities by a person that is not
participating in the distribution and must identify its passive market making
bids on the Nasdaq electronic inter-dealer reporting system. In addition, the
net daily purchases made by a passive market maker generally may not exceed 30%
of such market maker's average daily trading volume in the security for the two
full consecutive calendar months (or any 60 consecutive days ending within 10
days) immediately preceding the date of determination of the public offering
price for the Common Stock.
From time to time, certain of the Underwriters or their affiliates have
provided, and may continue to provide in the future, investment banking,
general financing and banking services to the Company and its affiliates, for
which they have received, and expect to receive, customary compensation. Bear
Stearns, William Blair & Company, L.L.C., Prudential Securities Incorporated
and Chase Securities Inc. acted as initial purchasers of debt securities of the
Company in October 1997 and received customary discounts for their services.
Bear Stearns acted as financial advisor to the Company in connection with the
Company's acquisition of Arcus Group and received a customary fee for its
services. William Blair & Company, L.L.C. acted as financial advisor to the
Company in connection with the Company's acquisition of Safesite and received a
customary fee for its services. The Chase Manhattan Bank, an affiliate of Chase
Securities Inc., is the Administrative Agent and a lender under the Credit
Agreement and will receive a portion of the amounts to be repaid under the
Credit Agreement to the extent that the net proceeds of the Offering will be
used to repay indebtedness thereunder. See "Use of Proceeds." Because it is
expected that more than 10% of the net proceeds of the Offering will be paid to
an affiliate of a member of the National Association of Securities Dealers,
Inc. (the "NASD") that is participating in the Offering, the Offering is being
made pursuant to Rule 2710(c)(8) of the Conduct Rules of the NASD.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Sullivan & Worcester LLP, Boston, Massachusetts and for
the Underwriters by Jones, Day, Reavis & Pogue, New York, New York. Jas. Murray
Howe, Secretary of the Company, is of counsel to Sullivan & Worcester LLP and
beneficially owns 8,000 shares of Common Stock.
EXPERTS
The following financial statements have been audited by the following
independent public accountants. The following amends and supersedes in its
entirety the information under the caption "Experts" in the accompanying
Prospectus:
The consolidated financial statements and schedule of Iron Mountain
Incorporated and its subsidiaries for the three years ended December 31, 1997,
included in Iron Mountain's Annual Report on Form 10-K dated March 27, 1998,
have been audited by Arthur Andersen LLP, independent public accountants, as
stated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
S-52
<PAGE>
The consolidated financial statements of Arcus Technology Services, Inc.
for the two years ended December 31, 1997 and the five-month period ended
December 31, 1995 and the consolidated financial statements of Arcus, Inc.
(Predecessor Company) for the seven-month period ended July 31, 1995, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon and included herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The financial statements of Security Archives of Minnesota for the year
ended December 31, 1996, included in Iron Mountain's Current Report on Form 8-K
dated October 30, 1997, have been audited by Arthur Andersen LLP, independent
public accountants, as stated in their report with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said report.
The financial statements of Wellington Financial Services, Inc. for the
year ended December 31, 1996, included in Iron Mountain's Current Report on
Form 8-K dated October 30, 1997, have been audited by Arthur Andersen LLP,
independent public accountants, as stated in their report with respect thereto,
and are incorporated by reference herein in reliance upon the authority of said
firm as experts in giving said report.
The financial statements of Allegiance Business Archives, Ltd. for the
year ended December 31, 1996, included in Iron Mountain's Current Report on
Form 8-K dated November 25, 1997, have been audited by Stout, Causey & Horning,
P.A., independent public accountants, as stated in their report with respect
thereto, and are incorporated by reference herein in reliance upon the
authority of said firm as experts in giving said report.
The financial statements and schedule of Safesite Records Management
Corporation for the three years ended December 31, 1996, included in Iron
Mountain's Registration Statement on Form S-4 (file no. 333-24635, effective
date May 14, 1997), have been audited by Arthur Andersen LLP, independent
public accountants, as stated in their reports with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said reports.
The financial statements of Concorde Group, Inc. and Neil Trucker Trust
for the year ended December 31, 1996, included in Iron Mountain's Current
Report on Form 8-K dated October 30, 1997, have been audited by Fisher, Schacht
& Oliver LLP, independent public accountants, as stated in their report with
respect thereto, and are incorporated by reference herein in reliance upon the
authority of said firm as experts in giving said report.
The financial statements of Data Securities International, Inc. for the
year ended December 31, 1996, included in Iron Mountain's Current Report on
Form 8-K dated October 30, 1997, have been audited by Arthur Andersen LLP,
independent public accountants, as stated in their report with respect thereto,
and are incorporated by reference herein in reliance upon the authority of said
firm as experts in giving said report.
The financial statements of Records Retention/FileSafe, LP for the two
years ended December 31, 1996, included in Iron Mountain's Current Report on
Form 8-K dated November 25, 1997, have been audited by Abbott Stringham &
Lynch, independent public accountants, as stated in their report with respect
thereto, and are incorporated by reference herein in reliance upon the
authority of said firm as experts in giving said report.
The consolidated financial statements of HIMSCORP, Inc. and Subsidiaries
for the period February 1, 1995 to December 31, 1995 and for the year ended
December 31, 1996, appearing in Iron Mountain's Current Reports on Form 8-K
dated October 30, 1997 and November 25, 1997, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their reports thereon included
therein, and are incorporated by reference herein in reliance upon the
authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Arcus Group, Inc. for the two
years in the period ended December 31, 1996, appearing in Iron Mountain's
Current Reports on Form 8-K dated October 30, 1997 and November 25, 1997, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereof included therein, and are incorporated by reference herein in
reliance upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Arcus Group, Inc. for the year
ended December 31, 1994, included in Iron Mountain's Current Report on Form 8-K
dated November 25, 1997, have been audited by Arthur Andersen LLP, independent
public accountants, as stated in their report with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said report.
S-53
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
In addition to the documents incorporated by reference or deemed
incorporated by reference into the accompanying Prospectus, which Prospectus is
supplemented by this Prospectus Supplement, the following documents, which have
been filed with the Commission pursuant to the Exchange Act, are hereby
incorporated in this Prospectus Supplement and specifically made a part hereof
by reference: (i) Annual Report on Form 10-K for the year ended December 31,
1997 and (ii) Current Report on Form 8-K dated March 30, 1998. All documents
filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of this Prospectus Supplement and prior to
the termination of this Offering shall be deemed to be incorporated by
reference into this Prospectus Supplement and to be a part hereof from the
respective dates of filing of such documents.
Any statement contained herein or in a document incorporated or deemed to
be incorporated herein by reference shall be deemed to be modified or
superseded for purposes of this Prospectus Supplement to the extent that a
statement contained herein (or in the Prospectus), or in any other subsequently
filed document that also is or is deemed to be incorporated herein by
reference, modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus Supplement.
The Company hereby undertakes to provide without charge to each person to
whom this Prospectus Supplement is delivered, upon the written or oral request
of such person, a copy of any and all of the information that has been
incorporated by reference in this Prospectus Supplement (excluding exhibits
unless such exhibits are specifically incorporated by reference into the
information that this Prospectus Supplement incorporates). Requests for such
copies should be made to the Company at its principal executive offices, 745
Atlantic Avenue, Boston, Massachusetts 02111, Attention: John F. Kenny, Jr.,
Executive Vice President and Chief Financial Officer.
S-54
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Financial Statements of Iron Mountain Incorporated:
Annual Consolidated Financial Statements ......... F-2
Financial Statements of Completed Acquisitions:
Arcus Technology Services, Inc. .................. F-21
HIMSCORP, Inc. and Subsidiaries .................. F-37
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Iron Mountain Incorporated:
We have audited the accompanying consolidated balance sheets of Iron
Mountain Incorporated (a Delaware corporation) and its subsidiaries as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Iron Mountain Incorporated
and its subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 20, 1998
F-2
<PAGE>
IRON MOUNTAIN INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ............................... $ 3,453 $ 24,510
Accounts receivable (less allowances of $1,061 and $1,929
as of 1996 and 1997, respectively) .................... 24,136 40,545
Receivable from insurance company ....................... -- 5,410
Deferred income taxes ................................... 3,378 5,896
Prepaid expenses and other .............................. 3,821 5,566
--------- ---------
Total Current Assets ................................. 34,788 81,927
Property, Plant and Equipment:
Property, plant and equipment ........................... 163,495 245,174
Less--Accumulated depreciation .......................... (45,146) (61,276)
--------- ---------
Net Property, Plant and Equipment .................... 118,349 183,898
Other Assets:
Goodwill, net ........................................... 109,363 340,852
Customer acquisition costs, net ......................... 6,334 7,319
Deferred financing costs, net ........................... 7,358 14,429
Other ................................................... 5,607 8,361
--------- ---------
Total Other Assets ................................... 128,662 370,961
--------- ---------
Total Assets ......................................... $ 281,799 $ 636,786
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt ....................... $ 396 $ 520
Note payable ............................................ -- 3,000
Accounts payable ........................................ 3,750 11,022
Accrued expenses ........................................ 17,275 28,131
Deferred income ......................................... 4,995 11,931
Other current liabilities ............................... 414 1,149
--------- ---------
Total Current Liabilities ............................ 26,830 55,753
Long-term Debt, net of current portion ................... 184,337 424,498
Other Long-Term Liabilities .............................. 6,576 5,336
Deferred Rent ............................................ 7,651 8,202
Deferred Income Taxes .................................... 4,021 5,264
Commitments and Contingencies (see Note 9)
Stockholders' Equity:
Preferred stock ......................................... -- --
Common stock ............................................ 101 135
Additional paid-in capital .............................. 62,135 151,971
Accumulated deficit ..................................... (9,852) (14,373)
--------- ---------
Total Stockholders' Equity ........................... 52,384 137,733
--------- ---------
Total Liabilities and Stockholders' Equity ........... $ 281,799 $ 636,786
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
IRON MOUNTAIN INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
Revenues:
Storage ............................................... $ 64,165 $ 85,826 $125,968
Service and storage material sales .................... 40,271 52,892 82,797
-------- -------- --------
Total Revenues ..................................... 104,436 138,718 208,765
Operating Expenses:
Cost of sales (excluding depreciation) ................ 52,277 70,747 106,879
Selling, general and administrative ................... 26,035 34,342 51,668
Depreciation and amortization ......................... 12,341 16,936 27,107
-------- -------- --------
Total Operating Expenses ........................... 90,653 122,025 185,654
-------- -------- --------
Operating Income ....................................... 13,783 16,693 23,111
Interest Expense ....................................... 11,838 14,901 27,712
-------- -------- --------
Income (Loss) Before Provision (Benefit) for
Income Taxes ..................................... 1,945 1,792 (4,601)
Provision (Benefit) for Income Taxes ................... 1,697 1,435 (80)
-------- -------- --------
Income (Loss) Before Extraordinary Charge .......... 248 357 (4,521)
Extraordinary Charge from Early Retirement of Debt
(Net of Tax Benefit of $1,413) ........................ -- 2,126 --
-------- -------- --------
Net Income (Loss) .................................. 248 (1,769) (4,521)
Accretion of Redeemable Put Warrant .................... 2,107 280 --
-------- -------- --------
Net Loss Applicable to Common Stockholders ......... $ (1,859) $ (2,049) $ (4,521)
======== ======== ========
Income (Loss) per Common Share--Basic and Diluted
(See Notes 5 and 6):
Income (loss) before extraordinary charge ............. $ (48.92) $ 0.01 $ (0.39)
Extraordinary charge (net of tax benefit) ............. -- (0.23) --
-------- -------- --------
Net Loss Applicable to Common Stockholders ............ $ (48.92) $ (0.22) $ (0.39)
======== ======== ========
Weighted Average Common Shares Outstanding ............. 38 9,274 11,448
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
IRON MOUNTAIN INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(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.
F-5
<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.
F-6
<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>
F-7
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies (continued)
The Company develops various software applications for internal use.
Payroll and related costs for employees who are directly associated with and
who devote time to the development and conversion of internal-use computer
software projects (to the extent of the time spent directly on the project) are
capitalized and amortized over the useful life of the software. Capitalization
begins when the design stage of the application has been completed, it is
probable that the project will be completed and the application will be used to
perform the function intended. Amortization begins when the software is placed
in service.
Minor maintenance costs are expensed as incurred. Major improvements to
the leased buildings are capitalized as leasehold improvements and depreciated
as described above.
e. Goodwill
Goodwill reflects the cost in excess of fair value of the net assets of
companies acquired in purchase transactions. Goodwill is amortized using the
straight-line method from the date of acquisition over the expected period to
be benefited, currently estimated at 25 to 30 years. The Company assesses the
recoverability of goodwill, as well as other long-lived assets based upon
expectations of future undiscounted cash flows in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Accumulated
amortization of goodwill was $18,858 and $26,931 as of December 31, 1996 and
1997, respectively. In 1995, the Company recorded a $900 impairment of goodwill
related to one of its subsidiaries.
f. Customer Acquisition Costs
Costs, net of revenues received for the initial transfer of the records,
related to the acquisition of large volume accounts are capitalized and
amortized for an appropriate period not exceeding 12 years, unless the customer
terminates its relationship with the Company, at which time the unamortized
cost is charged to expense. However, in the event of such termination, the
Company collects and records as income permanent removal fees that generally
equal or exceed the amount of unamortized customer acquisition costs. As of
December 31, 1996 and 1997, those costs were $8,134 and $9,769, respectively,
and accumulated amortization of those costs were $1,800 and $2,450,
respectively.
g. Deferred Financing Costs
Deferred financing costs are amortized over the life of the related debt
using the effective interest rate method. If debt is retired early, unamortized
deferred financing costs are written off as an extraordinary charge in the
period the debt is retired. As of December 31, 1996 and 1997, deferred
financing costs were $7,998 and $16,163, respectively, and accumulated
amortization of those costs were $640 and $1,734, respectively.
h. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
--------- ---------
<S> <C> <C>
Incentive compensation ......... $ 2,287 $ 3,932
Interest ....................... 4,247 8,427
Workers' compensation .......... 2,949 3,022
Payroll and vacation ........... 2,642 3,432
Restructuring costs ............ 1,340 5,443
Other .......................... 3,810 3,875
------- -------
$17,275 $28,131
======= =======
</TABLE>
F-8
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies (continued)
i. Revenues
The Company's revenues consist of storage revenues and service and storage
material sales revenues. Storage revenues consist of periodic charges related
to the storage of materials (either on a per unit or per cubic foot of records
basis). In certain circumstances, based upon customer requirements, storage
revenues include periodic charges associated with normal, recurring service
activities. Service and storage material sales revenues are comprised of
charges for related service activities and the sale of storage materials. In
certain circumstances, storage material sales are recorded net of product costs
when the Company functions as a sales representative of the product
manufacturer and does not receive or take title to the products. Customers are
generally billed on a monthly basis on contractually agreed-upon terms.
Storage and service revenues are recognized in the month the respective
service is provided. Storage material sales are recognized when shipped to the
customer. Amounts related to future storage for customers where storage fees
are billed in advance are accounted for as deferred income and amortized over
the applicable period.
j. Deferred Rent
The Company has entered into various leases for buildings used in the
storage of records. Certain leases have fixed escalation clauses or other
features which require normalization of the rental expense over the life of the
lease resulting in deferred rent being reflected in the accompanying balance
sheets. In addition, the Company has assumed various unfavorable leases in
connection with certain of its acquisitions. The discounted present value of
these lease obligations in excess of market rate at the date of the acquisition
was recorded as a deferred rent liability and is being amortized over the
remaining lives of the respective leases.
k. Stock-Based Compensation
Effective January 1, 1996, the Company adopted the provisions of SFAS No.
123, Accounting for Stock-Based Compensation. The Company has elected to
continue to account for stock options at intrinsic value with disclosure of the
effects of fair value accounting on net income (loss) and earnings (loss) per
share on a pro forma basis.
l. Interest Rate Caps
Premiums paid for interest rate cap agreements are amortized to interest
expense over the terms of the cap. Unamortized premiums are included in other
assets in the accompanying consolidated balance sheets. Amounts receivable, if
any, under cap agreements are accounted for as a reduction of interest expense.
m. Income (Loss) Per Common Share
During 1997, the Company adopted SFAS No. 128, Earnings Per Share, and
restated its net income (loss) per share for the years ended 1995 and 1996 (see
Note 6).
n. Reclassifications
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform to the 1997 presentation.
F-9
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1997
----------- ------------
<S> <C> <C>
Revolving Credit Facility ..................................... $ 9,000 $ --
10-1/8% Senior Subordinated Notes due 2006 (the "1996 Notes").. 165,000 165,000
8-3/4% 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 26, 2002. Both the March
3, 1997 and September 26, 1997 amendments 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 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 10-1/8% Senior
Subordinated Notes due 2006. Interest on the 1996 Notes is payable semiannually
on April 1 and October 1. Payments commenced on April 1, 1997. The net proceeds
were $160.1 million after underwriting discounts and commissions. The proceeds
were used to repay
F-10
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Debt (continued)
outstanding bank debt under the 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 5% 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 8-3/4% Senior
Subordinated Notes due 2009. Interest on the 1997 Notes is payable semiannually
on March 31 and September 30, with payments commencing on March 31, 1998. The
net proceeds were $242.6 million after an original issue discount of $485 and
underwriting discounts and commissions. The proceeds were used to repay
outstanding bank debt and to fund the purchase prices of two acquisitions.
Prior to September 30, 2002, and subsequent to certain restrictions, the
Company may, at its option, redeem any or all of the 1997 Notes at a make-whole
price, as defined. On or after September 30, 2002, and subject to certain
restrictions, the Company may, at its option, redeem any or all of the 1997
Notes at face value, plus a premium of up to approximately 4% through September
30, 2005. Thereafter, the 1997 Notes may be redeemed at face value. Also, any
time through October 23, 2000, the Company may redeem a portion of the 1997
Notes, subject to restrictions, with the net proceeds of one or more qualified
equity offerings, as defined, at a redemption price of 108.75% of the principal
amount of such 1997 Notes. Additionally, under certain circumstances, including
a change of control or following certain asset sales, the holders of the 1997
Notes may require the Company to repurchase the 1997 Notes.
The 1996 and 1997 Notes are fully and unconditionally guaranteed, on a
joint and several basis, on a senior subordinated basis, by all of the
Company's direct and indirect subsidiaries (the "Subsidiary Guarantors"). The
Company is a holding company, substantially all of the assets of which are the
stock of the Subsidiary Guarantors, and substantially all of the operations of
which are conducted by the Subsidiary Guarantors. Accordingly, the aggregate
assets, liabilities, earnings and equity of the Subsidiary Guarantors are
substantially equivalent to the assets, liabilities, earnings and equity of the
Company on a consolidated basis. Management of the Company believes that
separate financial statements of, and other disclosures with respect to, the
Subsidiary Guarantors are not meaningful or material to investors.
d. Other
The real estate mortgages consist of an $8,037, 10 year, 11% mortgage
based on 30 year amortization with a $7,495 balloon payment due October 2000
and a $3,000, 8% note that is payable in various installments commencing in
1997 and maturing in November 2006.
F-11
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Debt (continued)
Maturities of long-term debt are as follows:
Year Amount
- --------------------------- ----------
1998 ................ $ 520
1999 ................ 430
2000 ................ 7,796
2001 ................ 301
2002 ................ 301
Thereafter .......... 415,670
--------
$425,018
========
Based on the borrowing rates currently available to the Company for loans
with similar terms and average maturities, the Company has estimated the
following fair values for its long-term debt as of December 31:
<TABLE>
<CAPTION>
1996 1997
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
10-1/8% Senior Subordinated Notes ........ $165,000 $173,602 $165,000 $179,850
8-3/4% Senior Subordinated Notes ......... -- -- 249,525 255,000
Real estate mortgages .................... 10,733 11,329 10,312 11,322
</TABLE>
4. Acquisitions
The Company purchased substantially all of the assets and assumed certain
liabilities of four, 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.
A summary of the cash consideration (not including contingent payments of
approximately $5,875, based on the achievement of certain revenue targets) and
allocation of the purchase price as of the acquisition dates are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Cash Paid ...................................... $ 33,048 $ 68,496 $ 192,230
Fair Value of Common Stock Issued .............. -- -- 85,863
Fair Value of Options Issued ................... -- -- 3,071
-------- -------- ---------
Total Consideration ........................ 33,048 68,496 281,164
-------- -------- ---------
Fair Value of Assets Acquired .................. 15,232 19,476 68,774
Liabilities Assumed ............................ (8,238) (4,874) (26,932)
-------- -------- ---------
Fair Value of Net Assets Acquired .......... 6,994 14,602 41,842
-------- -------- ---------
Recorded Goodwill .............................. $ 26,054 $ 53,894 $ 239,322
======== ======== =========
</TABLE>
F-12
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
4. Acquisitions (continued)
The following unaudited pro forma combined information shows the results
of the Company's operations for the years ended December 31, 1996 and 1997 as
though each of the acquisitions completed during 1996 and 1997 had occurred as
of the beginning of the period reported:
<TABLE>
<CAPTION>
1996 1997
------------- -----------
<S> <C> <C>
Revenues ............................................. $ 228,961 $264,276
========= ========
Loss Before Extraordinary Charge ..................... $ (8,634) $ (6,981)
Extraordinary Charge (Net of Tax Benefit) ............ (2,126) --
--------- --------
Net Loss Applicable to Common Stockholders ........... $ (10,760) $ (6,981)
========= ========
Loss per Common Share--Basic and Diluted:
Loss before extraordinary charge .................... $ (0.69) $ (0.52)
Extraordinary charge (net of tax benefit) ........... (0.17) --
--------- --------
Net loss applicable to common stockholders .......... $ (0.86) $ (0.52)
========= ========
</TABLE>
The pro forma results have been prepared for comparative purposes only and
are not necessarily indicative of the actual results of operations had the
acquisitions taken place as of the beginning of the period reported or the
results that may occur in the future. Furthermore, the pro forma results do not
give effect to all cost savings or incremental costs which may occur as a
result of the integration and consolidation of the companies. Certain
acquisitions completed in 1996 and 1997 are not included in the pro forma
results as their effect was immaterial.
In connection with the acquisitions completed in 1996 and 1997, the
Company has undertaken certain restructurings of the acquired businesses, which
have been, or will be, completed within one year from the date of acquisition.
The restructuring activities include certain reductions in staffing levels,
elimination of duplicate facilities, move costs and other costs associated with
exiting certain activities of the acquired businesses. In connection with these
restructuring activities, the Company established reserves of $1,883 and $6,266
in 1996 and 1997, respectively. These amounts were recorded as costs of the
acquisitions and were provided in accordance with Emerging Issues Task Force
Issue No. 95-3, "Recognition of Liabilities in Connection with a Purchase
Business Combination." During 1996 and 1997, the Company expended $602 and
$2,163, respectively, for restructuring costs. These expenditures consisted
primarily of severance costs, move costs and costs relating to exited
facilities. As of December 31, 1997, the Company had a total of $5,443 accrued
for restructuring costs on all of its acquisitions.
5. Capital Stock, Redeemable Put Warrant and Stock Options
a. Capital Stock
On February 6, 1996, the Company completed the 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:
Authorized
Class Shares
- --------------------------------------------------- -------------
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
F-13
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Capital Stock, Redeemable Put Warrant and Stock Options (continued)
Upon consummation of the 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 the Class A
and Class B common stock in the form of a stock dividend. All weighted average
common share and stock-related data in the consolidated financial statements
have been retroactively restated to reflect the stock split.
b. Redeemable Put Warrant
In connection with the issuance of certain debt, the Company also issued a
put warrant, dated December 14, 1990 (the "Warrant"), exercisable for 444,385
shares of common stock for nominal consideration upon the occurrence of certain
specified events. On February 7, 1996, in connection with the 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.
c. Stock Options
In September 1991, the Company created a nonqualified stock option plan
pursuant to which up to 444,385 shares of Class A common stock of the Company
could be issued at the discretion of the Stock Option Committee to key
employees, consultants and directors.
Effective November 30, 1995, the Board of Directors approved the adoption
of the 1995 Stock Incentive Plan (the "Stock Option Plan"), which replaced the
previous stock option plan. A total of 1,000,000 shares of common stock were
available for grant as options and other rights under the Stock Option Plan,
including the options issued under the 1991 plan. On March 3, 1997, the number
of shares of common stock available for grant as options under the Stock Option
Plan increased to 1,400,000.
Effective December 21, 1995, the Board of Directors approved the 1995
Stock Option Plan for Non-Employee Directors (the "Non-Employee Director Plan")
that permitted non-employee directors to elect to receive all or a portion of
their compensation in the form of common stock. Directors electing to receive
common stock received, as an incentive, an amount of stock equivalent to 110%
of the director's compensation otherwise due to be paid in cash. During 1997,
the Company issued 1,484 shares under the Non-Employee Director Plan. On June
30, 1997, the Non-Employee Director Plan was terminated.
F-14
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Capital Stock, Redeemable Put Warrant and Stock Options (continued)
During 1997, the Company issued options to employees of acquired companies
to purchase 145,919 shares of the Company's common stock. The options replaced
options held by the employee for the acquired company's common stock. The
options were accounted for as additional purchase price based on the fair value
of the options when issued.
The following is a summary of stock option transactions, including those
issued to employees of acquired companies, during the applicable periods:
<TABLE>
<CAPTION>
Weighted Average
Options Exercise Price
------------ -----------------
<S> <C> <C>
Options outstanding, December 31, 1994 ......... 261,484 $ 6.89
Granted ....................................... 97,018 12.58
Exercised ..................................... (15,976) 12.58
Canceled ...................................... (8,219) 11.21
-------
Options outstanding, December 31, 1995 ......... 334,307 8.16
Granted ....................................... 453,854 16.49
Exercised ..................................... (6,896) 9.58
Canceled ...................................... (18,404) 11.76
-------
Options outstanding, December 31, 1996 ......... 762,861 13.02
Granted ....................................... 469,113 25.51
Exercised ..................................... (83,807) 9.89
Canceled ...................................... (30,802) 22.10
-------
Options outstanding, December 31, 1997 ......... 1,117,365 18.25
=========
</TABLE>
The stock options were granted with exercise prices equal to or greater
than the fair market value at the date of grant. The majority of options become
exercisable ratably over a period of five years unless the holder terminates
employment. The number of options available for grant at December 31, 1997 was
145,214.
