<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON , 1997
REGISTRATION NO. 333-23119
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
PIERCE LEAHY CORP.
(exact name of registrant as specified in its charter)
PENNSYLVANIA 4226 23-2588479
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
631 PARK AVENUE
KING OF PRUSSIA, PENNSYLVANIA 19406
(610) 992-8200
(Address, including zip code, and telephone number, including area code, of
the registrant's principal executive offices)
DOUGLAS B. HUNTLEY
CHIEF FINANCIAL OFFICER
631 PARK AVENUE
KING OF PRUSSIA, PENNSYLVANIA 19406
(610) 992-8200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
RICHARD J. BUSIS, ESQUIRE JOSEPH A. COCO, ESQUIRE
COZEN AND O'CONNOR SKADDEN, ARPS, SLATE, MEAGHER & FLOM
1900 MARKET STREET LLP
PHILADELPHIA, PENNSYLVANIA 19103 919 THIRD AVENUE
NEW YORK, NEW YORK 10022
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 17, 1997
PROSPECTUS
$100,000,000
[LOGO]
PIERCE LEAHY CORP.
% SENIOR SUBORDINATED NOTES DUE 2007
INTEREST PAYABLE AND
--------
Pierce Leahy Corp. (the "Company") is offering (the "Notes Offering")
$100,000,000 aggregate principal amount of its % Senior Subordinated Notes due
2007 (the "Notes"). The Notes are redeemable for cash at any time on or after
, 2002, at the option of the Company, in whole or in part, at the redemption
prices set forth herein plus accrued and unpaid interest, if any, to the
redemption date. In addition, the Company, at its option, may redeem in the
aggregate up to % of the original principal amount of the Notes at any time
and from time to time prior to , 2000 at % of the aggregate principal amount
so redeemed, plus accrued and unpaid interest thereon to the redemption date,
with the Net Proceeds (as defined herein) of one or more Public Equity
Offerings (as defined herein), provided that at least $ of the principal
amount of the Notes originally issued remain outstanding immediately after the
occurrence of any such redemption. See "Description of the Notes--Optional
Redemption."
Upon a Change of Control (as defined herein), each holder of the Notes will
have the right to require the repurchase of its Notes by the Company in cash at
a purchase price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the date of purchase. See "Description of the
Notes."
The Notes are general unsecured obligations of the Company, subordinate in
right of payment to all existing and future Senior Indebtedness (as defined
herein) of the Company and senior in right of payment to any subordinated
indebtedness of the Company. The Notes rank pari passu in right of payment to
all existing and future senior subordinated indebtedness of the Company. As of
December 31, 1996, after giving pro forma effect to the 1997 Acquisitions (as
defined herein), the Notes Offering and the Equity Offerings (as defined below)
and the application of the net proceeds therefrom, the Company would have had
$3.7 million of Senior Indebtedness outstanding and $130 million of
indebtedness ranked pari passu with the Notes.
Concurrently with the Notes Offering, the Company and certain shareholders of
the Company are offering shares of the Company's Common Stock (the "Equity
Offerings," and together with the Notes Offering, the "Offerings") by a
separate prospectus. The consummation of the Notes Offering is conditioned upon
the consummation of the Equity Offerings. The Offerings are expected to occur
simultaneously.
SEE "RISK FACTORS" COMMENCING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE NOTES OFFERED
HEREBY.
--------
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.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note $ $ $
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Total(3) $ $ $
</TABLE>
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(1) Plus accrued interest, if any, from the date of issuance.
(2) For information regarding indemnification of the Underwriters, see
"Underwriting."
(3) Before deducting expenses estimated at $ , all of which are payable by
the Company.
--------
The Notes are being offered by the several Underwriters named herein, subject
to prior sale, when, as and if accepted by them and subject to certain
conditions. It is expected that the Notes offered hereby will be available for
delivery on or about , 1997 at the office of Smith Barney Inc., 333 West
34th Street, New York, New York 10001.
--------
SMITH BARNEY INC.
MERRILL LYNCH & CO.
CIBC WOOD GUNDY SECURITIES CORP.
, 1997
<PAGE>
[GATEFOLD ARTWORK]
CERTAIN PERSONS PARTICIPATING IN THE NOTES OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES, INCLUDING
STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE
IMPOSITION OF A PENALTY BID. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and
financial statements contained elsewhere in this Prospectus. Except as
otherwise indicated by the context, references to the "Company" include Pierce
Leahy Corp. and its consolidated subsidiaries. Management is not aware of any
definitive information about the size or nature of the North American records
management market (vended and unvended, active and inactive). Estimates of
such numbers and percentages contained in this Prospectus have been developed
by the Company from internal sources and reflect the Company's current
estimates; however, no assurance can be given regarding the accuracy of such
estimates. Unless otherwise indicated, the information in this Prospectus
assumes (i) no exercise by certain of the underwriters in the Equity Offerings
of an over-allotment option granted by the Company and certain selling
shareholders to purchase additional shares of the Company's Common Stock in
the Equity Offerings and (ii) gives effect to the Stock Recapitalization (as
hereinafter defined) and the Offerings. In addition, unless otherwise
indicated, the information regarding the Company in this Prospectus includes
the 1997 Acquisitions described under "Business--The 1997 Acquisitions."
THE COMPANY
The Company is the largest archive records management company in North
America, as measured by its 47.5 million cubic feet of records currently under
management. The Company operates a total of 152 records management facilities
of which 139 are in the United States, serving 58 markets, including the 16
largest U.S. markets. In addition, the Company operates 13 records management
facilities in five of Canada's six largest markets.
The Company is a full-service provider of records management and related
services, enabling customers to outsource their data and records management
functions. The Company offers storage for all major media, including paper
(which has typically accounted for approximately 95% of the Company's storage
revenues), computer tapes, optical discs, microfilm, video tapes and X-rays.
In addition, the Company provides next day or same day records retrieval and
delivery, allowing customers prompt access to all stored material. The Company
also offers other data management services, including customer records
management programs, imaging services and records management consulting
services.
The Company believes it is the most technologically advanced records
management company in the industry by virtue of its Pierce Leahy User
Solution(R) (PLUS(R)) computer system. The PLUS(R) system fully integrates the
Company's records management, data retrieval and billing functions on a
centralized basis through the use of proprietary, real time software. The
PLUS(R) system assists the Company in efficiently managing records in multiple
locations for national and local customers, rapidly integrating acquisitions
of records management companies and maintaining a low-cost operating
structure. The Company serves a diversified group of over 22,000 customer
accounts in a variety of industries such as financial services, manufacturing,
transportation, healthcare and law. The Company's storage and related services
are typically provided pursuant to contracts that include recurring monthly
storage fees, which continue until such records are permanently removed (for
which the Company charges a fee), and additional charges for services such as
retrieval on a per unit basis.
The Company's revenues and operating income before non-recurring charges (on
a pro forma basis as defined herein) for the year ended December 31, 1996 were
$167.8 million and $23.4 million, respectively. From 1992 to 1996, the
Company's revenues and operating income before non-recurring charges grew at
compound annual growth rates of 19.9% and 28.7%, respectively. The Company
attributes this growth to the expansion of its business with new and existing
customers, which has been primarily driven by the trend towards outsourcing
of records management functions by companies and the ongoing consolidation of
the fragmented records management industry. The Company has successfully
acquired and integrated 26 companies from 1992 to 1996.
3
<PAGE>
The Company's growth strategy is to expand its business in new and existing
markets through (i) targeting new customers, (ii) growing with existing
customers and (iii) continuing its acquisition program. The Company has adopted
the following approaches to pursue its growth objectives:
. Targeting New Customers. The Company has a dual sales strategy focused
on both larger, typically multi-location accounts and smaller accounts,
with a dedicated sales force for each. The Company's sales and marketing
force has increased from 41 persons at the end of 1995 to 75 persons
currently. For large regional and national accounts, the Company
believes its national presence, sophisticated systems and low-cost
operating structure provide a competitive advantage. These organizations
are increasingly outsourcing such noncore activities, which enables
their management to focus on their core business and to reduce space
requirements and records management costs. For smaller accounts, the
Company combines the cost benefits of its centralized systems with
quality local service. From 1992 to 1996, the average annual growth rate
of cubic feet of storage from new customers was approximately 8%.
. Growing with Existing Customers. The Company services its existing
customers through both a centralized customer service organization and
local client service representatives. Existing customers typically
generate additional records annually which are stored with the Company.
From 1992 to 1996, the average annual growth rate of cubic feet of
storage from existing customers was approximately 6%.
. Continuing Acquisition Program. The Company believes that the records
management industry is highly fragmented and offers substantial
opportunity for consolidation. The Company targets potential
acquisitions both in the markets it already services and in new markets
which it is not yet servicing. From 1992 to 1996, the Company
successfully completed and integrated 26 acquisitions, totalling
approximately 12.4 million cubic feet of records at the time of
acquisition. Since January 1, 1997, the Company has completed five
acquisitions, totalling approximately 6.7 million cubic feet of records
at the time of acquisition. As a result of its centralized
organizational structure and the PLUS(R) system, the Company has been
able to rapidly achieve significant economies of scale in its
acquisitions. From 1992 to 1996, the average annual growth rate of cubic
feet of storage from acquisitions was approximately 10%. See "Business--
Acquisition and Growth Strategy."
The Company's growth strategy is supported by an operating strategy which
emphasizes providing premium standardized services while maintaining a low-cost
operating structure. As a result, the Company's operating income before non-
recurring charges as a percentage of total revenues increased from 13.3% in
1992 to 17.7% in 1996. The Company expects to continue its growth and enhance
its position by implementing its strategy based on the following elements:
. Using Sophisticated Centralized Systems to Provide High Quality
Service. In tandem with the Company's centralized customer service
organization and local field support personnel, the Company utilizes its
PLUS(R) system to provide a high and consistent level of service (24
hours a day, seven days a week) to its customers on a national and local
basis, including providing its customers with real-time access to the
database. Although PLUS(R) is centralized, the system permits local
management flexibility through a variety of pre-programmed options to
customize the system and enhance its utility to different types of
customers.
. Maintaining its Position as a Low-Cost Provider through Economies of
Scale. The Company strives to remain a low-cost operator through
achieving economies of scale in labor, real estate, transportation,
computer systems and administrative expenses. The PLUS(R) system allows
the Company to enhance the efficiency of its facilities while reducing
fixed and operating costs. This system eliminates the need to designate
permanent locations for an individual customer's records within a
facility by using sophisticated bar-coding technology which enables
records to be stored wherever space is available and to be positioned
within the Company's facilities based on retrieval frequency, thereby
reducing labor costs. PLUS(R) is similarly valuable in helping to
achieve cost savings in acquisitions.
4
<PAGE>
THE RECORDS MANAGEMENT INDUSTRY
According to a 1994 study by the Association of Commercial Record Centers
(the "ACRC"), an industry trade group with over 500 members, approximately
2,800 companies offer records storage and related services in North America.
The Company believes that only 25% of the potential market outsources its
records management functions and that approximately 75% is still "unvended," or
internally managed. The Company estimates that the North American vended
records management industry generates annual revenues in excess of $1.0
billion. Management believes that the industry is highly fragmented, with most
industry participants operating on a regional or local basis.
Saved documents, or records, generally fall into two categories: active and
inactive. Active records refer to information that is frequently referenced and
usually stored on-site by the originator. Inactive records are not needed for
frequent access, but must be retained for future reference, legal requirements
or regulatory compliance. Inactive records, which the Company estimates
comprise approximately 80% of all records, are the principal focus of the
records management industry.
The Company believes that the records management industry is characterized by
the following trends:
. Industry Consolidation. The records management industry is undergoing a
period of consolidation as larger, better capitalized industry
participants acquire smaller regional or local participants. Management
believes that consolidation is primarily driven by the needs of large
customers for fully integrated coverage and the ability to realize
economies of scale, especially with respect to labor, real estate,
transportation, computer systems and administrative expenses. Industry
consolidation also provides private owners of smaller records management
companies the ability to obtain liquidity.
. Movement Towards Outsourcing. Outsourcing of internal records management
functions represents the largest single source of new business for
records management companies. The Company believes that as more
organizations become aware of the advantages of professional records
management, such as net cost reductions and enhanced levels of service,
the records management industry will continue to gain a growing portion
of the unvended segment. The Company also believes that the
establishment of national providers with well-known brand names will
help to accelerate this trend.
. Increasing Production of Paper. Increasingly widespread technologies
such as facsimiles, copiers, personal computers, laser printers and
advanced software packages have enabled organizations to create, copy
and distribute documents more easily and broadly. In spite of new
"paperless" technologies (including the Internet and "e-mail"),
information remains predominantly paper based. Additionally, the cost of
storing records on paper is currently less expensive than the cost of
converting paper records to, and storing on, other media (e.g., computer
media, imaging, microfilm, CD-Rom and optical disc).
. Expanded Record Keeping Needs. While technology has augmented the growth
of paper generation, several external forces and concerns have played an
important role in organizations' decisions to store and retain access to
records. For example, the continued growth of regulatory requirements
and the proliferation of litigation has resulted in increased volumes
and lengthened holding periods of documents. Retained records are also
remaining in storage for extended periods of time because the process of
determining which records to destroy is time consuming and often more
costly in the short-term than continued storage.
5
<PAGE>
RECENT ACQUISITIONS
Since January 1997, the Company has acquired five records management
companies, adding an aggregate of 6.7 million cubic feet of records (an
increase of approximately 17% from December 31, 1996) at the time of
acquisition, including the acquisition of Records Management Services, Inc.
("RMS") on , 1997 (collectively, the "1997 Acquisitions"). The
acquisition of RMS added 5.2 million cubic feet of records in eight cities, of
which three were in new markets for the Company and five were in existing
markets.
During 1996, the Company acquired 12 records management companies, adding an
aggregate of 6.9 million cubic feet of records at the time of acquisition, the
majority of which were completed during the second half of 1996.
CONCURRENT OFFERING
Concurrent with the Notes Offering, by separate prospectus, the Company and
certain shareholders of the Company (the "Selling Shareholders") are offering
an aggregate of shares of Common Stock. The net proceeds to the Company
from the sale of Common Stock by the Company are estimated to be approximately
$78.2 million ($ million if the underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $ per share.
The Notes Offering is conditioned upon the consummation of the Equity
Offerings.
RISK FACTORS
Prospective purchasers should consider carefully the information set forth
under the caption "Risk Factors," and all other information set forth in this
Prospectus, in evaluating the Notes offered hereby and the Company.
6
<PAGE>
THE NOTES OFFERING
Issuer...................... Pierce Leahy Corp.
Securities Offered.......... $ principal amount of % Senior Subordinated
Notes due 2007 (the "Notes").
Maturity Date............... , 2007.
Interest Rate............... The Notes will bear interest at a rate of % per
annum.
Interest Payment Dates...... Interest will accrue on the Notes from the date
of issuance (the "Issuance Date") and will be
payable semiannually on each and , com-
mencing , 1997.
Ranking.....................
The Notes will be general unsecured obligations
of the Company subordinate in right of payment to
all existing and future Senior Indebtedness of
the Company and senior in right of payment to all
subordinated indebtedness of the Company. The
Notes will rank pari passu in right of payment
with all existing and future senior subordinated
indebtedness, including the Company's 11 1/8% Se-
nior Subordinated Notes due 2006 (the "1996
Notes"). As of December 31, 1996, after giving
pro forma effect to the 1997 Acquisitions, the
Offerings and the application of the net proceeds
therefrom, the Company would have had $3.7 mil-
lion of Senior Indebtedness outstanding and $130
million of indebtedness ranked pari passu with
the Notes (consisting of the principal amount of
the 1996 Notes). In addition, as of December 31,
1996, the Company's Canadian subsidiary had $3.9
million of outstanding indebtedness (excluding
Senior Indebtedness) which was structurally se-
nior to the Notes (including trade payables).
Guarantees by Future The Notes will be unconditionally guaranteed, on
Subsidiaries................ an unsecured senior subordinated basis, as to the
payment of principal, premium, if any, and inter-
est, jointly and severally (the "Guarantees"), by
all future direct and indirect domestic Re-
stricted Subsidiaries of the Company having ei-
ther assets or shareholders' equity in excess of
$5,000 (the "Guarantors"). Any such Guarantees
will be subordinated to all Senior Indebtedness
of the respective Guarantors. No Guarantees will
be effective on the date of issuance of the
Notes. The Notes will be secured by a pledge of
65% of the capital stock of the Company's Cana-
dian subsidiary, PLC Command (as defined herein).
See "Description of the Notes--Certain Cove-
nants--Limitation on Creation of Subsidiaries."
The pledge will be subordinate to a pledge of
such shares in favor of the lenders and the ad-
ministrative agent under the Credit Facility and
the holders of the 1996 Notes. See "Description
of the Notes--General."
Mandatory Redemption........ There will be no mandatory redemption require-
ments with respect to the Notes.
7
<PAGE>
Optional Redemption......... The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or
after , 2002, at the redemption prices set
forth herein, plus accrued and unpaid interest to
the date of redemption. In addition, the Company,
at its option, may redeem in the aggregate up to
% of the original principal amount of the Notes
at any time and from time to time prior to
, 2000 at a redemption price equal to % of the
principal amount thereof plus accrued interest to
the redemption date with the Net Proceeds of one
or more Public Equity Offerings, provided that at
least $ principal amount of Notes issued re-
main outstanding immediately after the occurrence
of any such redemption and that any such redemp-
tion occurs within 90 days following the closing
of any such Public Equity Offering.
Change of Control........... In the event of a Change of Control, the Company
will be required to make an offer to purchase all
outstanding Notes at a price equal to 101% of the
principal amount thereof plus accrued and unpaid
interest to the date of repurchase. See "Descrip-
tion of the Notes--Change of Control Offer."
There can be no assurance that the Company will
have sufficient funds or will be contractually
permitted by outstanding Senior Indebtedness to
pay the required purchase price for all Notes
tendered by holders upon a Change of Control.
Asset Sale Proceeds......... The Company will be obligated in certain in-
stances to make offers to repurchase the Notes at
a purchase price in cash equal to 100% of the
principal amount thereof plus accrued and unpaid
interest, if any, to the date of repurchase with
the net cash proceeds of certain asset sales. See
"Description of the Notes--Certain Covenants--
Limitation on Certain Asset Sales."
Certain Covenants........... The Indenture contains covenants for the benefit
of the holders of the Notes that, among other
things, restrict the ability of the Company and
any Restricted Subsidiaries (as defined herein)
to: (i) incur additional Indebtedness; (ii) pay
dividends and make distributions; (iii) issue
stock of subsidiaries; (iv) make certain invest-
ments; (v) repurchase stock; (vi) create liens;
(vii) enter into transactions with affiliates;
(viii) enter into sale and leaseback transac-
tions; (ix) merge or consolidate the Company or
any Guarantors; and (x) transfer and sell assets.
These covenants are subject to a number of impor-
tant exceptions. See "Description of the Notes--
Certain Covenants."
Governing Law............... The Notes and the Indenture are governed by the
laws of the state of New York.
Use of Proceeds............. The net proceeds from the Notes Offerings will be
primarily used to repay outstanding borrowings
under the Company's credit facility. The net pro-
ceeds of the Equity Offerings will be primarily
used to redeem a portion of the 1996 Notes. Any
remaining proceeds of the Offerings will be used
for general corporate purposes, including possi-
ble acquisitions.
8
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following summary historical and pro forma financial data, insofar as it
relates to each of the five years in the period ended December 31, 1996, has
been derived from the audited Consolidated Financial Statements, including the
consolidated balance sheets at December 31, 1995 and 1996 and the related
consolidated statements of operations for each of the three years in the period
ended December 31, 1996 and the notes thereto appearing elsewhere in this
Prospectus.
The following summary pro forma statements of operations, other data and
balance sheets give effect to, among other things, acquisitions completed in
1996 and the 1997 Acquisitions, the termination of the Company's status as a
Subchapter S corporation for income tax purposes and the impact of the
Offerings, as if each of these items had occurred on January 1, 1996 or as of
December 31, 1996 in the case of the balance sheets. These items and certain
management assumptions and adjustments are described in the accompanying notes
hereto. This pro forma information is not necessarily indicative of the results
that would have occurred had the completed acquisitions in 1996, the 1997
Acquisitions, the Subchapter S corporation termination and the Offerings been
completed on the dates indicated or of the Company's actual or future results
or financial position. The summary historical and pro forma consolidated
statements of operations, other data and balance sheets should be read in
conjunction with the information contained in the Company's Consolidated
Financial Statements and the notes thereto, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Selected
Historical and Pro Forma Consolidated Statements of Operations, Other Data and
Balance Sheets" and "Pro Forma Financial Data" included elsewhere in this
Prospectus.
9
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
PRO FORMA
1992 1993 1994 1995 1996 1996(A)
------- ------- ------- ------- -------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues
Storage................ $37,633 $42,122 $47,123 $55,501 $ 75,900 $ 98,885
Service and storage
material sales........ 25,202 31,266 35,513 39,895 53,848 68,953
------- ------- ------- ------- -------- --------
Total revenues......... 62,835 73,388 82,636 95,396 129,748 167,838
Cost of sales, excluding
depreciation and
amortization........... 39,702 45,391 49,402 55,616 73,870 93,299
Selling, general and
administrative......... 9,012 11,977 15,882 16,148 20,007 33,018
Depreciation and
amortization........... 5,734 6,888 8,436 8,163 12,869 18,169
Consulting payments to
related parties(b)..... -- -- 500 500 -- --
Non-recurring
charges(c)............. -- -- -- -- 3,254 3,254
------- ------- ------- ------- -------- --------
Operating income....... 8,387 9,132 8,416 14,969 19,748 20,098
Interest expense........ 6,388 6,160 7,216 9,622 17,225 25,250
------- ------- ------- ------- -------- --------
Income before income
taxes and
extraordinary charge.. 1,999 2,972 1,200 5,347 2,523 (5,152)
Income tax benefit...... -- -- -- -- -- 350 (e)
Extraordinary
charge(d).............. -- 9,174 5,991 3,279 2,015 --
------- ------- ------- ------- -------- --------
Net income (loss)....... 1,999 (6,202) (4,791) 2,068 508 (4,802)
Accretion (cancellation)
of redeemable
warrants............... -- (746) 16 889 1,561 --
------- ------- ------- ------- -------- --------
Net income (loss)
applicable to Common
shareholders........... $ 1,999 $(5,456) $(4,807) $ 1,179 $ (1,053) $ (4,802)
======= ======= ======= ======= ======== ========
Pro forma data
(unaudited):
Pro forma adjustment
for income taxes...... $ 1,659 (e)
Historical income
before extraordinary
charge, as adjusted
for pro forma income
taxes................. $ 864
Historical income
before extraordinary
charge per Common
share, as adjusted for
pro forma income
taxes................. $ (f)
Historical net loss
applicable to Common
shareholders, as
adjusted for pro forma
income taxes.......... $ (1,958)
Historical net loss
applicable to Common
shareholders per
Common share, as
adjusted for pro forma
income taxes.......... $ (f)
Shares used in
computing per share
amounts...............
Pro forma net loss
applicable to Common
shareholders per
Common share.......... $ (g)
Pro forma shares used
in computing per share
amount................