Effective January 1, 1996, the Company adopted the provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." The Company has elected to
continue to account for stock options issued to employees at intrinsic value
with disclosure of fair value accounting on net income (loss) and earnings
(loss) per share on a pro forma basis. Had the Company elected to recognize
compensation cost based on the fair value of the options granted at grant date
as prescribed by SFAS No. 123, net loss applicable to common stockholders and
net loss per common share would have been increased to the pro forma amounts
indicated in the table below:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net loss applicable to common stockholders, as reported ........... $ (1,859) $ (2,049) $ (4,521)
Net loss applicable to common stockholders, pro forma ............. (1,978) (2,614) (5,411)
Net loss per common share--basic and diluted, as reported ......... (48.92) (0.22) (0.39)
Net loss per common share--basic and diluted, pro forma ........... (52.05) (0.28) (0.47)
</TABLE>
The weighted average fair value of options granted in 1995, 1996 and 1997
was $5.22, $7.38 and $16.59 per share, respectively. The values were estimated
on the date of grant using the Black-Scholes option pricing model. The
following table summarizes the weighted average assumptions used for grants in
the year ended December 31:
<TABLE>
<CAPTION>
Assumption 1995 1996 1997
- ----------------------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Expected volatility .................. 24.2% 24.2% 29.2%
Risk-free interest rate .............. 7.51 6.34 5.91
Expected dividend yield .............. N/A N/A N/A
Expected life of the option .......... 6.3 years 7.5 years 7.0 years
</TABLE>
F-15
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Capital Stock, Redeemable Put Warrant and Stock Options (continued)
The following table summarizes additional information regarding options
outstanding and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------ ---------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Remaining Average Remaining Average
Range of Contractual Life Exercise Contractual Life Exercise
Exercise Prices Number (in Years) Price Number (in Years) Price
- ------------------------- ------------ ------------------ ---------- ---------- ------------------ ---------
<S> <C> <C> <C> <C> <C> <C>
$1.12 to $1.31........... 25,970 4.00 $ 1.30 9,420 4.00 $ 1.30
$6.48 to $7.05........... 219,233 4.00 6.49 219,233 4.00 6.49
$9.95 to $13.65.......... 111,348 6.77 12.49 60,815 6.44 12.29
$15.38 to $16.13......... 405,844 8.22 15.50 77,835 8.22 15.50
$25.75 to $30.38......... 54,676 6.83 21.99 5,766 6.25 21.50
$31.44 to $36.50......... 300,294 9.59 32.22 -- -- --
------- ---- ------- ------- ---- ------
1,117,365 7.60 $ 18.25 373,069 5.30 $ 9.42
========= ==== ======= ======= ==== ======
</TABLE>
6. Income (Loss) Per Common Share--Basic and Diluted
In accordance with SFAS No. 128, basic income (loss) per common share is
calculated by dividing income (loss) available to common stockholders by the
weighted average number of common shares outstanding. The calculation of
diluted income (loss) per share is consistent with that of basic income (loss)
per share but gives effect to all dilutive potential common shares (that is,
securities such as options, warrants or convertible securities) that were
outstanding during the period, unless the effect is antidilutive.
Income (loss) per common share--basic and diluted has been calculated as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Income (loss) before extraordinary charge .......................... $ 248 $ 357 $ (4,521)
Accretion of redeemable put warrant ................................ (2,107) (280) --
-------- -------- --------
Income (loss) applicable to common stockholders, before
extraordinary charge .............................................. (1,859) 77 (4,521)
Extraordinary charge (net of tax benefit) .......................... -- (2,126) --
-------- -------- --------
Net loss applicable to common stockholders ......................... $ (1,859) $ (2,049) $ (4,521)
======== ======== ========
Weighted average common shares outstanding (in thousands) .......... 38 9,274 11,448
======== ======== ========
Income (loss) per common share--basic and diluted:
Income (loss) before extraordinary charge ......................... $ (48.92) $ 0.01 $ (0.39)
Extraordinary charge (net of tax benefit) ......................... -- (0.23) --
-------- -------- --------
Net loss applicable to common stockholders ........................ $ (48.92) $ (0.22) $ (0.39)
======== ======== ========
</TABLE>
The effect of adopting SFAS No. 128 on previously reported loss per share
data was as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Primary and fully diluted net loss per share (as previously reported) $ (0.24) $ (0.20)
Effect of SFAS No. 128 ............................................... (48.68) (0.02)
-------- -------
Net loss per common share--basic and diluted ......................... $ (48.92) $ (0.22)
======== =======
</TABLE>
F-16
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Income (Loss) Per Common Share--Basic and Diluted (continued)
The following potential common shares have been excluded from the above
calculations because their effects are antidilutive:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ---------- ------------
<S> <C> <C> <C>
Shares of Convertible Preferred Stock .............................. 499,395 -- --
Shares of Common Stock Subject to Outstanding Options .............. 334,337 762,861 1,117,365
Shares of Common Stock Underlying Outstanding Put Warrant .......... 444,385 -- --
------- ------- ---------
1,278,117 762,861 1,117,365
========= ======= =========
</TABLE>
Subsequent to year end, the Company issued 1,438,012 shares of common
stock and approximately 590,000 options in connection with an acquisition (see
Note 13).
7. Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
which requires the recognition of deferred tax assets and liabilities for the
expected tax consequences of temporary differences between the tax and
financial reporting bases of assets and liabilities.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997
----------- -----------
<S> <C> <C>
Accrued liabilities .............................................................. $ 1,757 $ 4,726
Deferred rent .................................................................... 3,056 3,411
Net operating loss carryforwards ................................................. 4,751 7,360
AMT credit ....................................................................... 587 587
Other ............................................................................ 1,719 2,317
--------- ---------
Gross deferred tax assets ...................................................... 11,870 18,401
--------- ---------
Other assets principally due to differences in amortization ...................... (2,150) (2,693)
Plant and equipment, principally due to differences in depreciation .............. (7,039) (11,217)
Customer acquisition costs ....................................................... (2,337) (3,859)
--------- ---------
Gross deferred tax liabilities ................................................. (11,526) (17,769)
--------- ---------
Net deferred tax asset ........................................................ $ 344 $ 632
========= =========
</TABLE>
The Company and its subsidiaries file a consolidated federal income tax
return. The provision (benefit) for income tax consists of the following
components:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1996 1997
--------- ----------- ---------
<S> <C> <C> <C>
Federal--current ........................................................ $ 422 $ 958 $ --
Federal--deferred ....................................................... 837 57 (459)
State--current .......................................................... 96 1,450 399
State--deferred ......................................................... 342 (1,030) (20)
------ -------- ------
$1,697 $ 1,435 $ (80)
====== ======== ======
</TABLE>
F-17
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. Income Taxes (continued)
A reconciliation of total income tax expense (benefit) and the amount
computed by applying the federal income tax rate of 34% to income (loss) before
income taxes is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ------------
<S> <C> <C> <C>
Computed "expected" tax provision ................................... $ 661 $ 609 $ (1,564)
Increase in income taxes resulting from:
State taxes (net of federal tax benefit) ........................... 289 278 250
Nondeductible goodwill amortization ................................ 843 602 1,221
Other .............................................................. (96) (54) 13
------ ------ --------
$1,697 $1,435 $ (80)
====== ====== ========
</TABLE>
The Company has estimated federal net operating loss carryforwards of
$20,487 at December 31, 1997 to reduce future federal income taxes, if any,
which begin to expire in 2005. The Company also has estimated state net
operating loss carryforwards of approximately $3,426 to reduce future state
income taxes, if any. Additionally, the Company has alternative minimum tax
credit carryforwards of $587, which have no expiration date and are available
to reduce future income taxes, if any.
8. Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
Quarter Ended March 31 June 30 September 30 December 31
- --------------------------------------------------------- ------------- ------------- -------------- -----------------
<S> <C> <C> <C> <C>
1996
Revenues ............................................. $31,028 $32,922 $ 36,019 $ 38,749
Gross profit ......................................... 15,360 16,207 17,311 19,093
Income (loss) before extraordinary charge ............ 286 411 -- (340)
Net income (loss) .................................... 6(1) 411(2) -- (2,466)(3)
Net income (loss) per common share--basic and diluted:
Income (loss) before extraordinary charge ............ 0.00 0.04 0.00 (0.03)
Net income (loss) .................................... 0.00 0.04 0.00 (0.24)
1997
Revenues ............................................. $42,154 $46,585 $ 54,655 $ 65,371
Gross profit ......................................... 20,390 22,477 26,785 32,233
Net loss ............................................. (516) (969) (325) (2,711)
Net loss per common share--basic and diluted ......... (0.05) (0.09) (0.03) (0.21)
</TABLE>
(1) Includes a charge of $280 related to the accretion of the put warrant.
(2) Includes a $193 after-tax charge related to the relocation of the
corporate accounting function from Los Angeles to Boston.
(3) Includes an extraordinary charge of $2,126, net of tax benefit, related
to the prepayment of certain indebtedness.
9. Commitments and Contingencies
a. Leases
Iron Mountain leases most of its facilities under various operating
leases. A majority of these leases have renewal options of five to ten years
and have either fixed or Consumer Price Index escalation clauses. The Company
also leases equipment under operating leases, primarily computers which have an
average lease life of three years. Trucks and office equipment are also leased
and have remaining lease lives ranging from one to seven years. Rent expense
was $15,661, $21,114 and $29,332 for the years ended December 31, 1995, 1996
and 1997, respectively.
F-18
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. Commitments and Contingencies (continued)
Minimum future lease payments are as follows:
<TABLE>
<CAPTION>
Year Operating
- --------------------------------------------- ----------
<S> <C>
1998 .................................. $ 30,641
1999 .................................. 29,799
2000 .................................. 28,830
2001 .................................. 26,919
2002 .................................. 24,452
Thereafter ............................ 117,897
--------
Total minimum lease payments .......... $258,538
========
</TABLE>
b. Facility Fire
As previously disclosed, in March 1997, the Company experienced three
fires, all of which authorities have determined were caused by arson. These
fires resulted in damage to one and destruction of the Company's other records
management facility in South Brunswick Township, New Jersey. The Company has
filed several insurance claims related to the fires, including a significant
claim under its business interruption insurance policy. The claims process is
lengthy and its outcome cannot be predicted with certainty.
Some of Iron Mountain's customers or their insurance carriers have
asserted claims as a consequence of the destruction of or damage to their
records as a result of the fires, some of which allege negligence or other
culpability on the part of Iron Mountain. On December 12, 1997, Iron Mountain
received notice that a lawsuit had been filed by one of its customers seeking
up to $1 million in damages. The action has been removed from a state court in
New Jersey to the United States District Court in New Jersey. The Company has
since received notices of additional lawsuits filed by customers seeking
unspecified damages against the Company and to rescind their written contracts
with Iron Mountain. Iron Mountain denies any liability as a result of the
destruction of or damage to customer records as a result of the fires, which
were beyond its control, and intends to vigorously defend itself against these
and any other lawsuits that may arise. The Company is also pursuing coverage of
these claims and lawsuits with its various insurers.
The outcome of these pending claims and proceedings cannot be predicted.
Based on its present assessment of the situation, management, after
consultation with legal counsel, does not believe that the fires will have a
material adverse effect on Iron Mountain's financial condition or results of
operations, although there can be no assurance in this regard.
c. Other Litigation
Iron Mountain is presently involved as a defendant in various litigation
which has occurred in the normal course of business. Management believes it has
meritorious defenses in all such actions, and in any event, the amount of
damages, if such matters were decided adversely, would not have a material
adverse effect on Iron Mountain's financial condition or results of operations.
d. Other
The Company may be responsible for environmental clean-up costs at certain
of its facilities. Estimated costs of approximately $800 to perform the
necessary remediation work are included in other liabilities in the
accompanying consolidated balance sheets. Management believes the ultimate
outcome of the above issue will not have a material adverse effect on Iron
Mountain's financial condition or results of operations.
F-19
<PAGE>
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. Related Party Transactions
Iron Mountain leases space to an affiliated company, Schooner Capital
Corporation ("Schooner") for its corporate headquarters located in Boston,
Massachusetts. For the years ended December 31, 1995, 1996 and 1997, Schooner
paid Iron Mountain rent totaling $49, $68 and $85, respectively. Iron Mountain
leases one facility from a landlord which is a related party. Total rental
payments for the years ended December 31, 1995, 1996 and 1997, for this
facility totaled $93, $94 and $99, respectively. In the opinion of management,
both of these leases were entered into at market prices and terms.
11. Profit Sharing Retirement Plan
The Company has a defined contribution plan which covers all non-union
employees meeting certain service requirements. Eligible employees may elect to
defer from 1% to 15% of compensation per pay period up to the amount allowed by
the Internal Revenue Code. The Company makes matching contributions based on
the amount of the employee contribution and years of credited service,
according to a schedule as described in the plan documents. The Company has
expensed $276, $419 and $642 for the years ended December 31, 1995, 1996 and
1997, respectively.
12. Noncash Transactions
As part of the consideration paid for the acquisitions completed in 1997,
the Company issued common stock and options with fair values of $85,863 and
$3,071, respectively. In addition, $3,086 of property and equipment, destroyed
in a fire, was transferred to receivable from insurance company.
13. Subsequent Events
a. Completed Acquisitions
Through February 20, 1998, the Company acquired four records management
businesses for approximately $13,000 in cash. All of these acquisitions were
accounted for as purchases. In addition, the Company completed the previously
announced Arcus merger. Total consideration for the Arcus merger was
approximately $154,000, including approximately $55,000 representing the
combined value of 1,438,012 shares of common stock and options to purchase
approximately 590,000 shares of common stock. The balance consists of payments
in cash and assumed indebtedness. The Arcus merger will be accounted for as a
purchase.
b. Pending Acquisition (Unaudited)
In February 1998, the Company signed a definitive agreement to acquire
InterMation, Inc. for approximately $28,000, including shares of the Company's
common stock valued at approximately $18,000 (subject to adjustment), and the
assumption of certain debt. This acquisition of InterMation will be accounted
for as a purchase and is expected to close in the first half of 1998.
c. Increase in Authorized Shares
On January 5, 1998, the stockholders voted to increase the authorized
shares of common stock to 100 million from 20 million.
F-20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Iron Mountain Incorporated
We have audited the consolidated balance sheets of Arcus Technology Services,
Inc. as of December 31, 1996 and 1997, and the related consolidated statements
of operations, stockholders' equity and cash flows for the five-month period
ended December 31, 1995, and each of the two years in the period ended December
31, 1997. We have also audited the consolidated statements of operations,
stockholders' equity and cash flows of Arcus, Inc. (Predecessor Company) for
the seven-month period ended July 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Arcus Technology
Services, Inc. at December 31, 1996 and 1997, and the consolidated results of
its operations and cash flows for the five-month period ended December 31,
1995, and each of the two years in the period ended December 31, 1997, and the
consolidated results of operations and cash flows of Arcus, Inc. (Predecessor
Company) for the seven-month period ended July 31, 1995, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
February 23, 1998
F-21
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1997
------------- -------------
<S> <C> <C>
ASSETS (Note 4)
Current Assets:
Cash ........................................................... $ 1,687,101 $ 1,577,047
Accounts receivable, less allowance for doubtful accounts of
$156,227 and $168,413, respectively............................ 14,008,613 18,196,492
Inventory ...................................................... 371,715 295,076
Prepaid expenses and other current assets ...................... 1,018,281 1,078,564
----------- -----------
Total Current Assets ........................................ 17,085,710 21,147,179
Property and Equipment, at cost:
Land, buildings, and leasehold improvements .................... 6,266,886 6,993,068
Vault equipment and vehicles ................................... 8,819,780 11,586,199
Furniture and other equipment .................................. 3,958,006 4,285,515
----------- -----------
19,044,672 22,864,782
Less accumulated depreciation ............................... 3,649,357 6,673,457
----------- -----------
Property and Equipment, net ..................................... 15,395,315 16,191,325
Cost In Excess of Net Assets Acquired, net of accumulated
amortization of $2,310,903 and $4,668,206, respectively......... 55,367,074 56,861,518
Deferred Income Taxes (Note 6) .................................. -- 2,212,000
Other Assets .................................................... 609,649 946,818
----------- -----------
Total Assets ................................................ $88,457,748 $97,358,840
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................... $ 5,796,844 $ 4,941,648
Accrued payroll ................................................ 2,441,433 3,540,504
Other accrued liabilities ...................................... 1,344,001 1,256,315
Deferred revenue ............................................... 3,469,265 3,626,869
Due to parent (Note 2) ......................................... 1,335,702 2,894,475
Current portion of long-term debt .............................. 3,218,794 3,988,269
----------- -----------
Total Current Liabilities ................................... 17,606,039 20,248,080
Long-Term Debt (Note 4) ......................................... 39,513,473 37,388,280
Note Payable to Parent (Note 4) ................................. -- 1,500,000
Deferred Income Taxes (Note 6) .................................. 501,000 --
Other Liabilities ............................................... 226,700 378,595
Commitments and Contingencies (Notes 3 and 9)
Stockholders' Equity:
Common stock, $.01 par value:
Authorized shares--5,000,000
Issued and outstanding shares--3,205,263 and 3,325,229,
respectively ................................................. 32,052 33,252
Capital in excess of par value ................................ 26,918,088 36,182,170
Retained earnings .............................................. 3,619,939 1,607,624
Translation adjustment ......................................... 40,457 20,839
----------- -----------
Total Stockholders' Equity .................................. 30,610,536 37,843,885
----------- -----------
Total Liabilities and Stockholders' Equity .................. $88,457,748 $97,358,840
=========== ===========
</TABLE>
See accompanying notes.
F-22
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Five-months
Seven-months Ended Year Ended Year Ended
Ended July 31, December 31, December 31, December 31,
1995 1995 1996 1997
---------------- -------------- -------------- ---------------
(Predecessor)
<S> <C> <C> <C> <C>
Revenues:
Storage and transport ....................... $21,401,465 $16,158,490 $43,671,062 $ 51,606,825
Other ....................................... 4,276,499 4,519,868 22,310,314 43,737,980
----------- ----------- ----------- ------------
Total Revenues ........................... 25,677,964 20,678,358 65,981,376 95,344,805
Operating Expenses:
Cost of services rendered ................... 11,345,153 9,450,781 32,737,753 53,322,935
Selling and administrative expenses ......... 8,730,900 6,632,234 21,591,852 27,328,667
Depreciation and amortization ............... 1,532,211 1,601,464 4,436,529 6,017,498
Stock compensation expense (Note 5) ......... -- -- -- 8,067,014
----------- ----------- ----------- ------------
Total Operating Expenses ................. 21,608,264 17,684,479 58,766,134 94,736,114
----------- ----------- ----------- ------------
Operating Income ............................. 4,069,700 2,993,879 7,215,242 608,691
Interest (Income) Expense, net ............... (336,556) 1,128,963 2,668,719 3,317,006
----------- ----------- ----------- ------------
Income (Loss) Before Income Taxes ............ 4,406,256 1,864,916 4,546,523 (2,708,315)
Provision (Benefit) for Income Taxes
(Note 6) .................................... 1,852,000 807,500 1,984,000 (696,000)
----------- ----------- ----------- ------------
Net Income (Loss) ............................ $ 2,554,256 $ 1,057,416 $ 2,562,523 $ (2,012,315)
=========== =========== =========== ============
</TABLE>
See accompanying notes.
F-23
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Capital in
---------------------- Excess of Retained Translation
Shares Amount Par Value Earnings Adjustment Total
----------- ---------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Arcus, Inc. (Predecessor):
Balances at December 31, 1994 ....... 7,770,697 $77,707 $ 2,025,519 $ 14,750,715 $ (487,167) $ 16,366,774
Currency translation adjustment..... -- -- -- -- 9,440 9,440
Exercise of stock options .......... 10,000 100 42,400 -- -- 42,500
Net income ......................... -- -- -- 2,554,256 -- 2,554,256
--------- ------- ----------- ------------ ---------- ------------
Balances at July 31, 1995 ........... 7,780,697 $77,807 $ 2,067,919 $ 17,304,971 $ (477,727) $ 18,972,970
========= ======= =========== ============ ========== ============
Arcus Technology Services, Inc.:
Issue equity at August 1, 1995 ...... 2,191,150 $21,911 $17,507,289 $ -- $ -- $ 17,529,200
Currency translation adjustment..... -- -- -- -- (12,952) (12,952)
Net income ......................... -- -- -- 1,057,416 -- 1,057,416
--------- ------- ----------- ------------ ---------- ------------
Balances at December 31, 1995 ....... 2,191,150 21,911 17,507,289 1,057,416 (12,952) 18,573,664
Issuances of common stock in
connection with acquisitions
(Note 3) .......................... 333,007 3,330 2,299,282 -- -- 2,302,612
Sales of common stock to
Parent (Note 3) ................... 681,106 6,811 7,111,517 -- -- 7,118,328
Currency translation adjustment -- -- -- -- 53,409 53,409
Net income ......................... -- -- -- 2,562,523 -- 2,562,523
--------- ------- ----------- ------------ ---------- ------------
Balances at December 31, 1996 ....... 3,205,263 32,052 26,918,088 3,619,939 40,457 30,610,536
Issuances of common stock
(Note 3) .......................... 4,038 41 9,963 -- -- 10,004
Sales of common stock to
Parent (Note 3) ................... 115,928 1,159 1,187,105 -- -- 1,188,264
Stock compensation (Note 5) ........ -- -- 8,067,014 -- -- 8,067,014
Currency translation adjustment..... -- -- -- -- (19,618) (19,618)
Net loss ........................... -- -- -- (2,012,315) -- (2,012,315)
--------- ------- ----------- ------------ ---------- ------------
Balances at December 31, 1997 ....... 3,325,229 $33,252 $36,182,170 $ 1,607,624 $ 20,839 $ 37,843,885
========= ======= =========== ============ ========== ============
</TABLE>
See accompanying notes.
F-24
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Seven-months Five-months Ended Year Ended Year Ended
Ended July 31, December 31, December 31, December 31,
1995 1995 1996 1997
---------------- ------------------- ---------------- ----------------
(Predecessor)
<S> <C> <C> <C> <C>
Operating Activities:
Net income (loss) ............................... $ 2,554,256 $ 1,057,416 $ 2,562,523 $ (2,012,315)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization .................. 1,532,211 1,601,464 4,436,529 6,017,498
Stock compensation expense ..................... -- -- -- 8,067,014
Deferred tax provision (benefit) ............... (124,000) (47,000) 237,000 (2,823,000)
Provision for losses on accounts
receivable .................................... 21,000 15,000 56,000 12,000
(Gain) loss on disposal of assets .............. 3,961 185 (18,110) 15,816
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable .......................... (138,515) (1,614,511) (2,988,055) (2,822,514)
Inventory .................................... (64,996) (18,239) (65,232) 76,330
Prepaid expenses ............................. 42,197 (341,081) (72,961) 176,684
Other assets ................................. 11,773 (7,315) (96,822) (454,056)
Accounts payable ............................. 41,491 1,388,888 1,970,283 (1,082,938)
Accrued and other liabilities ................ 332,906 719,665 (330,112) 1,011,215
Deferred revenue ............................. 87,259 48,263 254,460 157,604
------------ ------------- ------------- -------------
Net Cash Provided by Operating Activities. ....... 4,299,543 2,802,735 5,945,503 6,339,338
Investing Activities:
Acquisitions, net of cash acquired .............. -- (48,751,173) (15,128,889) (7,078,801)
Purchase of property and equipment .............. (1,831,165) (2,290,595) (5,280,173) (4,124,643)
Funds invested with Parent ...................... (1,515,060) -- -- --
Sales of property and equipment ................. 13,087 -- 1,808,959 --
Other investing activities ...................... 293 (8,085) (68,568) (48,151)
------------ ------------- ------------- -------------
Net Cash Used for Investing Activities ........... (3,332,845) (51,049,853) (18,668,671) (11,251,595)
Financing Activities:
Proceeds from sales of common stock ............. 42,500 17,529,200 7,118,328 1,198,268
Proceeds from issuances of long-term debt ....... -- 30,000,000 9,883,000 7,919,152
Payments on long-term debt ...................... (131,071) (1,580,544) (3,540,918) (4,138,896)
Increase (decrease) in due to parent ............ -- 13,500 1,322,202 1,427,773
Net increase (decrease) in revolving line of
credit ......................................... -- 3,000,000 (1,100,000) (1,600,000)
------------ ------------- ------------- -------------
Net Cash Provided by (Used for) Financing
Activities ...................................... (88,571) 48,962,156 13,682,612 4,806,297
Effect of Exchange Rate Changes on Cash .......... 1,093 (2,220) 14,839 (4,094)
------------ ------------- ------------- -------------
Net Increase (Decrease) in Cash .................. 879,220 712,818 974,283 (110,054)
Cash at Beginning of Period ...................... 56,636 -- 712,818 1,687,101
------------ ------------- ------------- -------------
Cash at End of Period ............................ $ 935,856 $ 712,818 $ 1,687,101 $ 1,577,047
============ ============= ============= =============
</TABLE>
See accompanying notes.
F-25
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
Arcus Technology Services, Inc. (ATSI) is an 81% owned subsidiary of
United Acquisition Company (UAC or the Parent) which is an 80% owned subsidiary
of Arcus Group, Inc. (AGI). ATSI was formed in June 1995 to acquire all of the
outstanding stock of Arcus, Inc. (Arcus or Predecessor), effective after the
close of business on July 31, 1995. The consideration given was cash and the
acquisition was accounted for using the purchase method. The Predecessor
financial statements have been prepared using the historical cost of its assets
and have not been adjusted to reflect the purchase by ATSI.
During 1996, through its wholly-owned subsidiaries Arcus Data Security,
Inc. (ADSI) and Arcus Staffing Resources, Inc. (ASRI), ATSI made eight
acquisitions for a combined purchase price of approximately $23.3 million, net
of cash acquired. During 1997, through ASRI, ATSI made one acquisition for a
purchase price of approximately $4.9 million, net of cash acquired. See Note 3.
The financial statements include the accounts of ATSI and its
subsidiaries, Arcus, ADSI, ASRI, Professional Solutions, Inc., Trinity Holdings
Corp. (formerly Trinity Partners, Inc.), Wolf Advisory International, Ltd.,
Wolf Advisory International, Inc., and Towler Data Services, Inc. and ADSI's
U.K. subsidiary, Arcus Data Security Limited (ADSL). All intercompany
transactions between ATSI and its subsidiaries have been eliminated. The term
"Company" includes ATSI, Arcus, ADSI, ADSL, ASRI, Professional Solutions, Inc.,
Trinity Holdings Corp., Wolf Advisory International, Ltd., Wolf Advisory
International, Inc., and Towler Data Services, Inc. taken together, except
where otherwise indicated. The Predecessor financial statements include the
accounts of Arcus, and its wholly owned subsidiaries, ADSI and ADSL.
On January 6, 1998, Iron Mountain Incorporated (IMTN) acquired all of the
outstanding common stock, preferred stock, common stock options and common
stock warrants of AGI, UAC and ATSI for approximately $96 million in cash,
1,438,012 shares of IMTN common stock and options to purchase 590,000 shares of
IMTN common stock. A portion of the purchase price was used to extinguish all
of ATSI's long-term debt as of the acquisition date (see Note 4). As part of
and immediately preceding the acquisition, UAC and ATSI were merged into AGI.
AGI was then merged into IMTN. Additionally, certain assets of UAC and AGI
unrelated to ATSI were distributed to the AGI stockholders immediately prior to
the sale.
The Company provides data security and technical staffing services to
information technology departments of its business customers. Data security
services involve the secure transport, handling and storage of duplicate or
back-up computer data. Recognizing that customers' data centers are vulnerable
to natural disasters as well as other types of disasters, including terrorism
and employee sabotage, ATSI provides services that enable businesses to recover
successfully from such disasters. To protect against loss of information in
such a disaster, the Company provides secure off-site storage of duplicate data
processing records whereby computer tapes and cartridges are transported on a
regular basis by specially equipped vehicles and stored in climate controlled,
concrete, steel-reinforced vaults. If a disaster occurs, the Company delivers
the duplicate data quickly to a specified location, often a hot site (an
alternate data processing site for use by businesses when their normal
processing center is not available because of a disaster). The Company's
disaster recovery services also include assisting its customers in the testing
of their disaster recovery plans. As part of its data security services, the
Company also performs media library relocations. In addition, the Company sells
a variety of brand name data products to its customers. Through its staffing
services, the Company helps customers meet their personnel needs by supplying
information technology professionals on either a contract or temporary basis.
The Company also recruits information technology professionals for permanent
placement with its customers. Approximately 97%, 96%, 81% and 64% of the
Company's revenue during the seven-month period ended July 31, 1995, the
five-month period ended December 31, 1995 and the years ended December 31, 1996
and 1997, respectively, came from data security services. The Company serves
customers from 45 locations in the United States and one location in the United
Kingdom.
The Company provides services, generally on a contract basis, to a
diversified customer base, with no single customer accounting for more than 5%
of revenue. A significant portion of the Company's data security revenue is
billed monthly in advance and trade accounts receivable are due within 30 days.
Accounts receivable are not collateralized.
F-26
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies
Inventory
Data products inventory purchased for resale are carried at the lower of
cost, which approximates first-in, first-out, or market. However, items are
generally purchased for a specific customer and shipped directly to the
customer by the supplier.
Property and Equipment
Property and equipment consisting primarily of land, buildings, vault
equipment, and leasehold improvements are carried at cost and are depreciated
using the straight-line method over their estimated useful lives. The estimated
useful lives are: buildings-40 years, vault equipment 4-20 years, vehicles 3-7
years, furniture and other equipment 3-10 years. Leasehold improvements are
amortized over the shorter of their useful lives or the applicable lease term.
The Company expenses repair and maintenance costs as incurred unless they
significantly extend the remaining life of the asset, in which case they are
capitalized. Repair and maintenance expense for facilities and equipment,
including vehicles, was $588,000, $495,000, $1,228,000 and $1,290,000 for the
seven-month period ended July 31, 1995, the five-month period ended December
31, 1995 and the years ended December 31, 1996 and 1997, respectively.
Costs in Excess of Net Assets Acquired
Costs in excess of net assets acquired arose from ATSI's acquisition of
Arcus in 1995 and ATSI's eight acquisitions in 1996 and one acquisition in 1997
(see Note 3). These costs are being amortized over 25 years on a straight-line
basis.
Other Assets
Other assets are comprised of long-term deposits, intangible assets, and
deferred organization costs. Intangible assets, consisting mainly of covenants
not-to-compete, are amortized over three to five years on a straight-line
basis. Related amortization expense was $75,000, $96,000, $212,000 and $111,000
for the seven-month period ended July 31, 1995, the five-month period ended
December 31, 1995 and the years ended December 31, 1996 and 1997, respectively.
Foreign Currency Translation
The Company's only international operation is in the United Kingdom. The
functional currency of that operation is the Pound Sterling. The translation of
this currency into U.S. Dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for revenue and
expense accounts using an average exchange rate during the period. Foreign
currency transaction gains and losses, which have not historically been
material, are charged to operations as incurred.
Revenues
Storage and transport revenues include monthly billings to customers for
basic data security services. Other revenues include specialized data security
services, data product sales and staffing services revenues. Certain storage
and transport services are billed in advance of the delivery of service. These
billings are accounted for as deferred revenue on the Company's balance sheet
until the service is delivered, at which time the revenue is recognized. See
Note 11 for revenues by business segment.
Included in other revenues are product sales, net of product costs,
totaling $834,000, $665,000, $1,800,000 and $2,259,000 for the seven-month
period ended July 31, 1995, the five-month period ended December 31, 1995 and
the years ended December 31, 1996 and 1997, respectively. Product sales are
presented on a net basis since
F-27
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies (continued)
the Company generally functions as a sales representative of the product
manufacturers and the Company seldom receives or takes title to the products.
Gross product sales were $4,502,000, $4,367,000, $10,465,000 and $13,189,000
for the seven-month period ended July 31, 1995, the five-month period ended
December 31, 1995 and the years ended December 31, 1996 and 1997, respectively.
Interest Rate Cap Agreement
The Company entered into an interest rate cap agreement to effectively
limit the interest rate which it pays on a portion of its long-term debt. The
interest rate differential to be received, if any, is accrued as a reduction in
interest expense. The fair value of the cap is not recognized in the financial
statements.
Income Taxes
For tax return purposes, the Company is included in AGI's consolidated
federal income tax return. The Company's tax expense (benefit) and payable is
determined on a separate return basis at maximum tax rates without regard to
graduated rates. Accordingly, the Company's federal income taxes payable
represents an intercompany payable to Parent at December 31, 1996 and 1997, and
is shown as Due to Parent on the Consolidated Balance Sheets.
Deferred income taxes recorded using the liability method reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes.
Stock Options
The Company has elected to follow APB No. 25, "Accounting for Stock Issued
to Employees" and related Interpretations in the primary financial statements
and provide the supplementary disclosures required by SFAS No. 123, "Accounting
for Stock-Based Compensation" (see Note 5).
Reclassifications
Certain 1995 and 1996 amounts have been reclassified in order to conform
to the 1997 presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. Acquisitions
In August 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of Professional Solutions, Inc. (PSI), a company
operating in the information technology staffing industry in northern
California, Oregon and Washington state for approximately $4,923,000, net of
cash acquired. The purchase price consisted of net cash payments of
approximately $3,923,000, a subordinated note payable to the seller for
$1,000,000 and 60,000 options to purchase the Company's common stock at $16.41
per share. The cash payment was partially financed by issuance of a $1.5
million subordinated convertible note payable to UAC (see Note 4).
Additionally, if certain profitability targets are met, the Company could be
obligated to make an additional cash
F-28
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Acquisitions (continued)
payment of up to $750,000. The acquisition was accounted for using the purchase
method. Results of operations and cash flows of the acquired company are
included in the consolidated statements of operations and cash flows for the
period from the purchase date through December 31, 1997.
During 1996, the Company completed eight acquisitions in the data security
and information technology staffing industries. Each acquisition was accounted
for using the purchase method. For each acquisition, results of operations and
cash flows of the acquired company are included in the statement of operations
and cash flows for the period from the purchase date. In connection with
certain of the acquisitions, the Company issued shares of its common stock to
the sellers as partial consideration and sold shares of its common stock to its
Parent to assist in financing the cash portion of the acquisitions. The fair
value of the Company's stock issued or sold in connection with the acquisitions
was determined by the Board of Directors of the Company based on formulas used
in similar transactions.
On June 19, 1996, the Company acquired the stock of Wolf Advisory
International, Inc. and Wolf Advisory International, Ltd. and acquired
substantially all of the operating assets and assumed certain liabilities of
Computer Plus Temporaries, Inc. (collectively Wolf), a provider of contract and
temporary information technology staffing services in eastern Pennsylvania and
northern Florida, for approximately $10,931,000, net of cash acquired. The
purchase price was comprised of approximately $6,240,000, of net cash payments,
228,242 shares of the Company's common stock (225,111 estimated shares recorded
in 1996 and 3,131 shares recorded in 1997 upon final determination), and a
$3,156,000 obligation to the seller. Cash payment of the obligation to the
seller was made in March 1997. Approximately $1,188,000 of this obligation was
funded through a sale of common stock to UAC.
On October 30, 1996, the Company acquired the stock of Trinity Partners,
Inc. (Trinity), a provider of contract information technology staffing services
in northern California, for approximately $2,510,000, net of cash acquired. The
purchase price was comprised of net cash payments of approximately $2,330,000,
a subordinated note payable to the seller for $180,000, and immediately vested
five-year options to purchase 15,000 shares of the Company's common stock at
$16.55 per share (see Note 5). In June 1997, the Company sold the operating
assets of the non-staffing portion of Trinity's business to the former owner of
Trinity and other former Trinity employees for a $400,000 five year note,
bearing interest at 12% with all principal due at maturity. In conjunction with
the sale, and in consideration of a cash payment of $250,000 to the former
owner, the former owner and the Company signed a mutual release. Among the
Company's obligations released were any contingent consideration due to the
former owner under the original agreement to acquire Trinity, the $180,000
subordinated note payable to the former owner, certain stock options held by
the former owner and certain other agreements signed with the former owner. The
Company recorded a loss of approximately $400,000 on this transaction.
On November 5, 1996, the Company acquired substantially all of the
operating assets of the data security business of Zurich Data Corporation, a
two-facility provider of such services in northern New Jersey and the New York
City metropolitan area, for approximately $5,146,000. The purchase price was
comprised of approximately $3,570,000 in cash, 100,000 shares of the Company's
common stock, a 10-year warrant for the purchase of 10,000 additional shares of
the Company's common stock at $8.00 per share, and ten annual payments having a
net present value of approximately $859,000.
During 1996, the Company made five additional acquisitions, primarily in
the data security industry, for a combined purchase price of $4,703,000. The
combined purchase price was comprised of cash payments of $2,989,000, notes
payable and other obligations to sellers totaling $1,665,000, 7,896 shares of
the Company's common stock, and assumption of specific liabilities.
4. Long-Term Debt
In connection with the 1995 acquisition of Arcus by UAC, the Company
entered into a $52 million credit facility (the Facility). Under the Facility,
the Company received $18 million under a five-year term loan agreement
F-29
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
4. Long-Term Debt (continued)
(Term A Loan), $12 million under a seven year term loan agreement (Term B
Loan), a commitment for a five-year $7.5 million revolving line of credit (the
Revolver), a seven-year $12.5 million acquisition loan facility (the
Acquisition Facility) and a five-year $2 million additional line of credit (the
Swingline Loan). In December 1996, the Company amended the Facility. As a
result, the total acquisition loan commitment was increased by $20 million and
the maturity date of this commitment was extended by one year. On June 11,
1997, the Company amended its Credit agreement to increase the size of the
Revolving Facility from $7.5 million to $11 million and reduced the size of the
Acquisition Facility by $3.5 million.
Under the Facility, the Company may, at its option and subject to certain
restrictions, designate certain borrowings as either "Base Rate" or
"Eurodollar" borrowings. This designation determines the interest rates which
ATSI pays under the agreement. The Base Rate is defined as the higher of the
bank's prime rate (8.5% at December 31, 1997) or 1/2% over the US Federal Funds
Rate (8.5% at December 31, 1997) plus an applicable margin interest rate. The
Eurodollar rate is defined as the London Interbank Offering Rate (LIBOR)
(5.6875% at December 31, 1997) plus an applicable margin spread. Base Rate
borrowings bear interest at the Base Rate plus 1% to 1.5% and Eurodollar
borrowings bear interest at LIBOR plus 2.5% to 3%.
The Facility requires mandatory repayments of term borrowings from the
proceeds that result from specified types of transactions. Additionally, excess
cash flow, as defined, is to be applied to reduce borrowings. Voluntary
prepayments of principal are also allowed under the Facility, with $750,000 and
$500,000 of such prepayments made during 1996 and 1997, respectively. Both
mandatory and voluntary payments reduce the outstanding balances and future
repayments under the Term A Loan, Term B Loan and Acquisition Facility on a pro
rata basis.
The Facility subjects the Company to financial covenants including
restrictions on mergers and acquisitions of businesses; limitations on lease
and rental expenses incurred, intercompany indebtedness, loans to employees,
and capital expenditures; and maintenance of specified levels of profitability
and cash flows, both in absolute terms and in relation to interest and other
fixed charges. The Facility is collateralized by substantially all of the
assets of the Company.
In connection with the acquisition of PSI in 1997 (see Note 3), ATSI
issued a note payable to the Seller of $1,000,000 which remains outstanding at
December 31, 1997. Additionally, $2,793,000 of the net cash payments of
$3,923,000 for PSI were financed through the Company's Acquisition Facility and
$1,500,000 of the net cash payments were financed through a note payable to
UAC.
In connection with five of the acquisitions completed by ATSI during 1996
(see Note 3), the Company issued notes payable and incurred other long-term
obligations (including contingent purchase price obligations) of which
approximately $5,485,000 and $1,886,000 is outstanding at December 31, 1996 and
1997, respectively. Of these amounts, $4,405,000 and $986,000 are due to
individuals who are shareholders, employees, or consultants of the Company at
December 31, 1996 and 1997, respectively. These obligations bear interest
annually at rates ranging from 5% to 9%. An obligation for $1,040,000 and
$900,000 at December 31, 1996 and 1997, respectively, is a demand obligation,
guaranteed by a bank letter of credit for the same amount expiring on February
3, 1998, which the Company plans to refinance, if required, using the Revolver
and, therefore, has been classified as a long-term liability.
On August 17, 1995, the Company paid $20,250 to enter into an interest
rate cap agreement with a commercial bank having a notional principal of $15
million. This agreement effectively entitles the Company to receive from the
bank, certain payments, if the LIBOR rate applicable to Eurodollar borrowings
exceeds 8.9375%. The interest rate cap agreement expired on September 5, 1997.
F-30
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
4. Long-Term Debt (continued)
Long-term debt is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
Term A Loan, increasing quarterly principal payments over a four-year
period beginning March 31, 1996 .................................... $14,316,000 $11,220,000
Term B Loan, nominal quarterly principal payments for the five-year
period beginning September 30, 1995 with the balance due in equal
quarterly installments for the following two years ................. 10,839,000 10,663,000
Acquisition Facility, increasing quarterly principal payments over a
four-year period starting September 30, 1999 ....................... 9,725,000 15,939,000
Revolver, principal due five years from July 31, 1995, with the
Company having the option to extend for an additional three years
with bank approval ................................................. 1,900,000 300,000
Acquisition notes and obligations ................................... 5,485,000 2,886,000
7% mortgage note payable in quarterly principal and interest
installments, maturing April 2001 .................................. 441,000 355,000
Capital lease obligations ........................................... 26,000 13,000
----------- -----------
42,732,000 41,376,000
Less current portion ................................................ 3,219,000 3,988,000
----------- -----------
$39,513,000 $37,388,000
=========== ===========
</TABLE>
On January 6, 1998, in connection with the acquisition of the Company by
IMTN, the Term A Loan, Term B Loan, Acquisition Facility, Revolver and mortgage
note payable were repaid in full. In addition, the $1,500,000 note payable to
UAC was cancelled. Of the $2,886,000 in acquisition obligations outstanding at
December 31, 1997, $133,000 matures in 1998, $144,000 matures in 1999, $156,000
matures in 2000, $1,993,000 matures in 2001 and $460,000 matures thereafter.
Cash payments for interest during the seven-month period ended July 31,
1995, the five-month period ended December 31, 1995 and the years ended
December 31, 1996 and 1997 were $35,000, $913,000, $3,131,000 and $3,645,000,
respectively. At December 31, 1996 and 1997, the fair value of the Company's
long-term debt approximated its carrying value.
5. Stock Option Plans
The Company's 1995 Stock Option Plan reserves 340,000 and 455,000 shares
at December 31, 1996 and 1997, respectively, of authorized but unissued common
stock for sale or award to directors, officers, and key employees as stock
options, stock appreciation rights, restricted stock awards or performance
share awards. Both nonqualified and incentive stock options (ISO's) can be
granted and in the case of an ISO, the purchase price cannot be less than the
fair market value at grant date.
Options expire on the date set by the Plan Administration Committee of the
Company's Board of Directors (the Committee), but in no case later than ten
years from the grant date and, in some cases, no later than five years from the
grant date for ISO's.
During 1995, 1996 and 1997, the Company granted nonqualified stock options
to certain directors and key members of management. In general, the options
granted are 20% vested at the grant date with the remaining options
F-31
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Stock Option Plans (continued)
becoming vested semi-annually over a four year period. Vested options only
become exercisable if either UAC's ownership of ATSI or AGI's ownership of UAC
falls below 80%. No options were exercisable at December 31, 1996 or 1997. As
of December 31, 1997, no shares had been exercised or canceled.
In connection with the January 6, 1998 acquisition of the Company by IMTN,
the Company's options were exchanged for IMTN options with the same intrinsic
value and with exercisability at the earlier of the original vesting dates in
the Company's option or at termination of employment, in which case they become
fully exercisable. As a result of the approval of the final acquisition
agreement in November 1997, the Company recorded $8,067,014 of compensation
expense equal to the intrinsic value in the Company's options based on the
exchange value at the acquisition date.
The following is a summary of employee stock option transactions under the
1995 Stock Option Plan:
<TABLE>
<CAPTION>
Weighted
Number Option Price Average Option
of Shares Per Share Price per Share
----------- ----------------- ----------------
<S> <C> <C> <C>
Granted after July 31, 1995 .............. 198,100 $ 8.00 $ 8.00
-------
Outstanding at December 31, 1995 ......... 198,100 $ 8.00 $ 8.00
Granted in 1996 .......................... 88,900 $10.24 - $11.03 $ 10.71
-------
Outstanding at December 31, 1996 ......... 287,000 $ 8.00 - $11.03 $ 8.84
Granted in 1997 .......................... 150,590 $10.06 - $16.41 $ 12.83
Forfeited in 1997 ........................ (13,345) $8.00 - $11.03 $ 10.29
-------
Outstanding at December 31, 1997 ......... 424,245 $8.00 - $16.41 $ 10.21
=======
</TABLE>
The weighted average remaining contractual life for ATSI options
outstanding at December 31, 1996 and 1997 was approximately nine years and
eight years, respectively.
A total of 365,000 and 465,000 shares of common stock were reserved for
issuance under the 1995 Stock Option Plan and the acquisition warrant (see Note
3) at December 31, 1996 and 1997, and the acquisition options (see Note 3) at
December 31, 1996.
Pro forma information regarding net income (loss) is required by SFAS No.
123, and has been determined as if the Company had accounted for its employee
share options under the fair value method. The fair value for options granted
($0 for 1995, 1996 and 1997) was estimated at the date of grant using a minimum
value option pricing model with the following assumptions for 1995, 1996 and
1997: a risk-free interest rate of 5.6%, 5.6% and 6.3%, respectively; no
dividends expected to be declared; volatility factor of zero for the expected
price of the Company's common stock as it is not publicly traded; and a
weighted-average expected life of the options of 2.3 years.
F-32
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Income Taxes
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1997
------------- --------------
<S> <C> <C>
Deferred tax assets:
Stock compensation .......................................................... $ -- $ 3,163,000
Accrued liabilities ......................................................... 166,000 409,000
Other ....................................................................... 14,000 97,000
---------- ------------
180,000 3,669,000
Deferred tax liabilities:
Costs in excess of net assets acquired and other assets ..................... (455,000) (875,000)
Property and equipment ...................................................... (46,000) (161,000)
---------- ------------
(501,000) (1,036,000)
---------- ------------
Net deferred tax assets (liabilities) ........................................ $ (321,000) $ 2,633,000
========== ============
</TABLE>
Current deferred tax assets totaling $180,000 and $421,000 as of December
31, 1996 and 1997, respectively, are included in prepaid expenses and other
current assets on the consolidated balance sheets.
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
Seven-months Five-months
Ended Ended Year Ended Year Ended
July 31, December 31, December 31, December 31,
1995 1995 1996 1997
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Current:
Federal ................................. $1,532,000 $ 678,500 $1,337,000 $ 1,648,000
State ................................... 444,000 176,000 410,000 479,000
---------- --------- ---------- ------------
1,976,000 854,500 1,747,000 2,127,000
Deferred ................................. (124,000) (47,000) 237,000 (2,823,000)
---------- --------- ---------- ------------
$1,852,000 $ 807,500 $1,984,000 $ (696,000)
========== ========= ========== ============
</TABLE>
The effective tax rates differ from the federal statutory rates primarily
as a result of the following:
<TABLE>
<CAPTION>
Seven-months Five-months
Ended Ended Year Ended Year Ended
July 31, December 31, December 31, December 31,
1995 1995 1996 1997
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Federal tax at statutory rate ............... 34.0% 34.0% 34.0% (34.0)%
State tax provision ......................... 6.6 6.2 6.0 (3.8)
Goodwill amortization ....................... -- -- -- 8.3
Other non-deductible expenses ............... 1.4 3.1 3.6 3.8
---- ---- ---- -----
42.0% 43.3% 43.6% (25.7)%
==== ==== ==== =====
</TABLE>
Cash payments for income taxes during the seven-month period ended July
31, 1995, the five-month period ended December 31, 1995, the year ended
December 31, 1996 and the year ended December 31, 1997, were $1,961,000,
$720,000, $609,000, and $804,000, respectively.
F-33
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. Retirement Plans
On August 1, 1995, the Company adopted the Arcus, Inc. 401(k) Profit
Sharing Plan (the Plan). Employees of the Company and its subsidiaries who
satisfy a six month service requirement as of open enrollment each January 1st
and July 1st participate in the Plan. Participants in the Plan may contribute
from 1% to 15% of their annual compensation. The Company matches one half of
employee contributions up to a total of 1.5% of their annual compensation.
Company matching expense, net of forfeitures, was $52,000, $132,000, and
$185,000, for the five-month period ended December 31, 1995, and the years
ended December 31, 1996 and 1997, respectively. Company matching expense
relating to a similar plan of the Predecessor's former parent was $75,000 for
the seven-month period ended July 31, 1995. The Company may also make an annual
voluntary contribution for all eligible employees, whether or not they elect a
salary deferral. The Company provided for a voluntary contribution in 1995,
1996, and 1997, to be funded in the following year, based upon a percentage of
participant compensation. Voluntary contribution expense, net of forfeitures,
for the five-month period ended December 31, 1995, and the years ended December
31, 1996 and 1997 was $147,000, $427,000, and $532,000, respectively. The
Predecessor had voluntary contribution expense for the seven-month period ended
July 31, 1995 of $212,000.
8. Related Party Transactions
During the seven-month period ended July 31, 1995, the Predecessor's
parent provided management, accounting and other administrative services to the
Company. The cost of such services is based upon standard charges for the
Company's relative use of the underlying services compared to the Parent's
other operating companies. Charges for these services were $255,000 for the
seven-month period ended July 31, 1995. During the seven-month period ended
July 31, 1995, insurance was purchased by the Predecessor's parent for the
parent's consolidated group. Policy premiums were charged to each company based
upon relative payroll, revenue, vehicles, property values or losses, depending
on the type of insurance coverage.
The Company leases twelve of its facilities from its former parent, a
stockholder of the Company (Note 9). The Company paid rental expense to its
former parent of $766,000, $554,000, $1,361,000 and $1,375,000 for the
seven-month period ended July 31, 1995, the five-month period ended December
31, 1995, and the years ended December 31, 1996 and 1997, respectively.
In January 1997, an employee of the Company purchased 907 shares of the
Company's common stock for $11.03 per share.
9. Commitments and Contingencies
As of December 31, 1997, the Company leases 29 vault facilities, 14
staffing offices and certain equipment under noncancelable operating lease
agreements. Twelve of the Company's vault facilities are leased from a single
landlord of which nine have fifteen-year terms beginning January 1, 1995, with
two five-year renewal options, providing for cost of living increases every
three years based upon the Consumer Price Index, with a 3.33% ceiling per year.
The remaining vault facilities are leased under leases which commenced June
1989 or later, and have primary lease terms ranging from four to twenty years,
generally with one or two five-year renewal options. During 1997, the Company
signed leases in regard to two vault facilities that were under construction at
December 31, 1997. These two leases each have fifteen-year terms that commenced
during 1998. With respect to vault facilities, the Company generally is
required to pay property tax, insurance, and facility maintenance expenses.
Staffing offices, located in multi-tenant commercial office buildings, have
primary lease terms ranging from one to five years, generally with no renewal
options. The Company has an irrevocable letter of credit of $50,000 expiring on
April 9, 1998 that supports an office lease obligation. Other operating leases
are for equipment and vehicles. Rental expense under operating leases,
including month-to-month rentals, was $2,293,000, $1,578,000, $4,409,000 and
$5,844,000 for the seven-month period ended July 31, 1995, the five-month
period ended December 31, 1995, and the years ended December 31, 1996 and 1997,
respectively.