OTHER DATA:
Total revenue growth.... 12.9% 16.8% 12.6% 15.4% 36.0% 75.9%
Operating income (before
non- recurring charges)
margin................. 13.3% 12.4% 10.2% 15.7% 17.7% 13.9%
EBITDA(h)............... $14,121 $16,020 $17,352 $23,632 $ 35,871 $ 41,521
EBITDA, as adjusted(i).. -- -- -- -- -- $ 52,342
EBITDA margin........... 22.5% 21.8% 21.0% 24.8% 27.7% 24.7%
EBITDA, as adjusted
margin................. -- -- -- -- -- 31.2%
Cash interest expense... $ 5,402 $ 4,677 $ 5,919 $ 9,089 $ 16,709 $ 24,333
Capital
expenditures(j)........ $ 5,565 $ 5,827 $ 6,352 $16,288 $ 23,493 $ --
Cubic feet of storage
under management at end
of period (000s)....... 16,248 19,025 22,160 29,523 40,410 47,191
Ratio of earnings to
fixed charges(k)....... 1.21x 1.30x 1.11x 1.37x 1.11x --
Ratio of EBITDA, as
adjusted to cash
interest expense....... -- -- -- -- -- 2.15x
Ratio of total debt to
EBITDA, as adjusted.... -- -- -- -- -- 4.63x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-----------------------------------
PRO FORMA FOR
1997 PRO
ACTUAL ACQUISITIONS(L) FORMA(M)
--------- --------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital deficit................... $ (23,933) $ (23,229) $ (5,203)
Total assets.............................. 234,820 318,341 336,592
Total debt................................ 217,423 297,970 242,096
Shareholders' equity (deficit)............ (25,438) (25,438) 40,087
</TABLE>
10
<PAGE>
NOTES TO SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(a) Gives effect to the (i) acquisitions completed in 1996 and the 1997
Acquisitions, (ii) termination of the Company's status as a Subchapter S
corporation and (iii) impact of the Offerings, as if each of these items
had occurred on January 1, 1996. See "Pro Forma Financial Data" and Note 2
of the Notes to Consolidated Financial Statements. Upon termination of the
Company's status as a Subchapter S corporation, the Company will record a
deferred income tax provision of approximately $6.6 million for the tax
effect of differences in the basis of assets and liabilities for financial
reporting and income tax purposes. This deferred income tax provision has
not been reflected in the Pro Forma Condensed Consolidated Statement of
Operations. Also not reflected in the Pro Forma Condensed Consolidated
Statement of Operations is the extraordinary charge for the early
extinguishment of a portion of the 1996 Notes that will occur in the
quarter in which the redemptions occur (see (d) below) and an unusual
charge of approximately $ (pretax), or $ per share, for the write-off
of the estimated unamortized compensation expense associated with options
granted on January 1, 1997, due to the acceleration of vesting upon the
completion of the Offerings.
(b) Represents aggregate payments made to eight Pierce family members.
(c) Represents non-recurring charges in 1996 of $2.8 million paid to a related
party partnership to assume the partnership's position in certain leases
with third parties and of $.5 million for the establishment of an annual
pension for Leo W. Pierce, Sr. and his spouse.
(d) Represents loss on early extinguishment of debt due to refinancings in
1993, 1994, 1995 and 1996. Amounts include write-off of unamortized
deferred financing costs and discount, along with prepayment penalties and
other costs. A similar charge for the early extinguishment of a portion of
the 1996 Notes of approximately $10.0 million (pretax), or $ per share,
will occur in the quarter in which the redemptions occur. Such charge has
not been reflected in the Pro Forma Condensed Consolidated Statement of
Operations. See "Use of Proceeds" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
(e) The Company has historically been taxed as a Subchapter S corporation. Such
status terminates upon completion of the Equity Offerings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 2 of Notes to Consolidated Financial Statements.
(f) See Note 2 of Notes to Consolidated Financial Statements for information
concerning the computation of historical net loss per share as adjusted for
pro forma income taxes. Excluding the non-recurring charges incurred in
1996, pro forma net income and net income per share as adjusted for income
taxes would have been $57 and $ , respectively.
(g) Excluding the non-recurring charges incurred in 1996 and $10,821 of
operating expenses specifically identified by management that would not
have been incurred had the acquisitions completed in 1996 and the 1997
Acquisitions occurred as of January 1, 1996 and such cost savings been
fully implemented as of such date, pro forma net income and net income per
share would have been $3,765 and $ , respectively.
(h) "EBITDA" is defined as net income (loss) before interest expense, taxes,
depreciation and amortization, consulting payments to related parties, non-
recurring charges, and extraordinary charge. EBITDA is not a measure of
performance under GAAP. While EBITDA should not be considered in isolation
or as a substitute for net income, cash flows from operating activities and
other income or cash flow statement data prepared in accordance GAAP, or as
a measure of profitability or liquidity, management understands that EBITDA
is customarily used as a criteria in evaluating records management
companies. Moreover, substantially all of the Company's financing
agreements, including the Notes, contain covenants in which EBITDA is used
as a measure of financial performance. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a discussion
of other measures of performance determined in accordance with GAAP and the
Company's sources and applications of cash flows.
(i) EBITDA, as adjusted is defined as EBITDA plus $10,821 of operating expenses
specifically identified by management that would not have been incurred had
the acquisitions completed in 1996 and the 1997 Acquisitions occurred as of
January 1, 1996 and such cost savings been fully implemented as of such
date. See Note (b) of Notes to Pro Forma Condensed Consolidated Statement
of Operations. Management expects to realize additional cost savings beyond
the $10,821 specifically identified.
(j) Capital expenditures for 1996 are comprised of $11.0 million for new
shelving, $4.0 million for leasehold and building improvements, $3.8
million for new facility purchases and related improvements, $2.9 million
for data processing and $1.8 million for the purchase of transportation,
warehouse and office equipment. Of the total 1996 capital expenditures,
management estimates that approximately $2.5 million was for upgrading and
restructuring of existing facilities to accommodate growth or for
maintenance capital expenditures. The 1996 capital expenditures do not
include $11.0 million paid for real estate and other assets acquired from
related parties (see Note 10 of Notes to the Consolidated Financial
Statements).
(k) The pro forma earnings for the year ended December 31, 1996 were inadequate
to cover fixed charges by $5.2 million.
(l) Gives effect to the 1997 Acquisitions as if they had occurred on December
31, 1996. See "Pro Forma Financial Data," and "Use of Proceeds."
(m) Gives effect to the (i) 1997 Acquisitions, (ii) termination of the
Company's Subchapter S corporation status upon completion of the Equity
Offerings and (iii) impact of the Offerings, as if each of these items had
occurred on December 31, 1996. See "Pro Forma Financial Data," "Use of
Proceeds" and Note 2 to Notes to Consolidated Financial Statements.
11
<PAGE>
RISK FACTORS
Prospective purchasers of the Notes should consider carefully the following
risk factors, in addition to the other information set forth in this
Prospectus, before making an investment.
HIGH LEVEL OF INDEBTEDNESS AND LEVERAGE; ABILITY TO SERVICE DEBT
As of December 31, 1996, on a pro forma basis after giving effect to the
1997 Acquisitions, the Offerings and the estimated use of the net proceeds
therefrom, the Company's consolidated indebtedness would have been
approximately $242.1 million and its shareholders' equity would have been
$40.1 million. This level of indebtedness will have important consequences to
holders of the Notes, including: (i) a substantial part of the Company's
anticipated cash flow from operations will be required for the payment of
principal and interest; (ii) the Company's ability to obtain additional
financing in the future may be limited; (iii) the Company's leveraged position
and covenants contained in the Notes and the 1996 Notes and the Credit
Facility (as defined herein) (or any replacement thereof) could limit its
ability to expand and make capital improvements and acquisitions; and (iv) the
Company's level of indebtedness could make it more vulnerable to economic
downturns, limit its ability to withstand competitive pressures, and limit its
flexibility in reacting to changes in its industry and economic conditions
generally. See "Description of Certain Indebtedness."
The Company's ability to meet its debt service obligations will be dependent
upon its future operating performance (including the performance of any
acquired businesses), debt levels and financial results which, in turn, will
be subject to general economic conditions and to financial, business and other
factors affecting the operations of the Company, many of which are beyond its
control. Although management believes that the Company's cash flow from
operations and available borrowings under the Credit Facility will be
sufficient to meet its anticipated requirements for capital expenditures,
working capital and future debt service requirements, there can be no
assurance that the Company will generate cash flows at levels sufficient to
meet these requirements. To the extent that the Company's existing resources
and future earnings are insufficient to fund the Company's activities or to
repay indebtedness, the Company may need to raise additional funds through
public or private financings. There can be no assurance that such additional
financing would be available on acceptable terms or at all.
SUBORDINATION OF THE NOTES; NO GUARANTEES
The Notes will be subordinated in right of payment to all existing and
future Senior Indebtedness of the Company and will be ranked pari passu in
right of payment with existing and future senior subordinated indebtedness. As
of December 31, 1996, after giving pro forma effect to the 1997 Acquisitions,
the Offerings and the application of the net proceeds therefrom, the Company
would have had $3.7 million of Senior Indebtedness outstanding and $130
million of indebtedness ranked pari passu with the Notes (consisting of the
principal amount of the 1996 Notes). The Notes will also be structurally
subordinated to all existing and future liabilities of the Company's
subsidiaries, other than non-Senior Indebtedness of any subsidiaries of the
Company that may in the future become Guarantors. Substantially all of the
Company's assets (including a portion of the stock of the Company's Canadian
subsidiary) are pledged to secure the Company's obligations under the Credit
Facility. As of December 31, 1997, the Company's Canadian subsidiary had $3.9
million of outstanding indebtedness (excluding Senior Indebtedness) which is
structurally senior to the Notes (including trade payables). In addition,
under the Indenture, provided certain incurrence tests are met, the Company
will be able to incur additional indebtedness, including Senior Indebtedness.
In the event of a bankruptcy, liquidation or reorganization of the Company or
in the event that any default in payment of, or the acceleration of, any debt
occurs, holders of Senior Indebtedness will be entitled to payment in full
from the proceeds of all assets of the Company prior to any payment of such
proceeds to the holders of the Notes. In addition, the Company may not make
any principal or interest payments in respect of the Notes if any payment
default exists with respect to Senior Indebtedness or any other default on
Designated Senior Indebtedness (as defined in the Indenture) occurs and the
maturity of such indebtedness is accelerated, or in certain circumstances
prior to such acceleration for a specified period of time, unless, in any
case, such default has been cured or waived, any such acceleration has
12
<PAGE>
been rescinded or such indebtedness has been repaid in full. Consequently,
there can be no assurance that the Company will have sufficient funds
remaining after such payments to make payments to the holders of the Notes.
See "Description of the Notes--Subordination" and "Description of the Notes--
Certain Covenants--Limitation on Additional Indebtedness."
The Company's operations in Canada are conducted through a subsidiary in
which the Company has a 99% equity interest. See "The Company." The Notes are
obligations exclusively of the Company. The Canadian subsidiary is a separate
and distinct legal entity which has not guaranteed the Notes. However, the
Notes will be secured by a third priority pledge of a portion of the capital
stock of such subsidiary. See "Description of the Notes--General." The
subsidiary has no obligation, contingent or otherwise, to pay amounts due
pursuant to the Notes or to make any funds available therefor. Moreover, the
payment of dividends and the making of loan advances to the Company by its
Canadian subsidiary is contingent upon the earnings of such subsidiary.
RISKS ASSOCIATED WITH ACQUISITIONS
One of the Company's strategies is to acquire records management businesses
that will complement its existing operations or provide it with an entree into
areas it does not presently serve. There can be no assurance that the Company
will be able to acquire or profitably manage additional acquisitions or
successfully integrate them into the Company. Furthermore, certain risks are
inherent in the Company's acquisition strategy, such as increasing leverage
and debt service requirements, diversion of management time and attention, and
combining disparate company cultures and facilities, which could adversely
affect the Company's operating results. The success of any acquisition will
depend in part on the Company's ability to integrate effectively the acquired
records management business into the Company. See "Business--Acquisition and
Growth Strategy."
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 results
that may be achieved for any subsequent quarter or for a full fiscal year.
Further, there can be no assurance that acquisitions will not have an adverse
effect on the Company's operating results, particularly in quarters
immediately following the consummation of such transactions, while the
operations of the acquired businesses are being integrated into the Company's
operations. Once integrated, acquisitions may not achieve levels of net sales
or profitability comparable to those achieved by the Company's existing
operations, or otherwise perform as expected. In addition, earnings may be
adversely affected by transaction-related expenses in the quarter in which an
acquisition is consummated. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RESTRICTIVE DEBT COVENANTS
The Credit Facility contains a number of covenants that, among other things,
limit the Company's ability to incur additional indebtedness, pay dividends,
prepay subordinated indebtedness, dispose of certain assets, create liens,
make capital expenditures, make certain investments or acquisitions and
otherwise restrict corporate activities. The Credit Facility also requires the
Company to comply with certain financial ratios and tests, under which the
Company will be required to achieve certain financial and operating results.
The ability of the Company to comply with such provisions may be affected by
events beyond its control. A breach of any of these covenants would result in
a default under the Credit Facility. In the event of any such default,
depending on the actions taken by the lenders under the Credit Facility, the
Company could be prohibited from making any payments on the Notes. In
addition, such lenders could elect to declare all amounts borrowed under the
Credit Facility, together with accrued interest, to be due and payable. As a
result of the priority and security afforded the Credit Facility, there can be
no assurance that the Company would have sufficient assets to pay indebtedness
then outstanding under the Credit Facility and the Notes. Any refinancing of
the Credit Facility is likely to contain similar restrictive covenants. See
"Description of Certain Indebtedness--The Credit Facility."
13
<PAGE>
COMPETITION
The Company faces competition from numerous competitors in all geographic
areas where it operates. The Company believes that competition for customers
is based on price, reputation for reliability, and quality and scope of
service and technology. As a result of this competition, the records
management industry has for the past several years experienced downward
pricing pressures. Should a further downward trend in pricing occur or
continue for an extended period of time, it could have a material adverse
effect on the Company's results of operations. The Company also competes for
acquisition candidates. Some of the Company's competitors possess greater
financial and other resources than the Company. If any such competitor were to
devote additional resources to the records storage business and/or such
acquisition candidates or to focus its strategy on the Company's areas of
operation, the Company's results of operations could be adversely affected.
The Company also faces competition from the internal document handling
capability of its current and potential customers. There can be no assurance
that these organizations will outsource more of their document management
needs or that they will not bring in-house some or all of the functions they
currently outsource. See "Business--The Records Management Industry" and
"Business--Competition."
ALTERNATIVE TECHNOLOGIES
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
currently include computer media, imaging, microfilming, audio/video tape,
film, CD-Rom and optical disc. 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 the
Company's business.
CHANGE OF CONTROL
In the event of a Change of Control, the Company will be required to offer
to repurchase all of the outstanding Notes at 101% of the principal amount
thereof plus any accrued and unpaid interest thereon to the date of the
purchase. The 1996 Notes have a similar provision. A Change of Control under
the Indenture will result in a default under the Credit Facility. The exercise
by the holders of the Notes of their right to require the Company to
repurchase the Notes upon a Change of Control could also cause a default under
other indebtedness of the Company, even if the Change of Control itself does
not, because of the financial effect of such repurchase on the Company. The
Company's ability to pay cash to the holders of the Notes upon a repurchase
may be limited by the Company's then existing financial resources. There can
be no assurance that in the event of a Change of Control, the Company will
have, or will have access to, sufficient funds or will be contractually
permitted under the terms of outstanding indebtedness to pay the required
purchase price for all Notes or 1996 Notes tendered by holders of Notes or
1996 Notes upon a Change of Control. See "Description of the Notes" and
Description of Certain Indebtedness--The 1996 Notes"; "--The Credit Facility."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends, in part, upon the efforts, abilities and
expertise of its executive officers and other key employees, including in
particular, J. Peter Pierce, the Company's President and Chief Executive
Officer. The Company has no employment contracts with any of its executive
officers. There can be no assurance that the Company will be able to retain
such officers, the loss of any of whom could have a material adverse effect
upon the Company. See "Management."
14
<PAGE>
CASUALTY
The Company currently maintains and intends to continue to maintain, to the
extent such insurance is available on commercially reasonable terms,
comprehensive liability, fire, flood and earthquake (where appropriate) and
extended coverage insurance with respect to the properties that it now owns or
leases or that it may in the future own or lease, with customary limits and
deductibles. Certain types of loss, however, may not be fully insurable on a
cost-effective basis. In the future, should uninsured losses or damages occur,
the Company could lose both its investment in and anticipated profits 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 material loss could materially adversely
affect the Company. See "Business--Insurance."
ENVIRONMENTAL MATTERS
As of March 1, 1997, the Company owned or leased approximately 10 million
square feet of facilities. Under various federal, state, local and foreign
environmental laws, regulations and ordinances ("environmental laws"), the
Company's properties and operations may subject it to liability for the costs
of investigation, removal or remediation of soil and groundwater, on or off-
site, contaminated by hazardous substances and other contaminants or hazardous
materials such as petroleum products ("hazardous materials"), as well as
damages to natural resources. Certain such laws impose cleanup responsibility
and liability without regard to whether the owner or operator of the real
estate or business 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
materials, or the failure to properly remediate such property, may adversely
affect the current property owner's or operator's ability to sell, rent or use
such property or to borrow using such property as collateral. The owner or
operator of contaminated property also may be subject to statutory and common
law claims by third parties based on any 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") in buildings. Such laws may impose
liability for improper handling and release of ACMs and third parties may seek
to recover from owners or operators of real estate for personal injury
associated with exposure to such materials. Certain facilities operated by the
Company contain ACMs.
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 materials or the generation and disposal of
hazardous wastes, and the use of underground storage tanks ("USTs") for
hazardous materials. The Company has from time to time conducted certain
environmental investigations, and remedial activities have been performed, at
certain of its former and current properties, but an in-depth environmental
review of each of the properties and related operations has not been conducted
by or on behalf of the Company. In connection with its former and current
ownership or operation of certain properties and businesses, the Company may
be subject to environmental liability as discussed above and as more
specifically described under "Business--Environmental Matters."
The Company has not received any written notice from any governmental
authority or third party asserting, and is not otherwise aware of, any
material environmental non-compliance, liability or claim relating to
hazardous materials or otherwise under any environmental laws applicable to
the Company in connection with any of its present or former properties or
operations other than as described under "Business--Environmental Matters."
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, or compliance with future environmental laws, will not require the
Company to incur costs with respect to its properties or operations that could
have a material adverse effect on the Company's financial condition or results
of operations.
15
<PAGE>
CONTROL BY EXISTING SHAREHOLDERS
Prior to the Equity Offerings, all of the outstanding stock of the Company
was owned by members of the Pierce family. Certain members of the Pierce
family, who are expected to own approximately % of the shares of Common Stock
outstanding after the Equity Offerings, have entered into a ten-year voting
trust agreement (the "Voting Trust Agreement") pursuant to which all of the
shares subject to the Voting Trust Agreement will be voted at the direction of
Leo W. Pierce, Sr. and J. Peter Pierce (the "Voting Trustees"). Consequently,
the Voting Trustees will be able to elect the Company's directors, to
determine the outcome of corporate actions requiring shareholder approval and
otherwise to control the business affairs of the Company. See "Principal
Shareholders--Voting Trust Agreement."
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Notes are a new issue of securities for which there is currently no
public market, and there can be no assurance as to the liquidity of the market
for the Notes that may develop, the ability of the holders to sell their Notes
or the prices at which holders of the Notes would be able to sell their Notes.
If a market for the Notes does develop, the Notes may trade at a discount from
their initial public offering price, depending on prevailing interest rates,
the market for similar securities, the performance of the Company, the
performance of the records management industry and other factors. No assurance
can be given as to whether an active trading market will develop or be
maintained for the Notes. See "Underwriting."
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended, and is subject to the safe-harbor created by
such sections. Such forward-looking statements concern the Company's
operations, economic performance and financial condition, including in
particular the 1997 Acquisitions and their integration into the Company's
existing operations. Such statements involve known and unknown risks,
uncertainties and other factors, including those identified under this "Risk
Factors" section and elsewhere in this Prospectus that may cause the actual
results, performance or achievements of the Company, or industry results, to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions; changes
in customer preferences; competition; changes in technology; the integration
of any acquisitions; changes in business strategy; the indebtedness of the
Company; quality of management, business abilities and judgment of the
Company's personnel; the availability, terms and deployment of capital; and
various other factors referenced in this Prospectus. See "Summary",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." The forward-looking statements are made as of the
date of this Prospectus, and the Company assumes no obligation to update the
forward-looking statements or to update the reasons why actual results could
differ from those projected in the forward-looking statements.
16
<PAGE>
THE COMPANY
The Company was incorporated in Pennsylvania in March 1997 and is the
successor by merger immediately preceding the Offerings to Pierce Leahy Corp.
which was incorporated in New York in 1990 ("PLC"). From inception, PLC had an
authorized capitalization consisting of two classes of Common Stock: Class A
Common Stock which was voting and Class B Common Stock which was nonvoting.
Immediately preceding the merger, PLC effected a stock split and
recapitalization pursuant to which each outstanding share of Class A and Class
B Common Stock was converted into shares of voting Common Stock. Immediately
thereafter, PLC was redomesticated into Pennsylvania pursuant to the merger.
Such transactions are collectively referred to herein as the "Stock
Recapitalization."
The Company's operations date to 1957 when its predecessor company, L.W.
Pierce Co., Inc., was founded to provide filing systems and related equipment
to companies in the Philadelphia area. L. W. Pierce Co., Inc. expanded
primarily through internal growth until 1990 when it acquired Britannia
Security Group, Inc. (doing business as Leahy Business Archives), which
approximately doubled the size of the Company. PLC was formed at that time
from the consolidation of the predecessor company with Leahy Business
Archives.
From its incorporation in 1990, PLC had elected to be taxed as a corporation
under Subchapter S (a "Subchapter S corporation") of the Internal Revenue Code
of 1986, as amended (the "Code"). As a result of the Equity Offerings, PLC's
status as a Subchapter S corporation will terminate. In connection with tax
liabilities of the Company's former Subchapter S shareholders for the portion
of 1997 during which the Company was a Subchapter S corporation, the Company
expects that it will make distributions to such shareholders to cover their
tax liabilities related to the Company. Such distributions will not be
restricted by the terms of the Notes.
The Company's Canadian business is operated by Pierce Leahy Command Company
("PLC Command"), a Nova Scotia unlimited liability company. As a result of
PLC's status as a Subchapter S corporation prior to the Equity Offerings, all
of the capital stock of PLC Command is owned by two limited partnerships. Two
separate corporations owned by J. Peter Pierce are the general partner of each
partnership, respectively, and the Company has a 99% limited partnership
interest in each partnership. Accordingly, the Company has an indirect 99%
equity interest in PLC Command.
The principal executive offices of the Company are located at 631 Park
Avenue, King of Prussia, Pennsylvania 19406, and its telephone number is (610)
992-8200.
CONCURRENT OFFERING
Concurrent with the Notes Offering, by separate prospectus, the Company and
certain shareholders of the Company (the "Selling Shareholders") are offering
an aggregate of and shares of Common Stock, respectively (the "Equity
Offerings"). The net proceeds to the Company from the sale of Common Stock by
the Company are estimated to be approximately $78.2 million ($ million if
the underwriters' over-allotment option is exercised in full), assuming an
initial public offering price of $ per share. Prior to the Equity Offerings,
there has been no public market for the Common Stock. The sale of the Notes is
conditioned upon the closing of the Equity Offerings.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes are estimated to
be approximately $96.8 million, after deducting estimated underwriting
discounts and commissions and estimated offering expenses. The Company expects
to use approximately $ million of the net proceeds of the Notes Offering to
repay outstanding borrowings under the U.S. dollar portion of its Credit
Facility. As of March 1, 1997, the effective interest rate on the U.S. dollar
portion of the Credit Facility was approximately 7.5%. The borrowings under
the Credit Facility which will be repaid by the net proceeds of the sale of
the Notes were primarily used to fund the Company's acquisitions in 1996 and
the 1997 Acquisitions, including the recent acquisition of RMS. See
"Business--Acquisition History and Growth Strategy" and "Business--The 1997
Acquisitions."
The net proceeds to the Company from the sale of shares of Common Stock
by the Company in the Equity Offerings, after deducting estimated underwriting
discounts and commissions and estimated offering expenses, are estimated to be
approximately $78.2 million ($ million if the underwriters' over-allotment
option is exercised in full), assuming an initial public offering price of $
per share. The Company will not receive any proceeds from the sale of Common
Stock by the Selling Shareholders. The Company expects to use approximately
$ million of the net proceeds of the Equity Offerings to repurchase a
portion of the 1996 Notes. Under the Indenture for the 1996 Notes, up to an
aggregate of $70,000,000 principal amount of the $200,000,000 1996 Notes
outstanding may be redeemed by the Company with the net proceeds of the Equity
Offerings at 110% of the principal amount plus any accrued but unpaid interest
to the date of redemption. The 1996 Notes bear interest at 11 1/8% per annum
and are due July 15, 2006. The 1996 Notes were issued primarily to retire
certain existing indebtedness of the Company under its previous credit
facility. See "Description of Certain Indebtedness--The 1996 Notes."
The balance of any net proceeds from the Offerings will be used for general
corporate purposes, including possible acquisitions.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996 (i) on an actual basis, (ii) on a pro forma basis to give
effect to the 1997 Acquisitions as if they had occurred as of December 31,
1996 and (iii) as further adjusted to give effect to the sale by the Company
of shares of Common Stock in the Equity Offerings, the sale of the 1997
Notes in the Notes Offering and the application of the estimated net proceeds
from the Offerings as described under "Use of Proceeds." This table should be
read in conjunction with the Company's Pro Forma Financial Data and
Consolidated Financial Statements and notes thereto and the other information
included elsewhere in this Prospectus (amounts in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
--------------------------------
PRO FORMA
FOR 1997
ACTUAL ACQUISITIONS PRO FORMA
-------- ------------ ---------
<S> <C> <C> <C>
Cash (a)..................................... $ 1,254 $ 1,727 $ 13,853
======== ======== ========
Senior credit facility (a)................... $ 5,327 $ 85,874 $ --
11 1/8% Senior subordinated notes due 2006... 200,000 200,000 130,000
% Senior subordinated notes due 2007........ -- -- 100,000
Seller notes (a)............................. 7,600 7,600 7,600
Other indebtedness........................... 4,496 4,496 4,496
Less--Current portion........................ (7,776) (7,776) (7,776)
-------- -------- --------
Total long term debt (b)................... 209,647 290,194 234,320
-------- -------- --------
Preferred stock (c).......................... -- -- --
Common stock (d)............................. -- -- 78,200
Additional paid-in capital................... -- -- --
Accumulated deficit (e)...................... (25,438) (25,438) (38,113)
-------- -------- --------
Total shareholders' equity (deficit)....... (25,438) (25,438) 40,087
-------- -------- --------
Total capitalization....................... $184,209 $264,756 $274,407
======== ======== ========
</TABLE>
- --------
(a) Does not reflect additional borrowings of $ under the senior credit
facility through , 1997, a portion of which was used for the repayment
of $7,100 of seller notes in January 1997.
(b) See Note 6 of the Notes to Financial Statements for information concerning
the Company's debt obligations.
(c) In connection with the Recapitalization, the Company authorized shares
of undesignated Preferred Stock.
(d) Actual outstanding Common Stock consists of Class A and Class B Common
Stock.
(e) Does not include an unusual charge that will occur in the quarter in which
the Offerings are completed of approximately $ (pretax) for the write-
off of the estimated unamortized compensation expense associated with
options granted on January 1, 1997, due to the acceleration of vesting
upon the completion of the Offerings.
19
<PAGE>
PRO FORMA FINANCIAL DATA
The unaudited pro forma condensed consolidated balance sheet as of December
31, 1996 gives effect to, among other things, the Offerings, the 1997
Acquisitions and termination of the Company's status as a Subchapter S
corporation, as if they occurred on December 31, 1996. The unaudited pro forma
condensed consolidated statement of operations for the year ended December 31,
1996 gives effect to, among other things, the Offerings, the acquisitions of
businesses completed in 1996 for periods prior to their acquisition by the
Company and the results of operations of the 1997 Acquisitions, as if they
occurred on January 1, 1996. The Offerings, the acquisitions completed in
1996, the 1997 Acquisitions, the Subchapter S termination and certain
management assumptions and adjustments are described in the accompanying notes
hereto. This pro forma information is not necessarily indicative of the
results that would have occurred had the acquisitions completed in 1996, the
1997 Acquisitions, the Subchapter S termination and the Offerings been
completed on the dates indicated or of the Company's actual or future results
or financial position. The unaudited pro forma condensed consolidated balance
sheet and statement of operations should be read in conjunction with the
Company's Consolidated Financial Statements and notes thereto, as of December
31, 1996 and for each of the three years in the period ended December 31,
1996, appearing elsewhere in this Prospectus.
The unaudited Pro Forma Condensed Consolidated Balance Sheet at December 31,
1996 and the unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 1996 assumes the completion of the
Notes Offering and the application of the net proceeds therefrom. The
consummation of the Notes Offering is conditioned upon consummation of the
Equity Offerings.
20
<PAGE>
PIERCE LEAHY CORP.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
1997 FOR 1997 FROM THE
ACTUAL ACQUISITIONS (A) ACQUISITIONS OFFERINGS PRO FORMA
-------- ---------------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................... $ 1,254 $ 473 $ 1,727 $175,000 (b) $ 13,853
(155,874)(b)
(7,000)(c)
Accounts receivable.... 17,828 2,787 20,615 -- 20,615
Inventories............ 611 120 731 -- 731
Prepaid expenses and
other................. 688 298 986 -- 986
Deferred income taxes.. 3,900 (c) 5,900
-- -- -- 2,000 (d)
-------- ------- -------- -------- --------
Total current assets.. 20,381 3,678 24,059 18,026 42,085
PROPERTY AND EQUIPMENT,
net.................... 113,134 12,789 125,923 -- 125,923
OTHER ASSETS, primarily
intangibles............ 101,305 67,054 168,359 3,200 (b) 168,584
(2,975)(c)
-------- ------- -------- -------- --------
$234,820 $83,521 $318,341 $ 18,251 $336,592
======== ======= ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of
long-term debt and
noncompete
obligations........... $ 7,776 $ -- $ 7,776 $ -- $ 7,776
Accounts payable....... 6,757 1,476 8,233 -- 8,233
Accrued expenses....... 20,563 1,405 21,968 -- 21,968
Deferred revenues...... 9,218 93 9,311 -- 9,311
-------- ------- -------- -------- --------
Total current
liabilities.......... 44,314 2,974 47,288 -- 47,288
LONG-TERM DEBT AND
NONCOMPETE
OBLIGATIONS............ 209,647 80,547 290,194 100,000 (b) 234,320
(155,874)(b)
DEFERRED RENT........... 2,841 -- 2,841 -- 2,841
DEFERRED INCOME TAXES... 3,456 -- 3,456 8,600 (d) 12,056
SHAREHOLDERS' EQUITY
(DEFICIT).............. (25,438) -- (25,438) 78,200 (b) 40,087
(9,975)(c)
3,900 (c)
(6,600)(d)
-------- ------- -------- -------- --------
$234,820 $83,521 $318,341 $ 18,251 $336,592
======== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
21
<PAGE>
PIERCE LEAHY CORP.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(a) Represents the balance sheets for the businesses acquired by the Company
after December 31, 1996 (Security Archives & Storage Company, The Records
Center, Data Archives, Professional Records Storage and Delivery, and Records
Management Services) (see "Business--Acquisition History and Growth Strategy"
and "--The 1997 Acquisitions"), after application of the purchase method of
accounting. The purchase price of the 1997 Acquisitions was $80,547, including
transaction costs.
(b) Reflects the sale of shares of Common Stock resulting in estimated net
proceeds to the Company of $78,200 (at an assumed public offering price of $
per share) and net proceeds of $96,800 from the Notes Offering (after deducting
underwriting discounts and commissions and estimated offering expenses of
$3,200). A portion of the Equity Offerings will be used to redeem $70,000 of
the 1996 Notes. The proceeds from the Notes Offering will be used to repay
existing senior indebtedness of $5,327 at December 31, 1996 and senior
indebtedness of $80,547 incurred in connection with the completed acquisitions.
(c) Represents the payment of the $7,000 (pretax) prepayment penalty to be
incurred in connection with the redemption of a portion of the 1996 Notes and
the related write-off of $2,975 (pretax) in related unamortized deferred
financing costs. This extraordinary charge of $9,975 (pretax) relating to the
early extinguishment of debt will be recorded in the quarter in which the
redemptions occur. A tax benefit of approximately $3,900 will be recorded for
these charges.
(d) The Company operates as a Subchapter S corporation and will terminate
such status upon completion of the Equity Offerings. Upon the termination of
the Company's status as a Subchapter S corporation, the Company will record a
deferred income tax provision of approximately $6,600 for the tax effect of the
differences in the basis of assets and liabilities for financial reporting and
income tax purposes. This deferred tax provision will be recorded in the
quarter in which the Equity Offerings are completed and the Subchapter S status
terminates.
22
<PAGE>
PIERCE LEAHY CORP.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS PRO FORMA
FOR FOR ADJUSTMENTS PRO FORMA
ACTUAL ACQUISITIONS(A) ACQUISITIONS(B) ACQUISITIONS FROM OFFERINGS (B)
--------- --------------- --------------- ------------ -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES................ $ 129,748 $ 38,090 $ -- $ 167,838 $ -- $ 167,838
--------- -------- --------- --------- ------- ---------
OPERATING EXPENSES
Cost of sales, excluding
depreciation and
amortization........... 73,870 19,429 -- 93,299 -- 93,299
Selling, general and
administrative......... 20,007 13,011 -- 33,018 -- 33,018
Depreciation and
amortization........... 12,869 2,085 3,215(c) 18,169 -- 18,169
Non-recurring charges... 3,254 -- -- 3,254 -- 3,254
--------- -------- --------- --------- ------- ---------
Total operating
expenses............. 110,000 34,525 3,215 147,740 -- 147,740
--------- -------- --------- --------- ------- ---------
Operating income...... 19,748 3,565 (3,215) 20,098 -- 20,098
INTEREST EXPENSE........ 17,225 1,341 8,764(d) 27,330 (2,080) 25,250(e)
--------- -------- --------- --------- ------- ---------
Income (loss) before
income tax benefit
and extraordinary
charge............... 2,523 2,224 (11,979) (7,232) 2,080 (5,152)
INCOME TAX BENEFIT...... -- -- -- -- 350(f) 350(f)
--------- -------- --------- --------- ------- ---------
INCOME (LOSS) BEFORE
EXTRAORDINARY CHARGE... $ 2,523 $ 2,224 $ (11,979) $ (7,232) $ 2,430 $ (4,802)
========= ======== ========= ========= ======= =========
</TABLE>
The accompanying notes are an integral part of this statement.
23
<PAGE>
PIERCE LEAHY CORP.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
(a) Represents the historical results of operations of acquisitions
completed in 1996 for the periods from January 1, 1996 to their dates of
acquisition by the Company and the results of operations for 1996 for the 1997
Acquisitions. See "Business--Acquisition and Growth Strategy."
(b) Management expects to achieve cost savings from its acquisitions in 1996
and the 1997 Acquisitions as a result of the factors described below. The Pro
Forma Condensed Consolidated Statement of Operations for the year ended
December 31, 1996 reflects only the cost savings actually achieved in 1996
from the 1996 acquisitions and none of the expected savings from the 1997
Acquisitions. Because most of the 1996 acquisitions occurred in the second
half of 1996, and there is typically a lag after an acquisition to fully
realize such savings, the Company expects to achieve additional substantial
savings from the acquisitions completed in 1996 as well as the 1997
Acquisitions.
The integration of an acquired company entails, among other things,
converting the database of stored records to the PLUS(R) system, reorganizing
archive operating activities and eliminating certain back office activities
which can be handled through the PLUS(R) system or the Company's centralized
corporate organization. Cost savings start to be realized a short time after
an acquisition. Management has specifically identified $10,821 of estimated
operating expenses that would not have been incurred had the acquisitions
completed in 1996 and the 1997 Acquisitions occurred as of January 1, 1996.
These savings relate to (i) the termination of certain employees due to the
efficiency of the PLUS(R) system and integration and consolidation of
facilities, (ii) a reduction in warehouse rent expense related to facilities
the Company has vacated or will vacate or has negotiated changes in lease
terms and (iii) a reduction of other operating costs due to the Company's
economies of scale. Management expects to realize additional cost savings
beyond the $10,821 specifically identified.
(c) A pro forma adjustment has been made to reflect additional depreciation
and amortization expense based on the fair market value of the assets
acquired, as if the acquisitions completed in 1996 and the 1997 Acquisitions
occurred as of January 1, 1996. Such depreciation and amortization has been
recorded in accordance with the Company's accounting policies as stated in
Notes 3 and 4 to the Consolidated Financial Statements. The purchase price
allocation may change upon the final appraisal of the fair market value of the
net assets acquired. However, management believes that any change in value
will not materially impact the amount of depreciation and amortization
recorded.
(d) Represents interest expense of $8,764 on debt incurred to finance the
acquisitions completed in 1996 and the 1997 Acquisitions, using an effective
annual interest rate of 8.3%.
(e) Reflects interest expense on $200,000 of 1996 Notes at 11 1/8%, $100,000
of 1997 Notes at an assumed rate, net interest expense of $149 on other pro
forma indebtedness, commitment fees on existing senior indebtedness of $471
and amortization of deferred financing costs of $1,238, offset by the
elimination of interest expense on $70,000 of the 1996 Notes that will be
redeemed from the proceeds of the Equity Offerings and elimination of $322 of
related amortization of the deferred financing costs. The redemption of the
1996 Notes will require a prepayment penalty equal to 10% of the portion of
the 1996 Notes redeemed and the write-off of deferred financing costs of
approximately $2,975, which will be recorded in the quarter in which the
redemption occurs and has not been reflected in the Pro Forma Condensed
Consolidated Statement of Operations.
(f) The Company operates as a Subchapter S corporation for income tax
purposes and will terminate such status upon completion of the Equity
Offerings. The pro forma income tax benefit represents taxes on the pro forma
loss before income taxes and extraordinary charge after addback of all pro
forma loss from non-deductible expenses of approximately $4,000.
24
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED STATEMENTS OF
OPERATIONS, OTHER DATA AND BALANCE SHEETS
The following selected consolidated statements of operations and balance
sheets, insofar as it relates to each of the five years in the period ended
December 31, 1996, have been derived from the Consolidated Financial
Statements of the Company which have been audited by Arthur Andersen LLP,
independent public accountants. The report of Arthur Andersen LLP with respect
to the Company's Consolidated Financial Statements for the years ended
December 31, 1994, 1995 and 1996 appears elsewhere in this Prospectus.
The following selected pro forma statements of operations, other data and
balance sheets give effect to, among other things, the acquisitions completed
in 1996 and the 1997 Acquisitions, the termination of the Company's status as
a Subchapter S corporation for income tax purposes and the impact of the
Offerings, as if each of these items had occurred on January 1, 1996 or as of
December 31, 1996 in the case of the balance sheets. These items are described
in the accompanying notes hereto. The pro forma information should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto as of December 31, 1996 and for the three years in the period then
ended, appearing elsewhere in this Prospectus. This pro forma information is
not necessarily indicative of the results that would have occurred had the
acquisitions, the Subchapter S corporation termination and the Offerings been
completed on the dates indicated or the Company's actual or future results or
financial position.
The information set forth below should be read in conjunction with the Pro
Forma Condensed Consolidated Financial Statements, the Company's Consolidated
Financial Statements and the related notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Prospectus.
25
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED STATEMENTS OF
OPERATIONS, OTHER DATA AND BALANCE SHEETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
PRO FORMA
1992 1993 1994 1995 1996 1996(A)
--------- --------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues
Storage................ $ 37,633 $ 42,122 $ 47,123 $ 55,501 $ 75,900 $ 98,885
Service and storage
material sales........ 25,202 31,266 35,513 39,895 53,848 68,953
--------- --------- -------- -------- --------- --------
Total revenues........ 62,835 73,388 82,636 95,396 129,748 167,838
Cost of sales, excluding
depreciation and
amortization........... 39,702 45,391 49,402 55,616 73,870 93,299
Selling, general and
administrative......... 9,012 11,977 15,882 16,148 20,007 33,018
Depreciation and
amortization........... 5,734 6,888 8,436 8,163 12,869 18,169
Consulting payments to
related parties (b).... -- -- 500 500 -- --
Non-recurring charges
(c).................... -- -- -- -- 3,254 3,254
--------- --------- -------- -------- --------- --------
Operating income...... 8,387 9,132 8,416 14,969 19,748 20,098
Interest expense........ 6,388 6,160 7,216 9,622 17,225 25,250
--------- --------- -------- -------- --------- --------
Income before income
taxes and
extraordinary
charge............... 1,999 2,972 1,200 5,347 2,523 (5,152)
Income tax benefit...... -- -- -- -- -- 350(e)
Extraordinary charge
(d).................... -- 9,174 5,991 3,279 2,015 --
--------- --------- -------- -------- --------- --------
Net income (loss)....... 1,999 (6,202) (4,791) 2,068 508 (4,802)
Accretion (cancellation)
of redeemable
warrants............... -- (746) 16 889 1,561 --
--------- --------- -------- -------- --------- --------
Net income (loss)
applicable to Common
shareholders........... $ 1,999 $ (5,456) $ (4,807) $ 1,179 $ (1,053) $ (4,802)
========= ========= ======== ======== ========= ========
Pro forma data
(unaudited):
Pro forma adjustment
for income taxes...... $ 1,659(e)
Historical income
before extraordinary
charge, as adjusted
for pro forma income
taxes................. $ 864
Historical income
before extraordinary
charge per Common
share, as adjusted for
pro forma income
taxes................. $ (f)
Historical net loss
applicable to Common
shareholders, as
adjusted for pro forma
income taxes.......... $ (1,958)
Historical net loss
applicable to Common
shareholders per
Common share, as
adjusted for pro forma
income taxes.......... $ (f)
Shares used in
computing per share
amounts...............
Pro forma net loss
applicable to Common
shareholders per
Common share.......... $ (g)
Pro forma shares used
in computing per share
amount................
OTHER DATA:
Total revenue growth
rate................... 12.9% 16.8% 12.6% 15.4% 36.0% 75.9%
Operating income (before
non-recurring charges)
margin................. 13.3% 12.4% 10.2% 15.7% 17.7% 13.9%
EBITDA (h).............. $ 14,121 $ 16,020 $ 17,352 $ 23,632 $ 35,871 $ 41,521
EBITDA, as adjusted(i).. -- -- -- -- -- $ 52,342
EBITDA margin........... 22.5% 21.8% 21.0% 24.8% 27.7% 24.7%
EBITDA, as adjusted
margin................. -- -- -- -- -- 31.2%
Cash interest expense... $ 5,402 $ 4,677 $ 5,919 $ 9,089 $ 16,709 $ 24,333
Capital expenditures
(j).................... $ 5,565 $ 5,827 $ 6,352 $ 16,288 $ 23,493 --
Cubic feet of storage
under management at end
of period (000s)....... 16,248 19,025 22,160 29,523 40,410 47,191
Ratio of earnings to
fixed charges (k)...... 1.21x 1.30x 1.11x 1.37x 1.11x --
Ratio of EBITDA, as
adjusted to cash
interest expense....... -- - -- -- -- 2.15x
Ratio of total debt to
EBITDA, as adjusted.... -- -- -- -- -- 4.63x
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
PRO
1992 1993 1994 1995 1996 FORMA (L)
--------- --------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
deficit................ $ (11,656) $ (9,143) $ (5,202) $ (8,139) $ (23,933) $ (5,203)
Total assets............ 65,869 74,621 79,746 131,328 234,820 336,592
Total debt (including
redeemable warrants)... 55,027 69,736 77,683 120,071 217,423 242,096
Shareholders' equity
(deficit).............. (9,028) (14,508) (19,341) (18,201) (25,438) 40,087
</TABLE>
26
<PAGE>
NOTES TO SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS, OTHER DATA AND BALANCE SHEETS
(a) Gives effect to the (i) acquisitions completed in 1996 and the 1997
Acquisitions, (ii) termination of the Company's status as a Subchapter S
corporation and (iii) impact of the Offerings, as if each of these items had
occurred on January 1, 1996. See "Pro Forma Financial Data" and Note 2 of the
Notes to Consolidated Financial Statements. Upon the termination of the
Company's status as a Subchapter S corporation, the Company will record a
deferred income tax provision of approximately $6.6 million for the tax effect
of differences in the basis of assets and liabilities for financial reporting
and income tax purposes. This deferred income tax provision has not been
reflected in the Pro Forma Condensed Consolidated Statement of Operations.
Also not reflected in the Pro Forma Condensed Consolidated Statement of
Operations is the extraordinary charge for the early extinguishment of a
portion of the 1996 Notes that will occur in the quarter in which the
redemptions occur (see (d) below) and an unusual charge of approximately $
(pretax), or $ per share, for the write-off of the estimated unamortized
compensation expense associated with options granted on January 1, 1997, due
to the acceleration of vesting upon the completion of the Offerings.
(b) Represents aggregate payments made to eight Pierce family members.
(c) Represents non-recurring charges in 1996 of $2.8 million paid to a
related party partnership to assume the partnership's position in certain
leases with third parties and of $.5 million for the establishment of an
annual pension for Leo W. Pierce, Sr. and his spouse.
(d) Represents loss on early extinguishment of debt due to refinancings in
1993, 1994, 1995 and 1996. Amounts include write-off of unamortized deferred
financing costs and discount, along with prepayment penalties and other costs.
A similar charge for the early extinguishment of a portion of the 1996 Notes
of approximately $10.0 million (pretax), or $ per share, will occur in the
quarter in which the redemptions occur. Such charge has not been reflected in
the Pro Forma Condensed Consolidated Statement of Operations. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(e) The Company has historically been taxed as a Subchapter S corporation.
Such status terminates upon completion of the Equity Offerings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 2 of Notes to Consolidated Financial Statements.
(f) See Note 2 of Notes to Consolidated Financial Statements for information
concerning the computation of historical net loss per share as adjusted for
pro forma income taxes. Excluding the non-recurring charges incurred in 1996,
pro forma net income and net income per share as adjusted for income taxes
would have been $57 and $ , respectively.
(g) Excluding the non-recurring charges incurred in 1996 and $10,821 of
operating expenses specifically identified by management that would not have
been incurred had the acquisitions completed in 1996 and the 1997 Acquisitions
occurred as of January 1, 1996 and such cost savings been fully implemented as
of such date, pro forma net income and net income per share would have been
$3,765 and $ , respectively.
(h) "EBITDA" is defined as net income (loss) before interest expense, taxes,
depreciation and amortization, consulting payments to related parties, non-
recurring charges, and extraordinary charge. EBITDA is not a measure of
performance under GAAP. While EBITDA should not be considered in isolation or
as a substitute for net income, cash flows from operating activities and other
income or cash flow statement data prepared in accordance GAAP, or as a
measure of profitability or liquidity, management understands that EBITDA is
customarily used as a criteria in evaluating records management companies.
Moreover, substantially all of the Company's financing agreements, including
the Notes, contain covenants in which EBITDA is used as a measure of financial
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a discussion of other measures of performance
determined in accordance with GAAP and the Company's sources and applications
of cash flows.
(i) EBITDA, as adjusted is defined as EBITDA plus $10,821 of operating
expenses specifically identified by management that would not have been
incurred had the acquisitions completed in 1996 and the 1997 Acquisitions
occurred as of January 1, 1996 and such cost savings been fully implemented as
of such date. See Note (b) of Notes to Pro Forma Condensed Consolidated
Statement of Operations. Management expects to realize additional cost savings
beyond the $10,821 specifically identified.
(j) Capital expenditures for 1996 are comprised of $11.0 million for new
shelving, $4.0 million for leasehold and building improvements, $3.8 million
for new facility purchases and related improvements, $2.9 million for data
processing and $1.8 million for the purchase of transportation, warehouse and
office equipment. Of the total 1996 capital expenditures, management estimates
that approximately $2.5 million was for upgrading and restructuring of
existing facilities to accommodate growth or for maintenance capital
expenditures. The 1996 capital expenditures do not include $11.0 million paid
for real estate and other assets acquired from related parties (see Note 10 of
Notes to the Consolidated Financial Statements).
(k) The pro forma earnings for the year ended December 31, 1996 were
inadequate to cover fixed charges by $5.2 million.