F-34
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. Commitments and Contingencies (continued)
Future minimum rentals required under operating leases having an initial
or remaining noncancelable lease term in excess of one year as of December 31,
1997 are as follows:
<TABLE>
<S> <C>
1998 ................................. $ 5,791,865
1999 ................................. 5,273,024
2000 ................................. 4,716,059
2001 ................................. 3,696,412
2002 ................................. 3,227,004
Thereafter ........................... 20,983,452
-----------
Total minimum lease payments ......... $43,687,816
===========
</TABLE>
10. Business Segments
The following tables present data relating to the Company's revenues, cost
of services rendered, depreciation, operating income, identifiable assets and
capital expenditures by business segment:
<TABLE>
<CAPTION>
Seven-months Five-months
Ended Ended Year Ended Year Ended
July 31, December 31, December 31, December 31,
1995 1995 1996 1997
-------------- -------------- --------------- ---------------
(Predecessor)
<S> <C> <C> <C> <C>
Revenues
Data security ............................... $ 24,964,319 $ 19,867,759 $ 53,145,334 $ 60,735,198
Technical staffing .......................... 713,645 810,599 12,997,907 35,033,443
Intercompany eliminations ................... -- -- (161,865) (423,836)
------------ ------------ ------------ ------------
Total revenues .............................. $ 25,677,964 $ 20,678,358 $ 65,981,376 $ 95,344,805
============ ============ ============ ============
Cost of Services Rendered
Data security ............................... $ 10,874,499 $ 8,929,784 $ 23,554,642 $ 27,378,174
Technical staffing .......................... 470,654 520,997 9,344,976 26,368,597
Intercompany eliminations ................... -- -- (161,865) (423,836)
------------ ------------ ------------ ------------
Total costs of services rendered ............ $ 11,345,153 $ 9,450,781 $ 32,737,753 $ 53,322,935
============ ============ ============ ============
Depreciation and Amortization
Data security ............................... $ 1,431,684 $ 1,488,093 $ 3,907,825 $ 4,434,903
Technical staffing .......................... -- 1,575 219,586 1,196,860
Corporate ................................... 100,527 111,796 309,118 385,735
------------ ------------ ------------ ------------
Total depreciation and amortization ......... $ 1,532,211 $ 1,601,464 $ 4,436,529 $ 6,017,498
============ ============ ============ ============
Operating Income
Data security ............................... $ 5,958,390 $ 4,629,540 $ 12,149,565 $ 11,120,396
Technical staffing .......................... 242,991 114,709 442,812 (3,109,843)
Corporate ................................... (2,131,681) (1,750,370) (5,377,135) (7,401,862)
------------ ------------ ------------ ------------
Total operating income ...................... $ 4,069,700 $ 2,993,879 $ 7,215,242 $ 608,691
============ ============ ============ ============
</TABLE>
F-35
<PAGE>
ARCUS TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. Business Segments (continued)
<TABLE>
<CAPTION>
Seven-months Five-months
Ended Ended Year Ended Year Ended
July 31, December 31, December 31, December 31,
1995 1995 1996 1997
-------------- -------------- -------------- -------------
(Predecessor)
<S> <C> <C> <C> <C>
Capital Expenditures
Data security ...................... $1,785,025 $2,115,127 $ 4,363,670 $ 3,209,003
Technical staffing ................. -- 43,662 317,302 782,593
Corporate .......................... 46,140 131,806 599,201 133,047
---------- ---------- ----------- -----------
Total Capital expenditures ......... $1,831,165 $2,290,595 $ 5,280,173 $ 4,124,643
========== ========== =========== ===========
Identifiable Assets
Data security ...................... $85,687,540 $93,126,124
Technical staffing ................. 2,041,337 3,613,296
Corporate .......................... 728,871 619,420
----------- -----------
Total identifiable assets .......... $88,457,748 $97,358,840
=========== ===========
</TABLE>
11. Supplemental Pro Forma Acquisition Information (Unaudited)
The following supplemental pro forma information has been presented as if
the 1996 and 1997 acquisitions described in Note 3 occurred on January 1, 1996.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1997
-------------- ---------------
<S> <C> <C>
Revenues ........................................................... $89,208,750 $101,006,182
=========== ============
Operating income ................................................... $ 9,524,802 $ 1,102,135
=========== ============
Net income (loss) .................................................. $ 3,377,656 $ (1,793,259)
=========== ============
</TABLE>
F-36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
HIMSCORP, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of HIMSCORP, Inc.
and Subsidiaries as of December 31, 1995 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for the period from
February 1, 1995 (commencement of operations) to December 31, 1995 and for the
year ended December 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of HIMSCORP, Inc.
and Subsidiaries at December 31, 1995 and 1996, and the consolidated results of
their operations and their cash flows for the period from February 1, 1995
(commencement of operations) to December 31, 1995 and for the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
February 21, 1997
F-37
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
September 30,
1995 1996 1997
-------------- ------------- --------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ........................................ $ 87,314 $ 103,617 $ 228,535
Accounts receivable, net of allowance of $2,500 in 1995,
$64,394 in 1996 and $111,500 in 1997 ............................ 2,100,106 2,709,549 4,448,779
Prepaid expenses and deposits .................................... 133,415 182,568 590,125
Restricted certificates of deposit ............................... -- 3,000,000 3,500,000
----------- ----------- -----------
Total Current Assets ......................................... 2,320,835 5,995,734 8,767,439
Equipment and Leasehold Improvements:
Warehouse machinery and equipment ............................... 995,435 1,694,632 2,865,972
Office machinery and equipment .................................. 389,028 715,896 1,177,409
Vehicles ........................................................ 277,207 488,637 1,001,490
Leasehold improvements .......................................... 133,827 243,575 517,412
Furniture and fixtures .......................................... 45,719 42,943 79,776
----------- ----------- -----------
1,841,216 3,185,683 5,642,059
Less: accumulated depreciation ................................... 394,027 979,729 1,665,115
----------- ----------- -----------
Net Equipment and Leasehold Improvements ....................... 1,447,189 2,205,954 3,976,944
Other Assets:
Goodwill, net of accumulated amortization of $455,073 in
1995, $1,110,921 in 1996 and $1,952,639 in 1997.................. 13,187,687 18,049,189 27,351,923
Deferred financing costs, net of accumulated amortization of
$43,725 in 1995, $123,876 in 1996 and $223,716 in 1997........... 271,017 483,174 631,391
Organization costs, net of accumulated amortization of $49,227
in 1995, $122,304 in 1996 and $199,423 in 1997................... 252,526 309,460 330,677
Other ............................................................ 600 800 1,000
----------- ----------- -----------
Total Other Assets ........................................... 13,711,830 18,842,623 28,314,991
----------- ----------- -----------
Total Assets ................................................. $17,479,854 $27,044,311 $41,059,374
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ............................ $ 212,902 $ 3,092,805 $ 2,877,000
Accounts payable ................................................ 411,899 328,054 241,553
Accrued payroll and related expenses ............................ 249,327 497,117 862,079
Accrued expenses ................................................ 65,685 306,204 463,029
Income taxes payable ............................................ 114,757 149,174 --
Deferred revenue ................................................ 494,558 775,176 1,049,804
Deferred income taxes ........................................... 113,000 19,000 19,000
Other ........................................................... -- 400,000 300,000
----------- ----------- -----------
Total Current Liabilities .................................... 1,662,128 5,567,530 5,812,465
Long-Term Debt, Less Current Maturities .......................... 11,184,010 15,210,011 27,409,497
Deferred Income Taxes ............................................ 122,000 300,000 523,000
Other ............................................................ -- 300,000 --
Stockholders' Equity:
Preferred stock, $1.00 par value; authorized 5,000 shares;
no issued and outstanding shares .............................. -- -- --
Class A voting common stock, $0.01 par value; authorized
10,000 shares; issued and outstanding 8,050 shares ............ 81 81 81
Class B voting common stock, $0.01 par value; authorized
15,000 shares; issued and outstanding 12,522 shares in
1995, 13,155 shares in 1996 and 13,323 shares in 1997 ......... 125 132 133
Additional paid-in capital .................................... 3,866,468 4,056,461 5,308,760
Retained earnings ............................................. 645,042 1,610,096 2,005,438
----------- ----------- -----------
Total Stockholders' Equity ................................... 4,511,716 5,666,770 7,314,412
----------- ----------- -----------
Total Liabilities and Stockholders' Equity ................... $17,479,854 $27,044,311 $41,059,374
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Period from
February 1, 1995
(commencement Nine months ended
of operations) Year ended September 30,
to December 31, December 31, ----------------------------------
1995 1996 1996 1997
----------------- --------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Storage revenue ................................. $9,043,414 $14,066,875 $10,278,500 $16,913,361
Service revenue ................................. 469,791 1,584,744 625,552 3,558,620
---------- ----------- ----------- -----------
Total Revenues ................................ 9,513,205 15,651,619 10,904,052 20,471,981
Operating Expenses:
Cost of services ................................ 4,825,935 7,859,723 5,479,857 10,423,752
Selling, general, and administrative ............ 1,671,018 3,207,340 2,284,093 5,073,803
Depreciation and amortization ................... 942,052 1,474,846 998,981 1,798,398
---------- ----------- ----------- -----------
Total Operating Expenses ...................... 7,439,005 12,541,909 8,762,931 17,295,953
---------- ----------- ----------- -----------
Operating Income ................................. 2,074,200 3,109,710 2,141,121 3,176,028
Other (Income) Expense:
Interest income ................................. -- (40,633) -- (185,500)
Interest expense ................................ 995,688 1,318,994 904,322 1,976,953
---------- ----------- ----------- -----------
Total Other Expense ........................... 995,688 1,278,361 904,322 1,791,453
---------- ----------- ----------- -----------
Income Before Provision for Income Taxes ......... 1,078,512 1,831,349 1,236,799 1,384,575
Provision for Income Taxes ....................... 433,470 866,295 508,174 989,233
---------- ----------- ----------- -----------
Net Income ....................................... $ 645,042 $ 965,054 $ 728,625 $ 395,342
========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-39
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------------------------------
Class A Class B Additional
----------------- --------------------- Paid-in Retained
Description Shares Amount Shares Amount Capital Earnings Total
- ---------------------------------------- -------- -------- ---------- ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Class A common stock
on February 1, 1995 at $415.16
per share ............................. 8,050 $81 -- $-- $3,341,957 $ -- $3,342,038
Issuance of Class B common stock
on February 1, 1995 at $42.56
per share ............................. -- -- 1,950 20 82,980 -- 83,000
Issuance of Class B common stock
on June 30, 1995 at $42.56 per
share, net of issuance costs .......... -- -- 10,572 105 441,531 -- 441,636
Net Income for the period ended
December 31, 1995 ..................... -- -- -- -- -- 645,042 645,042
----- --- ------ --- ---------- ---------- ----------
Balance as of December 31, 1995 ........ 8,050 81 12,522 125 3,866,468 645,042 4,511,716
Issuance of Class B common stock
on September 30, 1996 at $300
per share ............................. -- -- 633 7 189,993 -- 190,000
Net Income for the year ended
December 31, 1996 ..................... -- -- -- -- -- 965,054 965,054
----- --- ------ --- ---------- ---------- ----------
Balance as of December 31, 1996 ........ 8,050 81 13,155 132 4,056,461 1,610,096 5,666,770
Issuance of Class B common stock
on May 14, 1997 at $650 per
share (unaudited) ..................... -- -- 174 1 113,299 -- 113,300
Redemption, Class B Common Stock
at $300 per share (unaudited) ......... -- -- (83) (1) (24,999) -- (25,000)
Issuance of Class B Common Stock
at $670 per share (unaudited) ......... -- -- 77 1 51,999 -- 52,000
Stock compensation (unaudited) ......... -- -- -- -- 1,112,000 -- 1,112,000
Net Income for the period ended
September 30, 1997 (unaudited) ........ -- -- -- -- -- 395,342 395,342
----- --- ------ ----- ---------- ---------- ----------
Balance at September 30, 1997
(unaudited) ........................... 8,050 $81 13,323 $133 $5,308,760 $2,005,438 $7,314,412
===== === ====== ===== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-40
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
February 1, 1995
(commencement of Nine months ended
operations) Year ended September 30,
to December 31, December 31, ------------------------------------
1995 1996 1996 1997
----------------- --------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C>
Operating Activities:
Net Income ......................................... $ 645,042 $ 965,054 $ 728,625 $ 395,342
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ..................................... 394,027 665,773 429,055 777,963
Amortization ..................................... 548,025 809,073 569,926 1,020,435
Deferred income taxes ............................ 235,000 84,700 31,000 223,000
Stock compensation expense ....................... -- -- -- 1,112,000
Changes in operating assets and liabilities:
Accounts receivable ............................. (583,888) (84,462) (249,321) (1,166,173)
Prepaid expenses and deposits ................... (39,559) (31,053) (9,693) (298,112)
Accounts payable ................................ (203,849) (88,545) (236,707) (695,836)
Other current liabilities ....................... 341,715 301,009 222,625 223,584
------------- ------------ ------------ ------------
Net Cash Provided by Operating Activities .......... 1,336,513 2,621,549 1,485,510 1,592,203
Investing Activities:
Acquisitions, net of cash acquired ................ (13,387,245) (2,433,000) (2,433,000) (7,540,277)
Purchases of equipment and leasehold
improvements .................................... (501,401) (990,087) (756,935) (1,462,843)
Purchases of certificates of deposits ............. -- (3,000,000) (3,000,000) (3,500,000)
Proceeds from maturities of certificate of
deposit ......................................... -- -- -- 3,000,000
------------- ------------ ------------ ------------
Net Cash Used in Investing Activities .............. (13,888,646) (6,423,087) (6,189,935) (9,503,120)
Financing Activities:
Proceeds from borrowings of long-term
debt ............................................ 12,295,773 10,314,224 9,324,187 10,987,234
Payments of long-term debt ........................ (3,440,000) (6,686,383) (4,504,059) (3,066,699)
Repurchase of common stock ........................ -- -- -- (25,000)
Issuance of common stock, net of issuance
costs ........................................... 3,783,674 190,000 -- 140,300
------------- ------------ ------------ ------------
Net Cash Provided by Financing Activities .......... 12,639,447 3,817,841 4,820,128 8,035,835
------------- ------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash
Equivalents ....................................... 87,314 16,303 115,703 124,918
Cash and Cash Equivalents at Beginning of
Period ............................................ -- 87,314 87,314 103,617
------------- ------------ ------------ ------------
Cash and Cash Equivalents at End of Period ......... $ 87,314 $ 103,617 $ 203,017 $ 228,535
============= ============ ============ ============
Noncash Investing and Financing Activities:
Subordinated notes payable issued in
acquisitions .................................... $ 2,259,010 $ 3,000,000 $ 3,000,000 $ 3,500,000
Common stock issued in acquisitions ............... 83,000 -- -- --
Earn-out obligations in connection with
acquisition ..................................... -- 700,000 700,000 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-41
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997
(Information with respect to the nine-month periods ended September 30, 1996
and 1997 is unaudited)
1. Description of Business
HIMSCORP, Inc. (the Company) was formed on December 22, 1994 (operations
commenced February 1, 1995) to act as a holding company for acquired health
information management services companies (Note 3). The Company provides
off-site record storage, retrieval, and management services primarily to
hospitals in the Detroit, Los Angeles, New Orleans, Philadelphia, Pittsburgh,
San Diego, Cleveland, Houston, St. Louis, Baltimore, Portland and Milwaukee
markets.
Basis of Presentation
The financial statements of the Company as of September 30, 1997 and for
the nine-month periods ended September 30, 1996 and 1997 and all information
subsequent to December 31, 1996 are unaudited. All adjustments and accruals
(consisting of normal recurring adjustments) have been made which, in the
opinion of management, are necessary for a fair presentation of the financial
position and operating results of the interim period presented. Interim results
are not necessarily indicative of results for a full year.
The interim financial statements are condensed and do not include all the
information and disclosures necessary for a full interim financial statement
presentation.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Investments
Restricted certificates of deposit (Note 4) are classified as
held-to-maturity as the Company has the positive intent and ability to hold the
securities to maturity. The certificate outstanding at December 31, 1996
matured January 2, 1997. The certificates outstanding at September 30, 1997
mature on October 1, 1997 ($500,000) and January 2, 1998 ($3,000,000).
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Expenditures for
normal repairs and maintenance are charged to expense as incurred. Depreciation
on equipment is computed by accelerated methods based on the estimated useful
lives of assets (5 to 15 years). Amortization of leasehold improvements is
included in depreciation and amortized over the shorter of the estimated useful
life or the lease term.
Intangibles
Goodwill is amortized on a straight-line basis over 25 years. Organization
costs are amortized using the straight-line method over five years.
The Company assesses intangibles for impairment under FASB Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. Under those rules, the intangibles
F-42
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997
(Information with respect to the nine-month periods ended September 30, 1996
and 1997 is unaudited)
2. Summary of Significant Accounting Policies (continued)
associated with assets acquired in a purchase business combination are included
in impairment evaluations when events or circumstances exist that indicate the
carrying amount of those assets may not be recoverable.
Deferred Financing Costs
Deferred financing costs are amortized using the straight-line method over
the life of the related loan.
Stock-Based Compensation
Stock-based compensation awards are accounted for under APB Opinion No. 25
Accounting for Stock Issued to Employees.
Revenue Recognition
Revenue is recognized when the services are performed. Certain services
are billed in advance, and the related revenue is deferred until the related
services are performed.
Income Taxes
Income taxes are accounted for under the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and income tax bases of assets and liabilities
and are measured using the enacted tax rates and laws in effect when the
differences are expected to reverse.
Fair Value of Financial Instruments
The Company's financial instruments include accounts receivable, accounts
payable, accrued liabilities and notes payable. The fair value of all financial
instruments were not materially different than their carrying values.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. Business Acquisitions
On February 1, 1995, the Company purchased all of the outstanding common
stock of Record Management of Louisiana, Inc., Century Medical, Inc., DLS,
Inc., and INFORR Corp., Inc. for $12,527,755, consisting of $10,485,745 in
cash, $1,959,010 in subordinated notes payable, and $83,000 in the Company's
common stock (1,950 Class B common shares). The Company also assumed
liabilities of $770,334. In conjunction with the acquisition, the Company
recorded $10,885,502 in goodwill.
On June 30, 1995, the Company purchased all of the outstanding common
stock of JAD Interests, Inc., and substantially all of the assets of Record
Care for $3,201,500, consisting of $2,901,500 in cash and $300,000 in
subordinated notes payable. The Company also assumed liabilities of $54,681 in
connection with the acquisition. In conjunction with the acquisition, the
Company recorded $2,757,258 in goodwill.
On March 31, 1996, the Company purchased all of the outstanding common
stock of C.N.S. Records Management, Inc. and Stendy Corp. for $2,358,000 in
cash and a minimum of $700,000 in future earn-out payments, of which $400,000
and $300,000 are due on March 31, 1997 and 1998, respectively. The Company
projects the actual earn-out payments will be $700,000 and has recorded the
liability and additional goodwill at December 31,
F-43
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997
(Information with respect to the nine-month periods ended September 30, 1996
and 1997 is unaudited)
3. Business Acquisitions (continued)
1996. The Company assumed liabilities of $308,131 in connection with the
acquisitions. In conjunction with the acquisitions, the Company recorded
$2,703,223 in goodwill.
On September 30, 1996, the Company purchased all of the outstanding common
stock of Copyright, Inc. for $3,075,000, consisting of $75,000 in cash and
$3,000,000 in subordinated notes payable and assumed liabilities of $198,900.
In conjunction with the acquisition, the Company recorded $2,814,127 in
goodwill.
On January 2, 1997, the Company purchased all of the common stock of
Recordkeepers, Inc. and Record Tech, Inc. for $7,879,000, consisting of
$4,879,000 in cash and $3,000,000 in subordinated notes payable. The Company
also assumed liabilities of $853,305. In conjunction with the acquisitions, the
Company recorded $7,840,328 in goodwill.
On June 1, 1997, the Company purchased all of the outstanding stock of
MKC, Inc. for $3,200,000 consisting of $2,700,000 in cash and $500,000 in
subordinated notes payable. The Company also assumed liabilities of $179,687 in
connection with this acquisition. In conjunction with the acquisition, the
Company recorded $2,347,002 in goodwill.
In addition, the Company entered into certain employment, noncompete, and
consulting agreements with the principal shareholders and certain ongoing
senior management of the acquired companies.
The acquisitions have been accounted for as purchases and, accordingly,
the consolidated statements of income include the results of operations of the
acquired businesses from their respective dates of acquisition.
Based on unaudited data, the following table presents selected financial
information for the company on a pro forma basis, assuming the companies had
been combined since February 1, 1995.
<TABLE>
<CAPTION>
Period from
February 1, 1995 Year ended Nine-months ended
to December 31, December 31, September 30,
1995 1996 1997
------------------ -------------- ------------------
<S> <C> <C> <C>
Revenues ........... $18,439 $23,801 $21,390
Net income ......... 1,281 2,135 472
</TABLE>
The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had the acquisitions been made
as of February 1, 1995.
F-44
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997
(Information with respect to the nine-month periods ended September 30, 1996
and 1997 is unaudited)
4. Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1995 1996
-------------- -------------
<S> <C> <C>
Working capital loan, plus interest at the prime rate (8.25% at
December 31, 1996) plus 1.5% ........................................... $ -- $ 1,000
Revolving loan, payable in varying quarterly installments through
July 1, 2002, plus interest payable monthly at varying LIBOR
interest rates (ranging from 5.50% to 6.50% at December 31,1996)
plus 3.50% ............................................................. 9,137,902 13,042,806
Subordinated notes payable to sellers (including shareholders) in
varying annual installments from 1997 through 2002, plus interest at
varying rates up to 7.75%, payable semiannually through 2002 ........... 2,259,010 5,259,010
----------- -----------
11,396,912 18,302,816
Less: Current maturities ................................................ 212,902 3,092,805
----------- -----------
$11,184,010 $15,210,011
=========== ===========
</TABLE>
The Company's subsidiaries have an agreement with a bank which provides
for a credit facility which expires October 1, 2000 and includes a revolving
loan of up to $14,000,000 and a working capital loan of up to $1,300,000. In
1997, the agreement was amended to increase the revolving loan to $23,500,000
and the working capital loan to $2,000,000.
A facility fee of .50% per annum is payable on a quarterly basis on the
available credit under the credit facility. The credit facility requires the
subsidiaries of the Company to collectively maintain a specified amount of
consolidated adjusted net worth, working capital, current ratio, interest
coverage ratio, payment of dividends, and certain other financial covenants,
all as defined within the agreement.
The credit facility is collateralized by substantially all assets and
common stock of the Company. In addition, the Company is required to maintain a
life insurance policy covering the principal stockholder of the Company which
also collateralizes the borrowings under the agreement. The agreement also
provides that the principal stockholder may not pledge or permit a security
interest or lien to exist on his common stock in connection with any other
debt.
The subordinated notes are subordinated to amounts outstanding under the
credit facility. In addition, at December 31, 1996, $3,000,000 of the
subordinated notes are secured by a letter of credit which is collateralized by
a certificate of deposit; the remaining subordinated notes are unsecured.
Principal maturities on long-term debt for each of the five years
succeeding 1996 and thereafter are as follows: 1997--$3,092,805,
1998--$1,900,000, 1999--$2,883,333; 2000--$3,283,333; 2001--$4,342,345; and
thereafter--$2,801,000.
5. Capital Stock
The holders of Class A common stock are entitled to receive cumulative
cash dividends at 8% per annum. Dividends began to accumulate on the date of
first issuance of the Class A shares and will be paid to Class A shareholders
of record only in the event of a distribution to common shareholders.
Accumulated dividends total $532,049 at December 31, 1996.
1,950 shares of the Class B common stock have vesting provisions based on
either time (1,000 shares) or performance (950 shares) criteria. The time
shares are considered a fixed plan and the performance shares are
F-45
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997
(Information with respect to the nine-month periods ended September 30, 1996
and 1997 is unaudited)
5. Capital Stock (continued)
considered a variable plan under APB Opinion No. 25. At December 31, 1996, 500
and 550 shares remain unvested under the fixed and variable plans,
respectively. The Company has recorded compensation expense of $1,112,000 in
the nine months ended September 30, 1997 for the performance shares based on
their estimated fair value at September 30, 1997.
6. Leases
The Company and its subsidiaries lease warehouse and office facilities and
certain other equipment under operating leases that expire at various dates
through 2001. In most cases, management expects that leases will be renewed or
replaced by other similar leases in the normal course of business.
Future minimum rental payments required under operating leases that have
initial or remaining noncancelable terms in excess of one year are as follows:
<TABLE>
<S> <C>
1997 ................................. $1,489,620
1998 ................................. 1,339,826
1999 ................................. 1,113,214
2000 ................................. 357,272
2001 ................................. 128,061
----------
Total minimum lease payments ......... $4,427,993
==========
</TABLE>
Rental expense for operating leases was $813,325 and $1,562,913 in 1995
and 1996, respectively.
7. Income Taxes
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Period from
February 1, 1995 Year ended
to December 31, December 31,
1995 1996
------------------ -------------
<S> <C> <C>
Current:
Federal ......... $127,145 $651,680
State ........... 71,325 129,915
-------- --------
198,470 781,595
Deferred:
Federal ......... 205,000 73,800
State ........... 30,000 10,900
-------- --------
235,000 84,700
-------- --------
$433,470 $866,295
======== ========
</TABLE>
F-46
<PAGE>
HIMSCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997
(Information with respect to the nine-month periods ended September 30, 1996
and 1997 is unaudited)
7. Income Taxes (continued)
A reconciliation between the provision for income taxes computed at
statutory rates and the amount reflected in the accompanying consolidated
statements of income is as follows:
<TABLE>
<CAPTION>
Period from
February 1, 1995 Year ended
to December 31, December 31,
1995 1996
------------------ -------------
<S> <C> <C>
Computed federal tax provision at statutory rates ............. $366,694 $622,659
Increase in taxes resulting from:
State and local income taxes, net of federal benefit ......... 37,316 136,562
Other ........................................................ 29,460 107,074
-------- --------
$433,470 $866,295
======== ========
</TABLE>
Included in the income tax provision for the nine months ended September
30, 1997 is approximately $434,000 related to the non-deductible compensation
recorded in connection with the variable stock plan (Note 5). Significant
components of the Company's deferred income tax liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1995 1996
----------- -----------
<S> <C> <C>
Deferred income tax liabilities:
Excess tax amortization ......................................... $118,000 $288,000
Excess tax depreciation ......................................... 4,000 12,000
Prepaid insurance ............................................... 19,000 19,000
Other ........................................................... 94,000 --
-------- --------
Total deferred tax liabilities ................................... $235,000 $319,000
======== ========
</TABLE>
The Company paid income taxes of approximately $290,000 and $541,000 in
1995 and 1996, respectively.
8. Employee Benefits
Effective February 1, 1996, the Company established a 401(k)
profit-sharing plan. Substantially all full-time employees who meet age and
service requirements are eligible to participate. Employees may contribute up
to 15% of their compensation, with matching contributions of up to 25% of 4% of
compensation at the discretion of the Company. Company contributions to the
401(k) plan were $19,400 in 1996.
9. Related Party Transactions
Keystone Capital, Inc., wholly owned by the principal stockholder of the
Company, has responsibility for corporate operations and is paid an advisory
fee by the Company for services provided. Such fees approximated $101,000 and
$176,000 in 1995 and 1996, respectively.
10. Subsequent Events
On October 31, 1997, Iron Mountain Incorporated acquired all outstanding
stock of the Company. The transaction became effective November 1, 1997.
F-47
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
PROSPECTUS
$350,000,000
Iron Mountain Incorporated
Debt Securities, Preferred Stock, Depositary Shares,
Common Stock and Warrants
----------------
Iron Mountain Incorporated (the "Company" or "Iron Mountain") may from
time to time offer in one or more series (i) its debt securities (the "Debt
Securities"), (ii) its shares of preferred stock, par value $.01 per share (the
"Preferred Stock"), (iii) fractional shares of the Preferred Stock (the
"Depositary Shares"), (iv) its shares of common stock, par value $.01 per share
(the "Common Stock"), or (v) warrants to purchase any of the above securities
(the "Warrants"), with an aggregate public offering price of up to $350,000,000
on terms to be determined at the time of offering. The Debt Securities,
Preferred Stock, Depositary Shares, Common Stock and Warrants may be offered,
separately or together, in separate series, in amounts, at prices and on terms
to be set forth in a supplement to this Prospectus (a "Prospectus Supplement").
In connection with the Debt Securities, substantially all of the present
and future subsidiaries of Iron Mountain (the "Guarantors") may, on a joint and
several basis, offer full and unconditional guarantees ("Guarantees") of Iron
Mountain's obligations under the Debt Securities. The Debt Securities,
Guarantees, Preferred Stock, Depositary Shares, Common Stock and Warrants are
collectively referred to as the "Offered Securities."
The specific terms of the Offered Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable: (i) in the case of Debt
Securities, the specific title, aggregate principal amount, currency, form
(which may be registered or bearer, or certificated or global), authorized
denominations, maturity, rate (or manner of calculation thereof) and time of
payment of interest, terms for redemption at the option of the Company or
repayment at the option of the holder, terms for sinking fund payments, terms
for conversion into Preferred Stock, Depositary Shares or Common Stock, terms
of subordination to other indebtedness of the Company, terms of related
Guarantees (if any), terms of security or pledge of assets (if any), and any
original issue discount and any initial public offering price; (ii) in the case
of Preferred Stock, the specific title and stated value, any dividend,
liquidation, redemption, conversion, voting and other rights, and any initial
public offering price; (iii) in the case of Depositary Shares, the fractional
shares of Preferred Stock represented by each Depositary Share; (iv) in the
case of Common Stock, any offering price; and (v) in the case of Warrants, the
securities to which they relate, duration, offering price, exercise price and
detachability.
----------------
See "RISK FACTORS" at page 1 for certain information that should be
considered by prospective investors.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
The date of this Prospectus is January 20, 1998.
<PAGE>
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered
Securities covered by such Prospectus Supplement. Any statement contained in
this Prospectus will be deemed to be modified or superseded by any inconsistent
statement contained in the accompanying Prospectus Supplement.
The Common Stock is traded on the Nasdaq National Market System under the
symbol "IMTN." Application will be made to list any shares of Common Stock sold
pursuant to a Prospectus Supplement on the Nasdaq National Market System,
subject to official notice of issuance. Iron Mountain has not yet determined
whether any of the Debt Securities, Preferred Stock or Depositary Shares
offered hereby will be listed on any exchange or over-the-counter market. If
Iron Mountain decides to seek listing of any such Offered Securities, the
Prospectus Supplement relating thereto will disclose such exchange or market.
The Offered Securities may be offered directly, through agents designated
from time to time by the Company or to or through underwriters or dealers. If
any agents or underwriters are involved in the sale of any of the Offered
Securities, their names, and any applicable purchase price, fee, commission or
discount arrangement between or among them, will be set forth, or will be
calculable from the information set forth, in an accompanying Prospectus
Supplement. See "Plan of Distribution." No Offered Securities may be sold
without delivery of a Prospectus Supplement describing the method and terms of
the offering of such Offered Securities.