(l) Gives effect to the (i) the 1997 Acquisitions, (ii) termination of the
Company's Subchapter S corporation status upon completion of the Equity
Offerings and (iii) impact of the Offerings, as if each of these items had
occurred on December 31, 1996. See "Pro Forma Financial Data," "Use of
Proceeds" and Note 2 to Notes to Consolidated Financial Statements.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is the largest archive records management company in North
America, as measured by its 47.5 million cubic feet of records currently under
management. The Company's operations date to 1957 when its predecessor
company, L.W. Pierce Co., Inc., was founded to provide filing systems and
related equipment to companies in the Philadelphia area. The Company expanded
primarily through internal growth until 1990, when it acquired Leahy Business
Archives which effectively doubled its size. Since 1992, the Company has
pursued an expansion strategy combining growth from new and existing customers
with the completion and successful integration of 26 acquisitions through 1996
and the completion of five acquisitions since January 1, 1997. The Company's
ability to pursue this acquisition strategy was substantially enhanced by the
implementation of the PLUS(R) system which began at the end of 1993 and was
completed in the beginning of 1995, and the expansion of the Company's credit
facilities beginning in 1994.
The Company has experienced significant growth in its revenues and operating
income as a result of its successful expansion and acquisition strategy.
During the five-year period ended December 31, 1996, revenues increased from
$62.8 million to $129.7 million, representing a compound annual growth rate of
19.9%. The Company has also made substantial investments in its facilities and
management information systems, the benefits of which are now being realized
through economies of scale and increased operating efficiencies. The Company's
operating income as a percentage of total revenues improved from 13.3% in 1992
to 15.2% in 1996 (17.7% excluding the non-recurring charges in 1996), while
operating income increased from $8.4 million in 1992 to $19.7 million in 1996
($23.0 million excluding the non-recurring charges in 1996). This increase
represents a compound annual growth rate of 23.9% as reported and 28.7%
excluding the non-recurring charges incurred in 1996. As the Company's volume
of business grows, the Company believes its substantial investment in
infrastructure will be amortized over a larger base of business, creating
further economies of scale.
Another tool for measuring the performance of records management companies
is EBITDA. Substantially all of the Company's financing agreements, including
the Notes, 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. The Company's EBITDA as a percentage of total revenues
improved from 22.5% in 1992 to 27.7% in 1996, while EBITDA increased from
$14.1 million in 1992 to $35.9 million in 1996, representing a compound annual
growth rate of 26.3%.
28
<PAGE>
The following table illustrates the growth in stored cubic feet from
existing customers, new customers and acquisitions from 1992 through 1996:
NET ADDITIONS OF CUBIC FEET OF STORAGE BY CATEGORY
(CUBIC FEET IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Additions of Cubic Feet:
New Customer Accounts(a)....... 995 1,494 1,038 2,018 2,994
Existing Customer Accounts(b).. 1,101 1,166 1,657 722 (c) 962 (c)
Acquisitions................... 294 117 440 4,623 6,931
------ ------ ------ ------ ------
Total........................ 2,390 2,777 3,135 7,363 10,887
% Increase From:
New Customer Accounts(a)....... 7% 9% 5% 9% 10%
Existing Customer Accounts(b).. 8% 7% 9% 3%(c) 3%(c)
Acquisitions................... 2% 1% 2% 21% 24%
------ ------ ------ ------ ------
Total........................ 17% 17% 16% 33% 37%
Cubic Feet Under Management:
Beginning of Period............ 13,858 16,248 19,025 22,160 29,523
End of Period.................. 16,248 19,025 22,160 29,523 40,410
</TABLE>
- --------
(a) For the first twelve months after the establishment of a customer account,
records added to such account are classified as additions to new customer
accounts in the period in which they are received.
(b) Net of permanent removals.
(c) Includes effect of a records destruction program of 372,000 and 475,000
cubic feet of records in 1995 and 1996, respectively, for a major
customer, as recommended by the Company pursuant to a consulting agreement
with the Company.
Revenues
The Company's revenues consist of storage revenues (58.5% of total revenues
in 1996), and related service and storage material sales revenues (41.5% of
total revenues in 1996). The Company provides records storage and related
services under annual or multi-year contracts that typically provide for
recurring monthly storage fees which continue until such records are
permanently removed (for which the Company charges a service fee) and service
charges based on activity with respect to such records. The Company's current
average monthly storage rate is approximately $0.186 per cubic foot (or $2.23
per year). Permanent removal fees typically range from $2.00 to $5.75 per
cubic foot. Since there are relatively little direct on-going marketing, labor
or capital expenditures associated with storing a box of records, recurring
storage fees contribute significantly to the Company's operating results.
While the Company's total revenues have increased at a compound annual
growth rate of 19.9% from 1992 to 1996, total revenue per annual average cubic
foot during such period has declined 8.4% from $4.17 to $3.82.* The decline is
principally attributable to (i) increases in sales to large volume accounts
under long-term contracts with discounted rates, which generate lower revenue
per cubic foot, but typically generate increased operating income, (ii)
renegotiation of contracts with existing customers to provide for longer term
contracts at lower rates, and (iii) competition. Declines in revenues per
cubic foot have been more than offset by improvements in operating
efficiencies and greater productivity as demonstrated by the increase in
EBITDA and EBITDA as a percentage of total revenues over the same period.
- --------
* For periods through 1994, average cubic feet is the average of cubic feet
at the beginning and the end of the period; for periods beginning on or after
January 1, 1995, average cubic feet is the average of the cubic feet at the
end of each month in such period.
29
<PAGE>
Operating Expenses and Productivity
Operating expenses consist primarily of cost of sales, selling, general and
administrative expenses, and depreciation and amortization. Cost of sales are
comprised mainly of wages and benefits, facility occupancy costs, equipment
costs and supplies. The major components of selling, general and
administrative expenses are management, administrative, marketing and data
processing wages and benefits and also include travel, communication and data
processing expenses, professional fees and office expenses.
In recent years, the Company has undertaken several steps to reduce
operating expenses, particularly labor and facility occupancy costs, which are
its two highest cost components. From 1992 to 1996, annual operating expenses
(before depreciation, amortization and consulting payments) per average annual
cubic foot declined 14.8% from $3.24 to $2.76.*
The installation of the PLUS(R) system (which took approximately five years
and over $8 million to develop and implement and an additional $2.1 million to
upgrade and expand capacity) has significantly reduced the Company's labor
requirements by streamlining administrative and warehouse work processes,
thereby reducing the labor required to process customer orders. The PLUS(R)
system also has increased the speed at which the Company can obtain labor
efficiencies when acquiring new records management companies, which in
conjunction with the Company's centralized corporate administrative functions,
has generally enabled the Company to integrate several acquisition sites
concurrently and to reduce the workforce of acquired businesses by at least
20%.
The following table illustrates the Company's improvement in labor
productivity from 1992 to 1996:
ANALYSIS OF LABOR PRODUCTIVITY
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Cubic Feet Under Management Per
Employee(a).......................... 19,961 23,033 24,405 24,521 26,021
EBITDA Per Employee(b)................ $18,162 $19,537 $20,014 $22,379 $26,022
Number of Employees at End of Period.. 814 826 908 1,204 1,553
</TABLE>
- --------
(a) Based on end of period cubic footage under management and end of period
number of employees.
(b) Based on the average of the number of employees at the beginning and end
of period.
The Company has begun to operate in warehouses into larger, more efficient
regional facilities in some areas, which generate economies of scale in both
labor and facility occupancy costs. For example, in 1995 the Company secured
two new facilities, one in New Jersey and one in Massachusetts, which expanded
the Company's storage capacity by 17 million cubic feet. The Company is in the
process of consolidating certain individual warehouses into these facilities
and anticipates realizing further economies of scale as its consolidates
- --------
* For periods through 1994, average cubic feet is the average of cubic feet
at the beginning and the end of the period; for periods beginning on or after
January 1, 1995, average cubic feet is the average of the cubic feet at the
end of each month in such period.
30
<PAGE>
other warehouses over the next two or three years as existing leases expire.
This added capacity is expected to satisfy the Company's growth requirements
in its Northeast region for several years. The Company intends to pursue this
consolidation strategy, when feasible, in other locations. Primarily as a
result of the new facilities in New Jersey and Massachusetts, warehouse
utilization has declined to approximately 64% at the end of 1996 from
historical levels of 70% to 80%. Increases in utilization rates at existing
facilities generally result in increased operating income because of the
relatively minimal incremental operating costs associated with such increased
utilization.
The Company's depreciation and amortization charges result primarily from
the capital-intensive nature of its business and the acquisitions the Company
has completed. The principal components of depreciation relate to shelving,
facilities and leasehold improvements, equipment for new facilities and
computer systems. Amortization primarily relates to the amortization of
intangible assets associated with acquisitions, including goodwill, and to the
amortization of client 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
market value of their 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.
Capital Expenditures and Client Acquisition Costs
The majority of the Company's capital expenditures are related to expansion.
The largest single component is the purchase of shelving which is directly
related to the addition of new records. The marginal cost of adding a cubic
foot of storage capacity in an existing facility is approximately $2.60, of
which approximately $2.00 is attributable to shelving costs. Shelving has a
relatively long life and rarely needs to be replaced. The remaining $.60 is
attributed to the installation of lighting and security systems and other
storage related modifications. Most of the Company's storage facilities (both
in number and square feet) are leased, but the Company will purchase
facilities on an opportunistic basis. The Company's data processing capital
expenditures are also largely related to growth.
In 1996, capital expenditures of $23.5 million consisted of $11.0 million
for new shelving, $4.0 million for leasehold and building improvements, $3.8
million for new facility purchases and related improvements, $2.9 million for
data processing and $1.8 million for the purchase of transportation, warehouse
and office equipment. Of the total 1996 capital expenditures, management
estimates that approximately $2.5 million was for maintenance capital
expenditures.
In addition, in August 1996 in connection with the offering of the 1996
Notes, the Company purchased certain real estate interests and other assets
from affiliates for $14.8 million, of which $11.0 million was for the purchase
of facilities.
In connection with the acquisition of new large volume accounts, the Company
often incurs client acquisition costs, primarily sales commissions and move-in
costs. Client acquisition costs are capitalized and amortized over six years.
In 1996, the Company incurred $6.5 million of client acquisition costs.
Amortization of client acquisition costs amounted to $1.7 million in 1996.
Extraordinary Charge
To provide capital to fund its growth oriented business strategy, the
Company has incurred substantial indebtedness. The Company has completed
several expansions of its credit facilities, primarily utilizing bank debt,
which have resulted in one-time charges including the repurchase of warrants
and the write- off of deferred financing costs of $6.0 million, $3.3 million
and $2.0 million in 1994, 1995 and 1996, respectively.
In connection with the use of the proceeds from the Equity Offerings, the
Company will incur a prepayment penalty of $7.0 million (pretax) to redeem a
portion of the 1996 Notes. In addition, approximately $3.0 million
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<PAGE>
(pretax) of unamortized deferred financing costs will be written off. This
extraordinary charge of approximately $10.0 million (pretax) will be recorded
in the quarter in which the redemption occurs. Upon the completion of the
Equity Offerings, the Company's status as a Subchapter S corporation will
terminate and a deferred income tax provision of approximately $6.6 million
will be recorded. In addition, due to the acceleration of the vesting of
certain options which will occur upon the completion of the Equity Offerings,
the Company will also record an unusual charge of approximately $ (pretax)
for the estimated unamortized compensation expense associated with stock
options granted on January 1, 1997 in the quarter in which the Offerings are
consummated. See Note (8) of Notes to Consolidated Financial Statements.
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 revenue. There can be no assurance that the trends in revenue
growth or operating results shown below will continue in the future.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Storage...................................... 57.0% 58.2% 58.5%
Service and storage material sales........... 43.0 41.8 41.5
-------- -------- --------
Total revenues............................. 100.0 100.0 100.0
Cost of sales, excluding depreciation and
amortization.................................. 59.8 58.3 57.0
Selling, general and administrative............ 19.2 16.9 15.4
Depreciation and amortization.................. 10.2 8.6 9.9
Consulting payments to related parties......... 0.6 0.5 0
Non-recurring charges.......................... 0 0 2.5
-------- -------- --------
Operating income............................. 10.2 15.7 15.2
Interest expense............................... 8.7 10.1 13.3
-------- -------- --------
Income (loss) before extraordinary charge.... 1.5 5.6 1.9
Extraordinary charge........................... 7.3 3.4 1.5
-------- -------- --------
Net income (loss)............................ (5.8)% 2.2% 0.4%
======== ======== ========
OTHER DATA:
EBITDA....................................... 21.0% 24.8% 27.7%
Operating income before non-recurring
charges..................................... 10.2% 15.7% 17.7%
</TABLE>
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total revenues increased from $95.4 million in 1995 to $129.7 million in
1996, an increase of $34.3 million or 36.0%. Revenues from acquisitions
represented $25.7 million or 74.9% of this increase, including $16.3 million
from a full year of operations of five acquisitions made in 1995 and $9.4
million from a partial year of operations of twelve acquisitions made in 1996.
Approximately $8.6 million or 25.1% of the total revenue growth resulted from
sales to new customers and increases in cubic feet stored from existing
customers.
Storage revenues increased from $55.5 million in 1995 to $75.9 million in
1996, an increase of $20.4 million or 36.8%. Service and storage material
sales revenues increased from $39.9 million in 1995 to $53.8 million in 1996,
an increase of $13.9 million or 35.0%.
The annual average cubic feet stored increased from approximately 25.1
million in 1995 to approximately 34.0 million in 1996, an increase of 35.5% as
a result of acquisitions, new customer accounts and growth from existing
customer accounts.
32
<PAGE>
Cost of sales (excluding depreciation and amortization) increased from $55.6
million in 1995 to $73.9 million in 1996, an increase of $18.3 million or
32.8%, but decreased as a percentage of total revenues from 58.3% in 1995 to
57.0% in 1996. The $18.3 million increase was due primarily to increases in
wages and benefits resulting from an increased number of employees and to
increases in facility occupancy costs associated with the growth in business.
The decrease as a percentage of total revenue was due primarily to increased
operating and storage efficiencies.
Selling, general and administrative expenses increased from $16.1 million in
1995 to $20.0 million in 1996, an increase of $3.9 million or 23.9%, and
decreased as a percentage of total revenues from 16.9% in 1995 to 15.4% in
1996. The decrease as a percentage of total revenues was due to operating
efficiencies and the implementation of programs to control and reduce certain
administrative expenses. The purchase of certain real estate interests from
affiliates in August 1996 contributed $0.9 million to the reduction in cost of
sales or 0.7% as a percentage of revenues.
Depreciation and amortization expenses increased from $8.2 million in 1995
to $12.9 million in 1996, an increase of $4.7 million or 57.7%, and increased
as a percentage of total revenues from 8.6% in 1995 to 9.9% in 1996. This
increase was the result of increased capital expenditures for shelving and
improvements to record management facilities and information systems and the
amortization of goodwill from the Company's acquisitions.
The Company incurred non-recurring charges of $3.3 million in 1996 in
connection with the assumption of leasehold interests in certain facilities
from affiliated parties and with the establishment of a pension for
L.W. Pierce, Sr. See "Management--Compensation Committee Interlocks and
Insider Participation."
As a result of the foregoing factors, excluding the non-recurring charges in
1996, operating income increased from $15.0 million in 1995 to $23.0 million
in 1996, an increase of 53.7%, and increased as a percentage of total revenues
from 15.7% in 1995 to 17.7% in 1996. The increase reflected the growth in the
Company's business, economies of scale and increased operating efficiencies.
Interest expense increased from $9.6 million in 1995 to $17.2 million in
1996, an increase of $7.6 million or 79.0%, due primarily to higher levels of
indebtedness. The Company recorded extraordinary charges of $3.3 million in
1995 and $2.0 million in 1996 related to the early extinguishment of debt as a
result of refinancing and expanding its existing credit agreement in 1995 and
again in 1996.
As a result of the foregoing factors, net income was $0.5 million in 1996
compared to net income of $2.1 million in 1995.
EBITDA increased from $23.6 million in 1995 to $35.9 million in 1996, an
increase of $12.3 million or 51.8%, and increased as a percentage of total
revenues from 24.8% in 1995 to 27.7% in 1996. The increase as a percentage of
the total revenues reflected growth in the Company's business, economies of
scale and increased operating efficiencies.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total revenues increased from $82.6 million in 1994 to $95.4 million in
1995, an increase of $12.8 million or 15.4%. Almost one-half of the total
revenue growth resulted from sales to new customers and increases in cubic
feet stored from existing customers, partially offset by the reduction of
records of a major customer pursuant to a records destruction program
recommended by the Company pursuant to a consulting agreement with the
Company. Five acquisitions completed from February 1995 to October 1995
accounted for $6.6 million (or 51.6%) of the increase.
Storage revenues increased from $47.1 million in 1994 to $55.5 million in
1995, an increase of $8.4 million or 17.8%. Service and storage material sales
revenues increased from $35.5 million in 1994 to $39.9 million in 1995, an
increase of $4.4 million or 12.3%.
33
<PAGE>
The annual average cubic feet stored increased from approximately 20.6
million in 1994 to approximately 25.1 million in 1995, an increase of 21.8% as
a result of acquisitions, new customer accounts and growth from existing
customer accounts.
Cost of sales (excluding depreciation and amortization) increased from $49.4
million in 1994 to $55.6 million in 1995, an increase of $6.2 million or
12.6%, but decreased as a percentage of total revenues from 59.8% in 1994 to
58.3% in 1995. The $6.2 million increase was due primarily to increases in
storage volume and the associated cost of additional storage capacity. The
decrease as a percentage of total revenues was due primarily to increased
operating and storage efficiencies, in part reflecting the full implementation
of the PLUS(R) system during the first quarter of 1995.
Selling, general and administrative expenses increased from $15.9 million in
1994 to $16.1 million in 1995, an increase of $0.2 million or 1.7%, and
decreased as a percentage of total revenues from 19.2% in 1994 to 16.9% in
1995. The decrease as a percentage of total revenues was due to operating
efficiencies and the implementation of programs to control and reduce certain
administrative expenses.
Depreciation and amortization expenses decreased from $8.4 million in 1994
to $8.2 million in 1995, a decrease of $0.2 million or 3.2%, and decreased as
a percentage of total revenues from 10.2% in 1994 to 8.6% in 1995. This
decrease, both in dollars and as a percentage of total revenues, was due
primarily to the Company's revision of the estimated useful lives of certain
long-term assets, effective January 1, 1995, to more accurately reflect the
estimated economic lives of the related assets and to be more in conformity
with industry practices. The aggregate effect of adopting these revised lives
was to decrease amortization and depreciation expense by approximately $4.9
million. This change more than offset what would have been an increase in
depreciation charges resulting from capital expenditures for shelving and
improvements to records management facilities and information systems and the
amortization of goodwill from the Company's acquisitions.
As a result of the foregoing factors, operating income increased from $8.4
million in 1994 to $15.0 million in 1995, an increase of 77.9%, and increased
as a percentage of the total revenues from 10.2% in 1994 to 15.7% in 1995. The
increases reflect the growth in the Company's business, economies of scale and
increased operating efficiencies.
Interest expense increased from $7.2 million in 1994 to $9.6 million in
1995, an increase of $2.4 million or 33.3%, due primarily to higher levels of
indebtedness. The Company recorded extraordinary charges of $6.0 million in
1994 and $3.3 million in 1995 related to the early extinguishment of debt as a
result of refinancing and expanding its then existing credit agreement in 1994
and again in 1995.
As a result of the foregoing factors, net income was $2.1 million in 1995
compared to a net loss of $4.8 million in 1994.
EBITDA increased from $17.4 million in 1994 to $23.6 million in 1995, an
increase of $6.2 million or 36.2%, and increased as a percentage of total
revenues from 21.0% in 1994 to 24.8% in 1995. The increase as a percentage of
total revenues reflected growth in the Company's business, economies of scale
and increased operating efficiencies.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital have been cash flows from
operations and borrowings under various revolving credit facilities and other
senior indebtedness. Historically, the Company's primary uses of capital have
been acquisitions, capital expenditures and client acquisition costs.
The net proceeds from the Equity Offerings will be primarily used to redeem
a portion of the 1996 Notes, and the net proceeds of the Notes Offering will
be primarily used to repay outstanding amounts under the Credit Facility. The
result of the use of proceeds from the Offerings will be to reduce the
Company's leverage and
34
<PAGE>
improve its financial flexibility. As of December 31, 1996, on a pro forma
basis after giving effect to the 1997 Acquisitions, the Offerings and the
estimated use of the net proceeds therefrom, the Company's consolidated
indebtedness would have been approximately $242.1 million. As of December 31,
1996, the Company's consolidated indebtedness was $217.4 million, and adjusted
for the 1997 Acquisitions, the Company's consolidated indebtedness would have
been $298.0 million. The Company believes that future cash flows from
operations, together with borrowings under the Credit Facility and any net
proceeds of the Offerings not used to repay indebtedness, will be sufficient
to fund future working capital needs, capital expenditure requirements and
debt service requirements of the Company for the foreseeable future.
Capital Investments
For 1994, 1995 and 1996, capital expenditures were $6.4 million, $16.3
million and $23.5 million, respectively, and client acquisition costs were
$1.9 million, $2.2 million and $6.5 million, respectively. Capital
expenditures for 1996 were comprised of $11.0 million for new shelving, $4.0
million for leasehold and building improvements, $3.8 million for new facility
purchases and related improvements, $2.9 million for data processing and $1.8
million for the purchase of transportation, warehouse and office equipment.
In addition, in August 1996 in connection with the offering of the 1996
Notes, the Company purchased certain real estate interests and other assets
from affiliates for $14.8 million, of which $11.0 million was for the purchase
of facilities.
In 1997, the Company expects its aggregate capital expenditures will
approximate $30 million. Of this amount, approximately $10 million is expected
to be related to the purchase of facilities. Of the remaining $20 million,
over 85% is anticipated to be growth related, principally for shelving for new
records.
Acquisitions
In order to capitalize on industry consolidation opportunities, the Company
has actively pursued acquisitions since the beginning of 1994, which has
significantly impacted liquidity and capital resources. From 1994 to 1996, the
Company acquired 21 records management companies for an aggregate cash
purchase price of $104.3 million. Since the beginning of 1997, the Company has
made five acquisitions for an aggregate cash purchase price of $80.5 million.
The Company has historically financed its acquisitions with borrowings under
its credit agreements and the 1996 Notes and with cash flows from existing
operating activities. In the past, the Company has relied solely upon cash as
consideration for its acquisitions; however, following the Offerings, the
Company may also use equity securities or a combination of cash and equity
securities to purchase other records management companies.
To the extent that future acquisitions are financed by additional borrowings
under its Credit Facility or other types of indebtedness, the resulting
increase in debt and interest expense could have a negative effect on such
measures of liquidity as debt to equity.
Certain Effects Resulting from Acquisitions
As a result of its substantial acquisition experience, the Company has
developed a standardized program by which it integrates acquired companies
into its existing infrastructure. The integration of an acquired company
entails, among other things, converting the database of stored records to the
PLUS(R) system, reorganizing archive operating activities and eliminating
certain back office activities which can be handled through the PLUS(R) system
or the Company's centralized corporate organization. Certain savings start to
be realized a short time after an acquisition. The pro forma operating
expenses reflected in the Pro Forma Condensed Consolidated Statement of
Operations would have been reduced by an estimated $10,821 for specifically
identified items had the acquisitions completed in 1996 and the 1997
Acquisitions occurred as of January 1, 1996. See Note (b) to the Pro Forma
Condensed Consolidated Statement of Operations. These savings relate to (i)
the termination of
35
<PAGE>
certain employees due to the efficiency of the PLUS(R) system and integration
and consolidation of facilities, (ii) a reduction in warehouse rent expense
related to facilities the Company has vacated or will vacate or has negotiated
changes in lease terms and (iii) a reduction of other operating costs due to
the Company's economies of scale. Management expects to realize additional
cost savings beyond the $10,821 specifically identified.
Sources of Funds
Net cash flows provided by operating activities were $11.0 million, $17.5
million and $26.4 million for 1994, 1995 and 1996, respectively. The $6.5
million increase from 1994 to 1995 was primarily comprised of a $6.9 million
increase in net income and a $3.4 million decrease in working capital offset
in part by a $2.7 million decline in extraordinary charges. The $8.9 million
increase from 1995 to 1996 was primarily comprised of a $4.7 million increase
in depreciation and amortization and a $6.8 million decrease in working
capital, offset by a $1.6 million decrease in net income and a $1.3 million
decline in extraordinary charges.
Net cash flows used in investing activities were $13.9 million, $51.3
million and $108.8 million for 1994, 1995 and 1996, respectively. The uses of
such cash flows were primarily for acquisitions, capital expenditures and
client acquisition expenditures detailed above.
Net cash flows provided by financing activities were $2.8 million, $34.2
million and $82.9 million for 1994, 1995 and 1996, respectively. In 1994, the
Company's previous credit facility was expanded to $120.0 million and included
a substantial acquisition facility. In 1995, the Company's previous credit
facility was expanded to $170.0 million, including a substantial acquisition
facility, and provided funds for the acquisition of PLC Command in Canada. In
July 1996, the Company issued $200.0 million of the 1996 Notes and used the
net proceeds to retire all of the debt outstanding under the Company's
previous credit facility, to purchase certain properties from affiliates of
the Company, to redeem stock from a shareholder of the Company, to fund an
acquisition and for general corporate purposes. In August 1996, the Company
entered into the Credit Facility which provides $100.0 million in U.S. dollar
borrowings and Cdn $35.0 million in Canadian dollar borrowings. The Credit
Facility contains a number of financial and other covenants restricting the
Company's ability to incur additional indebtedness and make certain types of
expenditures. Covenants in the Indenture governing the 1996 Notes also
restrict borrowings under the Credit Facility. As of December 31, 1996, after
giving effect to the 1997 Acquisitions and pro forma for the Offerings and the
application of the estimated net proceeds therefrom (at an assumed initial
public offering price of $ per share), the Company could have borrowed
$ under the Credit Facility. The interest rate on the Credit Facility, pro
forma for the Offerings and the 1997 Acquisitions, would have been %.
Although there can be no assurances, the Company anticipates that subsequent
to the Offerings, it will modify its Credit Facility to increase the total
availability to $ in U.S. dollar borrowings and Cdn $ in Canadian dollar
borrowings and to change certain other provisions of the Credit Facility.
Future Capital Needs
Management believes that cash flow from operations in conjunction with the
net proceeds of the Offerings and borrowings under the Credit Facility will be
sufficient for the foreseeable future to meet working capital requirements and
to make possible future acquisitions and capital expenditures. Depending on
the pace and size of future possible acquisitions, the Company may elect to
seek additional debt or equity financing. There can be no assurance that the
Company will be able to obtain any future financing, if required, or that the
terms for any such future financing would be favorable to the Company.
36
<PAGE>
BUSINESS
GENERAL
The Company is the largest archive records management company in North
America, as measured by its 47.5 million cubic feet of records currently under
management. The Company operates a total of 152 records management facilities
of which 139 are in the United States, serving 58 markets, including the 16
largest U.S. markets. In addition, the Company operates 13 records management
facilities in five of Canada's six largest markets.
The Company is a full-service provider of records management and related
services, enabling customers to outsource their data and records management
functions. The Company offers storage for all major media, including paper
(which has typically accounted for approximately 95% of the Company's storage
revenues), computer tapes, optical discs, microfilm, video tapes and X-rays.
In addition, the Company provides next day or same day records retrieval and
delivery, allowing customers prompt access to all stored material. The Company
also offers other data management services, including customer records
management programs, imaging services and records management consulting
services.
The Company believes it is the most technologically advanced records
management company in the industry by virtue of its Pierce Leahy User
Solution(R) (PLUS(R)) computer system. The PLUS(R) system fully integrates the
Company's records management, data retrieval and billing functions on a
centralized basis through the use of proprietary, real time software. The
PLUS(R) system assists the Company in efficiently managing records in multiple
locations for national and local customers, rapidly integrating acquisitions
of records management companies and maintaining a low-cost operating
structure. The Company serves a diversified group of over 22,000 customer
accounts in a variety of industries such as financial services, manufacturing,
transportation, healthcare and law. The Company's storage and related services
are typically provided pursuant to contracts that include recurring monthly
storage fees, which continue until such records are permanently removed (for
which the Company charges a fee), and additional charges for services such as
retrieval on a per unit basis.
The Company's revenues and operating income before non-recurring charges (on
a pro forma basis as defined herein) for the year ended December 31, 1996 were
$167.8 million and $23.4 million, respectively. From 1992 to 1996, the
Company's revenues and operating income before non-recurring charges grew at
compound annual growth rates of 19.9% and 28.7%, respectively. The Company
attributes this growth to the expansion of its business with new and existing
companies, which has been primarily driven by the trend towards outsourcing of
records management functions by companies and the ongoing consolidation of the
fragmented records management industry. The Company has successfully acquired
and integrated 26 companies from 1992 to 1996.
The Company's growth strategy is to expand its business in new and existing
markets through (i) targeting new customers, (ii) growing with existing
customers and (iii) continuing its acquisition program. The Company has
adopted the following approaches to pursue its growth objectives:
Targeting New Customers. The Company has a dual sales strategy focused on
both larger, typically multi-location accounts and smaller accounts, with a
dedicated sales force for each. The Company's sales and marketing force has
increased from 41 persons at the end of 1995 to 75 persons currently. For
large regional and national accounts, the Company believes its national
presence, sophisticated systems and low-cost operating structure provide a
competitive advantage. These organizations are increasingly outsourcing such
noncore activities, which enables their management to focus on their core
business and to reduce space requirements and records management costs. For
smaller accounts, the Company combines the cost benefits of its centralized
systems with quality local service. From 1992 to 1996, the average annual
growth rate of cubic feet of storage from new customers was approximately 8%.
Growing with Existing Customers. The Company services its existing customers
through both a centralized customer service organization and local client
service representatives. Existing customers typically
37
<PAGE>
generate additional records annually which are stored with the Company. From
1992 to 1996, the average annual growth rate of cubic feet of storage from
existing customers was approximately 6%.
Continuing Acquisition Program. The Company believes that the records
management industry is highly fragmented and offers substantial opportunity for
consolidation. The Company targets potential acquisitions both in the markets
it already services and in new markets which it is not yet servicing. From 1992
to 1996, the Company successfully completed and integrated 26 acquisitions,
totalling approximately 12.4 million cubic feet of records at the time of
acquisition. Since January 1, 1997, the Company has completed five
acquisitions, totalling approximately 6.7 million cubic feet of records at the
time of acquisition. As a result of its centralized organizational structure
and the PLUS(R) system, the Company has been able to rapidly achieve
significant economies of scale in its acquisitions. From 1992 to 1996, the
average annual growth rate of cubic feet of storage from acquisitions was
approximately 10%. See "--Acquisition and Growth Strategy."
The Company's growth strategy is supported by an operating strategy which
emphasizes providing premium standardized services while maintaining a low-cost
operating structure. As a result, the Company's operating income before non-
recurring charges as a percentage of total revenues increased from 13.3% in
1992 to 17.7% in 1996 and 13.9% in 1996 on a pro forma basis. The Company
expects to continue its growth and enhance its position by implementing its
strategy based on the following elements:
Using Sophisticated Centralized Systems to Provide High Quality Service. In
tandem with the Company's centralized customer service organization and local
field support personnel, the Company utilizes its PLUS(R) system to provide a
high and consistent level of service (24 hours a day, seven days a week) to its
customers on a national and local basis, including providing its customers with
real-time access to the database. Although PLUS(R) is centralized, the system
permits local management flexibility through a variety of pre-programmed
options to customize the system and enhance its utility to different types of
customers. For example, PLUS(R) offers (i) specialized inventory reporting
formats (e.g., by insurance policy, law case file number or mortgage file),
(ii) specialized invoicing (e.g., to local division with information reporting
to the customer's corporate office, and vice versa, and departmental
invoicing), (iii) pre-set inventory review dates based on the assigned
retention period for a particular class of document and (iv) authorized users
with security passwords.
Maintaining its Position as a Low-Cost Provider through Economies of
Scale. The Company strives to remain a low-cost operator through achieving
economies of scale in labor, real estate, transportation, computer systems and
administrative expenses. The PLUS(R) system allows the Company to enhance the
efficiency of its facilities while reducing fixed and operating costs. This
system eliminates the need to designate permanent locations for an individual
customer's records within a facility, by using sophisticated bar-coding
technology which enables records to be stored wherever space is available and
to be positioned within the Company's facilities based on retrieval frequency,
thereby reducing labor costs. PLUS(R) is similarly valuable in helping to
achieve cost savings in acquisitions.
THE RECORDS MANAGEMENT INDUSTRY
According to a 1994 study by the Association of Commercial Record Centers
(the "ACRC"), an industry trade group with over 500 members, approximately
2,800 companies offer records storage and related services in North America.
The Company believes that only 25% of the potential market outsources its
records management functions and that approximately 75% is still "unvended," or
internally managed. The Company estimates that the North American vended
records management industry generates annual revenues in excess of $1.0
billion. Management believes that the industry is highly fragmented, with most
industry participants operating on a regional or local basis.
Saved documents, or records, generally fall into two categories: active and
inactive. Active records refer to information that is frequently referenced and
usually stored on-site by the originator. Inactive records are not needed for
frequent access, but must be retained for future reference, legal requirements
or regulatory compliance.
38
<PAGE>
Inactive records, which the Company estimates comprise approximately 80% of
all records, are the principal focus of the records management industry.
The Company believes that the records management industry is characterized by
the following trends:
Industry Consolidation. The records management industry is undergoing a
period of consolidation as larger, better capitalized industry participants
acquire smaller regional or local participants. Management believes that
consolidation is primarily driven by the needs of large customers for fully
integrated coverage and the ability to realize economies of scale, especially
with respect to labor, real estate, transportation and computer systems and
administrative expenses. Industry consolidation also provides private owners of
smaller records management companies the ability to obtain liquidity.
Movement Towards Outsourcing. Outsourcing of internal records management
functions represents the largest single source of new business for records
management companies. The Company believes that as more organizations become
aware of the advantages of professional records management, such as net cost
reductions and enhanced levels of service, the records management industry will
continue to gain a growing portion of the unvended segment. The Company also
believes that the establishment of national providers with well-known brand
names will help to accelerate this trend.
Increasing Production of Paper. Increasingly widespread technologies such as
facsimiles, copiers, personal computers, laser printers and advanced software
packages have enabled organizations to create, copy and distribute documents
more easily and broadly. In spite of new "paperless" technologies (including
the Internet and "e-mail"), information remains predominantly paper based.
Additionally, the cost of storing records on paper is currently less expensive
than the cost of converting paper records to, and storing on, other media
(e.g., computer media, imaging, microfilm, CD-Rom and optical disc).
Expanded Record Keeping Needs. While technology has augmented the growth of
paper generation, several external forces and concerns have played an important
role in organizations' decisions to store and retain access to records. For
example, the continued growth of regulatory requirements and the proliferation
of litigation has resulted in increased volumes and lengthened holding periods
of documents. Retained records are also remaining in storage for extended
periods of time because the process of determining which records to destroy is
time consuming and often more costly in the short-term than continued storage.
ACQUISITION HISTORY AND GROWTH STRATEGY
The Company believes that the consolidation trend occurring in the North
American records management industry will continue and that acquisitions will
remain an important part of the Company's growth strategy. Acquisitions provide
the Company with the ability to expand and achieve additional economies of
scale. From 1992 to 1996, the Company successfully completed and integrated 26
acquisitions, totaling approximately 12.4 million cubic feet of records at the
time of acquisition. Since January 1, 1997, the Company has completed five
acquisitions, totalling approximately 6.7 million cubic feet of records at the
time of acquisition. As a result of its substantial acquisition experience, the
Company has developed a standardized program through which it integrates
acquired companies into its existing infrastructure. In each of these
acquisitions, staffing levels were initially reduced with further reductions
typically taking place in the following months as general and administrative
functions were integrated into the Company's centralized operating system.
39
<PAGE>
The following table summarizes certain information for each acquisition since
1990:
<TABLE>
<CAPTION>
EXISTING/ DATE OF
ACQUISITION LOCATION NEW LOCATION ACQUISITION
- ----------- -------- ------------ --------------
<S> <C> <C> <C>
Leahy Business Archives Multiple* Existing/New February 1990
Muhlenhaupt Records
Management Long Island Existing April 1992
Arcus Data New York Existing July 1992
File Away Baltimore/Washington, D.C. Existing July 1992
Taylor Document Richmond New August 1992
Data Management of
Tennessee Nashville New April 1993
Command Records Chicago Existing June 1994
Fidelity Archives Philadelphia Existing July 1994
ProFilers Jacksonville New October 1994
Fileminders Jacksonville New October 1994
Vital Archives New York Existing February 1995
Bestway Archival
Services Miami Existing May 1995
Curtis Archives Seattle New August 1995
Command Records Service Canada** New October 1995
AMK Documents Phoenix New October 1995
Brambles (Ottawa
Division) Ottawa Existing March 1996
The File Cabinet Atlanta Existing March 1996
File Box Austin New April 1996
Security Archives Dallas Existing May 1996
Archives America of San
Diego San Diego New July 1996
Security Archives of
Denver Denver New August 1996
Data Protection Services Birmingham New September 1996
Info-Stor Calgary Existing October 1996
Archives Denver Existing October 1996
InTrust Denver, Albuquerque, Existing/New October 1996
Colorado Springs, Ft. Wayne
Security Archives of Las
Vegas Las Vegas New October 1996
Records Management Birmingham Existing December 1996
Security Archives &
Storage Company Wilmington Existing January 1997
The Records Center Tampa Existing January 1997
Data Archives Trenton Existing January 1997
Professional Records
Storage & Delivery West Palm Beach Existing January 1997
Records Management
Services Multiple*** Existing/New March 1997
</TABLE>
- --------
* Los Angeles, Houston, New York, New Jersey, Boston, Connecticut, Chicago,
Dallas and Miami/Ft. Lauderdale.
** Toronto, Montreal, Vancouver, Ottawa and Calgary.
*** Chicago, Indianapolis, Cincinnati, Los Angeles, Phoenix, Houston, New York
and St. Louis.
The Company's centralized organizational structure and management information
systems are essential elements for both the successful integration of acquired
records management operations and the ability of the Company to achieve
economies of scale. The rapid conversion of an acquired company's records into
the PLUS(R) system and the integration of all corporate functions (order
processing, accounting, payroll, etc.) into the Company's corporate
organization in an efficient, standardized process allows the Company to
realize cost savings as a result of reduced labor and overhead costs and
improved facility utilization. The Company also believes that its centralized
approach permits better quality measurement and control procedures than a
decentralized approach to integrating acquisitions. See "Risk Factors--Risks
Associated with Acquisitions."
The Company targets potential acquisitions both in locations it already
services (existing markets) and in new areas which it is not yet servicing.
Existing market acquisitions typically provide the highest degree of operating
leverage as a result of eliminating redundant overhead, such as overlapping
delivery runs, and when economically feasible, consolidating with an existing
Company facility in the same market. New market acquisitions allow the Company
to both expand its business generally and enhance its ability to serve multi-
location customer accounts. These acquisitions are typically either the result
of following an existing customer into a new location or are on a more
opportunistic basis when an attractive acquisition comes to the attention of
the Company. Once in the new area, the Company seeks to obtain records from its
existing multi-location
40
<PAGE>
customers which may have operations in that area. Additionally, operating in
the new locations assists the Company's sales force in more effectively
targeting new customers in that area.
In the past, the Company has relied solely upon cash as consideration for
its acquisitions; however, following the Offerings, the Company may also use
equity securities or a combination of cash and equity securities to purchase
other records management companies.
THE 1997 ACQUISITIONS
In January 1997, the Company successfully completed and has subsequently
integrated four acquisitions with facilities in Wilmington, Tampa, Trenton and
West Palm Beach. On , 1997, the Company completed the acquisition of
Records Management Services, Inc. with facilities in Chicago, Indianapolis,
Cincinnati, Los Angeles, Phoenix, Houston, New York and St. Louis. The
aggregate cash consideration paid for the 1997 Acquisitions was approximately
$80.5 million.
DESCRIPTION OF SERVICES
The Company's records management services are focused on storage, retrieval
and data management of hard copy documents.
Storage
Storage revenues have averaged 58% of total revenues during the Company's
last five fiscal years. Nearly all of the Company's storage fees are derived
from hard copy storage. During 1996, the Company generated 94% of its storage
revenues from hard copy storage and 6% from vault storage for special items
such as computer tapes, X-rays, films or other valuable items. Storage charges
typically are billed monthly on a per cubic foot basis.
The Company tracks all of its records stored in cartons, from initial pick-
up through permanent removal, with the use of its PLUS(R) system. Bar-coded
boxes are packed by the customer and transported by the Company's
transportation department to the appropriate facility where they are scanned
and placed into storage at the locations designated by PLUS(R). At such time,
the Company's data input personnel enter the data twice (i.e., double key
verifying) to enhance the integrity of the information entered into the
system.
The Company offers secure, climate-controlled facilities for the storage of
non-paper forms of media such as computer tapes, optical discs, microfilm,
video tapes and X-rays. These types of media often require special facilities
due to the nature of the records. The Company's storage fees for non-paper
media are higher than for typical paper storage. The Company also provides
ancillary services for non-paper records in the same manner as it provides for
its hard copy storage operations.
Service and Product Sales
The Company's principal services include adding records to storage,
temporary removal of records from storage to support a customer's need to
review the files, replacing temporarily removed records and permanent
withdrawals from storage or destruction of records. Pick-up and delivery of
customer records can be tailored to a customer's specific needs and range from
standard service (typically requests received by 10:30 a.m. are delivered or
picked up that afternoon and requests received by 3:30 p.m. are delivered or
picked up the next day) to emergency service (typically within three hours or
less). Pick-up and delivery operations are supported by the Company's fleet of
over 400 owned or leased vehicles. The Company charges for pick-up and
delivery services on a per-unit basis depending on the immediacy of delivery
requested.
A small percentage of the Company's customers manage their records on a file
by file basis, allowing the customer direct access and traceability of a
specific file (rather than on a box by box basis). The Company provides data
entry services to such customers to input the file by file listings into the
PLUS(R) system.
41
<PAGE>
The Company also offers a records destruction service, which provides
customers with a secure, controlled program to periodically review and remove
records which no longer need to be retained. Although boxes destroyed no
longer generate monthly storage fees, the Company charges for the destruction
of records and increases its available shelving space as a result. The Company
believes its ability to manage destruction programs for customers efficiently
through the PLUS(R) system also enhances its ability to attract large
accounts.
In addition to providing traditional storage, customers may contract with
the Company to manage their on-site records or file services center. Such
management services generally include providing Company personnel to manage
the customer's active files (including records storage and tracking) at the
customer's facilities, supplemented by off-site storage at the Company's
facilities. As part of this service, the Company can use its own internally
developed file management software, or maintain the customer's existing
system. The Company also provides consulting and other services on an
individualized basis, including advisory work for customers setting up in-
house records management systems. In addition, the Company sells cardboard
boxes and other storage containers to its customers.
CUSTOMER SERVICE
Customer calls are routed into one of the Company's two centralized customer
service departments located in the Company's U.S. and Canadian corporate
headquarters. Both customer service departments are staffed and can receive
customer calls 24 hours a day, seven days a week. The Company currently
employs approximately 70 customer service representatives. Routine pick-up and
delivery requests are dispatched directly by customer service representatives
to local facilities as directed by PLUS(R).
PLUS(R), in tandem with a centralized order processing organization and
local field support personnel, enables the Company to provide a high and
consistent level of service (24 hours a day, seven days a week) to its
customers in a cost-effective manner. The centralized order entry system
allows (i) efficient workload balancing as the daily "peak" call-in periods
can be spread over three time zones, (ii) centralized quality control
monitoring to increase delivery of consistent and high-quality service, and
(iii) the employment of Spanish- speaking customer service representatives
whose language skills can serve any of the Company's U.S. customers, primarily
for its operations in Florida, Texas and California.
As a complement to its centralized customer service departments, the Company
provides client service representatives to work with existing customers at the
local level. In addition to maintaining personal contacts with customers, the
local client service representatives help meet the Company's customers'
changing records management needs through advice in efficient recordkeeping
procedures, and, when appropriate, by offering the sale of additional
services.
MANAGEMENT INFORMATION SYSTEMS
The Company believes that PLUS(R), its core management information system,
is the most sophisticated records management system in the industry, and
provides the Company with a significant customer service and cost advantage in
attracting and retaining major accounts with records storage needs in multiple
locations and acquiring other records management companies. The Company's
centralized customer service and billing functions eliminate the need for
redundant functions at individual facilities. In addition, the PLUS(R) system
enables the Company to offer its customers full life cycle records management,
from file creation to destruction, and coordinates inventory control, order
entry, billing, material sales, service activity, accounts receivable and
management reporting on a centralized basis. PLUS(R) utilizes database
technology, proprietary software and extensive bar coding in a flexible,
enterprise-wide, client/server environment.
During 1993, the Company completed an extensive two and one-half year
development program and began to install the PLUS(R) system in each of its
facilities. The Company invested approximately $8 million in developing
PLUS(R), primarily in conjunction with Andersen Consulting, together with
input from Hewlett Packard, Racal, Progress and Symbol Technologies. The
system has been designed on a modular basis which
42
<PAGE>
provides the Company with the ability to expand the system's capacity as its
business grows. The Company also has devised certain backups designed to
protect against loss of data and computer failures. Company-wide installation
of PLUS(R) commenced at the end of 1993 and was completed during the first
quarter of 1995. Since initial development, the Company has also invested an
additional $2.1 million to upgrade and expand the capacity of the PLUS(R)
system and to further increase its functionality.
Implementation of the PLUS(R) system has improved the Company's operating
efficiency by streamlining a number of its daily work processes:
. PLUS(R) allows the Company real time access to locate each unit of a
customer's records, regardless of geographic location, through an
enterprise-wide, shared database and to centrally receive and dispatch
pick-up and delivery orders to the appropriate location for processing.
Management believes that no other records management system in the
industry offers such real time access for multiple locations.
. The PLUS(R) system reduces the number of employees required to handle the
inbound/outbound movement of boxes through the use of sophisticated
algorithms which allow archive employees to process multiple customer
requests in an efficient manner.
. PLUS(R) facilitates the integration of acquired records management
companies in an efficient, standardized process. By converting the
acquired company's records into the PLUS(R) system, the Company is able
to reduce the labor and overhead costs associated with the acquisition,
resulting in cost savings.
. The PLUS(R) system assists the Company in efficiently utilizing its
storage space by eliminating the need for permanent locations for
individual records. At any one time, approximately 2% of total cubic feet
of records managed by the Company are temporarily returned to customers,
freeing up storage space which PLUS(R) enables the Company to use
productively. When a box is temporarily returned to a customer, a new box
may be placed in the original box's location. Upon return of the original
box to the Company, PLUS(R) automatically assigns the box a new location
within a facility in the market in which the Company determines to store
the box.
PLUS(R) offers several additional features which enhance the Company's
customer support functions. The system is continuously updated when any
account activity is undertaken, providing customers with real time access to
information regarding box location and retrievals. The PLUS(R) system is
flexible and allows the Company to design and implement customized records
management solutions for various industries utilizing a set of standardized
options. The PLUS(R) system's on-line customer support network allows certain
customers to place orders for both records storage and retrieval directly from
their own in-house terminals resulting in a more efficient system of records
management. PLUS(R) can also perform sophisticated searches to locate
inventory items even when the customers do not have the specific number of the
box they are seeking. In addition, the Company has recently initiated a trial
program, PLUS(R) Link, which is designed to transfer information directly
between the Company's centralized database and a customer's local file room.
In marketing its services, the Company believes it can point to the
following direct benefits to a customer of the PLUS(R) system:
. Through the PLUS(R) system central data base, a customer is able to
obtain real time access to any file listing which is stored in any
location. In addition to the benefits of immediate access to file listing
information, this centralized data base is likely to reduce the time
required to locate a file that a client might have stored in one of
several locations.
. With PLUS(R), a file can be retained in any Company warehouse and
delivered only if and when it is needed at a specific location. Customers
with multiple locations typically do not have large enough records
management requirements to justify their own dedicated warehouse in each
area. In order to increase the efficiency of warehouse facilities, such
companies sometimes require operations in disparate locations to ship
their records to a central or a regional warehouse. This process
increases the costs as such companies must pay to ship files a
substantial distance to inactive storage and incur additional costs, and
typically time delay, to subsequently return the files to the initial
location.
43
<PAGE>
. Through utilization of the PLUS(R) system, customers eliminate the need
for expensive in-house computer systems and programming support staff to
maintain an inventory management system. Companies which store their own
records typically cannot achieve the economies of scale available to the
Company.