----------------
No person has been authorized to give any information or to make any
representations other than those contained or incorporated by reference in this
Prospectus in connection with the offer contained in this Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Company or any underwriters, agents or dealers.
This Prospectus does not constitute an offer to sell or solicitation of an
offer to buy securities in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
an implication that there has been no change in the affairs of the Company and
its subsidiaries since the date hereof or the information contained or
incorporated by reference herein is correct at any time subsequent to the date
hereof.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C., a registration statement on Form S-3
(together with all exhibits, schedules and amendments thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Offered Securities. This Prospectus,
which is a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement. Statements in this
Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other documents filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference and the exhibits and schedules thereto. For further information
concerning the Company and the Offered Securities, reference is made to the
Registration Statement. Copies of the Registration Statement may be obtained
from the Commission at its principal office in Washington, D.C. upon payment of
the prescribed fee.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Commission. The
Registration Statement, the exhibits and schedules forming a part thereof and
the reports, proxy statements and other information filed by the Company with
the Commission can be inspected and copies obtained at the public reference
facilities maintained by the Commission at Judiciary Plaza, Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following regional
offices of the Commission: Chicago Regional Office, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661-2511; and New York Regional Office,
Seven World Trade Center, New York, New York 10048. Copies of such material can
be obtained at prescribed rates from the Public Reference Section of the
Commission at its principal office at 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission maintains a World Wide Web site that contains reports,
proxy and information statements and other information regarding registrants,
including the Company, that file electronically with the Commission. The
address of the site is http://www.sec.gov. In addition, reports, proxy
statements and other information concerning the Company may be inspected at the
offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
ii
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by Iron Mountain with the
Commission (File No. 0-27584) pursuant to the Exchange Act, are hereby
incorporated in this Prospectus and specifically made a part hereof by
reference: (i) Annual Report on Form 10-K for the fiscal year ended December
31, 1996 (the "Annual Report"), (ii) Quarterly Reports on Form 10-Q for the
quarters ended March 31, 1997, June 30, 1997 and September 30, 1997, (iii)
Current Reports on Form 8-K dated June 25, 1997 (as amended August 26, 1997),
October 1, 1997, October 16, 1997 (as amended November 10, 1997), October 30,
1997, November 25, 1997 and January 13, 1998 and (iv) the description of the
Common Stock contained in the Company's Registration Statement on Form 8-A
dated January 18, 1996. In addition, the financial information contained in
Iron Mountain's Registration Statements on Form S-4 (i) File No. 333-24635,
filed with the Commission on April 4, 1997, as amended on May 7, 1997 and May
13, 1997, as made effective by the Commission on May 14, 1997, and (ii) File
No. 333-41715, filed with the Commission on December 8, 1997, as made effective
by the Commission on December 11, 1997 is incorporated herein by reference. All
documents filed by Iron Mountain pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date of this Prospectus and prior to the
termination of the offering of the Offered Securities shall be deemed to be
incorporated by reference into the Registration Statement and to be a part
hereof from the respective dates of filing of any such documents.
Any statement contained herein or in a document incorporated or deemed to
be incorporated herein by reference shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein (or in the applicable Prospectus Supplement), or in any other
subsequently filed document that also is or is deemed to be incorporated herein
by reference, modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom this Prospectus is delivered, upon the written or oral request of such
person, a copy of any and all of the information that has been incorporated by
reference in this Prospectus (excluding exhibits unless such exhibits are
specifically incorporated by reference into the information that this
Prospectus incorporates). Requests for such copies should be made to the
Company at its principal executive offices, 745 Atlantic Avenue, Boston,
Massachusetts 02111, Attention: John F. Kenny, Jr., Executive Vice President
and Chief Financial Officer.
iii
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
RISK FACTORS
Investors should carefully consider the following risk factors, in
addition to the other information contained in this Prospectus and any
Prospectus Supplement, before purchasing any of the Offered Securities. This
Prospectus sets forth or incorporates by reference forward-looking statements
within the meaning of Section 27A of the Securities Act, such as those
regarding the goals, beliefs, plans or current expectations of the Company and
its management and other statements contained in this Prospectus regarding
matters that are not historical facts. Because such forward-looking statements
include risks and uncertainties, actual results may differ materially from
those expressed in or implied by such forward-looking statements. Factors that
could cause actual results to differ materially include, but are not limited
to, the risk factors set forth below and the matters set forth or incorporated
by reference in this Prospectus generally and any Prospectus Supplement. The
Company undertakes no obligation to release publicly the results of any
revisions to these forward-looking statements that may be made to reflect
future events or circumstances or to reflect unanticipated events.
Risks Associated with Acquisition Strategy
Iron Mountain has pursued and intends to continue to pursue acquisitions
of records management and related service businesses as a key component of its
growth strategy. Certain risks are inherent in an acquisition strategy, such as
increasing leverage and debt service requirements and combining disparate
company cultures and facilities, which could adversely affect Iron Mountain's
operating results. The success of any completed acquisition will depend in part
on Iron Mountain's ability to integrate effectively the acquired businesses
into Iron Mountain. The process of integrating such acquired businesses may
involve unforeseen difficulties and may require a disproportionate amount of
management's attention and Iron Mountain's financial and other resources. No
assurance can be given that additional suitable acquisition candidates will be
identified, financed and purchased on acceptable terms, or that recent
acquisitions or future acquisitions, if completed, will be successful.
In September 1997, Iron Mountain amended and restated its bank facility,
dated as of September 30, 1996 among Iron Mountain, the lenders party thereto
and The Chase Manhattan Bank, as Administrative Agent (the "Credit Agreement").
Under the terms of the Credit Agreement, acquisitions by Iron Mountain
involving in excess of (i) $65 million (other than the acquisition of Arcus
Group, Inc. (the "Arcus Acquisition") and the acquisition of HIMSCORP, Inc.
("HIMSCORP")) for any one acquisition and (ii) $150 million in the aggregate or
$100 million in cash for 1998 or any subsequent year require the approval of
lenders holding 51% or more of the commitments under the Credit Agreement. No
assurance can be given that the lenders will consent to any acquisitions that
Iron Mountain proposes to make in excess of such limits.
The size, timing and integration of possible future acquisitions may cause
substantial fluctuations in operating results from quarter to quarter. As a
result, operating results for any quarter may not be indicative of the results
that may be achieved for any subsequent fiscal quarter or for a full fiscal
year.
Competition; Alternative Technologies
Iron Mountain has one or more competitors in all geographic areas where it
operates. Iron Mountain believes that competition for customers is based on
price, reputation for reliability, quality of service and scope and scale of
technology, and believes that it generally competes effectively based on these
factors. As a result of this competition, the records management industry has
for the past several years experienced downward pricing pressures. While Iron
Mountain believes that this pricing climate is stabilizing, there can be no
assurance that prices will not decline further, as competitors seek to gain or
preserve market share. Should a further downward trend in pricing occur or
continue for an extended period of time, it could have a material adverse
effect on Iron Mountain's results of operations. Iron Mountain also competes
for acquisition candidates. Some of Iron Mountain's competitors may possess
greater financial and other resources than Iron Mountain. If any such
competitor were to devote additional resources to the records management
business and such acquisition candidates or to focus its strategy on Iron
Mountain's markets, Iron Mountain's results of operations could be adversely
affected. In addition, Iron Mountain faces competition from the internal
records management 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.
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The substantial majority of Iron Mountain'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 reduce or supplant the use of paper as a preferred
medium, which could in turn adversely affect Iron Mountain's business.
Financial Leverage; Debt Service Requirements
Iron Mountain is highly leveraged due to the substantial indebtedness it
has incurred primarily to finance acquisitions and expand its operations. Iron
Mountain expects to continue to borrow under the Credit Agreement and possible
future credit arrangements in order to finance possible future acquisitions and
for general corporate purposes.
The ability of Iron Mountain to repay its indebtedness depends upon future
operating performance, which is subject to the success of Iron Mountain's
business strategy, prevailing economic conditions, levels of interest rates and
financial, business and other factors, many of which are beyond Iron Mountain's
control. The debt service obligations of Iron Mountain could have important
consequences, including the following: (i) the ability of Iron Mountain to
obtain additional financing for future working capital needs or for possible
future acquisitions or other purposes may be limited; (ii) a substantial
portion of Iron Mountain's cash flow from operations will be dedicated to the
payment of principal and interest on its indebtedness, thereby reducing funds
available for other purposes; (iii) Iron Mountain may be more vulnerable to
adverse economic conditions than some of its competitors and thus may be
limited in its ability to withstand competitive pressures; and (iv) Iron
Mountain may be more highly leveraged than certain of its competitors, which
may place it at a competitive disadvantage.
A substantial portion of Iron Mountain's cash flow from operations is
required for debt service. Management believes that cash flow from operations
in conjunction with borrowings from existing and possible future credit
facilities will be sufficient for the foreseeable future to meet debt service
requirements and to make possible future acquisitions and capital expenditures.
However, there can be no assurance in this regard, and Iron Mountain's leverage
could make it vulnerable to a downturn in the operating performance of its
subsidiaries, a downturn in economic conditions or, because borrowings under
the Credit Agreement bear interest at rates which fluctuate, increases in
interest rates on borrowings under the Credit Agreement. If such cash flow were
not sufficient to meet such debt service requirements or payments of principal,
Iron Mountain could be required to sell additional equity securities, refinance
its obligations or dispose of assets in order to make such scheduled payments.
There can be no assurance that Iron Mountain would be able to effect any of
such transactions or do so on favorable terms.
Casualty
Iron Mountain currently maintains and intends to continue to maintain, to
the extent such insurance is available on commercially reasonable terms,
comprehensive liability, fire, flood and earthquake (where appropriate) and
extended coverage insurance with respect to the properties that it now owns or
leases or that it may in the future own or lease, with customary limits and
deductibles. Certain types of loss, however, may not be fully insurable on a
cost-effective basis, such as losses from earthquakes, or may be altogether
uninsurable, such as losses from riots. Iron Mountain has in the past suffered
damages and losses from an earthquake and a riot in California, which damages
and losses were substantially covered by insurance. In March 1997, Iron
Mountain experienced three fires, all of which authorities have determined were
caused by arson and which resulted in extensive damage to one and destruction
of the Company's other records management facility in South Brunswick Township,
New Jersey. Iron Mountain has filed several insurance claims related to the
South Brunswick fires, including a significant claim under its business
interruption insurance policy. Some of the Company's customers or their
insurance carriers have asserted claims or filed lawsuits as a consequence of
the destruction of or damage to their records due to the fires. The Company is
a defendant in three such lawsuits. 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 lawsuits 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.
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In the future, should uninsured losses or damages occur, Iron Mountain
could lose both its investment in and anticipated profits and cash flow from
the affected property and may continue to be obligated on any leasehold
obligations, mortgage indebtedness or other obligations related to such
property. As a result, any such loss could materially adversely affect Iron
Mountain.
History of Losses; EBITDA Objective
Iron Mountain has a history of experiencing net losses applicable to
common stockholders. Such net losses are attributable in part to significant
non-cash charges associated with Iron Mountain's pursuit of its growth
strategy, namely, (i) depreciation and amortization expenses associated with
expansion of Iron Mountain's storage capacity and (ii) goodwill amortization
associated with acquisitions accounted for under the purchase method. In
addition, net income applicable to common stockholders has been negatively
affected by a charge for accretion of a redeemable put warrant and, in 1996, by
an extraordinary charge related to the early retirement of debt. The put
warrant was redeemed in February 1996, upon completion of Iron Mountain's
initial public offering.
Iron Mountain's primary financial objective is to increase its earnings
before interest, taxes, depreciation, amortization and extraordinary items
("EBITDA"), which is a source of funds to service indebtedness and for
investment in continued internal growth and growth through acquisitions, and
not net income and net income applicable to common stockholders. Iron Mountain
has benefited from growth in EBITDA, while net losses applicable to common
stockholders have increased over such period. Based on its experience in the
records management industry, Iron Mountain 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 Iron Mountain's financing
agreements contain covenants in which EBITDA is used as a measure of financial
performance. Other measures of Iron Mountain's financial performance, such as
net income and net income applicable to common stockholders, have been
negatively affected by pursuit of Iron Mountain's objective to increase EBITDA
and may be negatively affected in the future. In addition, execution of Iron
Mountain's growth strategy could result in future net losses due to increased
interest expense associated with borrowings under the Credit Agreement and
possible future credit arrangements and increased depreciation and amortization
expenses.
Anti-Takeover Effect of Certain Provisions of Iron Mountain's Certificate of
Incorporation, By-Laws and the Notes Indentures
Certain provisions of Iron Mountain's Amended and Restated Certificate of
Incorporation (the "Restated Certificate") and Iron Mountain's By-Laws (the
"By-Laws") could have the effect of making it more difficult for a third party
to acquire, or discouraging a third party from acquiring, a majority of the
outstanding capital stock of Iron Mountain and could make it more difficult to
consummate certain types of transactions involving an actual or potential
change in control of Iron Mountain, such as a merger, tender offer or proxy
contest. The Restated Certificate also provides for three classes of Directors,
as equal in number as possible, to be elected on a staggered basis (one class
per year). As a result of such a provision, it would generally require at least
two elections of the Iron Mountain Board to replace a majority of the members
of the Iron Mountain Board, thereby enabling existing management to exercise
significant control over Iron Mountain's affairs during such period. Pursuant
to the Restated Certificate, shares of Preferred Stock may be issued in the
future without further stockholder approval and upon such terms and conditions,
and having such rights, privileges and preferences (including the right to vote
and the right to convert into Common Stock), as the Iron Mountain Board may
determine. Pursuant to the By-Laws, approximately 4 million shares of Common
Stock that were issued by the Company in five acquisitions are subject to
restrictions on transfer for varying periods of time, all of which expire by
January 1999. A significant portion of such shares are held by affiliates.
Iron Mountain currently has outstanding $165,000,000 in aggregate
principal amount of 10-1/8% Senior Subordinated Notes due 2006 issued in
October 1996 (the "1996 Notes") and $250,000,000 in aggregate principal amount
of 8-3/4% Senior Subordinated Notes due 2009 issued in October 1997 (the "1997
Notes," and collectively with the 1996 Notes, the "Senior Subordinated Notes").
Under certain circumstances relating to a change of control of Iron Mountain (a
"Change of Control") as set forth in the indentures for the Senior Subordinated
Notes (the "Notes Indentures"), Iron Mountain will be required to make an offer
to purchase all of the outstanding Senior Subordinated
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Notes at a purchase price, in cash, equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase.
There can be no assurance that Iron Mountain would be able to obtain such funds
through a refinancing of the Senior Subordinated Notes to be purchased or
otherwise, or that the purchase would be permitted under the Credit Agreement.
Also, the requirement that Iron Mountain make an offer to purchase all of the
Senior Subordinated Notes then outstanding in the event of a Change of Control
may have the effect of deterring a third party from effecting a transaction
that would constitute a Change of Control.
Control by Principal Stockholders
The voting power held by certain large stockholders of Iron Mountain may
have the effect of discouraging certain types of transactions involving an
actual or potential change of control of Iron Mountain, including transactions
in which the holders of Common Stock might otherwise receive a premium for
their shares over then-current market prices. In addition, as a result of such
voting power, such stockholders have the ability to significantly affect the
election of Directors of Iron Mountain who, in turn, control the management and
affairs of Iron Mountain.
Restrictions Imposed by Terms of Indebtedness; Dependence Upon Operations of
Subsidiaries
The Credit Agreement and the Notes Indentures contain covenants
restricting or limiting the ability of the Company and its subsidiaries to,
among other things: (i) incur additional indebtedness; (ii) pay dividends or
make other restricted payments; (iii) make asset dispositions; (iv) permit
liens; (v) enter into sale and leaseback transactions; (vi) enter into certain
mergers; (vii) make certain investments; and (viii) enter into transactions
with related persons. This may adversely affect the Company's ability to pursue
its acquisition strategy. The Credit Agreement also requires the Company to
maintain specific financial ratios and to satisfy certain financial condition
tests. The Company's ability to meet those financial ratios and financial
condition tests can be affected by events beyond its control, and there can be
no assurance that the Company will meet those tests. The breach of any of those
covenants could result in a default under the Credit Agreement, the Notes
Indentures or all of them. In the event of a default under the Credit Agreement
or the Notes Indentures, the lenders could seek to declare all amounts
outstanding under the Credit Agreement, together with accrued and unpaid
interest, if any, to be immediately due and payable. If the Company were unable
to repay those amounts, the lenders under the Credit Agreement could proceed
against the collateral granted to them to secure that indebtedness. If the
indebtedness under the Credit Agreement or the Notes Indentures were to be
accelerated, there can be no assurance that the assets of the Company would be
sufficient to repay in full that indebtedness and the other indebtedness of the
Company.
Substantially all of the tangible assets of the Company are held by, and
substantially all of the Company's operating revenues are derived from
operations of, the Company's subsidiaries. Therefore, the Company's ability to
pay interest and principal when due under the Credit Agreement and the Senior
Subordinated Notes is dependent upon the receipt of sufficient funds from such
subsidiaries. The Company's obligations under the Credit Agreement and the
Senior Subordinated Notes are guaranteed, jointly and severally, by
substantially all of the Company's present and future subsidiaries.
Environmental Matters
As of September 30, 1997, Iron Mountain owned or leased over 150 records
management facilities. Under various federal, state and local environmental
laws, ordinances and regulations ("Environmental Laws"), an owner of real
estate or a lessee conducting operations thereon may become liable for the
costs of investigation, removal or remediation of soil and groundwater
contaminated by certain hazardous substances or wastes or petroleum products.
Certain such laws impose cleanup responsibility and liability without regard to
whether the owner or operator of the real estate or operations thereon knew of
or was responsible for the contamination, and whether or not operations at the
property have been discontinued or title to the property has been transferred.
In addition, the presence of such substances, or the failure to properly
remediate such property, may adversely affect the current property owner's or
operator's ability to sell or rent such property or to borrow using such
property as collateral. The owner or operator of contaminated real estate also
may be subject to common law claims by third parties based on damages and costs
resulting from off-site migration of the contamination.
Certain Environmental Laws govern the removal, encapsulation or
disturbance of asbestos-containing materials ("ACMs"). Such laws may impose
liability for release of ACMs and may enable third parties to seek recovery
from owners or operators of real estate for personal injury associated with
exposure to such substances.
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Certain facilities operated by Iron Mountain contain or may contain ACMs.
Certain of the properties formerly or currently owned or operated by Iron
Mountain were previously used for industrial or other purposes that involved
the use or storage of hazardous substances or petroleum products or the
generation and disposal of hazardous wastes, and in some instances, included
the operation of underground storage tanks ("USTs"). In 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, Iron Mountain may be potentially liable for environmental
costs such as those discussed above. Iron Mountain has from time to time
conducted certain environmental investigations and remedial activities at
certain of its former and current facilities, but an in-depth environmental
review of all properties has not yet been conducted by or on behalf of Iron
Mountain.
Iron Mountain believes it is in substantial compliance with all applicable
material Environmental Laws. No assurance can be given that there are, or as a
result of possible future acquisitions there will be, no environmental
conditions for which Iron Mountain might be liable in the future or that future
regulatory action, as well as compliance with future Environmental Laws, will
not require Iron Mountain to incur costs for or at its properties that could
have a material adverse effect on Iron Mountain's financial condition and
results of operations.
No Intention to Pay Dividends
Iron Mountain has never declared or paid cash dividends on its capital
stock. Iron Mountain intends to retain future earnings for use in its business
and does not anticipate declaring or paying any cash dividends on shares of
Common Stock in the foreseeable future. In addition, Iron Mountain is currently
restricted under the terms of the Credit Agreement and the Notes Indentures
from declaring or paying cash dividends on its Common Stock.
THE COMPANY
Iron Mountain is America's largest records management company, as measured
by its revenues. The Company is a national, full-service provider of records
management and related services, enabling customers to outsource records
management functions. Iron Mountain has a diversified customer base, which
includes more than half of the Fortune 500 and numerous commercial, legal,
banking, healthcare, accounting, insurance, entertainment and government
organizations. The Company provides storage and related services for all major
media, including paper (the dominant form of record storage), computer disk 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, information technology staffing and
other outsourcing services.
Iron Mountain was incorporated in Delaware in 1990, but its predecessor
operations date from 1951. The principal executive office of the Company is
located at 745 Atlantic Avenue, Boston, Massachusetts 02111. Its telephone
number is (617) 357-4455.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Offered Securities
for general corporate purposes, which may include acquisitions, investments and
the repayment of indebtedness outstanding at such time or the reduction of
amounts outstanding under the Credit Agreement or any other credit facility.
Pending utilization as set forth above, the proceeds from the sale of the
Offered Securities will be invested in short-term, dividend-paying or
interest-bearing investment grade securities.
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RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's consolidated ratio of
earnings to fixed charges for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Pro Forma(1)
-----------------------------
Nine months ended For the year For the nine
Year ended December 31, September 30, ended months ended
------------------------------------------------- ------------------------ December 31, September 30,
1992 1993 1994 1995 1996 1996 1997 1996 1997
--------- --------- --------- --------- --------- --------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings
to fixed charges 1.3x 1.3x 1.2x 1.1x 1.1x 1.1x 0.9x(2) 0.7x(3) 0.8x(4)
</TABLE>
(1) Includes results of operations prior to the date of acquisition and pro
forma adjustments for acquisitions completed in 1996 and 1997 and the
acquisition by the Company of Arcus Group, Inc. Does not include results of
operations prior to the date of acquisition, or pro forma adjustments, for
acquisitions completed by HIMSCORP or Arcus Group, Inc. in 1996 and 1997.
(2) The Company reported a pretax loss for the nine months ended September 30,
1997. For such period the Company would have needed to generate additional
income from continuing operations, before provision for income taxes, of
$2,156 to cover its fixed charges of $24,425.
(3) On a pro forma basis, the Company would have needed to generate additional
income from continuing operations, before provision for income taxes, of
$17,779 to cover its fixed charges of $58,449.
(4) On a pro forma basis, the Company would have needed to generate additional
income from continuing operations, before provision for income taxes, of
$7,601 to cover its fixed charges of $44,366.
The ratios of earnings to fixed charges presented above were computed by
dividing the Company's earnings by fixed charges. For this purpose, earnings
have been calculated by adding fixed charges to income (loss) before provision
for income taxes. Fixed charges consist of interest costs, whether expensed or
capitalized, the interest component of rental expense, if any, amortization of
debt discounts and deferred financing costs, whether expensed or capitalized.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities will be direct obligations of the Company, which may
be secured or unsecured, and which may be senior or subordinated indebtedness
of the Company. The Debt Securities may be fully and unconditionally guaranteed
on a secured or unsecured, senior or subordinated basis, jointly and severally
by the Guarantors. The Debt Securities will be issued under one or more
indentures (an "Indenture") between the Company and a trustee (an "Indenture
Trustee"). Any Indenture will be subject to, and governed by, the Trust
Indenture Act of 1939, as amended (the "TIA"). The statements made hereunder
relating to any Indentures and the Debt Securities to be issued thereunder are
summaries of certain anticipated provisions thereof and do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all provisions of the Indentures and such Debt Securities.
General
The Company has filed with the Registration Statement with respect to the
Offered Securities a form of Indenture (as supplemented from time to time, the
"Senior Indenture") relating to the Senior Securities (as defined) and a form
of Indenture (as supplemented from time to time, the "Subordinated Indenture")
relating to the Senior Subordinated Securities (as defined) and Subordinated
Securities (as defined). The Debt Securities will be direct obligations of the
Company and, if issued under the Senior Indenture, will rank equally and
ratably in right of payment with other indebtedness of the Company that is not
subordinated (the "Senior Securities"), or, if issued under the Subordinated
Indenture, will be subordinated in right of payment to the prior payment in
full of Senior Indebtedness (as defined in the applicable Prospectus
Supplement) and may rank equally and ratably with the Senior Subordinated Notes
and any other senior subordinated indebtedness ("Senior Subordinated
Securities") or may be subordinated in right of payment to the Senior
Subordinated Notes and such other senior subordinated indebtedness
("Subordinated Securities"). See "--Subordination." The Debt Securities may be
issued without limit as to aggregate principal amount, in one or more series,
in each case as established from time to time in or pursuant to authority
granted by a resolution of the Board of Directors of the Company or as
established in one or more
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indentures supplemental to any Indenture. All Debt Securities of one series
need not be issued at the same time and, unless otherwise provided, a series
may be reopened, without the consent of the holders of the Debt Securities of
such series, for issuances of additional Debt Securities of such series.
It is anticipated that any Indenture will provide that the Company may,
but need not, designate more than one Indenture Trustee thereunder, each with
respect to one or more series of Debt Securities. Any Indenture Trustee under
any Indenture may resign or be removed with respect to one or more series of
Debt Securities, and a successor Indenture Trustee may be appointed to act with
respect to such series. In the event that two or more persons are acting as
Indenture Trustee with respect to different series of Debt Securities, each
such Indenture Trustee shall be a trustee of a trust under the applicable
Indenture separate and apart from the trust administered by any other Indenture
Trustee, and, except as otherwise indicated herein, any action described herein
to be taken by the Indenture Trustee may be taken by each such Indenture
Trustee with respect to, and only with respect to, the one or more series of
Debt Securities for which it is Indenture Trustee under the applicable
Indenture.
Reference is made to the Prospectus Supplement relating to the series of
Debt Securities being offered for the specific terms thereof, including, where
applicable, the following:
(1) the title of such Debt Securities and whether such Debt Securities are
Senior Securities, Senior Subordinated Securities or Subordinated
Securities;
(2) the aggregate principal amount of such Debt Securities and any limit
on such aggregate principal amount;
(3) the percentage of the principal amount at which such Debt Securities
will be issued and, if other than the principal amount thereof, the
portion of the principal amount thereof payable upon declaration of
acceleration of the maturity thereof, or (if applicable) the portion of
the principal amount of such Debt Securities which is convertible, or
the method by which any such portion shall be determined;
(4) if convertible, the terms on which such Debt Securities are
convertible, including the initial conversion price or rate and the
conversion period and any applicable limitations on the ownership or
transferability of the securities into which such Debt Securities are
convertible;
(5) the date or dates, or the method for determining such date or dates,
on which the principal of such Debt Securities will be payable;
(6) the rate or rates (which may be fixed or variable), or the method by
which such rate or rates shall be determined, at which such Debt
Securities will bear interest, if any;
(7) the date or dates, or the method for determining such date or dates,
from which any interest will accrue, the dates on which any such
interest will be payable, the record dates for such interest payment
dates, or the method by which any such date shall be determined, the
person to whom such interest shall be payable, and the basis upon which
interest shall be calculated if other than that of a 360-day year of 12
months consisting of 30 days each;
(8) the place or places where (i) the principal of, any premium and
interest on, and any additional amounts payable in respect of such Debt
Securities will be payable, (ii) such Debt Securities may be
surrendered for conversion or registration of transfer or exchange and
(iii) notices or demands to or upon the Company in respect of such Debt
Securities and the applicable Indenture may be served;
(9) the period or periods within which, the price or prices at which and
the terms and conditions upon which such Debt Securities may be
redeemed, as a whole or in part, at the option of the Company, if the
Company is to have such an option;
(10) the obligation, if any, of the Company to redeem, repay or purchase
such Debt Securities pursuant to any sinking fund or analogous
provision or at the option of a holder thereof, and the period or
periods within which, the price or prices at which and the terms and
conditions upon which such Debt Securities will be redeemed, repaid or
purchased, as a whole or in part, pursuant to such obligation;
(11) if other than U.S. dollars, the currency or currencies in which such
Debt Securities are denominated and payable, which may be a foreign
currency or units of two or more foreign currencies or a composite
currency or currencies, and the terms and conditions relating thereto;
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<PAGE>
(12) if the principal of or premium, if any, or interest on such Debt
Securities is to be payable, at the election of the Company or a
holder thereof, in one or more currencies or currency units other than
that or those in which such Debt Securities are stated to be payable,
the currency, currencies or currency units in which payment of the
principal of and premium, if any, and interest on Debt Securities of
such series as to which such election is made shall be payable, and
the periods within which and the terms and conditions upon which such
election is to be made;
(13) whether the amount of payments of interest on, principal of or
premium, if any, on such Debt Securities may be determined with
reference to an index, formula or other method (which index, formula
or method may, but need not, be based on a currency, currencies,
currency unit or units or composite currency or currencies) and the
manner in which such amounts shall be determined;
(14) the events of default or covenants of such Debt Securities, to the
extent different from or in addition to those described in this
Prospectus, and any provisions granting special rights to the holders
of such Debt Securities upon the occurrence of events specified in
such Prospectus Supplement;
(15) whether such Debt Securities will be issued in certificated and/or
book-entry form;
(16) whether such Debt Securities will be in registered or bearer form and,
if in registered form, the denominations thereof if other than $1,000
and any integral multiple thereof and, if in bearer form, the
denominations thereof and terms and conditions relating thereto;
(17) whether any of such Debt Securities are to be issuable in permanent
global form (a "Global Security") and, if so, the terms and
conditions, if any, upon which interests in such Global Security may
be exchanged, in whole or in part, for the individual Debt Securities
represented thereby;
(18) the applicability, if any, of the defeasance and covenant defeasance
provisions described in this Prospectus or any modification thereof;
(19) if such Debt Securities are to be issued upon the exercise of debt
warrants, the time, manner and place for such Debt Securities to be
authenticated and delivered;
(20) whether and under what circumstances the Company will pay additional
amounts on such Debt Securities in respect of any tax, assessment or
governmental charge and, if so, whether the Company will have the
option to redeem such Debt Securities in lieu of making such payment;
(21) the subordination provisions, if any, relating to such Debt
Securities;
(22) the provisions, if any, relating to any security provided for such
Debt Securities; and
(23) the provisions, if any, relating to any guarantee of such Debt
Securities.
The Debt Securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
("Original Issue Discount Securities"). If material or applicable, special U.S.
federal income tax, accounting and other considerations applicable to Original
Issue Discount Securities will be described in the applicable Prospectus
Supplement.
Except as described under "--Merger, Consolidation or Sale of Assets" or
as may be set forth in any Prospectus Supplement, an Indenture will not contain
any other provisions that would limit the ability of the Company to incur
indebtedness or that would afford holders of the Debt Securities protection in
the event of a highly leveraged or similar transaction involving the Company or
in the event of a change of control. Reference is made to the applicable
Prospectus Supplement for information with respect to any deletions from,
modifications of or additions to the events of default or covenants that are
described below, including any addition of a covenant or other provisions
providing event risk or similar protection.
Denominations, Interest, Registration and Transfer
Unless otherwise described in the applicable Prospectus Supplement, the
Debt Securities of any series that are registered securities, other than Global
Securities (which may be of any denomination), shall be issuable in
denominations of $1,000 and any integral multiple thereof.
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Unless otherwise specified in the applicable Prospectus Supplement, the
interest on and principal of and premium, if any, on any series of Debt
Securities will be payable at the corporate trust office of the Indenture
Trustee, initially at the address which will be set forth in the applicable
Prospectus Supplement; provided that, at the option of the Company, payment of
interest may be made by check mailed to the address of the person entitled
thereto as it appears in the applicable register or by wire transfer of funds
to such person at an account maintained within the United States.
Any interest not punctually paid or duly provided for on any interest
payment date with respect to a Debt Security ("Defaulted Interest") will
forthwith cease to be payable to the holder on the applicable regular record
date and may either be paid to the person in whose name such Debt Security is
registered at the close of business on a special record date (the "Special
Record Date") for the payment of such Defaulted Interest to be fixed by the
applicable Indenture Trustee, notice whereof shall be given to the holder of
such Debt Security not less than 10 days prior to such Special Record Date, or
may be paid at any time in any other lawful manner, all as more completely
described in the applicable Indenture.
Subject to certain limitations imposed upon Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for
other Debt Securities of the same series and of a like aggregate principal
amount and tenor of different authorized denominations upon surrender of such
Debt Securities at the corporate trust office of the applicable Indenture
Trustee. In addition, subject to certain limitations imposed upon Debt
Securities issued in book-entry form, the Debt Securities of any series may be
surrendered for conversion or registration of transfer thereof at the corporate
trust office of the applicable Indenture Trustee. Every Debt Security
surrendered for conversion, registration of transfer or exchange shall be duly
endorsed or accompanied by a written instrument of transfer. No service charge
will be made for any registration of transfer or exchange of any Debt
Securities, but the Indenture Trustee or the Company may require payment of a
sum sufficient to cover any tax or other governmental charge payable in
connection therewith. If the applicable Prospectus Supplement refers to any
transfer agent (in addition to the Indenture Trustee) initially designated by
the Company with respect to any series of Debt Securities, the Company may at
any time rescind the designation of any such transfer agent or approve a change
in the location through which any such transfer agent acts, except that the
Company will be required to maintain a transfer agent in each place of payment
for such series. The Company may at any time designate additional transfer
agents with respect to any series of Debt Securities.
Neither the Company nor any Indenture Trustee shall be required to (i)
issue, register the transfer of or exchange Debt Securities of any series
during a period beginning at the opening of business 15 days before any
selection of Debt Securities of that series to be redeemed and ending at the
close of business on (a) if such Debt Securities are issuable only as
registered securities, the day of the mailing of the relevant notice of
redemption and (b) if such Debt Securities are issuable as bearer securities,
the day of the first publication of the relevant notice of redemption or, if
such Debt Securities are also issuable as registered securities and there is no
publication, the mailing of the relevant notice of redemption; (ii) register
the transfer of or exchange any registered security so selected for redemption
in whole or in part, except, in the case of any registered security to be
redeemed in part, the portion thereof not to be redeemed; (iii) exchange any
bearer security so selected for redemption except that such a bearer security
may be exchanged for a registered security of that series and like tenor,
provided that such registered security shall be simultaneously surrendered for
redemption; or (iv) issue, register the transfer of or exchange any Debt
Security which has been surrendered for repayment at the option of the holder,
except the portion, if any, of such Debt Security not to be so repaid.
Merger, Consolidation or Sale of Assets
The Company may not consolidate or merge with or into (whether or not the
Company is the surviving corporation), or sell, assign, transfer, lease, convey
or otherwise dispose of all or substantially all of its properties or assets in
one or more related transactions, to another entity unless: (a) the Company is
the surviving corporation or the entity formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (b) the entity formed by
or surviving any such consolidation or merger (if other than the Company) or
the entity to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made assumes all the obligations of the Company
under the Debt Securities and any Indenture (pursuant to a supplemental
indenture in
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a form reasonably satisfactory to the applicable Indenture Trustee); and (c)
immediately after such transaction no event of default under the applicable
Indenture, and no event which, after notice or the lapse of time, or both,
would become such an event of default exists.
Certain Covenants
Provision of Financial Information. Whether or not required by the rules
and regulations of the Commission, so long as any Debt Securities are
outstanding, the Company will furnish to the holders of Debt Securities (a) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such Forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual information only, a report thereon by the Company's certified
independent accountants and (b) all financial information that would be
required to be included in a Form 8-K filed with the Commission if the Company
were required to file such reports. In addition, whether or not required by the
rules and regulations of the Commission, the Company will file a copy of all
such information and reports with the Commission for public availability
(unless the Commission will not accept such a filing) and make such information
available to investors who request it in writing.
Additional Covenants. Any additional or different covenants of the Company
(or modifications to the foregoing covenants) with respect to any series of
Debt Securities will be set forth in the applicable Prospectus Supplement.
Events of Default, Notice and Waiver
Each Indenture will provide that the following events are "Events of
Default" with respect to any series of Debt Securities issued thereunder: (a)
default for 30 days in the payment of any installment on any Debt Security of
such series; (b) default in the payment of the principal of (or premium, if
any, on) any Debt Security of such series at its maturity; (c) default in
making any sinking fund payments as required for any Debt Security of such
series; (d) default in the performance of any other covenant of the Company
contained in the applicable Indenture (other than a covenant added to such
Indenture solely for the benefit of a series of Debt Securities issued
thereunder other than such series), such default having continued for 60 days
after written notice as provided in such Indenture; (e) default in the payment
of an aggregate principal amount exceeding a specified dollar amount of any
evidence of indebtedness of the Company or any mortgage, indenture or other
instrument under which such indebtedness is issued or by which such
indebtedness is secured, such default having occurred after the expiration of
any applicable grace period and having resulted in the acceleration of the
maturity of such indebtedness or constituting a default in the payment of such
indebtedness at final maturity, but only if such indebtedness is not discharged
or such acceleration is not rescinded or annulled; (f) certain events of
bankruptcy, insolvency or reorganization, or court appointment of a receiver,
liquidator or trustee of the Company or any Significant Subsidiary (as
hereinafter defined) or any of their respective property; and (g) any other
event of default provided with respect to a particular series of Debt
Securities. The term "Significant Subsidiary" means each significant subsidiary
(as defined in Regulation S-X promulgated under the Securities Act) of the
Company.
If an Event of Default (other than an Event of Default described in clause
(f) above) under any Indenture with respect to Debt Securities of any series at
the time outstanding occurs and is continuing, then in every such case the
applicable Indenture Trustee or the holders of at least 25% in principal amount
of the outstanding Debt Securities of that series may declare the principal
amount (or, if the Debt Securities of that series are Original Issue Discount
Securities or indexed securities, such portion of the principal amount as may
be specified in the terms thereof) of all of the Debt Securities of that series
to be due and payable immediately by written notice thereof to the Company (and
to the applicable Indenture Trustee if given by the holders). If an Event of
Default described in clause (f) above with respect to the Debt Securities of
any series at the time outstanding shall occur, the principal amount of all the
Debt Securities of that series (or, in the case of any such Original Issue
Discount Security or other Debt Security, such specified amount) will
automatically, and without any action by the Indenture Trustee or any holder of
such series of Debt Securities, become immediately due and payable. However, at
any time after such a declaration of acceleration with respect to Debt
Securities of such series (or of all Debt Securities then outstanding under the
applicable Indenture, as the case may be) has been made, but before a judgment
or decree for payment of the money due has been obtained by the applicable
Indenture Trustee, the holders of not less than a majority in principal amount
of outstanding Debt Securities of such series (or of all Debt Securities then
outstanding under the applicable
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Indenture, as the case may be) may rescind and annul such declaration and its
consequences if (i) the Company shall have deposited with the applicable
Indenture Trustee all required payments of the principal of (and premium, if
any) and interest on the Debt Securities of such series (or of all Debt
Securities then outstanding under the applicable Indenture, as the case may
be), plus certain fees, expenses, disbursements and advances of the applicable
Indenture Trustee, and (ii) all Events of Default, other than the non-payment
of accelerated principal (or specified portion thereof), or premium, if any, or
interest on the Debt Securities of such series (or of all Debt Securities then
outstanding under the applicable Indenture, as the case may be) have been cured
or waived as provided in the applicable Indenture. Each of the Indentures will
also provide that the holders of not less than a majority in principal amount
of the outstanding Debt Securities of any series (or of all Debt Securities
then outstanding under the applicable Indenture, as the case may be) may waive
any past default with respect to such series and its consequences, except a
default (i) in the payment of the principal of (or premium, if any) or interest
on any Debt Security of such series or (ii) in respect of a covenant or
provision contained in the applicable Indenture that cannot be modified or
amended without the consent of the holder of each outstanding Debt Security
affected thereby.
The Indenture Trustee will be required to give notice to the holders of
Debt Securities within 90 days of a default under the applicable Indenture
unless such default has been cured or waived; provided, however, that such
Indenture Trustee may withhold notice to the holders of any series of Debt
Securities of any default with respect to such series (except a default in the
payment of the principal of (or premium, if any) or interest on any Debt
Security of such series or in the payment of any sinking fund installment in
respect of any Debt Security of such series) if specified responsible officers
of such Indenture Trustee consider such withholding to be in the interest of
such holders.
Each Indenture will provide that no holders of Debt Securities of any
series may institute any proceedings, judicial or otherwise, with respect to
the Indenture or for any remedy thereunder, except in the case of failure of
the Indenture Trustee, for 60 days, to act after it has received a written
request to institute proceedings in respect of an event of default from the
holders of not less than a majority in principal amount of the outstanding Debt
Securities of such series, as well as an offer of reasonable indemnity. This
provision will not prevent, however, any holder of Debt Securities from
instituting suit for the enforcement of payment of the principal of (and
premium, if any) and interest on such Debt Securities at the respective due
dates thereof.
Subject to provisions in the applicable Indenture relating to its duties
in case of default, no Indenture Trustee will be under any obligation to
exercise any of its rights or powers under such Indenture at the request or
direction of any holders of any series of Debt Securities then outstanding
under such Indenture, unless such holders shall have offered to the Indenture
Trustee reasonable security or indemnity. The holders of not less than a
majority in principal amount of the outstanding Debt Securities of any series
(or of all Debt Securities then outstanding under the applicable Indenture, as
the case may be) shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the applicable Indenture
Trustee, or of exercising any trust or power conferred upon such Indenture
Trustee. However, an Indenture Trustee may refuse to follow any direction which
is in conflict with any law or the Indenture, which may involve such Indenture
Trustee in personal liability or which may be unduly prejudicial to the holders
of Debt Securities of such series not joining therein.
The Company will be required to deliver to each Indenture Trustee annually
a certificate, signed by one of several specified officers of the Company,
stating whether or not such officer has knowledge of any default under the
applicable Indenture and, if so, specifying each such default and the nature
and status thereof.
Modification of the Indenture
Modifications and amendments of an Indenture will be permitted to be made,
and a waiver of any existing default or compliance with any provision may be
made, only with the consent of the holders of not less than a majority in
principal amount of all outstanding Debt Securities or series of outstanding
Debt Securities which are affected by such modification, amendment or waiver;
provided, however, that no such modification, amendment or waiver may, without
the consent of the holder of each such Debt Security affected thereby, (i)
change the stated maturity of the principal of, or any installment of interest
(or premium, if any) on any such Debt Security; (ii) reduce the principal
amount of, or the rate or amount of interest on, or any premium payable on
redemption of, any such Debt Security, or reduce the amount of principal of an
Original Issue Discount Security that would be due and payable upon declaration
of acceleration of the maturity thereof or would be provable in bankruptcy, or
adversely affect any right of repayment of the holder of any such Debt
Security; (iii) change the place of payment, or the
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coin or currency, for payment of principal of, premium, if any, or interest on
any such Debt Security; (iv) impair the right to institute suit for the
enforcement of any payment on or with respect to any such Debt Security; (v)
reduce the percentage of outstanding Debt Securities of any series necessary to
modify or amend the Indenture, to waive compliance with certain provisions
thereof or certain defaults and consequences thereunder or to reduce the quorum
or voting requirements set forth in such Indenture; or (vi) waive a default or
event of default in the payment of principal of or premium, if any, or interest
on the Debt Securities (except a recision of acceleration of the Debt
Securities by holders of not less than a majority in principal amount of Debt
Securities or series of Debt Securities affected thereby and that resulted from
such acceleration); or (vii) modify any of the foregoing provisions or any of
the provisions relating to the waiver of certain past defaults or certain
covenants, except to increase the required percentage to effect such action or
to provide that certain other provisions may not be modified or waived without
the consent of the holder of such Debt Security.
Modifications and amendments of an Indenture will be permitted to be made
by the Company and the applicable Indenture Trustee thereunder without the
consent of any holder of Debt Securities for any of the following purposes: (i)
to evidence the succession of another person to the Company as obligor under
such Indenture; (ii) to add to the covenants of the Company for the benefit of
the holders of all or any series of Debt Securities or to surrender any right
or power conferred upon the Company in such Indenture; (iii) to add events of
default for the benefit of the holders of all or any series of Debt Securities;
(iv) to add or change any provisions of the Indenture to facilitate the
issuance of, or to liberalize certain terms of, Debt Securities in bearer form,
or to permit or facilitate the issuance of Debt Securities in uncertificated
form; provided that such action shall not adversely affect the interests of the
holders of the Debt Securities in any material respect; (v) to change or
eliminate any provisions of the Indenture; provided that any such change or
elimination shall become effective only when there are no Debt Securities
outstanding of any series created prior thereto which are entitled to the
benefit of such provision; (vi) to secure the Debt Securities; (vii) to
establish the form or terms of Debt Securities of any series, including the
provisions and procedures, if applicable, for the conversion of such Debt
Securities into Common Stock or Preferred Stock; (viii) to provide for the
acceptance of appointment by a successor Indenture Trustee or facilitate the
administration of the trusts under an Indenture by more than one Indenture
Trustee; (ix) to cure any ambiguity, defect or inconsistency in an Indenture;
provided that such action shall not adversely affect the interests of holders
of Debt Securities of any series in any material respect; or (x) to supplement
any of the provisions of an Indenture to the extent necessary to permit or
facilitate defeasance and discharge of any series of such Debt Securities;
provided that such action shall not adversely affect the interests of the
holders of the Debt Securities of any series in any material respect.
Each Indenture will provide that in determining whether the holders of the
requisite principal amount of outstanding Debt Securities of a series have
given any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of holders of Debt
Securities, (i) the principal amount of an Original Issue Discount Security
that shall be deemed to be outstanding shall be the amount of the principal
thereof that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof, (ii) the principal amount
of a Debt Security denominated in a foreign currency that shall be deemed
outstanding shall be the U.S. dollar equivalent, determined on the issue date
for such Debt Security, of the principal amount (or, in the case of an Original
Issue Discount Security, the U.S. dollar equivalent on the issue date of such
Debt Security of the amount determined as provided in (i) above), (iii) the
principal amount of an indexed security that shall be deemed outstanding shall
be the principal face amount of such indexed security at original issuance,
unless otherwise provided with respect to such indexed security in the
applicable Indenture, and (iv) Debt Securities owned by the Company or any
other obligor upon the Debt Securities or any affiliate of the Company or of
such other obligor shall be disregarded.
Each Indenture will contain provisions for convening meetings of the
holders of each series of Debt Securities. A meeting may be called at any time
by an Indenture Trustee, and also, upon request, by the Company or the holders
of at least 25% in principal amount of the outstanding Debt Securities of such
series, in any such case, upon notice given as provided in such Indenture.
Except for any consent that must be given by the holder of each Debt Security
affected by certain modifications, amendments and waiver of an Indenture, any
resolution presented at a meeting or adjourned meeting duly reconvened at which
a quorum is present may be adopted by the affirmative vote of the holders of a
majority in principal amount of the outstanding Debt Securities of that series;
provided, however, that, except as referred to above, any resolution with
respect to any request, demand, authorization, direction, notice, consent,
waiver or other action that may be made, given or taken by the holders of a
specified percentage, which
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is less than a majority, in principal amount of the outstanding Debt Securities
of a series may be adopted at a meeting or adjourned meeting duly reconvened at
which a quorum is present by the affirmative vote of the holders of such
specified percentage in principal amount of the outstanding Debt Securities for
that series. Any resolution passed or decision taken at any meeting of holders
of Debt Securities of any series duly held in accordance with the applicable
Indenture will be binding on all holders of Debt Securities of that series. The
quorum at any meeting called to adopt a resolution, and at any reconvened
meeting, will be persons holding or representing a majority in principal amount
of the outstanding Debt Securities of a series; provided, however, that if any
action is to be taken at such meeting with respect to a consent or waiver which
may be given by the holders of not less than a specified percentage in
principal amount of the outstanding Debt Securities of a series, the persons
holding or representing such specified percentage in principal amount of the
outstanding Debt Securities of such series will constitute a quorum.
Notwithstanding the foregoing provisions, each Indenture will provide that
if any action is to be taken at a meeting of holders of Debt Securities of any
series with respect to any request, demand, authorization, direction, notice,
consent, waiver or other action that such Indenture expressly provides may be
made, given or taken by the holders of such series and one or more additional
series: (i) there shall be no minimum quorum requirement for such meeting and
(ii) the principal amount of the outstanding Debt Securities of such series
that vote in favor of such request, demand, authorization, direction, notice,
consent, waiver or other action shall be taken into account in determining
whether such request, demand, authorization, direction, notice, consent, waiver
or other action has been made, given or taken under such Indenture.
Discharge, Defeasance and Covenant Defeasance
The Company may discharge certain obligations to holders of any series of
Debt Securities that have not already been delivered to the applicable
Indenture Trustee for cancellation and that either have become due and payable
or will become due and payable within one year (or scheduled for redemption
within one year) by irrevocably depositing with such Indenture Trustee, in
trust, funds in such currency or currencies, currency unit or units or
composite currency or currencies in which such Debt Securities are payable in
an amount sufficient to pay the entire indebtedness on such Debt Securities in
respect of principal (and premium, if any) and interest to the date of such
deposit (if such Debt Securities have become due and payable) or to the stated
maturity or redemption date, as the case may be.
An Indenture may provide that, if certain provisions thereof are made
applicable to the Debt Securities of or within a series pursuant to the
Indenture, the Company may elect either (i) to defease and be discharged from
any and all obligations with respect to such Debt Securities (except for the
obligation to pay additional amounts, if any, upon the occurrence of certain
events of tax, assessment or governmental charge with respect to payments on
such Debt Securities and the obligations to register the transfer or exchange
of such Debt Securities, to replace temporary or mutilated, destroyed, lost or
stolen Debt Securities, to maintain an office or agency in respect of such Debt
Securities and to hold moneys for payment in trust) ("defeasance") or (ii) to
be released from its obligations with respect to such Debt Securities under
certain sections of such Indenture (including the restrictions described under
"--Certain Covenants") and, if provided pursuant to such Indenture, its
obligations with respect to any other covenant, and any omission to comply with
such obligations shall not constitute a default or an event of default with
respect to such Debt Securities ("covenant defeasance"), in either case upon
the irrevocable deposit by the Company with the applicable Indenture Trustee,
in trust, of an amount, in such currency or currencies, currency unit or units
of composite currency or currencies in which such Debt Securities are payable
at stated maturity, or Government Obligations (as defined below), or both,
applicable to such Debt Securities which through the scheduled payment of
principal and interest, in accordance with their terms will provide money in an
amount sufficient to pay the principal of (and premium, if any) and interest on
such Debt Securities, and any mandatory sinking fund or analogous payments
thereon, on the scheduled dates therefor.
Such a trust may be established only if, among other things, the Company
has delivered to the applicable Indenture Trustee an opinion of counsel (as
specified in the applicable Indenture) to the effect that the holders of such
Debt Securities will not recognize income, gain or loss for U.S. federal income
tax purposes as a result of such defeasance or covenant defeasance and will be
subject to U.S. federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such defeasance or covenant
defeasance had not occurred.
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"Government Obligations" means securities which are (i) direct obligations
of the United States of America or the government which issued the foreign
currency in which the Debt Securities of a particular series are payable, for
the payment of which its full faith and credit is pledged or (ii) obligations
of a person controlled or supervised by and acting as an agency or
instrumentality of the United States of America or such government which issued
the foreign currency in which the Debt Securities of a particular series are
payable, the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America or such other government,
which, in either case, are not callable or redeemable at the option of the
issuer thereof, and shall also include a depository receipt issued by a bank or
trust company as custodian with respect to any such Government Obligation or a
specific payment of interest on or principal of any such Government Obligation
held by such custodian for the account of the holder of a depository receipt;
provided that (except as required by law) such custodian is not authorized to
make any deduction from the amount payable to the holder of such depository
receipt from any amount received by the custodian in respect of the Government
Obligations or the specific payment of interest on or principal of the
Government Obligations evidenced by such depository receipt.
Unless otherwise provided in the applicable Prospectus Supplement, if
after the Company has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any
series, (i) the holder of a Debt Security of such series is entitled to, and
does, elect pursuant to the applicable Indenture or the terms of such Debt
Security to receive payment in a currency, currency unit or composite currency
other than that in which such deposit has been made in respect of such Debt
Security, or (ii) a Conversion Event (as defined below) occurs in respect of
the currency, currency unit or composite currency in which such deposit has
been made, the indebtedness represented by such Debt Security shall be deemed
to have been, and will be, fully discharged and satisfied through the payment
of the principal of (and premium, if any) and interest on such Debt Security as
they become due out of the proceeds yielded by converting the amount so
deposited in respect of such Debt Security into the currency, currency unit or
composite currency in which such Debt Security becomes payable as a result of
such election or such cessation of usage based on the applicable market
exchange rate. "Conversion Event" means the cessation of use of (i) a currency,
currency unit or composite currency both by the government of the country which
issued such currency and for the settlement of transactions by a central bank
or other public institutions of or within the international banking community,
(ii) the ECU both within the European Monetary System and for the settlement of
transactions by public institutions of or within the European Communities or
(iii) any currency unit or composite currency other than the ECU for the
purposes for which it was established. Unless otherwise provided in the
applicable Prospectus Supplement, all payments of principal of (and premium, if
any) and interest on any Debt Security that is payable in a foreign currency
that ceases to be used by its government of issuance shall be made in U.S.
dollars.
If the Company effects covenant defeasance with respect to any Debt
Securities and such Debt Securities are declared due and payable because of the
occurrence of any event of default and the amount in such currency, currency
unit or composite currency in which such Debt Securities are payable, and
Government Obligations on deposit with the Trustee, are not sufficient to pay
amounts due on such Debt Securities at the time of the acceleration resulting
from such event of default (even though they would have been sufficient to pay
amounts due under such Debt Security at their stated time of maturity), the
Company would remain liable to make payment of such amounts due at the time of
acceleration.
Notwithstanding the description set forth under "--Subordination" below,
in the event that the Company deposits money or Government Obligations in
compliance with the applicable Indenture in order to defease all or certain of
its obligations with respect to any Senior Subordinated Securities or
Subordinated Securities, the moneys or Government Obligations so deposited will
not be subject to the subordination provisions of such Indenture and the
indebtedness evidenced by such Senior Subordinated Securities or Subordinated
Securities will not be subordinated in right of payment to the holders of
senior indebtedness and senior subordinated indebtedness (as the case may be)
to the extent of the moneys or Government Obligations so deposited.
The applicable Prospectus Supplement may further describe the provisions,
if any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
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Conversion Rights
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Stock or Preferred Stock will be set forth in the
Prospectus Supplement relating thereto. Such terms will include whether such
Debt Securities are convertible into Common Stock or Preferred Stock, the
conversion price or rate (or manner of calculation thereof), the conversion
period, provisions as to whether conversion will be at the option of the
holders of the Company, the events requiring an adjustment of the conversion
price or rate and provisions affecting conversion in the event of the
redemption of such Debt Securities, and any restrictions on conversion.