SALES AND MARKETING
During the past five years, the Company has invested significant effort in
developing its sales and marketing department, which is comprised of 75
employees in the United States and Canada, excluding any additions that may
result from the acquisition of RMS. Sales representatives are trained to sell
a "total systems approach," in which a customer's records management
requirements are surveyed and evaluated in order to determine the file
management system which best meets the customer's needs and offer
recommendations on how to implement such a system. From 1992 to 1996, the
Company's sales representatives secured over 3,600 new customer accounts
comprising over 8.5 million cubic feet of records from new accounts.
The Company's sales and marketing department is divided into five regions:
Northeast; South; Midwest; West; and Canada. The Company's Vice President,
Sales and Marketing directs five regional sales managers who are each
responsible for one of the regions. In addition, the Company's sales force is
divided between sales representatives who focus on large accounts which are
frequently multi-location and a recently expanded group of sales
representatives who focus on smaller, single-location customers. The sales
force is primarily compensated on a commission basis with incentives tied to
the Company's sales goals. The Company also uses telemarketing, direct
response and print advertising to assist in its marketing programs.
CUSTOMERS
The Company serves a diversified group of over 22,000 customers accounts in
a variety of industries, including financial services, manufacturing,
transportation, healthcare and law. The Company tracks customer accounts,
which are based on invoices. Accordingly, depending on how invoices have been
arranged at the request of a customer, one customer may have multiple customer
accounts. None of the Company's customers accounted for more than 3% of the
Company's total revenues during any of the last three years. The Company
services all types of customers from small to medium size companies (such as
professional groups and law firms that often have one location) to Fortune 500
companies that have operations in multiple locations. The Company provides
records management services to approximately one-half of the Fortune 500
companies and has 49 customers with over 100,000 cubic feet of records under
management with the Company. Larger companies with multiple locations that
have performed their own records management services to date are a principal
focus for new customers by the Company. The Company believes that its presence
in multiple locations in conjunction with the PLUS(R) system enable it to
provide the sophisticated file management services frequently required by such
customers.
The Company's contracts with larger, typically multi-location customers
usually provide for an initial term of five or more years, and contracts with
other customers typically provide for initial terms of one or two years. Both
types of contracts generally provide for annual renewals thereafter (with
either party having the right to terminate the contract). Customers are
generally charged monthly storage fees until their records are destroyed or
permanently removed, for which fees are charged. In addition, services such as
file retrieval are separately charged. During 1996, approximately 3% of cubic
feet of records under management by the Company were permanently removed
(other than as part of an organized records destruction program). The Company
believes this relatively low attrition rate is due to a number of factors,
including satisfaction with the Company's services as well as the effort and
expense of transferring records to another service provider or back in-house.
FACILITIES
The Company operates a total of 152 records management facilities of which
139 are in the United States, serving 58 markets, including the 16 largest
U.S. markets, and 13 facilities in Canada serving five of Canada's six largest
markets. Of the 10.0 million square feet of floor space (representing over 74
million cubic feet of storage capacity) in the Company's records storage
facilities, approximately 36% and 64% (40% and 60% on a
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<PAGE>
cubic footage basis) are in owned and leased facilities, respectively. The
Company's facilities are located as follows:
<TABLE>
<CAPTION>
RECORDS
MANAGEMENT CUBIC FEET
REGION FACILITIES OF CAPACITY
------ ---------- ------------
<S> <C> <C>
United States
Southern Region...................................... 23 7.3 million
(includes Alabama, Florida,
Georgia, North Carolina and
Tennessee)
Northern Region...................................... 47 39.3 million
(includes Connecticut, Delaware,
Maryland, Massachusetts, New Jersey,
New York, Ohio, Pennsylvania and
Virginia)
Midwest Region....................................... 49 16.1 million
(includes Colorado, Illinois,
Indiana, Michigan, Missouri,
New Mexico and Texas)
Western Region....................................... 20 5.4 million
(includes Arizona, California, --- ------------
Nevada and Washington)
Total U.S.......................................... 139 68.1 million
Canada................................................. 13 6.1 million
(includes Calgary, Montreal, Ottawa, --- ------------
Toronto and Vancouver)
Total.............................................. 152 74.2 million
=== ============
</TABLE>
In response to certain opportunities that arose, the Company has made
significant new facility investments, substantially increasing the Company's
available storage capacity in its Northeast region. During 1995, the Company
purchased a storage facility in New Jersey with 12 million cubic feet of
storage capacity and leased (with an option to purchase) a storage facility in
Massachusetts with five million cubic feet of storage capacity. The Company is
in the process of consolidating certain individual warehouses into these
facilities and will consolidate other warehouses over the next two or three
years as existing leases expire. The addition of these facilities provides the
Company with substantial excess storage capacity in such region and is
expected to satisfy the Company's facility expansion requirements in its
Northeast region for several years. The Company intends to consolidate
facilities in other locations when appropriate. Primarily as a result of the
new facilities in New Jersey and Massachusetts, warehouse utilization has
declined to approximately 64% from historical levels of 70% to 80%.
COMPETITION
The Company competes with numerous records management companies in all
geographic areas in which it operates. The Company believes that competition
for customers is based on price, reputation for reliability, quality of
service and scope and scale of technology, and believes that it generally
competes effectively based on these factors. Management believes that, except
for Iron Mountain Incorporated, all of these competitors have records
management revenues significantly lower than those of the Company. The Company
believes that the trend towards consolidation in the industry will continue
and the Company also faces competition in identifying attractive acquisition
candidates. In addition, the Company faces competition from the internal
document handling capability of its current and potential customers.
45
<PAGE>
The substantial majority of the Company's revenues are derived from the
storage of paper records and from related services. 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 disc. Management believes that conversion of paper
documents into these smaller storage media is currently not cost-effective for
inactive records, primarily due to the high labor cost of preparing and
converting the documents for imaging.
EMPLOYEES
As of December 31, 1996, the Company had 1,553 employees, including 209
employees in Canada. None of the Company's employees is covered by a
collective bargaining agreement. Management considers its employee relations
to be good.
INSURANCE
The Company carries comprehensive property insurance covering replacement
costs of real and personal property. Subject to certain limitations and
deductibles, such policies also cover extraordinary expenses associated with
business interruption and damage or loss from flood or earthquakes (in certain
geographic areas), and losses at the Company's facilities up to approximately
$225 million.
ENVIRONMENTAL MATTERS
The Company's properties and operations may be subject to liability under
various environmental laws, regardless of fault, for the investigation,
removal or remediation of soil or groundwater, on or off-site, resulting from
the release or threatened release of hazardous materials, as well as damages
to natural resources. The owner or operator of contaminated property may also
be subject to claims for damages and remediation costs from third parties
based upon the migration of any hazardous materials to other properties.
At certain of the properties owned or leased by the Company, petroleum
products or other hazardous materials, are or were stored in USTs. Some
formerly used USTs have been removed; others were abandoned in place. The
Company believes all of the USTs are registered, where required under
applicable law. The Company also is aware of the presence in some of its
facilities of ACMs, but believes that no action is presently required to be
taken as a result of such material.
At the Company's New Jersey facility, certain contamination has been
discovered resulting from operations of the prior owner thereof. The prior
owner, which has agreed to be responsible for the cost of such remediation, is
completing remediation of the property under a consent order with the New
Jersey Department of Environmental Protection ("NJDEP"). The prior owner has
posted a $1.1 million letter of credit with the NJDEP. The Company has
purchased an environmental liability insurance policy covering the cleanup
costs to the Company, if any, resulting from any on- or off-site environmental
condition existing at the time of the Company's acquisition of this property,
with a $250,000 deductible and policy limits of $4 million per occurrence/$8
million in the aggregate, provided the claim first arises during the term of
the policy, which is August 10, 1995 through August 11, 1998.
The Company has not received any written notice from any governmental
authority or third party asserting, and is not otherwise aware of, any
material noncompliance, liability or claim under environmental laws applicable
to the Company other than as described above. No assurance can be given that
there are no environmental conditions for which the Company may be liable in
the future or that future regulatory action, or compliance with future
environmental laws, will not require the Company to incur costs that could
have a material adverse effect on the Company's financial condition or results
of operations.
LEGAL PROCEEDINGS
The Company is involved in litigation from time to time in the ordinary
course of its business. In the opinion of Management, no material legal
proceedings are pending to which the Company, or any of its property, is
subject.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is certain information regarding the Company's directors,
executive officers and other significant management personnel:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Leo W. Pierce, Sr................... 78 Chairman of the Board
J. Peter Pierce..................... 51 President, Chief Executive Officer and
Director
Douglas B. Huntley.................. 36 Vice President, Chief Financial Officer and
Director
Joseph A. Nezi...................... 50 Vice President, Sales and Marketing
David Marsh......................... 48 Vice President, Chief Information Officer
Ross M. Engelman.................... 33 Vice President, Operations--South
J. Michael Gold..................... 37 Vice President, Operations--Northeast
Christopher J. Williams............. 38 Vice President, Operations--West
Leo W. Pierce, Jr................... 52 Vice President, Contracts Administration
and Director
Michael J. Pierce................... 47 Vice President, Equipment Sales and
Distribution Group and Director
Raul A. Fernandez................... 46 Vice President, Information Services
Joseph P. Linaugh................... 47 Vice President, Treasurer
Thomas Grogan....................... 42 Vice President and Controller
Lisa G. Goldschmidt................. 29 General Counsel
Alan B. Campell..................... 46 Director
Delbert S. Conner................... 67 Director
</TABLE>
Leo W. Pierce, Sr. has served as Chairman of the Board of the Company since
its formation in 1957. Mr. Pierce served as the Chief Executive Officer of the
Company from formation to January 1995 and as its President from formation to
January 1984. Prior to forming the Company, Mr. Pierce was a sales
representative for Lefebure Corporation and an accountant for Price
Waterhouse. Mr. Pierce holds a B.A. degree from St. John's University.
J. Peter Pierce has served as President and Chief Executive Officer of the
Company since January 1995 and has been a director since the early 1970s. Mr.
Pierce served as President and Chief Operating Officer of the Company from
January 1984 to January 1995, prior to which time he served in various other
capacities with the Company, including as Vice President of Operations,
General Manager of Connecticut, New York and New Jersey and Sales Executive.
Mr. Pierce attended the University of Pennsylvania and served in the United
States Marine Corps.
Douglas B. Huntley has served as Chief Financial Officer since January 1994
and as a director of the Company since September 1994. From May 1993 until
December 1993, Mr. Huntley served as Assistant to the President of the
Company. From August 1989 to March 1993, he was an Executive Advisor and a
Project Manager of Rockwell International in connection with a multi-billion
dollar NASA contract. Prior thereto, Mr. Huntley was an accountant for
Deloitte Haskin & Sells. Mr. Huntley holds a B.S. degree from Bucknell
University and an M.B.A. from the University of Pennsylvania, Wharton School
of Business and is a Certified Public Accountant.
Joseph A. Nezi has served as Vice President, Sales and Marketing of the
Company since September 1991. From July 1990 to September 1991, Mr. Nezi was
the Vice President, Sales and Marketing of Delaware Valley Wholesale Florist
where he was responsible for the sales and marketing of a firm with $30
million of sales. Prior thereto, Mr. Nezi was the President and General
Manager of Pomerantz and Company following 17 years in various sales positions
of increasing responsibility with Xerox. Mr. Nezi holds a B.A. degree from
Villanova University.
47
<PAGE>
David Marsh has served as Vice President and Chief Information Officer of
the Company since January 1995 and was Assistant to the President of the
Company from November 1994 to December 1994. From August 1986 to May 1994, Mr.
Marsh was Manager--Corporate Relations for the Massachusetts Institute of
Technology where he was responsible for the management and development of
MIT's relationships with U.S. and European information technology,
communications and service companies. Prior to August 1986, Mr. Marsh held
positions as President of MEA Management Systems, Director of Corporate
Strategic Planning with Public Service Company of New Hampshire, Senior
Consultant with Booz, Allen & Hamilton and Second Vice President with the
Chase Manhattan Bank. Mr. Marsh holds a B.S. degree from University of
Salford, U.K. and S.M. degrees in Management and Nuclear Engineering from MIT.
Ross M. Engelman has served as Vice President, Operations--South since
October 1994. From June 1993 to October 1994, Mr. Engelman was Vice President,
Information Systems and from September 1991 to June 1993, he was Assistant to
the President of the Company. From August 1985 to September 1991, Mr. Engelman
was a management consultant with Andersen Consulting. Mr. Engelman holds a
B.S.E. degree from the University of Pennsylvania, Wharton School of Business.
J. Michael Gold has served as Vice President, Operations--Northeast of the
Company since June 1993. Prior thereto, Mr. Gold was Vice President,
Operations from February 1992 to June 1993, Vice President, New York
Metropolitan Region from January 1990 to February 1992 and General Manager of
the New Jersey Archive from April 1985 to February 1989. Prior to joining the
Company, Mr. Gold was the Budget Administration Manager for SmithKline
Beecham. Mr. Gold holds a B.A. degree from Villanova University.
Christopher J. Williams has served as Vice President, Operations--West since
June 1993. From February 1992 to June 1993, Mr. Williams was the Company's
Vice President, Information Services. Prior thereto, Mr. Williams held a
number of additional positions with the Company since he joined it in 1980,
including most recently as General Manager of the New York Archive and
Regional Vice President--New England. Mr. Williams holds a B.S. degree from
Western New England College.
Leo W. Pierce, Jr. has served as Vice President, Contract Administration of
the Company since January 1990 and as a director since the early 1970s. Mr.
Pierce has been affiliated with the Company since its inception in various
capacities, including as manager of the Philadelphia Archive and Vice
President, Facilities Management. Mr. Pierce holds a B.A. degree from LaSalle
University.
Michael J. Pierce has served as Vice President, Equipment Sales and
Distribution Group of the Company since February 1990 and as a director since
the early 1970s. Mr. Pierce has been affiliated with the Company since its
inception in various sales capacities. Mr. Pierce attended Temple University
and served in the United States Army.
Raul A. Fernandez has served as Vice President, Information Systems of the
Company since February 1990. From March 1988 to February 1990, Mr. Fernandez
was Director of Information Systems. Prior to joining the Company, Mr.
Fernandez was employed by RCA Pictures Division and Sperry-Unisys as District
Manager. Mr. Fernandez holds a B.A. degree from Kings College.
Joseph P. Linaugh has served as Vice President and Treasurer of the Company
since January 1994. From January 1990 to December 1993, Mr. Linaugh served as
Vice President, Chief Financial Officer and a director of the Company. Prior
to joining the Company, Mr. Linaugh worked in various financial positions with
private and publicly held companies and for Laventhol & Horwath in public
accounting. Mr. Linaugh holds a B.S. degree from LaSalle University and is a
Certified Public Accountant.
Thomas Grogan has served as Vice President and Controller of the Company
since January 1994. From April 1985 to December 1993, Mr. Grogan was the
Company's Vice President of Finance and Administration. Prior to joining the
Company, Mr. Grogan worked for Dunn, Dunn and Associates in public accounting
from
48
<PAGE>
May 1979 to March 1985 and in private industry from June 1977 to April 1979.
Mr. Grogan holds a B.S. degree from Widener College and is a Certified Public
Accountant.
Lisa G. Goldschmidt has served as General Counsel of the Company since
October 1995. From September 1992 to October 1995, Ms. Goldschmidt was an
attorney at Reed Smith Shaw & McClay. Ms. Goldschmidt holds a B.A. and a J.D.
degree from the University of Pennsylvania.
Alan B. Campell has served as a director of the Company since September
1994. Mr. Campell is one of the founders of Campell Vanderslice Furman, an
investment banking firm, and has been a Managing Director of the firm since
its formation in 1986. Prior thereto, Mr. Campell was a Vice President at
Chase Manhattan Bank, N.A. Mr. Campell holds a B.A. degree from Brown
University and an M.A. from the University of Southern California.
Delbert S. Conner has served as a director of the Company since September
1990. Since May 1995, Mr. Conner has served as the Vice Chairman of USCO
Distribution Services, Inc. on a semi-retired basis. From January 1994 through
April 1995, he was the Vice Chairman of USCO on a full-time basis and its
President and Chief Executive Officer from February 1983 to December 1993. Mr.
Conner holds a B.S. degree from Bryant College.
Messrs. J. Peter Pierce, Leo W. Pierce, Jr. and Michael J. Pierce are
brothers. Leo W. Pierce, Sr. is their father. For purposes of the above
biographical information, the Company includes L.W. Pierce Company, Inc., the
predecessor to the Company. See "The Company."
BOARD OF DIRECTORS
As of the closing of the Offerings, the Company's Board of Directors will be
classified into three classes with staggered three-year terms, each class to
contain as nearly as possible one-third of the number of members of the Board.
One class of directors will be elected for a three-year term at each annual
meeting of shareholders commencing in 1998. It is currently contemplated that
within 90 days after the closing of the Offerings, Mr. will resign and the
Board of Directors will add an independent director to the Board. The terms of
Messrs. and will expire at the 1998 annual meeting of shareholders; the
terms of Messrs. and will expire at the 1999 annual meeting of
shareholders; and the terms of Messrs. and will expire at the 2000
annual meeting of shareholders. It is expected that the term of the outside
director to be added by the Board will expire at the 1998 annual meeting of
shareholders.
The Company's Board of Directors has a Compensation Committee, which prior
to the Offerings has been comprised of Leo W. Pierce, Sr., J. Peter Pierce and
Alan B. Campell. The Compensation Committee recommends to the Board both
salary levels and bonuses for the officers of the Company. The Compensation
Committee also reviews and makes recommendations with respect to the Company's
existing and proposed compensation plans, and serves as the committee
responsible for administrating the Company's Nonqualified Option Plan (as
hereinafter defined).
Following the Offerings, the Board of Directors intends to reconstitute the
Compensation Committee and establish an Audit Committee, each of which will be
comprised of two or more directors. It is anticipated that the Compensation
Committee and the Audit Committee will be comprised of Mr. Conner and a second
nonemployee director. The Compensation Committee is expected to determine
compensation for executive officers of the Company and administer the
Company's stock option plans. The Audit Committee is expected to recommend the
appointment of the Company's independent public accountants and review the
scope and results of audits and internal accounting controls.
All directors receive reimbursement of reasonable out-of-pocket expenses
incurred in connection with meetings of the Board of Directors. Mr. Conner
also receives $3,500 for each meeting of the Board of Directors which he
attends. No other director receives separate compensation for services
rendered as a director. It is
49
<PAGE>
currently anticipated that any other outside directors added to the Board of
Directors will be compensated similarly to Mr. Conner, although the Board may
in the future consider using stock options or a combination of cash and stock
options to compensate outside directors.
EXECUTIVE COMPENSATION
The following table sets forth the compensation received by the Company's
Chief Executive Officer and the five other highest paid executive officers
(together with the Chief Executive Officer, the "Named Executive Officers")
for services to the Company in 1995 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------- ------------
OTHER SECURITIES
NAME AND ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
------------------ ---- -------- ------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
J. Peter Pierce......... 1996 $251,485 $93,400 -- -- $6,967(a)
President and Chief 1995 186,800 93,400 -- -- 6,681(a)
Executive Officer
Ross M. Engelman........ 1996 130,500 65,000 -- 5,216(b)
Vice President,
Operations--South 1995 130,422 65,000 -- 4,830(b)
J. Michael Gold......... 1996 130,000 65,000 -- 3,739(c)
Vice President, 1995 129,905 65,000 -- 3,417(c)
Operations--Northeast
Douglas B. Huntley...... 1996 130,000 65,000 -- 5,231(d)
Vice President and 1995 129,520 65,000 -- 4,802(d)
Chief Financial Officer
Joseph A. Nezi.......... 1996 130,000 92,370(e) -- 6,256(f)
Vice President, Sales 1995 133,020 97,841(e) -- 5,748(f)
and Marketing
Christopher J.
Williams............... 1996 130,000 65,000 -- 5,339(g)
Vice President,
Operations--West 1995 129,905 65,000 -- 5,089(g)
</TABLE>
- --------
(a) Included in such amounts for 1996 and 1995, respectively, are $2,268 and
$2,310 representing an employer match under the 401(k) Plan (as defined
herein), $1,699 and $1,371 in net premiums for a guaranteed term life
insurance policy on behalf of Mr. Pierce and $3,000 and $3,000
representing contributions made by the Company under the Profit Sharing
Plan (as defined herein).
(b) Included in such amounts for 1996 and 1995, respectively, are $2,249 and
$2,107 representing an employer match under the 401(k) Plan, $158 and $98
in net premiums for a guaranteed term life insurance policy on behalf of
Mr. Engelman and $2,809 and $2,608 representing contributions made by the
Company under the Profit Sharing Plan.
(c) Included in such amounts for 1996 and 1995, respectively, are $750 and
$700 representing an employer match under the 401(k) Plan, $191 and $119
in net premiums for a guaranteed term life insurance policy on behalf of
Mr. Gold and $2,798 and $2,598 representing contributions made by the
Company under the Profit Sharing Plan.
(d) Included in such amounts for 1996 and 1995, respectively, are $2,250 and
$2,093 representing an employer match under the 401(k) Plan, $191 and $119
in net premiums for a guaranteed term life insurance policy on behalf of
Mr. Huntley and $2,790 and $2,590 representing contributions made by the
Company under the Profit Sharing Plan.
(e) Includes $27,370 and $32,842 paid as commissions in 1996 and 1995,
respectively.
(f) Included in such amounts for 1996 and 1995, respectively, are $2,260 and
$2,310 representing an employer match under the 401(k) Plan, $996 and $438
in net premiums for a guaranteed term life insurance policy on
50
<PAGE>
behalf of Mr. Nezi and $3,000 and $3,000 representing contributions made by
the Company under the Profit Sharing Plan.
(g) Included in such amounts for 1996 and 1995, respectively, are $2,250 and
$2,066 representing an employer match under the 401(k) Plan, $191 and $125
in net premiums for a guaranteed term life insurance policy on behalf of
Mr. Williams and $2,898 and $2,898 representing contributions made by the
Company under the Profit Sharing Plan.
OPTION GRANTS IN 1996
The following table sets forth certain information concerning stock options
granted to the Named Executive Officers during 1996 (all of which were granted
on January 1, 1996) after giving effect to the Stock Recapitalization.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES % OF TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS PRICE APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM(B)
GRANTED EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME (#)(A) 1996 ($/SHARE) DATE 5% 10%
---- ---------- ------------ --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
J. Peter Pierce......... -- -- -- -- -- --
Ross M. Engelman........ $ * $ 199,145 $ 504,673
J. Michael Gold......... * 199,145 504,673
Douglas B. Huntley...... * 199,145 504,673
Joseph A. Nezi.......... * 136,668 346,344
Christopher J.
Williams............... * 199,145 504,673
</TABLE>
- --------
* The options have no specified expiration date.
(a) All options were granted under the Nonqualified Option Plan. The options
vest in five equal annual installments commencing on the first anniversary
of the date of grant, and vested options become exercisable on the earlier
of ten years from the date of grant or the date the Company is no longer a
Subchapter S corporation. The Company may make loans with respect to vested
options. See "--Stock Incentive Plan."
(b) Illustrates the value that might be received upon exercise of options
immediately prior to the assumed expiration of their term at the specified
compounded rates of appreciation based on the market price for the Common
Stock when the options were granted. At the time of grant, there was no
established trading market for the Common Stock and, accordingly, the
market price is based upon the formula set forth in the Nonqualified Option
Plan which is based upon a multiple of EBITDA, as well as the amount of
cash, cash equivalents, outstanding indebtedness and other obligations of
the Company. Since the options granted to the Named Executive Officers do
not have a specified expiration date, for purposes of calculating the
assumed appreciation, the options have been deemed to expire ten years from
the date of grant.
51
<PAGE>
STOCK OPTION EXERCISES AND HOLDINGS
The following table sets forth the value of options held by each of the
Named Executive Officers at December 31, 1996 after giving effect to the Stock
Recapitalization. None of the Named Executives exercised any options during
1996.