Subordination
The terms and conditions, if any, upon which Senior Subordinated
Securities or Subordinated Securities of a series are subordinated to Debt
Securities of another series or to other indebtedness of the Company will be
set forth in the applicable Prospectus Supplement. Such terms will include a
description of the indebtedness ranking senior to such Senior Subordinated
Securities or Subordinated Securities, the restrictions on payments to the
holders of such Senior Subordinated Securities or Subordinated Securities while
a default with respect to such senior indebtedness is continuing, the
restrictions, if any, on payments to the holders of such Senior Subordinated
Securities or Subordinated Securities following an Event of Default, and
provisions requiring holders of such Senior Subordinated Securities or
Subordinated Securities to remit certain payments to holders of senior
indebtedness.
Global Securities
If so set forth in the applicable Prospectus Supplement, the Debt
Securities of a series may be issued in whole or in part in the form of one or
more Global Securities that will be deposited with, or on behalf of, a
depositary identified in the applicable Prospectus Supplement relating to such
series. Global Securities may be issued in either registered or bearer form and
in either temporary or permanent form. The specific terms of the depositary
arrangement with respect to any such series of Debt Securities will be
described in the applicable Prospectus Supplement.
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of Iron Mountain and
certain provisions of the Restated Certificate and the By-Laws is a summary and
is qualified in its entirety by reference to the Restated Certificate and the
By-Laws.
Iron Mountain's authorized capital stock consists of 100,000,000 shares of
Common Stock, 1,000,000 shares of nonvoting common stock, $.01 par value per
share ("Nonvoting Common Stock") and 2,000,000 shares of Preferred Stock. No
shares of Preferred Stock have been issued. There were 13,452,917 shares of
Common Stock held by 219 holders of record and no shares of Nonvoting Common
Stock issued and outstanding as of January 5, 1998.
Common Stock
The rights of holders of the Common Stock and the Nonvoting Common Stock
are identical in all respects except voting and convertibility.
Dividends. Holders of record of shares of Common Stock and Nonvoting
Common Stock on the record date fixed by the Iron Mountain Board are entitled
to receive such dividends as may be declared by the Iron Mountain Board out of
funds legally available for such purpose. No dividends may be declared or paid
in cash or property on any share of either class, however, unless
simultaneously the same dividend is declared or paid on each share of the other
class. In the case of any stock dividend, holders of each class are entitled to
receive the same percentage dividend (payable in shares of that class) as the
holders of the other class.
Iron Mountain is currently restricted under the terms of the Credit
Agreement and the Notes Indentures from paying cash dividends on the Common and
Nonvoting Common Stock. Even if funds were to be available, Iron Mountain does
not intend to pay dividends in the foreseeable future.
Voting Rights. Except as otherwise required by law, on each matter
submitted for a vote of stockholders, holders of shares of Common Stock are
entitled to one vote per share and holders of Nonvoting Common Stock are not
entitled to vote.
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Under the Restated Certificate, the vote of holders of at least 80% of the
voting power of all outstanding shares of capital stock entitled to vote
generally in the election of Directors, voting together as a single class (the
"Voting Power"), is required for the amendment or repeal of, or the adoption of
any provision inconsistent with, provisions of the Restated Certificate
establishing a classified Board of Directors. The vote of holders of at least
66-2/3% of such Voting Power is required for the amendment or repeal of, or the
adoption of any provision inconsistent with, provisions of the Restated
Certificate authorizing the Preferred Stock, Common Stock and Nonvoting Common
Stock or specifying the terms of the Common Stock and the Nonvoting Common
Stock (including any amendment to increase any shares of authorized capital
stock). Certain other provisions also require such a 66-2/3% vote. See "DGCL and
Certain Provisions of the Restated Certificate and the By-Laws." There are no
cumulative voting rights in the election of the Board of Directors of the
Company.
Conversion Provisions. Shares of Nonvoting Common Stock are convertible,
at any time at the option of the holder, on a share-for-share basis into shares
of Common Stock without the payment of any additional consideration; provided
that the conversion of any shares of Nonvoting Common Stock by a "bank holding
company" under the Bank Holding Company Act of 1956, as amended, or an
affiliate thereof is prohibited if the conversion of the total number of shares
of Nonvoting Common Stock held by such holder would cause it to be in violation
of such Act.
Liquidation Rights. Upon liquidation, dissolution or winding-up of Iron
Mountain, the holders of Common Stock and Nonvoting Common Stock are entitled
to share ratably (based on the number of shares held) in all assets available
for distribution after payment in full of creditors and payment in full to any
holders of Preferred Stock then outstanding of any amount required to be paid
under the terms of such Preferred Stock.
Other Provisions. The outstanding shares of Common Stock and Nonvoting
Common Stock are validly issued, fully paid and nonassessable. In any merger,
consolidation or business combination, holders of each class will receive
identical consideration, except that in any such transaction in which shares of
stock are distributed, such shares may differ as to voting rights to the extent
that voting rights now differ between the two classes. Neither class may be
subdivided, consolidated, reclassified or otherwise changed unless,
concurrently, the other class is subdivided, consolidated, reclassified or
otherwise changed in the same proportion and in the same manner.
The Transfer Agent and Registrar for the Common Stock is Boston EquiServe
Limited Partnership, 150 Royall Street, Canton, Massachusetts 02021 (telephone
number (781) 575-2000).
The Iron Mountain Board has the power to issue shares of authorized but
unissued Common Stock and Nonvoting Common Stock without further stockholder
action. The holders of Common Stock and Nonvoting Common Stock are not entitled
to preemptive or subscription rights. The issuance of such unissued shares
could have the effect of diluting the earnings per share and book value per
share of currently outstanding shares of Common Stock.
Preferred Stock
The authorized and unissued shares of Preferred Stock may be issued with
such designations, preferences, limitations and relative rights as the Iron
Mountain Board may authorize including, but not limited to: (i) the distinctive
designation of each series and the number of shares that will constitute such
series; (ii) the voting rights, if any, of shares of such series; (iii) the
dividend rate on the shares of such series, any restriction, limitation or
condition upon the payment of such dividends, whether dividends shall be
cumulative, and the dates on which dividends are payable; (iv) the prices at
which, and the terms and conditions on which, the shares of such series may be
redeemed, if such shares are redeemable; (v) the purchase or sinking fund
provisions, if any, for the purchase or redemption of shares of such series;
(vi) any preferential amount payable upon shares of such series in the event of
the liquidation, dissolution or winding-up of Iron Mountain or the distribution
of its assets; and (vii) the price or rates of conversion at which, and the
terms and conditions on which the shares of such series may be converted into
other securities, if such shares are convertible. Although Iron Mountain has no
present intention to issue shares of Preferred Stock, the issuance of Preferred
Stock, or the issuance of rights to purchase such shares, could discourage an
unsolicited acquisition proposal and the rights of holders of Common Stock will
be subject to, and may be adversely affected by, the rights of holders of any
Preferred Stock that may be issued in the future.
The following description of the Preferred Stock sets forth certain
general terms and provisions of the Preferred Stock to which any Prospectus
Supplement may relate. The statements below describing the Preferred Stock are
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in all respects subject to and qualified in their entirety by reference to the
applicable provisions of the Restated Certificate (including any applicable
certificates of designation) and the By-Laws.
Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for specific terms, including:
(1) the title of such Preferred Stock;
(2) the number of shares of such Preferred Stock offered, the par value,
the liquidation preference per share and the offering price of such
Preferred Stock;
(3) the dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculation thereof applicable to such Preferred Stock;
(4) the date from which dividends on such Preferred Stock shall
accumulate, if applicable;
(5) the procedures for any auction and remarketing, if any, for such
Preferred Stock;
(6) the provision for a sinking fund, if any, for such Preferred Stock;
(7) the provision for redemption, if applicable, of such Preferred Stock;
(8) any listing of such Preferred Stock on any securities exchange;
(9) the terms and conditions, if applicable, upon which such Preferred
Stock will be convertible into Common Stock of the Company or another
series of Offered Securities, including the conversion price (or manner
of calculation thereof);
(10) whether interests in such Preferred Stock will be represented by
Depositary shares as more fully described below under "Description of
Depositary Shares;"
(11) any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock;
(12) a discussion of federal income tax considerations applicable to such
Preferred Stock;
(13) the relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up
of the affairs of the Company;
(14) any limitations on issuance of any series of Preferred Stock ranking
senior to or on a parity with such series of Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up
of the affairs of the Company; and
(15) any limitations on direct or beneficial ownership and restrictions on
transfer.
As described under "Description of Depositary Shares," the Company may, at
its option, elect to offer Depositary Shares evidenced by depositary receipts
("Depositary Receipts"), each representing a fractional interest (to be
specified in the Prospectus Supplement relating to the particular series of the
Preferred Stock) in a share of the particular series of the Preferred Stock
issued and deposited with a Depositary (as defined below).
Rank
Unless otherwise determined by the Iron Mountain Board and specified in
the applicable Prospectus Supplement, it is expected that the Preferred Stock
will, with respect to dividend rights and rights upon liquidation, dissolution
or winding up of the Company, rank (i) senior to all Common Stock, and to all
equity securities ranking junior to such Preferred Stock; (ii) on a parity with
all equity securities issued by the Company the terms of which specifically
provide that such equity securities rank on a parity with the Preferred Stock;
and (iii) junior to all equity securities issued by the Company the terms of
which specifically provide that such equity securities rank senior to the
Preferred Stock.
Dividends
Holders of Preferred Stock of each series shall be entitled to receive,
when, as and if declared by the Iron Mountain Board, out of assets of the
Company legally available for payment, cash dividends at such rates and on such
dates as will be set forth in the applicable Prospectus Supplement. Each such
dividend shall be payable to
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holders of record as they appear on the stock transfer books of the Company
(or, if applicable, on the records of the Depositary referred to below under
"Description of Depositary Shares") on such record dates as shall be fixed by
the Board.
Dividends on any series of the Preferred Stock may be cumulative or
noncumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Iron Mountain Board fails to declare a
dividend payable on a dividend payment date on any series of the Preferred
Stock for which dividends are noncumulative, then the holders of such series of
the Preferred Stock will have no right to receive a dividend in respect of the
dividend period ending on such dividend payment date, and the Company will have
no obligation to pay the dividend accrued for such period, whether or not
dividends on such series are declared payable on any future dividend payment
date.
If Preferred Stock of any series are outstanding, no full dividends shall
be declared or paid or set apart for payment on the Preferred Stock of the
Company of any other series ranking, as to dividends, on a parity with or
junior to the Preferred Stock of such series for any period unless (i) if such
series of Preferred Stock has a cumulative dividend, full cumulative dividends
have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for such payment on the Preferred
Stock of such series for all past dividend periods and the then current
dividend period or (ii) if such series of Preferred Stock does not have a
cumulative dividend, full dividends for the then current dividend period have
been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for such payment on the Preferred
Stock of such series. When dividends are not paid in full (or a sum sufficient
for such full payment is not so set apart) upon the Preferred Stock of any
series and the shares of any other series of Preferred Stock ranking on a
parity as to dividends with the Preferred Stock of such series, all dividends
declared upon Preferred Stock of such series and any other series of Preferred
Stock shall in all cases bear to each other the same ratio that accrued
dividends per share on the Preferred Stock of such series (which shall not
include any accumulation in respect of unpaid dividends for prior dividend
periods if such Preferred Stock do not have a cumulative dividend) and such
other series of Preferred Stock bear to each other. No interest, or sum of
money in lieu of interest, shall be payable in respect of any dividend payment
or payments on Preferred Stock of such series which may be in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Stock has a cumulative dividend, full cumulative
dividends on the Preferred Stock of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the repayment
thereof set apart for payment for all past dividend periods and the then
current dividend period, and (ii) if such series of Preferred Stock does not
have a cumulative dividend, full dividends on the Preferred Stock of such
series have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof set apart for payment for the then
current dividend period, no dividends (other than in Common Stock or other
capital stock ranking junior to the Preferred Stock of such series as to
dividends and upon liquidation) shall be declared or paid or set aside for
payment or other distribution shall be declared or made upon the Common Stock
or any other capital stock of the Company ranking junior to or on a parity with
the Preferred Stock of such series as to dividends or upon liquidation, nor
shall any Common Stock or any other capital stock of the Company ranking junior
to or on a parity with the Preferred Stock of such series as to dividends or
upon liquidation be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available for a sinking fund
for the redemption of any shares of any such stock) by the Company (except by
conversion into or exchange for other capital stock of the Company ranking
junior to the Preferred Stock of such series as to dividends and upon
liquidation and except pursuant to certain pro rata offers to purchase or a
concurrent redemption of all, or a pro rata portion of, the outstanding shares
of the Preferred Stock of such series and any other series of Preferred Stock
ranking on a parity with such series as to dividends and liquidation).
Any dividend payment made on shares of a series of Preferred Stock shall
first be credited against the earliest accrued but unpaid dividend due with
respect to shares of such series which remains payable.
Redemption
If so provided in the applicable Prospectus Supplement, the Preferred
Stock will be subject to mandatory redemption or redemption at the option of
the Company, as a whole or in part, in each case upon the terms, at the times
and at the redemption prices set forth in such Prospectus Supplement.
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The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of such Preferred Stock
that shall be redeemed by the Company in each year commencing after a date to
be specified, at a redemption price per share to be specified, together with an
amount equal to all accrued and unpaid dividends thereon (which shall not, if
such Preferred Stock do not have a cumulative dividend, include any
accumulation in respect of unpaid dividends for prior dividend periods) to the
date of redemption. The redemption price may be payable in cash or other
property, as specified in the applicable Prospectus Supplement. If the
redemption price for Preferred Stock of any series is payable only from the net
proceeds of the issuance of capital stock of the Company, the terms of such
Preferred Stock may provide that, if no such capital stock shall have been
issued or to the extent the net proceeds from any issuance are insufficient to
pay in full the aggregate redemption price then due, such Preferred Stock shall
automatically and mandatorily be converted into shares of the applicable
capital stock of the Company pursuant to conversion provisions specified in the
applicable Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if such series of Preferred
Stock has a cumulative dividend, full cumulative dividends on all shares of any
series of Preferred Stock shall have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment for all past dividend periods and the then current dividend period, and
(ii) if such series of Preferred Stock does not have a cumulative dividend,
full dividends on the Preferred Stock of any series have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for payment for the then current dividend period,
no shares of any other series of Preferred Stock ranking, as to dividends and
upon liquidation, on parity with or junior to the Preferred Stock of such
series shall be redeemed unless all outstanding series of Preferred Stock of
such series are simultaneously redeemed and the Company shall not purchase or
otherwise acquire directly or indirectly any Preferred Stock of such series
(except by conversion into or exchange for capital stock of the Company ranking
junior to the Preferred Stock of such series as to dividends and upon
liquidation); provided, however, that the foregoing shall not prevent the
purchase or acquisition of Preferred Stock of such series pursuant to a
purchase or exchange offer made on the same terms to holders of all outstanding
Preferred Stock of such series.
If fewer than all of the outstanding Preferred Stock of any series are to
be redeemed, the number of Preferred Stock to be redeemed will be determined by
the Company and such shares may be redeemed pro rata from the holders of record
of such shares in proportion to the number of such shares held by such holders
(with adjustments to avoid redemption of fractional shares) or by lot in manner
determined by the Company.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Preferred Stock of
any series to be redeemed at the address shown on the stock transfer books of
the Company. Each notice shall state: (i) the redemption date; (ii) the number
of shares and series of the Preferred Stock to be redeemed; (iii) the
redemption price; (iv) the place or places where certificates for such
Preferred Stock are to be surrendered for payment of the redemption price; (v)
that dividends on the shares to be redeemed will cease to accrue on such
redemption date; and (vi) the date upon which the holder's conversion rights,
if any, as to such shares shall terminate. If fewer than all the Preferred
Stock of any series are to be redeemed, the notice mailed to each such holder
thereof shall also specify the number of Preferred Stock to be redeemed from
each such holder. If notice of redemption of any Preferred Stock has been given
and if the funds necessary for such redemption have been set aside by the
Company in trust for the benefit of the holders of any of the Preferred Stock
so called for redemption, then from and after the redemption date dividends
will cease to accrue on such Preferred Stock, and any and all rights of the
holders of such shares will terminate, except the right to receive the
redemption price.
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding up
of the affairs of the Company, then, before any distribution or payment shall
be made to the holders of any Common Stock or any other class or series of
capital stock of the Company ranking junior to a series of Preferred Stock in
the distribution of assets upon any liquidation, dissolution or winding up of
the Company, the holders of such series of Preferred Stock shall be entitled to
receive out of assets of the Company legally available for distribution to
shareholders liquidating distributions in the amount of the liquidation
preference per share (set forth in the applicable Prospectus Supplement), plus
an amount equal to all dividends accrued and unpaid thereon (which shall not
include any accumulation in respect of unpaid dividends for prior dividend
periods if such Preferred Stock do not have a cumulative dividend). After
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payment of the full amount of the liquidating distributions to which they are
entitled, the holders of Preferred Stock will have no right or claim to any of
the remaining assets of the Company. In the event that upon any such voluntary
or involuntary liquidation, dissolution or winding up, the available assets of
the Company are insufficient to pay the amount of the liquidating distributions
on all outstanding shares of a series of Preferred Stock and the corresponding
amounts payable on all shares of other classes or series of capital stock of
the Company ranking on a parity with such series of Preferred Stock in the
distribution of assets (including, if applicable, other series of Preferred
Stock), then the holders of such series of Preferred Stock and all other such
classes or series of capital stock shall share ratably in any such distribution
of assets in proportion to the full liquidating distributions to which they
would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders
of Preferred Stock, the remaining assets of the Company shall be distributed
among the holders of any other classes or series of capital stock ranking
junior to the Preferred Stock upon liquidation, dissolution or winding up,
according to their respective rights and preferences and in each case according
to their respective number of shares. For such purposes, the consolidation or
merger of the Company with or into any other trust or corporation, or the sale,
lease or conveyance of all or substantially all of the property or business of
the Company, shall not be deemed to constitute a liquidation, dissolution or
winding up of the Company.
Voting Rights
Holders of the Preferred Stock will not have any voting rights, except as
set forth below or as otherwise from time to time required by law or as
indicated in the applicable Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, at any
time dividends on any Preferred Stock shall be in arrears for a specified
number of consecutive quarterly periods, the holders of such Preferred Stock
and any other series of Preferred Stock upon which like voting rights have been
conferred and are exercisable (voting separately as a class) will be entitled
to vote for the election of two additional directors of the Company at the next
annual meeting of shareholders and at each subsequent meeting until (i) if such
series of Preferred Stock has a cumulative dividend, all dividends accumulated
on such Preferred Stock for the past dividend periods and the then current
dividend period shall have been fully paid or declared and a sum sufficient for
the payment thereof set aside for payment or (ii) if such series of Preferred
Stock does not have a cumulative dividend, four consecutive quarterly dividends
shall have been fully paid or declared and a sum sufficient for the payment
thereof set aside for payment.
Unless otherwise specified in the applicable Prospectus Supplement, so
long as any Preferred Stock remain outstanding, the Company shall not, without
the affirmative vote or consent of the holders of a majority of the shares of a
series of Preferred Stock outstanding at the time that is adversely affected,
given in person or by proxy, either in writing or at a meeting (such series
voting separately as a class), (i) authorize or create, or increase the
authorized or issued amount of, any class or series of capital stock ranking
prior to such series of Preferred Stock with respect to payment of dividends or
the distribution of assets upon liquidation, dissolution or winding up, or
reclassify any authorized capital stock of the Company into any such shares, or
create, authorize or issue any obligation or security convertible into or
evidencing the right to purchase any such shares; or (ii) amend, alter or
repeal the provisions of the certificate of designation for such series of
Preferred Stock, whether by merger, consolidation or otherwise, so as to
materially and adversely affect any right, preference, privilege or voting
power of such series of Preferred Stock or the holders thereof; provided,
however, that any increase in the amount of the authorized Preferred Stock or
the creation or issuance of any other series of Preferred Stock, or any
increase in the amount of authorized shares of such series or any other series
of Preferred Stock, in each case ranking on a parity with or junior to the
Preferred Stock of such series with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up, shall not
be deemed to materially and adversely affect such rights, preferences,
privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series of Preferred Stock shall
have been redeemed or called for redemption and sufficient funds shall have
been deposited in trust to effect such redemption.
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As more fully described under "Description of Depositary Shares" below, if
the Company elects to issue Depositary Shares, each representing a fraction of
share of a series of the Preferred Stock, each such Depositary will, in effect
be entitled to such fraction of a vote per Depositary Share.
Conversion Rights
The terms and conditions, if any, upon which shares of any series of
Preferred Stock may be converted into or exchanged for Common Stock or another
series of Preferred Stock or other series of Offered Securities will be set
forth in the Prospectus Supplement relating thereto. Such terms will include
the number of Common Stock or other securities into which the Preferred Share
is convertible or exchangeable, conversion or exchange price (or manner of
calculation thereof), the conversion or exchange period, provisions as to
whether conversion or exchange will be at the option of the holders of the
Preferred Stock or the Company, the events requiring an adjustment of the
conversion or exchange price and provisions affecting conversion or exchange in
the event of the redemption such Preferred Stock.
DESCRIPTION OF DEPOSITARY SHARES
General
The description set forth below and in any applicable Prospectus
Supplement of certain provisions of any Deposit Agreement (as defined below)
and of the Depositary Shares and depositary receipts representing Depositary
Shares ("Depositary Receipts") does not purport to be complete and is subject
to and qualified in its entirety by reference to the forms of Deposit Agreement
and Depositary Receipts relating to each series of the Preferred Stock which
have been or will be filed with the Commission at or prior to the time of the
offering of such series of the Preferred Stock.
The Company may, at its option, elect to offer fractional interests in
shares of Preferred Stock, rather than shares of Preferred Stock. In the event
such option is exercised, the Company will provide for the issuance by a
Depositary (as defined below) to the public of Depositary Receipts, each of
which will represent a fractional interest to be set forth in the Prospectus
Supplement relating to a particular series of the Preferred Stock which will be
filed with the Commission at or prior to the time of the offering of such
series of the Preferred Stock as described below. Preferred Stock of each
series represented by Depositary Shares will be deposited under a separate
deposit agreement (each, a "Deposit Agreement") among the Company and the
depositary named therein (a "Depositary"). The Prospectus Supplement relating
to a series of Depositary Shares will set forth the name and address of the
Depositary. Subject to the terms of the applicable Deposit Agreement, each
owner of a Depositary Share will be entitled, in proportion to the fractional
interest of a share of a particular series of Preferred Stock represented by
such Depositary Share to all the rights and preferences of the Preferred Stock
represented by such Depositary Shares (including dividend, voting, conversion,
redemption and liquidation rights).
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the applicable Deposit Agreement. Upon surrender of Depositary
Receipts at the office of the Depositary and upon payment of the charges
provided in the Deposit Agreement and subject to the terms thereof, a holder of
Depositary Shares is entitled to have the Depositary deliver to such holder the
shares of Preferred Stock underlying the Depositary Shares evidenced by the
surrendered Depositary Receipts.
Dividends and Other Distributions
A Depositary will be required to distribute all cash dividends or other
cash distributions received in respect of the applicable Preferred Stock to the
record holders of Depositary Receipts evidencing the related Depositary Shares
in proportion to the number of such Depositary Receipts owned by such holders,
subject to certain obligations of holders to file proofs, certificates and
other information and to pay certain charges and expenses to such Depositary.
Fractions will be rounded down to the market whole cent.
In the event of a distribution other than in cash, a Depositary will be
required to distribute property received by it to the record holders of
Depositary Receipts entitled thereto, subject to certain obligations of holders
to file proofs, certificates and other information and to pay certain charges
and expenses to such Depositary, unless such
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Depositary determines that it is not feasible to make such distribution, in
which case such Depositary may, with the approval of the Company, sell such
property and distribute the net proceeds from such sale to such holders.
No distributions will be made in respect of any Depositary Share to the
extent that it represents any Preferred Stock which have been converted or
exchanged. The Deposit Agreement will also contain provisions relating to the
manner in which any subscription or similar rights offered by the Company to
holders of the Preferred Stock shall be made available to holders of Depositary
Shares.
Redemption of Depositary Shares
If a series of the Preferred Stock underlying the Depositary Shares is
subject to redemption, the Depositary Shares will be redeemed from the proceeds
received by the Depositary resulting from the redemption, in whole or in part,
of such series of the Preferred Stock held by the Depositary. The Depositary
shall mail notice of redemption not less than 30 and not more than 60 days
prior to the date fixed for redemption to the record holders of the Depositary
Receipts evidencing the Depositary Shares to be so redeemed at their respective
addresses appearing in the Depositary's books. The redemption price per
Depositary Share will be equal to the applicable fraction of the redemption
price per share payable with respect to such series of the Preferred Stock.
Whenever the Company redeems shares of Preferred Stock held by the Depositary,
the Depositary will redeem as of the same redemption date the number of
Depositary Shares relating to shares of Preferred Stock so redeemed. If less
than all of the Depositary Shares are to be redeemed, the Depositary Shares to
be redeemed will be selected by lot or pro rata as may be determined by the
Depositary.
After the date fixed for redemption, the Depositary Shares so called for
redemption will no longer be deemed to be outstanding and all rights of the
holders of the Depositary Shares and the related Depositary Receipts will
cease, except the right to receive the moneys payable upon such redemption and
any money or other property to which the holders of such Depositary Shares were
entitled upon such redemption upon surrender to the Depositary of the
Depositary Receipts evidencing such Depositary Shares.
Voting of the Preferred Stock
Upon receipt of notice of any meeting at which the holders of the
applicable Preferred Stock are entitled to vote, a Depositary will be required
to mail the information contained in such notice of meeting to the record
holders of the Depositary Receipts evidencing the Depositary Shares which
represent such Preferred Stock. Each record holder of Depositary Receipts
evidencing Depositary Shares on the record date (which will be the same date as
the record date for the Preferred Stock) will be entitled to instruct such
Depositary as to the exercise of the voting rights pertaining to the amount of
Preferred Stock represented by such holder's Depositary Shares. Such Depositary
will endeavor, insofar as practical, to vote the amount of Preferred Stock
represented by such Depositary Shares in accordance with such instructions, and
the Company will agree to take all reasonable action which may be deemed
necessary by such Depositary in order to enable such Depositary to do so. Such
Depositary will be required to abstain from voting the amount of Preferred
Stock represented by such Depositary Shares to the extent it does not receive
specific instructions from the holders of Depositary Receipts evidencing such
Depositary Shares. The Depositary will not be responsible for any failure to
carry out any instruction to vote, or for the manner or effect of any such vote
made, as long as such action or non-action is in good faith and does not result
from gross negligence or willful misconduct of such Depositary.
Liquidation Preference
In the event of the liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of each Depositary Share will be
entitled to the fraction of the liquidation preference accorded each share of
Preferred Stock represented by such Depositary Share, as set forth in the
applicable Prospectus Supplement.
Conversion of Preferred Stock
The Depositary Shares, as such, will not be convertible into or
exchangeable for Common Stock, Preferred Stock or any other securities or
property of the Company. Nevertheless, if so specified in the applicable
Prospectus Supplement relating to an offering of Depositary Shares, the
Depositary Receipts may be surrendered by holders thereof to the applicable
Depositary with written instructions to such Depositary to instruct the Company
to cause
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conversion or exchange of the Preferred Stock represented by the Depositary
Share evidenced by such Depositary Receipts into Common Stock, other shares of
Preferred Stock of the Company or such other Offered Securities as shall be
provided therein, and the Company will agree that upon receipt of such
instruction and any amounts payable in respect thereof, it will cause the
conversion or exchange thereof utilizing the same procedures as those provided
for delivery of Preferred Stock to effect such conversion or exchange. If the
Depositary Shares evidenced by a Depositary Receipt are to be converted in part
only, a new Depositary Receipt or Depositary Receipts will be issued for any
Depositary Shares not to be converted.