AGGREGATED OPTION EXERCISES IN 1996 AND
OPTION VALUES AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1996 DECEMBER 31, 1996(A)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE/UNEXERCISABLE(B) EXERCISABLE/UNEXERCISABLE(B)
---- ------------ -------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C>
J. Peter Pierce......... -- -- --/-- --/--
Ross M. Engelman........ -- -- --/ --/$0
J. Michael Gold......... -- -- --/ --/ 0
Douglas B. Huntley...... -- -- --/ --/ 0
Joseph A. Nezi.......... -- -- --/ --/ 0
Christopher J.
Williams............... -- -- --/ --/ 0
</TABLE>
- --------
(a) There was no established market for the Common Stock as of December 31,
1996, and, accordingly, the values are based on the exercise price of
options granted on January 1, 1997 in accordance with the formula set
forth in the Nonqualified Option Plan.
(b) As of December 31, 1996, none of the options were exercisable although of
such totals, options to purchase shares of Common Stock were vested for
Messrs. Engelman, Gold, Huntley and Williams and options to
purchase shares of Common Stock were vested for Mr. Nezi. Pursuant to
the terms of the Nonqualified Option Plan, vested options become
exercisable on the earlier of ten years from the date of grant or the date
the Company is no longer a Subchapter S corporation. Accordingly, upon the
consummation of the Offerings and the termination of the Company's status
as a Subchapter S corporation, the vested options set forth above will
become exercisable.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Offerings, the Compensation Committee of the Board of Directors
has been comprised of Leo W. Pierce, Sr., J. Peter Pierce and Alan B. Campell.
Leo W. Pierce, Sr. is the former Chief Executive Officer and President of the
Company and J. Peter Pierce is the Company's Chief Executive Officer and
President.
In August 1996, the Company purchased for $14.8 million all of the interests
of the two partnerships owned by members of the Pierce family in six
facilities previously leased to the Company and 16 facilities previously
subleased, as well as minority interests in five other properties currently
leased by the Company. The purchase price was based on third party appraisals
or the recent acquisition price for the six facilities and management's
estimates of the value of the leasehold and minority ownership interests based
on the net present value of the cash flows generated by such interests. The
leases and subleases were entered into during the period from March 1980 to
April 1995. The aggregate rental payments for the leases and subleases were
$7,658,000, $8,201,000 and $4,624,000 in 1994, 1995 and the portion of 1996
prior to the purchase, respectively.
The Company also leases from four separate limited partnerships its
corporate headquarters in King of Prussia, Pennsylvania and its facilities in
Suffield, Connecticut, Orlando, Florida and Charlotte, North Carolina. J.
Peter Pierce, the Company's President and Chief Executive Officer, is the
general partner of three of the limited partnerships and members of the Pierce
family and certain other officers and directors of the Company and their
affiliates own substantial limited partnership interests in each of the four
limited partnerships. The lease on the Company's corporate headquarters
expires on April 30, 2003, without any renewal options. The leases for the
Suffield, Orlando and Charlotte facilities terminate on December 31, 2005,
October 31, 2004 and August 31,
52
<PAGE>
2001, respectively. Each of such leases contains two five-year renewal
options. The aggregate rental payments by the Company for such properties
during 1994, 1995 and 1996 were $531,000, $773,000 and $894,000, respectively.
The Company believes that the terms of its leases with the related parties
are as favorable to the Company as those generally available from unaffiliated
third parties. There are no plans by the Company to lease additional
facilities from officers, directors or other affiliated parties.
In December 1993, the Company's Chairman, Leo W. Pierce, Sr., advanced
$80,000 to the Company. The Company repaid the loan, together with interest at
7%, in three equal installments in December 1994, December 1995 and May 1996.
In July, 1996, the Company redeemed 100 shares of voting Class A Common Stock
from Mr. Pierce for an aggregate price of $1.45 million, which price was based
on the Company's EBITDA. The Company had previously undertaken to pay $60,000
per year for a five-year period to Mr. Pierce's spouse upon his death. The
Company replaced this arrangement by providing an annual pension in the amount
of $96,000 to Mr. Pierce and then to his spouse, if she survives him.
The Company has entered into a tax indemnification agreement with the
current shareholders of the Company which provides for: (i) the distribution
to such shareholders of cash equal to the product of the Company's taxable
income for the period from January 1, 1997 until the date the Offerings are
completed and the sum of the highest effective federal and state income tax
rate applicable to any current shareholder (or in the case of shareholders
that are trusts, any beneficiaries), less any prior distributions to such
shareholders to pay taxes for such period, and (ii) an indemnification of such
shareholders for any losses or liabilities with respect to any additional
taxes (including interest, penalties and legal fees) resulting from the
Company's operations during the period in which it was a Subchapter S
corporation.
Alan B. Campell is a managing director of Campell Vanderslice Furman
("CVF"), an investment banking firm that has provided investment banking
services to the Company since 1992. Mr. Campell became a director of the
Company in 1994. During 1994, 1995 and 1996, the Company paid CVF $0.8
million, $0.7 million and $0.8 million, respectively, with respect to
investment banking services.
STOCK INCENTIVE PLAN
The Company established a Nonqualified Stock Option Plan (the "Nonqualified
Option Plan") in September 1994 to provide incentives to Key Employees
(defined below) who contribute significantly to the strategic and long-term
performance objectives and growth of the Company. The Nonqualified Option Plan
is administered by the Compensation Committee of the Board of Directors.
The Nonqualified Option Plan provides for the issuance of stock options not
intended to qualify as incentive stock options under Section 422 of the Code
("NQSOs") to "Key Employees," defined as employees of the Company who are
members of a select group of management or highly compensated employees. As of
December 31, 1996, there were 9 Key Employees. Under the Nonqualified Option
Plan, options exercisable for an aggregate of shares of Common Stock are
available for grant. The exercise price per share of Common Stock of options
granted under the Nonqualified Option Plan shall be equal to or greater than
the fair market value of the Common Stock as of the last day of the calendar
quarter coinciding with or immediately preceding the date of the grant.
Options granted under the Nonqualified Option Plan become exercisable, to the
extent they are vested, at the earlier of the tenth anniversary of the date of
grant or the date the Company is no longer a Subchapter S corporation.
The Board, in its sole discretion, may direct the Company to make a loan to
a Key Employee whose Vested Percentage (defined below) with respect to one or
more stock options is at least 60%. The maximum amount of any such loan shall
be 25% of the amount which would be payable to the Key Employee had he
terminated employment other than on account of death or total and permanent
disability as of the date of the loan as set forth in the following paragraph.
Vested Percentage is based upon the options vesting in five equal annual
53
<PAGE>
installments commencing on the first anniversary of the date of grant;
provided, however, that 100% shall be deemed to be vested in the case of a Key
Employee who terminates employment on account of death or total and permanent
disability.
If a Key Employee's employment is terminated for any reason, each stock
option which has not been exercised shall terminate; provided, however, that
if a Key Employee terminates employment after the Class B Common Stock has
become readily tradeable in an established securities market, other than
pursuant to a termination for cause, his option shall not expire until the end
of the 90-day period following the date of termination. Upon termination of
employment (other than for cause or when the Class B Common Stock is tradeable
in an established securities market), the Company is required to pay the Key
Employee the Vested Percentage of the value of any options held by the Key
Employee. The value of the options for this purpose is equal to the aggregate
fair market value of the underlying shares (determined by a formula set forth
in the Nonqualified Option Plan), less (i) the principal amount of any
outstanding loans pursuant to the Nonqualified Option Plan and (ii) the
aggregate exercise price of the underlying shares.
1997 STOCK OPTION PLAN
In April 1997, the Company adopted its 1997 Stock Option Plan (the "1997
Plan") which provides for grants of stock options ("Options") to selected
employees, officers, directors, consultants and advisers of the Company. By
encouraging stock ownership, the Company seeks to attract, retain and motivate
such persons and to encourage them to devote their best efforts to the
business and financial success of the Company.
The 1997 Plan authorizes up to shares of Common Stock (subject to
adjustment in certain circumstances) for issuance pursuant to the terms of the
1997 Plan. If Options expire or are terminated for any reason without being
exercised, the shares of Common Stock subject to such Options again will be
available for grant.
The 1997 Plan may be administered by the Board of Directors (the "Board") or
by a committee of the Board (references to the "Committee" refers to the
committee, if one is appointed, and otherwise to the Board). Grants under the
1997 Plan may consist of (i) options intended to qualify as incentive stock
options ("ISOs") within the meaning of Section 422 of the Code or (ii) NQSOs.
Options may be granted to any employee (including officers and directors) of
the Company, members of the Board who are not employees and consultants and
advisers who perform services to the Company or any of its subsidiaries ("Key
Advisers"). During any calendar year, no grantee may receive Options for more
than shares of Common Stock.
The option price of any ISO granted under the 1997 Plan will not be less
than the fair market value of the underlying shares of Common Stock on the
date of grant. The option price of a NQSO will be determined by the Committee,
in its sole discretion, and may be greater than, equal to or less than the
fair market value of the underlying shares of Common Stock on the date of
grant. The Committee will determine the term of each Option, provided that the
exercise period may not exceed ten years from the date of grant. The option
price of an ISO granted to a person who owns more than 10% of the total
combined voting power of all classes of stock of the Company must be at least
equal to 110% of the fair market value of Common Stock on the date of grant,
and the ISO's term may not exceed five years. A grantee may pay the option
price (i) in cash, (ii) by delivering shares of Common Stock already owned by
the grantee and having a fair market value on the date of exercise equal to
the option price, or (iii) by such other method as the Committee may approve.
The Committee may impose on Options such vesting and other conditions as the
Committee deems appropriate. Options may be exercised while the grantee is an
employee, Key Adviser or member of the Board or within a specified period
after termination of the grantee's employment or services.
In the event of a change of control (as defined in the 1997 Plan), all
outstanding Options will become fully exercisable, unless the Committee
determines otherwise. Except as provided below, unless the Committee
determines otherwise, in the event of a merger where the Company is not the
surviving corporation, all
54
<PAGE>
outstanding Options will be assumed by or replaced with comparable options by
the surviving corporation. The Committee may require the grantees surrender
their outstanding Options in the event of a change of control and receive a
payment in cash or Common Stock equal to the amount by which the fair market
value of the shares of Common Stock subject to the Options exceeds the
exercise price of the Options.
All Options will be granted subject to any applicable federal, state and
local withholding requirements; the Company can deduct from wages paid to the
grantee any such taxes required to be withheld with respect to the Options. If
the Company so permits, a grantee may choose to satisfy the Company's income
tax withholding obligation with respect to an Option by having shares withheld
up to an amount that does not exceed the grantee's maximum marginal tax rate
for federal, local and state taxes.
The Board may amend or terminate the 1997 Plan at anytime; provided that, if
the Common Stock becomes publicly traded, the Board may not make any amendment
that requires shareholder approval pursuant to Section 162(m) of the Code
without shareholder approval. To date, no Options have been granted under the
1997 Plan. The 1997 Plan will terminate in April 2007, unless terminated
earlier by the Board or extended by the Board with approval of the
shareholders.
401(K) PLAN; PROFIT SHARING PLAN
The Company has a savings and investment plan under Section 401(k) of the
Code (the "401(k) Plan") and a profit sharing plan also under Section 401(k)
(the "Profit Sharing Plan"). The 401(k) Plan covers substantially all full-
time employees over the age of 20 1/2 and with more than 1,000 hours of
service. Participants in the 401(k) Plan may elect to defer a specified
percentage of their compensation into the 401(k) Plan on a pre-tax basis. The
Company is required to make matching contributions under the 401(k) Plan equal
to 25% of the employee's contributions up to a maximum of 2% of the employee's
annual compensation. The contributions to the 401(k) Plan by a participant
vest immediately. Participants earn a vested right to their matching
contributions in increasing amounts over a period of five years, commencing
after three full years of employment. After seven years of service, the
participant's right to his or her matching contribution is fully vested.
Thereafter, the participant may receive a distribution of the entire value of
his or her account upon termination of employment or upon retirement,
disability or death.
The Profit Sharing Plan covers substantially all full-time employees over
the age of 21 with more than 1,000 hours of service. The Company may make
discretionary profit sharing contributions in amounts as the Board of
Directors of the Company may determine. The Company's contributions under the
Profit Sharing Plan have historically ranged from 2-3% of a participant's
annual eligible income. Participants are not permitted to contribute to the
Profit Sharing Plan directly. Participants earn a vested right to their profit
sharing contribution in increasing amounts over a period of five years,
commencing after three full years of employment. After seven years of service,
the participant's right to his or her profit sharing contribution is fully
vested. Thereafter, the participant may receive a distribution of the entire
value of his or her account upon termination of employment or upon retirement,
disability or death.
CERTAIN TRANSACTIONS
The Company has entered into a consulting agreement with Maurice Cox, Jr., a
shareholder of the Company, to provide consulting services to the Company
through 2004 for an annual payment of $40,000.
In December 1994, the Company loaned $60,000 to J. Michael Gold, its Vice
President, Operations--Northeast. During 1996, an additional $38,516 was
loaned to Mr. Gold. The entire principal amount of $98,516, together with
interest accruing at a rate of 8.875%, was outstanding as of February 28,
1997.
See also "Management--Compensation Committee Interlocks and Insider
Participation."
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of March 1, 1997, after giving effect to
the Stock Recapitalization, certain information regarding the ownership of
Common Stock by (i) each person known by the Company to beneficially own 5% or
more of the outstanding shares of Common Stock, (ii) each Selling Shareholder
in the Equity Offerings, (iii) each director and Named Executive Officer and
(iv) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO THE OFFERINGS AFTER THE OFFERINGS
---------------------- ----------------------
SHARES
NAME NUMBER PERCENTAGE TO BE SOLD NUMBER PERCENTAGE
---- ---------- ------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Leo W. Pierce, Sr.(2)... (3) (3)
J. Peter Pierce(2)...... (3) (3)
Leo W. Pierce, Jr. .....
Michael J. Pierce.......
Mary E. Pierce..........
Barbara P. Quinn........
Constance P. Buckley....
Maurice Cox, Jr. .......
Alan B. Campell......... --
Delbert S. Conner....... --
Ross M. Engelman........ --
J. Michael Gold......... --
Douglas B. Huntley...... --
Joseph A. Nezi.......... --
Christopher J.
Williams............... --
All directors and
executive officers as a
group
(13 persons)........... 73.3%
</TABLE>
- --------
(1) In the event the underwriters' over-allotment option in the Equity
Offerings is exercised in full, Messrs. and will beneficially own
shares ( %) and shares ( %), respectively, of the shares outstanding
after the Equity Offerings, and all directors and executive officers as a
group will beneficially own ( %).
(2) The business address for Leo W. Pierce, Sr., J. Peter Pierce, Leo W.
Pierce, Jr., Michael J. Pierce, Mary E. Pierce, Barbara P. Quinn and
Constance P. Buckley is c/o Pierce Leahy Corp., 631 Park Avenue, King of
Prussia, Pennsylvania 19406. The address for Maurice Cox, Jr. is 731 E.
Manoa Road, Havertown, Pennsylvania 19083.
(3) Messrs. Leo W. Pierce, Sr. and J. Peter Pierce are the Voting Trustees of
the Voting Trust Agreement described below. Accordingly, the beneficial
ownership of the Voting Trustees includes shares of stock subject to
the Voting Trust Agreement of which shares are owned directly by Leo W.
Pierce, Sr. and shares are owned directly by J. Peter Pierce.
VOTING TRUST AGREEMENT
Prior to the Offerings, all of the outstanding capital stock of the Company
was owned by members of the Pierce family. Members of the Pierce family owning
an aggregate of shares of Common Stock ( % of the shares of Common Stock
to be outstanding after the Offerings) have entered into a ten-year voting
trust agreement (the "Voting Trust Agreement") which appoints Leo W. Pierce,
Sr. and J. Peter Pierce as the Voting Trustees (the "Voting Trustees"). All
shares subject to the Voting Trust Agreement shall be voted at the direction
of the Voting Trustees. In the event the Voting Trustees cannot agree on how
to vote with respect to a certain matter, one-half of the shares subject to
the Voting Trust Agreement will be voted according to the
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<PAGE>
direction of each Voting Trustee. In the event that a Voting Trustee becomes
unable or unwilling to continue serving as a Voting Trustee, all persons
subject to the Voting Trust Agreement shall, pro rata in accordance with the
number of shares held by each such person at such time, appoint a replacement
Voting Trustee. The Voting Trust Agreement does not place any restriction on
the transfer of shares held subject to the Voting Trust Agreement; such shares
will be released from the Voting Trust Agreement upon their transfer to a
person not subject to the Voting Trust Agreement.
DESCRIPTION OF CERTAIN INDEBTEDNESS
THE 1996 NOTES
In July 1996, the Company issued $200,000,000 principal amount of 11 1/8%
Senior Subordinated Notes due 2006 (the "Original Notes"). In November 1996,
the Company exchanged the Original Notes for $200,000,000 principal amount of
11 1/8% Senior Subordinated Notes due 2006 (the "1996 Notes"), which are
substantially identical to the Original Notes except that the 1996 Notes are
registered under the Securities Act. The 1996 Notes mature on July 15, 2006,
and bear interest at 11 1/8% per annum, payable semi-annually in arrears on
January 15 and July 15. The Company may redeem up to an aggregate of
$70,000,000 principal amount of the 1996 Notes at any time prior to July 15,
1999 with the net proceeds of the one or more Public Equity Offerings (as
defined in the 1996 Indenture) at a redemption price equal to 110% of the
aggregate principal amount so redeemed plus accrued interest to the Redemption
Date. The Company expects to use a portion of the net proceeds of the Equity
Offerings to redeem $ principal amount of the 1996 Notes. See "Use of
Proceeds."
Except as described below, the 1996 Notes are substantially similar to the
Notes. See "Description of the Notes." Like the Notes, the 1996 Notes are
general unsecured obligations of the Company, subordinated in right of payment
to senior indebtedness of the Company (as defined in the 1996 Indenture). The
1996 Notes are secured by a pledge of 65% of the capital stock of the
Company's Canadian subsidiary. The pledge is on a second priority basis,
junior to the pledge of such shares in favor of the lenders and the
administrative agent under the Credit Facility and senior to the pledge in
favor of the holders of the Notes. The 1996 Notes will be guaranteed, pari
passu with the Notes, on an unsecured senior subordinated basis, by any future
domestic subsidiaries of the Company.
CREDIT FACILITY
In August 1996, the Company and its Canadian subsidiary entered into the
Credit Facility with Canadian Imperial Bank of Commerce ("CIBC" or "Agent") as
the Agent, and the syndicate banks, providing for a senior secured revolving
line of credit in an aggregate principal amount of $100 million in U.S. dollar
borrowings and Cdn $35 million in Canadian dollar borrowings by the Company's
Canadian subsidiary. The following is a summary of the material terms of the
Credit Facility and does not purport to be complete and is subject to and
qualified by reference to the Credit Facility which is filed as an exhibit to
the Registration Statement of which this Prospectus forms a part.
The Credit Facility matures on June 30, 2002, unless previously terminated,
and the aggregate available commitment under the Credit Facility will be
reduced incrementally on a quarterly basis, beginning September 30, 1999.
Borrowings under the U.S. dollar portion of the Credit Facility bear
interest at a rate equal to, at the option of the Company, either (i) the base
rate (which is based on as the Federal Funds rate or the prime rate most
recently announced by the Agent) or (ii) LIBOR, in each case plus an
applicable margin determined by reference to the ratio of Total Net Debt to
EBITDA of the Company (as defined in the Credit Facility). Borrowings under
the Canadian Dollar portion of the Credit Facility also bear interest based on
various methods plus an applicable margin.
The obligations of the Company under the Credit Facility are unconditionally
guaranteed, jointly and severally, by all subsidiaries of the Company. The
obligations of the Company and such guarantors under the
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<PAGE>
Credit Facility are secured primarily by a first priority pledge of the stock
of all material subsidiaries of the Company and a first priority lien on all
of the assets of the Company and such guarantors. Obligations under the
Canadian facility are guaranteed by the Company.
The Credit Facility contains, among other things, covenants restricting the
ability of the Company and its subsidiaries to dispose of assets, pay
dividends, repurchase or redeem capital stock and indebtedness, create liens,
make capital expenditures, make certain investments or acquisitions, enter
into transactions with affiliates and otherwise restrict corporate activities.
The Credit Facility also contains a number of financial covenants. Although
there can be no assurances, the Company anticipates that subsequent to the
Offerings, it will modify its Credit Facility to increase the total
availability to $ in U.S. dollar borrowings and Cdn $ in Canadian dollar
borrowings and to change certain other provisions of the Credit Facility.
DESCRIPTION OF THE NOTES
The Notes will be issued under an Indenture dated as of , 1997 (the
"Indenture") between the Company and , as trustee (the "Trustee"). The
terms of the Notes include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act"). The Notes are subject to all such terms, and
holders of the Notes are referred to the Indenture and the Trust Indenture Act
for a statement of such terms.
The following is a summary of the material terms and provisions of the
Notes. This summary does not purport to be a complete description of the Notes
and is subject to the detailed provisions of, and qualified by reference to,
the Notes and the Indenture (including the definitions contained therein).
Definitions relating to certain capitalized terms are set forth under "--
Certain Definitions" and throughout this description. Capitalized terms that
are used but not otherwise defined herein have the meanings assigned to them
in the Indenture, and such definitions are incorporated herein by reference.
The Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
GENERAL
The Notes will be limited in aggregate principal amount to $100,000,000. The
Notes are general unsecured obligations of the Company, subordinated in right
of payment to Senior Indebtedness of the Company and senior in right of
payment to any current or future subordinated indebtedness of the Company,
except as otherwise provided herein. The Notes will rank pari passu in right
of payment with other senior subordinated Indebtedness of the Company,
including the 1996 Notes.
The Notes will be unconditionally guaranteed, on a senior subordinated
basis, as to payment of principal, premium, if any, and interest, jointly and
severally, by each domestic Restricted Subsidiary which guarantees payment of
the Notes pursuant to the covenant described under "Limitation on Creation of
Subsidiaries" (the "Guarantors"). As of the Issue Date, none of the Company's
Restricted Subsidiaries will guarantee the Notes and accordingly, as of the
Issue Date, there will be no Guarantors.
The Notes are, however, secured by a pledge of 65% of the capital stock of
the Company's Canadian subsidiary. The pledge is on a third priority basis,
junior to the pledge of such shares in favor of the lenders and the
administrative agent under the Credit Facility and to the pledge in favor of
the holders of the 1996 Notes. Pursuant to a Pledge and Intercreditor
Agreement, the Trustee may not take any action to enforce its rights with
respect to the pledged stock prior to the date on which all obligations under
the Credit Facility and the 1996 Notes have been paid in full and the
commitments under the Credit Facility and the 1996 Notes have expired or been
terminated.
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<PAGE>
MATURITY, INTEREST AND PRINCIPAL
The Notes will mature on , 2007. The Notes will bear interest at a rate
of % per annum from the date of original issuance until maturity. Interest
is payable semi-annually in arrears on and , commencing , 1997, to
holders of record of the Notes at the close of business on the immediately
preceding , and , respectively.
OPTIONAL REDEMPTION
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after , 2002 at the following redemption prices
(expressed as a percentage of principal amount), together, in each case, with
accrued and unpaid interest to the redemption date, if redeemed during the
twelve-month period beginning on , of each year listed below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002.......................................................... %
2003.......................................................... %
2004.......................................................... %
2005 and thereafter........................................... 100.000%
</TABLE>
Notwithstanding the foregoing, the Company may redeem in the aggregate up to
% of the original principal amount of Notes at any time and from time to
time prior to , 2000 at a redemption price equal to % of the aggregate
principal amount so redeemed, plus accrued interest to the redemption date out
of the Net Proceeds of one or more Public Equity Offerings; provided, that at
least $ aggregate principal amount of Notes originally issued remains
outstanding immediately after the occurrence of any such redemption and that
any such redemption occurs within 90 days following the closing of any such
Public Equity Offering.
In the event of redemption of fewer than all of the Notes, the Trustee shall
select either on a pro rata basis or by lot or in such other manner as it
shall deem fair and appropriate the Notes to be redeemed. The Notes will be
redeemable in whole or in part upon not less than 30 nor more than 60 days'
prior written notice, mailed by first class mail to a holder's last address as
it shall appear on the register maintained by the Registrar of the Notes. If
any Note is to be redeemed in part only, the notice of redemption that relates
to such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note, in a principal amount equal to the unredeemed portion
thereof, will be issued in the name of the holder thereof upon cancellation of
the original Note. On and after any redemption date, interest will cease to
accrue on the Notes or portions thereof called for redemption unless the
Company shall fail to redeem any such Note.