Amendment and Termination of a Deposit Agreement
Any form of Depositary Receipt evidencing Depositary Shares and any
provision of a Deposit Agreement will be permitted at any time to be amended by
agreement between the Company and the applicable Depositary. However, any
amendment that materially and adversely alters the rights of the holders of
Depositary Shares will not be effective unless such amendment has been approved
by the existing holders of at least a majority of the applicable Depositary
Shares then outstanding. Every holder of an outstanding Depositary Receipt at
the time any such amendment becomes effective shall be deemed, by continuing to
hold such Depositary Receipt, to consent and agree to such amendment and to be
bound by the applicable Deposit Agreement as amended thereby.
Any Deposit Agreement may be terminated by the Company upon not less than
30 days' prior written notice to the applicable Depositary if a majority of
each series of Preferred Stock affected by such termination consents to such
termination, whereupon such Depositary will be required to deliver or make
available to each holder of Depositary Receipts, upon surrender of the
Depositary Receipts held by such holder, such number of whole or fractional
Preferred Stock as are represented by the Depositary Shares evidenced by such
Depositary Receipts together with any other property held by such Depositary
with respect to such Depositary Receipts. In addition, a Deposit Agreement will
automatically terminate if (i) all outstanding Depositary Shares thereunder
shall have been redeemed; (ii) there shall have been a final distribution in
respect of the related Preferred Stock in connection with any liquidation,
dissolution or winding up of the Company and such distribution shall have been
distributed to the holders of Depositary Receipts evidencing the Depositary
Shares underlying such Preferred Stock; or (iii) each of the related Preferred
Stock shall have been converted or exchanged into securities not so represented
by Depositary Shares.
Charges of a Depositary
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of a Deposit Agreement. In addition, the
Company will pay the fees and expenses of a Depositary in connection with the
initial deposit of the Preferred Stock and any redemption of Preferred Stock.
However, holders of Depositary Receipts will pay any transfer or other
governmental charges and the fees and expenses of a Depositary for any duties
requested by such holders to be performed which are outside of those expressly
provided for in the applicable Deposit Agreement.
Resignation and Removal of Depositary
A Depositary may resign at any time by delivering to the Company notice of
its election to do so, and the Company may at any time remove a Depositary, any
such resignation or removal to take effect upon the appointment of a successor
Depositary. A successor Depositary will be required to be appointed within 60
days after delivery of the notice of resignation or removal and will be
required to be a bank or trust company having its principal office in the
United States and having a combined capital and surplus of at least $50
million.
Miscellaneous
A Depositary will be required to forward to holders of Depositary Receipts
any reports and communications from the Company which are received by such
Depositary with respect to the related Preferred Stock.
Neither Depositary nor the Company will be liable if it is prevented from
or delayed in, by law or any circumstances beyond its control, performing its
obligations under a Deposit Agreement. The obligations of the Company and a
Depositary under a Deposit Agreement will be limited to performing their duties
thereunder in good faith and without gross negligence or willful misconduct,
and neither the Company nor any applicable Depositary
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will be obligated to prosecute or defend any legal proceeding in respect of any
Depositary Receipts, Depositary Shares or Preferred Stock represented thereby
unless satisfactory indemnity is furnished. The Company and any Depositary will
be permitted to rely on written advice of counsel or accountants, on
information provided by persons presenting Preferred Stock represented thereby
for deposit, holders of Depositary Receipts or other persons believed in good
faith to be competent to give such information, and on documents believed in
good faith to be genuine and signed by a proper party.
In the event a Depositary shall receive conflicting claims, requests or
instructions from any holders of Depositary Receipts, on the one hand, and the
Company, on the other hand, such Depositary shall be entitled to act on such
claims, requests or instructions received from the Company.
DESCRIPTION OF WARRANTS
The Company may issue, together with any other series of Offered
Securities or separately, Warrants entitling the holder to purchase from or
sell to the Company, or to receive from the Company the cash value of the right
to purchase or sell, Debt Securities, Preferred Stock, Depositary Shares or
Common Stock. Any Warrants will be issued under Warrant Agreements (each a
"Warrant Agreement") to be entered into between the Company and a warrant agent
(the "Warrant Agent"), all as set forth in the applicable Prospectus Supplement
relating to the particular issue of Warrants.
In the case of each series of Warrants, the applicable Prospectus
Supplement will describe the terms of the Warrants being offered thereby,
including the following, if applicable: (i) the offering price; (ii) the
currencies in which such Warrants are being offered; (iii) the number of
Warrants offered; (iv) the securities underlying the Warrants; (v) the exercise
price, the procedures for exercise of the Warrants and the circumstances, if
any, that will cause the Warrants to be deemed to be automatically exercised;
(vi) the date on which the right shall expire; (vii) U.S. federal income tax
consequences; and (viii) other terms of the Warrants.
Warrants may be exercised at the appropriate office of the Warrant Agent
or any other office indicated in the applicable Prospectus Supplement. Prior to
the exercise of Warrants entitling the holder to purchase any securities,
holders of such Warrants will not have any of the rights of holders of the
securities purchasable upon such exercise and will not be entitled to payments
made to holders of such securities.
The Warrant Agreements may be amended or supplemented without the consent
of the holders of the Warrants issued thereunder to effect changes that are not
inconsistent with the provisions of the Warrants and that do not adversely
affect the interests of the holders of the Warrants.
DGCL AND CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE AND THE BY-LAWS
The Restated Certificate and the By-Laws contain certain provisions that
could delay or make more difficult the acquisition of Iron Mountain by means of
a tender offer, a proxy contest or otherwise. These provisions, as described
below, are expected to discourage certain types of coercive takeover practices
and inadequate takeover bids and to encourage persons seeking to acquire
control of Iron Mountain first to negotiate with Iron Mountain. Iron Mountain
believes that the benefits of increased protection of its ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to acquire or
restructure Iron Mountain outweigh the disadvantages of discouraging such
proposals because, among other things, negotiations with respect to such
proposals could result in an improvement of their terms.
Classified Board of Directors
The Restated Certificate and the By-Laws provide for a Board of Directors
that is divided into three classes of Directors, as nearly equal in number as
possible, with the term of each class expiring in a different year. The By-Laws
provide that the number of Directors will be fixed from time to time
exclusively by the Iron Mountain Board, but shall consist of not more than 15
nor less than three Directors. The classified Iron Mountain Board is intended
to promote continuity and stability of Iron Mountain's management and policies
since a majority of the Directors at any given time will have prior experience
as Directors of Iron Mountain. Such continuity and stability facilitates
long-range planning of Iron Mountain's business and ensures the quality of its
business operations. The classification of Directors has the effect of making
it more difficult to change the composition of the Iron Mountain
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Board. At least two annual stockholder meetings, instead of one, would be
required to effect a change in the majority control of the Iron Mountain Board,
except in the event of vacancies resulting from removal (in which case the
remaining Directors will fill the vacancies so created). See "--Removal of
Directors; Filling Vacancies on the Iron Mountain Board."
Removal of Directors; Filling Vacancies on the Iron Mountain Board
The Restated Certificate and Iron Mountain By-Laws provide that an Iron
Mountain Director may be removed by the stockholders only for cause at any time
during such Director's term of office by the affirmative vote of the holders of
at least 80% of the Voting Power.
The By-Laws and the Restated Certificate both provide that a vacancy on
the Iron Mountain Board, including a vacancy created by an increase in the size
of the Iron Mountain Board by the Directors, may be filled by a majority of the
remaining Directors or by a sole remaining Director, or if no Directors remain,
then by the stockholders. The Restated Certificate also provides that any
Director elected by the Iron Mountain Board to replace another Director of a
given class of Directors will hold office until the next election of such class
of Directors. These provisions are to ensure that a third party would be
precluded from removing incumbent Directors and simultaneously gaining control
of the Iron Mountain Board by filling the vacancies created by such removal
with its own nominees. Moreover, even if the holders of the outstanding Common
Stock were to vote to remove Directors for cause, only the remaining Directors
would have the power to fill the vacancies created by such removal, unless such
vote provided for the removal of the entire Iron Mountain Board for cause.
Amendment of Certain Provisions of the Restated Certificate and the By-Laws
The Restated Certificate and the By-Laws contain provisions requiring the
affirmative vote of the holders of at least 66-2/3% of the Voting Power to amend
certain provisions of the Restated Certificate and the By-Laws. This
supermajority voting provision also applies to (i) the provisions of the
Restated Certificate authorizing Iron Mountain to release its Directors from
any liability for monetary damages as a result of any breach of their fiduciary
duties, with certain exceptions mandated by the DGCL, and (ii) the provisions
allowing for the indemnification of officers and Directors of Iron Mountain.
The Restated Certificate provides that the By-Laws may be amended only by a
majority of the full Iron Mountain Board or by the stockholders holding at
least 66-2/3% of the Voting Power. The DGCL provides that by-laws may not be
amended by a corporation's board of directors unless the corporation's
certificate of incorporation expressly authorizes such amendments by the board
of directors; the Restated Certificate includes such a provision. Under the
Restated Certificate, at least 80% of the Voting Power is required to approve
amendments to those provisions of the Restated Certificate or Iron Mountain
By-Laws establishing a classified Board, specifying notice requirements for
stockholder nominations of Directors or business to be brought by a stockholder
before an annual meeting and limiting the rights of stockholders to remove
Directors or fill vacancies on the Iron Mountain Board, to call special
meetings or to effect actions by written consent.
Stockholder Actions and Meetings
Iron Mountain's Restated Certificate provides that stockholder action may
be taken only at an annual or special meeting of stockholders and prohibits
stockholder action by written consent in lieu of a meeting. The Restated
Certificate and Iron Mountain By-Laws provide that special meetings of
stockholders can be called by the Chairman of the Board of Directors, if any,
or the Iron Mountain Board pursuant to a resolution approved by a majority of
the members of the Iron Mountain Board. The business permitted to be conducted
at any special meeting of stockholders is limited to the business brought
before the meeting by the Iron Mountain Board. The ByLaws set forth an advance
notice procedure with regard to the nomination, other than by or at the
direction of the Iron Mountain Board, of candidates for election as directors
and with regard to business brought before an annual meeting of stockholders of
Iron Mountain.
Delaware Anti-Takeover Statute
Subject to certain exceptions set forth therein, Section 203 of the DGCL
provides that a corporation shall not engage in any business combination with
any "interested stockholder" for a three-year period following the date that
such stockholder becomes an interested stockholder unless (i) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming
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an interested stockholder, (ii) upon consummation of the transaction that
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding certain shares) or
(iii) on or subsequent to such date, the business combination is approved by the
board of directors of the corporation and by the affirmative vote of at least
66-2/3% of the outstanding voting stock which is not owned by the interested
stockholder. Except as specified therein, an interested stockholder is defined
to mean any person that (a) is the owner of 15% or more of the outstanding
voting stock of the corporation or (b) is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock of
the corporation at any time within three years immediately prior to the relevant
date, or any affiliate or associate of such person referred to in (a) or (b) of
this sentence. Under certain circumstances, Section 203 of the DGCL makes it
more difficult for an interested stockholder to effect various business
combinations with a corporation for a three-year period, although the
stockholders may, by adopting an amendment to the corporation's certificate of
incorporation or by-laws, elect not to be governed by this section, effective 12
months after adoption. The Restated Certificate and the By-Laws do not exclude
Iron Mountain from the restrictions imposed under Section 203 of the DGCL. It is
anticipated that the provisions of Section 203 of the DGCL may encourage
companies interested in acquiring Iron Mountain to negotiate in advance with the
Iron Mountain Board.
DESCRIPTION OF INDEBTEDNESS
The summaries contained herein of certain of the indebtedness of Iron
Mountain do not purport to be complete and are qualified in their entirety by
reference to the provisions of the various agreements and indentures related
thereto, which are filed as exhibits to the Registration Statement of which
this Prospectus is a part and to which reference is hereby made.
Credit Agreement
The Credit Agreement, as currently in effect, is a $250.0 million
revolving credit facility that matures on September 30, 2002. Upon maturity,
all outstanding revolving credit loans and other amounts payable thereunder
will become due.
Borrowings under the Credit Agreement may be used to finance possible
future acquisitions, as well as for working capital and general corporate
purposes. The Company's obligations under the Credit Agreement are guaranteed
by substantially all of Iron Mountain's subsidiaries and are secured by the
pledge of the stock of such subsidiaries. Prepayment of outstanding borrowings
under the Credit Agreement are required in certain circumstances out of the
proceeds of certain insurance payments, condemnations, issuances of
indebtedness and asset dispositions.
The Credit Agreement permits the Company to elect interest rates from time
to time, as to all or a portion of the borrowings made thereunder, at interest
rates based upon the applicable reference rate and margin or spread over such
reference rate (which spread varies based upon the ratio of the Company's
indebtedness to EBITDA). The reference rate, at the Company's option, may be
based upon (i) a fluctuating rate of interest equal to the higher of the prime
rate of The Chase Manhattan Bank, or rates based upon certificate of deposit or
overnight federal funds rates, or (ii) for interest periods of 1, 2, 3, 6 or
(if available) 12 months, the interest rates prevailing on the date of
determination for the selected interest period in the London interbank market.
The Credit Agreement contains covenants restricting the ability of Iron
Mountain and its subsidiaries to, among other things: (i) declare dividends or
redeem or repurchase capital stock; (ii) make optional payments and
modifications of subordinated and other debt instruments; (iii) incur liens and
engage in sale and leaseback transactions; (iv) make loans and investments; (v)
incur indebtedness and contingent obligations; (vi) make capital expenditures;
(vii) engage in mergers, acquisitions and assets sales; (viii) enter into
transactions with affiliates; and (ix) make changes in their lines of business.
Iron Mountain is also required to comply with financial covenants with respect
to: (i) a maximum leverage ratio; (ii) a minimum interest coverage ratio; and
(iii) a minimum fixed charge coverage ratio. The Credit Agreement also contains
customary affirmative covenants and events of default.
The Senior Subordinated Notes
In October 1996, the Company issued $165.0 million principal amount of the
1996 Notes, and in October 1997, the Company issued $250.0 million principal
amount of the 1997 Notes. The 1996 Notes mature on October 1,
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2006, and bear interest at a rate of 10-1/8% per annum, payable semi-annually in
arrears on April 1 and October 1. The 1997 Notes mature on September 30, 2009,
and bear interest at a rate of 8-3/4% per annum, payable semi-annually in
arrears on March 31 and September 30. Both the 1996 Notes and the 1997 Notes
are general, unsecured obligations of the Company, subordinated in right of
payment to senior indebtedness of the Company, and are guaranteed on an
unsecured, senior subordinated and joint and several basis by substantially all
of the Company's present and future subsidiaries.
Each of the Notes Indentures provides that the Company may redeem up to
35% of the initial principal amount of the 1996 Notes and the 1997 Notes,
respectively, for a period of 36 months after the date of issuance with the net
proceeds of one or more equity offerings, whether such offerings are registered
pursuant to the Securities Act or not (unless such equity securities are
redeemable prior to the maturity of the 1996 Notes or the 1997 Notes, as the
case may be). In such event, the redemption price for the 1996 Notes would be
109.125%, and the redemption price for the 1997 Notes would be 108.75%, of the
aggregate principal amount plus, in each case, accrued and unpaid interest.
Each of the Notes Indentures also provides that the Company must repurchase, at
the option of the holders, the 1996 Notes and the 1997 Notes, respectively, at
100% of their principal amount, plus accrued and unpaid interest, upon the
occurrence of a "Change of Control," as defined therein. Except for required
repurchases upon the occurrence of a change of control or in the event of
certain asset sales, each as described in the respective Indenture, the Company
is not required to make sinking fund or redemption payments with respect to the
1996 Notes or the 1997 Notes. The 1996 Notes become redeemable at the option of
the Company at stated premiums commencing October 1, 2001. The 1997 Notes
become redeemable at the option of the Company at stated premiums commencing
September 30, 2002. Prior to September 30, 2002, the 1997 Notes are also
redeemable at the option of the Company, in whole or in part, at a specified
make-whole price.
The Notes Indentures contain covenants restricting or limiting the ability
of the Company and its subsidiaries to, among other things: (i) incur
additional indebtedness, including indebtedness ranking senior to the 1996
Notes and the 1997 Notes and junior to any senior indebtedness; (ii) pay
dividends or make other restricted payments; (iii) make asset dispositions;
(iv) permit liens; (v) enter into sale and leaseback transactions; (vi) enter
into certain mergers; (vii) make certain investments; and (viii) enter into
transactions with related persons.
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities to one or more underwriters
for public offering and sale by them or may sell the Offered Securities to
investors directly or through agents. Any such underwriter or agent involved in
the offer and sale of the Offered Securities will be named in the applicable
Prospectus Supplement.
The distribution of Offered Securities may be effected from time to time
in one or more transactions at a fixed price or prices, which may be changed,
at market prices prevailing at the time of sale, at prices related to such
market prices or at negotiated prices. In connection with the sale of Offered
Securities, underwriters or agents may receive or be deemed to have received
compensation from the Company or from purchasers in the form of underwriting
discounts, concessions or commissions. Underwriters may sell Offered Securities
to or through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters or from purchasers.
Any underwriting compensation paid by the Company to underwriters or
agents in connection with the offering of Offered Securities, and any
discounts, concessions or commissions allowed by underwriters to participating
dealers, will be set forth in the applicable Prospectus Supplement.
Underwriters, dealers and agents participating in the distribution of the
Offered Securities may be deemed to be underwriters, and any discounts,
concessions and commissions received by them and any profit realized by them on
resale of the Offered Securities may be deemed to be underwriting discounts and
commissions, under the Securities Act. Underwriters, dealers and agents may be
entitled, under agreements entered into with the Company, to indemnification
against and contribution toward certain civil liabilities, including
liabilities under the Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize underwriters or other persons acting as the Company's agents to
solicit offers by certain institutions to purchase Offered Securities from the
Company at the public offering price set forth in such Prospectus Supplement
pursuant to contracts providing for payment and delivery on a future date or
dates. Institutions with whom such contracts, when authorized, may be made
include commercial and savings banks, insurance companies, pension funds,
investment companies,
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educational and charitable institutions, and other institutions, but will in
all cases be subject to the approval of the Company. Any such contracts will be
subject to the condition that the purchase by an institution of the Offered
Securities covered by its contracts shall not at the time of delivery be
prohibited under the law of any jurisdiction in the United States to which such
institution is subject and, if a portion of the Offered Securities is being
sold to underwriters, may be subject to the condition that the Company shall
have sold to such underwriters the Offered Securities not sold for delayed
delivery. The underwriters and such other persons will not have any
responsibility in respect of the validity or performance of such contracts.
Unless otherwise specified in the related Prospectus Supplement, each series
of Offered Securities will be a new issue with no established trading market,
other than shares of Common Stock, which are listed on the Nasdaq National
Market. Any shares of Common Stock sold pursuant to a Prospectus Supplement
will be listed on the Nasdaq National Market. The Company may elect to list any
other series of Offered Securities on an exchange, but is not obligated to do
so. Any underwriters to whom Offered Securities are sold by the Company for
public offering and sale may make a market in such Offered Securities, but such
underwriters will not be obligated to do so and may discontinue any market
making at any time without notice. No assurance can be given as to the
liquidity of or the trading markets for any Offered Securities.
Certain of the underwriters and their affiliates may be customers of, engage
in transactions with and perform services for the Company and its subsidiaries
in the ordinary course of business.
The specific terms and manner of sale of the Offered Securities will be set
forth or summarized in the applicable Prospectus Supplement.
LEGAL MATTERS
Certain legal matters with respect to the Offered Securities offered by
the Company will be passed upon for the Company by Sullivan & Worcester LLP,
Boston, Massachusetts. Jas. Murray Howe, Secretary of Iron Mountain, is of
counsel to Sullivan & Worcester LLP and beneficially owns 5,000 shares of
Common Stock.
EXPERTS
The consolidated financial statements and schedule of Iron Mountain
Incorporated and its subsidiaries for the three years ended December 31, 1996,
included in Iron Mountain's Annual Report on Form 10-K, have been audited by
Arthur Andersen LLP, independent public accountants, as stated in their reports
with respect thereto, and are incorporated by reference herein in reliance upon
the authority of said firm as experts in giving said reports.
The financial statements of Nashville Vault Company, Ltd. for the year
ended December 31, 1995, included in Iron Mountain's Registration Statement on
Form S-4 (file No. 333-24635, effective date May 14, 1997), have been audited
by Geo. S. Olive & Co. LLC, independent public accountants, as stated in their
report with respect thereto, and are incorporated by reference herein in
reliance upon the authority of said firm as experts in giving said report.
The financial statements of International Record Storage and Retrieval
Services, Inc. for the year ended December 31, 1995, included in Iron
Mountain's Registration Statement on Form S-4 (file No. 333-24635, effective
date May 14, 1997), have been audited by Rothstein, Kass & Company, P.C.,
independent public accountants, as stated in their report with respect thereto,
and are incorporated by reference herein in reliance upon the authority of said
firm as experts in giving said report.
The financial statements of Mohawk Business Record Storage, Inc. for the
year ended December 31, 1995, included in Iron Mountain's Registration
Statement on Form S-4 (file No. 333-24635, effective date May 14, 1997), have
been audited by Arthur Andersen LLP, independent public accountants, as stated
in their report with respect thereto, and are incorporated by reference herein
in reliance upon the authority of said firm as experts in giving said report.
The financial statements of Security Archives of Minnesota for the year
ended December 31, 1996, included in Iron Mountain's Current Report on Form 8-K
dated October 30, 1997, have been audited by Arthur Andersen LLP, independent
public accountants, as stated in their report with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said report.
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The financial statements of Wellington Financial Services, Inc. for the
year ended December 31, 1996, included in Iron Mountain's Current Report on
Form 8-K dated October 30, 1997, have been audited by Arthur Andersen LLP,
independent public accountants, as stated in their report with respect thereto,
and are incorporated by reference herein in reliance upon the authority of said
firm as experts in giving said report.
The financial statements of Allegiance Business Archives, Ltd. for the
year ended December 31, 1996, included in Iron Mountain's Current Report on
Form 8-K dated November 25, 1997, have been audited by Stout, Causey & Horning,
P.A., independent public accountants, as stated in their report with respect
thereto, and are incorporated by reference herein in reliance upon the
authority of said firm as experts in giving said report.
The financial statements and schedule of Safesite Records Management
Corporation for the three years ended December 31, 1996, included in Iron
Mountain's Registration Statement on Form S-4 (file no. 333-24635, effective
date May 14, 1997), have been audited by Arthur Andersen LLP, independent
public accountants, as stated in their reports with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said reports.
The financial statements of Concorde Group, Inc. and Neil Trucker Trust
for the year ended December 31, 1996, included in Iron Mountain's Current
Report on Form 8-K dated October 30, 1997, have been audited by Fisher, Schacht
& Oliver LLP, independent public accountants, as stated in their report with
respect thereto, and are incorporated by reference herein in reliance upon the
authority of said firm as experts in giving said report.
The financial statements of Data Securities International, Inc. for the
year ended December 31, 1996, included in Iron Mountain's Current Report on
Form 8-K dated October 30, 1997, have been audited by Arthur Andersen LLP,
independent public accountants, as stated in their report with respect thereto,
and are incorporated by reference herein in reliance upon the authority of said
firm as experts in giving said report.
The financial statements of Records Retention/FileSafe, LP for the two
years ended December 31, 1996, included in Iron Mountain's Current Report on
Form 8-K dated November 25, 1997, have been audited by Abbott Stringham &
Lynch, independent public accountants, as stated in their report with respect
thereto, and are incorporated by reference herein in reliance upon the
authority of said firm as experts in giving said report.
The consolidated financial statements of HIMSCORP, Inc. and Subsidiaries
for the period February 1, 1995 to December 31, 1995 and for the year ended
December 31, 1996, appearing in Iron Mountain's Current Reports on Form 8-K
dated October 30, 1997 and November 25, 1997, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their reports thereon included
therein, and are incorporated by reference herein in reliance upon the
authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Arcus Technology Services, Inc.
(Successor Company) for the year ended December 31, 1996 and the five months
ended December 31, 1995 and the consolidated financial statements of Arcus,
Inc. (Predecessor Company) for the seven months ended July 31, 1995 and the
year ended December 31, 1994, appearing in Iron Mountain's Current Reports on
Form 8-K dated October 30, 1997 and November 25, 1997, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
included therein, and are incorporated by reference herein in reliance upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Arcus Group, Inc. for the two
years in the period ended December 31, 1996, appearing in Iron Mountain's
Current Reports on Form 8-K dated October 30, 1997 and November 25, 1997, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereof included therein, and are incorporated by reference herein in
reliance upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Arcus Group, Inc. for the year
ended December 31, 1994, included in Iron Mountain's Current Report on Form 8-K
dated November 25, 1997, have been audited by Arthur Andersen LLP, independent
public accountants, as stated in their report with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said report.
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No dealer, salesperson or other individual has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement or the accompanying Prospectus in connection with the Offering
covered by this Prospectus Supplement or the accompanying Prospectus. If given
or made, such information or representations must not be relied upon as having
been authorized by the Company or the Underwriters. Neither this Prospectus
Supplement nor the accompanying Prospectus constitutes an offer to sell, or a
solicitation of an offer to buy, the Common Stock in any jurisdiction where, or
to any person to whom, it is unlawful to make such offer or solicitation.
Neither the delivery of this Prospectus Supplement, the accompanying Prospectus
nor any sale made hereunder shall, under any circumstances, create any
implications that there has been no change in the affairs of the Company since
the date hereof or that the information contained herein is correct as of any
time subsequent to the date hereof.
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TABLE OF CONTENTS
Prospectus Supplement
Page
-----
Prospectus Supplement Summary .............. S-1
Recent and Pending Acquisitions ............ S-8
Use of Proceeds ............................ S-10
Capitalization ............................. S-11
Pro Forma Condensed Consolidated Financial
Information ............................. S-12
Selected Consolidated Financial and
Operating Information ................... S-21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations .............................. S-23
Business ................................... S-32
Management ................................. S-45
Principal Stockholders ..................... S-49
Underwriting ............................... S-51
Legal Matters .............................. S-52
Experts .................................... S-52
Incorporation of Certain Information by
Reference ............................... S-54
Index to Financial Statements .............. F-1
Prospectus
Available Information ...................... ii
Incorporation of Certain Documents by
Reference ............................... iii
Risk Factors ............................... 1
The Company ................................ 5
Use of Proceeds ............................ 5
Ratio of Earnings to Fixed Charges ......... 6
Description of Debt Securities ............. 6
Description of Capital Stock ............... 15
Description of Depositary Shares ........... 21
Description of Warrants .................... 24
DGCL and Certain Provisions of the Restated
Certificate and the By-Laws ............. 24
Description of Indebtedness ................ 26
Plan of Distribution ....................... 27
Legal Matters .............................. 28
Experts .................................... 28
3,500,000 Shares
[LOGO]
IRON MOUNTAIN
INCORPORATED
Common Stock
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PROSPECTUS SUPPLEMENT
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Bear, Stearns & Co. Inc.
William Blair & Company
Prudential Securities Incorporated
March 30, 1998
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