SUBORDINATION
The indebtedness represented by the Notes is, to the extent and in the
manner provided in the Indenture, subordinated in right of payment to the
prior indefeasible payment and satisfaction in full in cash of all existing
and future Senior Indebtedness of the Company. As of December 31, 1996, after
giving pro forma effect to the application of the net proceeds of the
Offerings and the 1997 Acquisitions, $3.7 million of Senior Indebtedness would
have been outstanding.
In the event of any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, reorganization or other similar case or proceeding
in connection therewith, relative to the Company or to its creditors, as such,
or to its assets, whether voluntary or involuntary, or any liquidation,
dissolution or other winding-up of the Company, whether voluntary or
involuntary and whether or not involving insolvency or bankruptcy, or any
general assignment for the benefit of creditors or any other marshalling of
assets or liabilities of the Company (except in connection with the merger or
consolidation of the Company or its liquidation or dissolution following the
transfer of substantially all of its assets, upon the terms and conditions
permitted under the circumstances described under "Mergers, Consolidations or
Sale of Assets") (all of the foregoing referred to herein individually as a
"Bankruptcy Proceeding" and collectively as "Bankruptcy Proceedings"), the
holders
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<PAGE>
of Senior Indebtedness of the Company will be entitled to receive payment and
satisfaction in full in cash of all amounts due on or in respect of all Senior
Indebtedness of the Company before the holders of the Notes are entitled to
receive or retain any payment or distribution of any kind on account of the
Notes. In the event that, notwithstanding the foregoing, the Trustee or any
holder of Notes receives any payment or distribution of assets of the Company
of any kind, whether in cash, property or securities, including, without
limitation, by way of set-off or otherwise, in respect of the Notes before all
Senior Indebtedness of the Company is paid and satisfied in full in cash, then
such payment or distribution will be held by the recipient in trust for the
benefit of holders of Senior Indebtedness and will be immediately paid over or
delivered to the holders of Senior Indebtedness or their representative or
representatives to the extent necessary to make payment in full in cash of all
Senior Indebtedness remaining unpaid, after giving effect to any concurrent
payment or distribution, or provision therefor, to or for the holders of
Senior Indebtedness. By reason of such subordination, in the event of
liquidation or insolvency, creditors of the Company who are holders of Senior
Indebtedness may recover more, ratably, than other creditors of the Company,
and creditors of the Company who are not holders of Senior Indebtedness or of
the Notes may recover more, ratably, than the holders of the Notes.
No payment or distribution of any assets or securities of the Company or any
Restricted Subsidiary of any kind or character (including, without limitation,
cash, property and any payment or distribution which may be payable or
deliverable by reason of the payment of any other Indebtedness of the Company
being subordinated to the payment of the Notes by the Company) may be made by
or on behalf of the Company or any Restricted Subsidiary, including, without
limitation, by way of set-off or otherwise, for or on account of the Notes, or
for or on account of the purchase, redemption, defeasance or other acquisition
of the Notes, and neither the Trustee nor any holder or owner of any Notes
shall take or receive from the Company or any Restricted Subsidiary, directly
or indirectly in any manner, payment in respect of all or any portion of Notes
following the delivery by the representative of the holders of Designated
Senior Indebtedness ("Representative") to the Trustee of written notice of (i)
the occurrence of a Payment Default or (ii) the occurrence of a Non-Payment
Event of Default on Designated Senior Indebtedness and the acceleration of the
maturity of such Designated Senior Indebtedness in accordance with its terms,
and, in any such event, such prohibition shall continue until such Payment
Default is cured, waived in writing or ceases to exist or such acceleration
has been rescinded or otherwise cured. At such time as the prohibition set
forth in the preceding sentence shall no longer be in effect, subject to the
provisions of the following paragraph, the Company shall resume making any and
all required payments in respect of the Notes, including any missed payments.
Upon the occurrence of a Non-Payment Event of Default on Designated Senior
Indebtedness, no payment or distribution of any assets or securities of the
Company of any kind or character (including, without limitation, cash,
property and any payment or distribution which may be payable or deliverable
by reason of the payment of any other Indebtedness of the Company being
subordinated to the payment of the Notes by the Company) may be made by or on
behalf of the Company, including, without limitation, by way of set-off or
otherwise, on account of the Notes, or for or on account of the purchase,
redemption, defeasance or other acquisition of Notes, and neither the Trustee
nor any holder or owner of any Notes shall take or receive from the Company or
any Restricted Subsidiary, directly or indirectly in any manner, payment in
respect of all or any portion of the Notes, for a period (a "Payment Blockage
Period") commencing on the date of receipt by the Trustee of written notice
from the Representative of such Non-Payment Event of Default unless and until
(subject to any blockage of payments that may then be in effect under the
preceding paragraph) the earliest of (x) more than 179 days shall have elapsed
since receipt of such written notice by the Trustee, (y) such Non-Payment
Event of Default shall have been cured or waived in writing or shall have
ceased to exist or such Designated Senior Indebtedness shall have been paid in
full or (z) such Payment Blockage Period shall have been terminated by written
notice to the Company or the Trustee from such Representative, after which, in
the case of clause (x), (y) or (z), the Company shall resume making any and
all required payments in respect of the Notes, including any missed payments.
Notwithstanding any other provision of the Indenture, in no event shall a
Payment Blockage Period commenced in accordance with the provisions of the
Indenture described in this paragraph extend beyond 179 days from the date of
the receipt by the Trustee of the notice referred to above (the "Initial
Blockage Period"). Any number of
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<PAGE>
additional Payment Blockage Periods may be commenced during the Initial
Blockage Period; provided, however, that no such additional Payment Blockage
Period shall extend beyond the Initial Blockage Period. After the expiration
of the Initial Blockage Period, no Payment Blockage Period may be commenced
until at least 180 consecutive days have elapsed from the last day of the
Initial Blockage Period. Notwithstanding any other provision of the Indenture,
no event of default with respect to Designated Senior Indebtedness (other than
a Payment Default) which existed or was continuing on the date of the
commencement of any Payment Blockage Period initiated by the Representative
shall be, or be made, the basis for the commencement of a second Payment
Blockage Period initiated by the Representative, whether or not within the
Initial Blockage Period, unless such event of default shall have been cured or
waived for a period of not less than 90 consecutive days.
Each Guarantee will, to the extent set forth in the Indenture, be
subordinated in right of payment to the prior payment in full of all Senior
Indebtedness of the respective Guarantor, including obligations of such
Guarantor with respect to the Credit Facility (including any guarantee
thereof), and will be subject to the rights of holders of Designated Senior
Indebtedness of such Guarantor to initiate blockage periods, upon terms
substantially comparable to the subordination of the Notes to all Senior
Indebtedness of the Company.
If the Company or any Guarantor fails to make any payment on the Notes or
any Guarantee, as the case may be, when due or within any applicable grace
period, whether or not on account of payment blockage provisions, such failure
constitutes an Event of Default under the Indenture and would enable the
holders of the Notes to accelerate the maturity thereof. See "--Events of
Default."
A holder of Notes by his acceptance of Notes agrees to be bound by such
provisions and authorizes and expressly directs the Trustee, on his behalf, to
take such action as may be necessary or appropriate to effectuate the
subordination provided for in the Indenture and appoints the Trustee his
attorney-in-fact for such purpose.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Additional Indebtedness
The Company will not, and will not permit any Restricted Subsidiary of the
Company to, directly or indirectly, incur (as defined) any Indebtedness
(including Acquired Indebtedness) unless (a) after giving effect to the
incurrence of such Indebtedness and the receipt and application of the
proceeds thereof, the ratio of total Indebtedness of the Company and its
Restricted Subsidiaries to the Company's Adjusted EBITDA is less than ;
provided, however, that if the Indebtedness which is the subject of a
determination under this provision is Acquired Indebtedness, or Indebtedness
incurred in connection with the simultaneous acquisition of any Person,
business, property or assets, then such ratio shall be determined by giving
effect (on a pro forma basis, as if the transaction had occurred at the
beginning of the four quarter period ending at the end of the last fiscal
quarter of such Person or business for which financial statements are
available) to the incurrence or assumption of such Acquired Indebtedness or
such other Indebtedness by the Company; and (b) no Default or Event of Default
shall have occurred and be continuing at the time or as a consequence of the
incurrence of such Indebtedness.
Notwithstanding the foregoing, the Company and its Restricted Subsidiaries
may incur Permitted Indebtedness; provided, that the Company will not incur
any Permitted Indebtedness, without meeting the Indebtedness incurrence
provisions of the preceding paragraph, that ranks pari passu or junior in
right of payment to the Notes and that has a maturity or mandatory sinking
fund payment prior to the maturity of the Notes.
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<PAGE>
Notwithstanding the two preceding paragraphs, the Company will not permit
any of its foreign Subsidiaries to incur any subordinated Indebtedness.
Limitation on Restricted Payments
The Company will not make, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, make, any Restricted Payment, unless:
(a) no Default or Event of Default shall have occurred and be continuing
at the time of or immediately after giving effect to such Restricted
Payment;
(b) immediately after giving pro forma effect to such Restricted Payment,
the Company could incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) under the covenant set forth under "Limitation on
Additional Indebtedness"; and
(c) immediately after giving effect to such Restricted Payment, the
aggregate of all Restricted Payments declared (except to the extent not
made on the payment date) or made after the Issue Date does not exceed the
sum of (1) 50% of the cumulative Consolidated Net Income of the Company
subsequent to the Issue Date (or minus 100% of any cumulative deficit in
Consolidated Net Income during such period) and (2) 100% of the aggregate
Net Proceeds and the fair market value of securities or other property
received by the Company from the issue or sale, after the Issue Date, of
Capital Stock (other than Disqualified Capital Stock or Capital Stock of
the Company issued to any Subsidiary of the Company) of the Company or any
Indebtedness or other securities of the Company convertible into or
exercisable or exchangeable for Capital Stock (other than Disqualified
Capital Stock) of the Company which has been so converted or exercised or
exchanged, as the case may be, and (3) $3,000,000. For purposes of
determining under this clause (c) the amount expended for Restricted
Payments, cash distributed shall be valued at the face amount thereof and
property other than cash shall be valued at its fair market value.
Notwithstanding the foregoing, the provisions of this covenant shall not
prohibit (i) the payment of any distribution within 60 days after the date of
declaration thereof, if at such date of declaration such payment would comply
with the provisions of the Indenture, (ii) the retirement of any shares of
Capital Stock of the Company or subordinated Indebtedness by conversion into,
or by or in exchange for, shares of Capital Stock (other than Disqualified
Capital Stock), or out of, the Net Proceeds of the substantially concurrent
sale (other than to a Subsidiary of the Company) of other shares of Capital
Stock of the Company (other than Disqualified Capital Stock), (iii) the
redemption or retirement of Indebtedness of the Company subordinated to the
Notes in exchange for, by conversion into, or out of the Net Proceeds of, a
substantially concurrent sale or incurrence of Indebtedness (other than any
Indebtedness owed to a Subsidiary) of the Company that is contractually
subordinated in right of payment to the Notes to at least the same extent as
the subordinated Indebtedness being redeemed or retired, (iv) the retirement
of any shares of Disqualified Capital Stock by conversion into, or by exchange
for, shares of Disqualified Capital Stock, or out of the Net Proceeds of the
substantially concurrent sale (other than to a Subsidiary of the Company) of
other shares of Disqualified Capital Stock, (v) Permitted Tax Distributions,
(vi) additional payments to employees of the Company for repurchases of stock
or repurchases pursuant to the Nonqualified Stock Option Plan; provided,
however, that the aggregate amount of all such payments under this clause (vi)
does not exceed $2,000,000 in the aggregate, exclusive of amounts funded by
insurance proceeds and, provided, further, that with respect to clause (vi)
(other than with respect to payments funded by insurance proceeds) no Default
or Event of Default shall have occurred and be continuing at the time of any
such distribution or payment or will occur immediately after giving effect to
any such distribution or payment; and, provided, further, that, in determining
the aggregate amount of all Restricted Payments made subsequent to the Issue
Date, all distributions or payments made pursuant to clause (vi) (exclusive of
insurance proceeds) shall be included.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by this covenant were computed, which calculations may be based upon
the Company's latest available financial statements, and that no Default or
Event of Default exists and is continuing and no Default or Event of Default
will occur immediately after giving effect to any Restricted Payments.
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Limitation on Other Senior Subordinated Debt
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, incur, contingently or otherwise, any Indebtedness
(other than the Notes and the Guarantees, as the case may be) that is both (i)
subordinate in right of payment to any Senior Indebtedness of the Company or
its Restricted Subsidiaries, as the case may be, and (ii) senior in right of
payment to the Notes and the Guarantees, as the case may be. For purposes of
this covenant, Indebtedness is deemed to be senior in right of payment to the
Notes and the Guarantees, as the case may be, if it is not explicitly
subordinate in right of payment to Senior Indebtedness at least to the same
extent as the Notes and the Guarantees, as the case may be, are subordinate to
Senior Indebtedness.
Limitations on Investments
The Company will not, and will not permit any of its Restricted Subsidiaries
to, make any Investment other than (i) a Permitted Investment or (ii) an
Investment that is made as a Restricted Payment in compliance with the
"Limitation on Restricted Payments" covenant, after the Issue Date.
Limitations on Liens
The Company will not, and will not permit any of its Restricted Subsidiaries
to, create, incur or otherwise cause or suffer to exist or become effective
any Liens of any kind (other than Permitted Liens) upon any property or asset
of the Company or any Restricted Subsidiary or any shares of stock or debt of
any Restricted Subsidiary which owns property or assets, now owned or
hereafter acquired, in any case which secures Indebtedness pari passu with or
subordinated to the Notes unless (i) if such Lien secures Indebtedness which
is pari passu with the Notes, then the Notes are secured on an equal and
ratable basis with the obligations so secured until such time as such
obligation is no longer secured by a Lien or (ii) if such Lien secures
Indebtedness which is subordinated to the Notes, any such Lien shall be
subordinated to the Lien granted to the holders of the Notes in the same
collateral to the same extent as such subordinated Indebtedness is
subordinated to the Notes.
Limitation on Transactions with Affiliates
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into any transaction or series of related
transactions (including, without limitation, the sale, purchase, exchange or
lease of assets, property or services) with any Affiliate (including entities
in which the Company or any of its Restricted Subsidiaries own a minority
interest) or holder of 10% or more of the Company's Common Stock (an
"Affiliate Transaction") or extend, renew, waive or otherwise modify the terms
of any Affiliate Transaction entered into prior to the Issue Date unless (i)
such Affiliate Transaction is between or among the Company and its Wholly-
Owned Subsidiaries; (ii) such Affiliate Transaction is solely between or among
Wholly-Owned Subsidiaries of the Company; or (iii) the terms of such Affiliate
Transaction are fair and reasonable to the Company or such Restricted
Subsidiary, as the case may be, and the terms of such Affiliate Transaction
are at least as favorable as the terms which could be obtained by the Company
or such Restricted Subsidiary, as the case may be, in a comparable transaction
made on an arm's-length basis between unaffiliated parties; provided, however,
that the Company and its Restricted Subsidiaries may renew any then existing
Affiliate Transaction through either a renewal option or upon expiration of an
arrangement on substantially similar terms to those in effect immediately
preceding such expiration. In any Affiliate Transaction involving an amount or
having a value in excess of $1 million which is not permitted under clause (i)
or (ii) above, the Company must obtain a resolution of the Board of Directors
certifying that such Affiliate Transaction complies with clause (iii) above
and that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors. In transactions with a value
in excess of $3 million which are not permitted under clause (i) or (ii)
above, the Company must obtain a written opinion as to the fairness from a
financial point of view of such a transaction from an independent investment
banking firm of national standing or real estate firm of national standing (as
the case may be).
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The foregoing provisions will not apply to (i) any Restricted Payment that
is not prohibited by the provisions described under "Limitations on Restricted
Payments" contained herein, (ii) any transaction, approved by the Board of
Directors of the Company in good faith, with an officer, director, employee or
consultant of the Company or of any Subsidiary in his or her capacity as an
officer, director, employee or consultant entered into in the ordinary course
of business, including compensation, indemnity and employee benefit
arrangements with any officer, director, employee or consultant of the Company
or of any Subsidiary, or (iii) customary investment banking, underwriting,
placement agent or financial advisor fees paid in connection with services
rendered to the Company or any Subsidiary.
Limitation on Creation of Subsidiaries
The Company shall not create or acquire, nor permit any of its Restricted
Subsidiaries to create or acquire, any Subsidiary other than (i) a Restricted
Subsidiary existing as of the date of the Indenture, (ii) a Restricted
Subsidiary that is acquired or created after the date of the Indenture, or
(iii) an Unrestricted Subsidiary; provided, however, that each Restricted
Subsidiary organized under the laws of the United States or any State thereof
or the District of Columbia acquired or created pursuant to clause (ii) shall,
at the time it has either assets or shareholder's equity in excess of $5,000,
execute a guarantee, in the form attached to the Indenture and reasonably
satisfactory in form and substance to the Trustee (and with such documentation
relating thereto as the Trustee shall require, including, without limitation a
supplement or amendment to the Indenture and opinions of counsel as to the
enforceability of such guarantee). See "Future Guarantees."
Limitation on Certain Asset Sales
The Company will not, and will not permit any of its Restricted Subsidiaries
to, consummate an Asset Sale unless (i) the Company or its Restricted
Subsidiaries, as the case may be, receives consideration at the time of such
sale or other disposition at least equal to the fair market value thereof (as
determined for Asset Sales other than eminent domain, condemnation or similar
government proceedings in good faith by the Company's board of directors, and
evidenced by a board resolution); (ii) not less than 85% of the consideration
received by the Company or its Subsidiaries, as the case may be, is in the
form of cash or Temporary Cash Investments; and (iii) the Asset Sale Proceeds
received by the Company or such Restricted Subsidiary are applied (a) first,
to the extent the Company elects, or is required, to prepay, repay or purchase
debt under any then existing Senior Indebtedness of the Company or any
Restricted Subsidiary within 180 days following the receipt of the Asset Sale
Proceeds from any Asset Sale; (b) second, to the extent of the balance of
Asset Sale Proceeds after application as described above, to the extent the
Company elects, to an investment in assets (including Capital Stock or other
securities purchased in connection with the acquisition of Capital Stock or
property of another Person) used or useful in businesses similar or ancillary
to the business of the Company or Restricted Subsidiary as conducted at the
time of such Asset Sale, provided that such investment occurs or the Company
or a Restricted Subsidiary enters into contractual commitments to make such
investment, subject only to customary conditions (other than the obtaining of
financing), on or prior to the 181st day following receipt of such Asset Sale
Proceeds (the "Reinvestment Date") and Asset Sale Proceeds contractually
committed are so applied within 270 days following the receipt of such Asset
Sale Proceeds; and (c) third, if on the Reinvestment Date with respect to any
Asset Sale, the Available Asset Sale Proceeds exceed $10 million, the Company
shall apply an amount equal to such Available Asset Sale Proceeds to an offer
to repurchase the Notes, or any future Indebtedness ranking pari passu with
the Notes, which Indebtedness contains similar provisions requiring the
Company to repurchase such Indebtedness, at a purchase price in cash equal to
100% of the principal amount thereof plus accrued and unpaid interest, if any,
to the date of repurchase (an "Excess Proceeds Offer"); provided, however,
that prior to making any such Excess Proceeds Offer, the Company may, to the
extent required pursuant to the terms of Indebtedness outstanding as of the
Issue Date offer to use such Available Asset Sale Proceeds to repurchase and
use all or a portion of such Available Asset Sale Proceeds to repurchase such
Indebtedness. If an Excess Proceeds Offer is not fully subscribed, the Company
may retain the portion of the Available Asset Sale Proceeds not required to
repurchase Notes for general corporate purposes. If the aggregate principal
amount of Notes tendered pursuant to such Excess Proceeds Offer is more than
the amount of the Available Asset Sale Proceeds, the Notes tendered will be
repurchased on a pro rata basis or by such other method as the Trustee shall
deem fair and appropriate.
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If the Company is required to make an Excess Proceeds Offer, the Company
shall mail, within 30 days following the Reinvestment Date (or within 120 days
following the Reinvestment Date if the Company is required to make an offer to
repurchase Indebtedness (other than the Notes) outstanding as of the Issue
Date), a notice to the holders stating, among other things: (1) that such
holders have the right to require the Company to apply the Available Asset
Sale Proceeds to repurchase such Notes at a purchase price in cash equal to
100% of the principal amount thereof plus accrued and unpaid interest, if any,
to the date of purchase; (2) the purchase date, which shall be no earlier than
30 days and not later than 60 days from the date such notice is mailed;
(3) the instructions, determined by the Company, that each holder must follow
in order to have such Notes repurchased; and (4) the calculations used in
determining the amount of Available Asset Sale Proceeds to be applied to the
repurchase of such Notes.
Limitation on Preferred Stock of Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary to issue any Preferred
Stock (except Preferred Stock to the Company or a Restricted Subsidiary) or
permit any Person (other than the Company or a Subsidiary) to hold any such
Preferred Stock unless the Company or such Restricted Subsidiary would be
entitled to incur or assume Indebtedness under the covenant described under
"Limitation on Additional Indebtedness" in the aggregate principal amount
equal to the aggregate liquidation value of the Preferred Stock to be issued;
provided, however, that any Restricted Subsidiary that guarantees the Notes
pursuant to the covenant described under "Limitation on Creation of
Subsidiaries" shall be permitted to issue Preferred Stock that is not
Disqualified Capital Stock.
Limitation on Capital Stock of Restricted Subsidiaries
The Company will not (i) sell, pledge, hypothecate or otherwise convey or
dispose of any Capital Stock of a Restricted Subsidiary (other than under the
terms of the Credit Facility or under the terms of any Designated Senior
Indebtedness) or (ii) permit any of its Restricted Subsidiaries to issue any
Capital Stock, other than to the Company or a Wholly-Owned Subsidiary of the
Company. The foregoing restrictions shall not apply to an Asset Sale made in
compliance with "Limitation on Certain Asset Sales" or the issuance of
Preferred Stock in compliance with the covenants described under "Limitation
on Preferred Stock of Restricted Subsidiaries."
Limitation on Sale and Lease-Back Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any Sale and Lease-Back Transaction unless (i) the consideration
received in such Sale and Lease-Back Transaction is at least equal to the fair
market value of the property sold, as determined by a board resolution of the
Company, and (ii) the Company could incur the Attributable Indebtedness in
respect of such Sale and Lease-Back Transaction in compliance with the
covenant described under "Limitation on Additional Indebtedness."
Payments for Consent
Neither the Company nor any of its Subsidiaries shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any holder of any Notes for or as an inducement
to any consent, waiver or amendment of any of the terms or provisions of the
Indenture or the Notes unless such consideration is offered to be paid or
agreed to be paid to all holders of the Notes which so consent, waive or agree
to amend in the time frame set forth in solicitation documents relating to
such consent, waiver or agreement.
Change of Control Offer
Within 30 days of the occurrence of a Change of Control, the Company shall
notify the Trustee in writing of such occurrence and shall make an offer to
purchase (the "Change of Control Offer") the outstanding Notes at a purchase
price equal to 101% of the principal amount thereof plus any accrued and
unpaid interest thereon to the Change of Control Payment Date (as hereinafter
defined) (such applicable purchase price being hereinafter referred to as the
"Change of Control Purchase Price") in accordance with the procedures set
forth in this covenant. See "Certain Definitions--Change of Control" herein.
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Within 30 days of the occurrence of a Change of Control, the Company also
shall (i) cause a notice of the Change of Control Offer to be sent at least
once to the Dow Jones News Service or similar business news service in the
United States and (ii) send by first-class mail, postage prepaid, to the
Trustee and to each holder of the Notes, at the address appearing in the
register maintained by the Registrar of the Notes, a notice stating:
(1) that the Change of Control Offer is being made pursuant to this
covenant and that all Notes tendered will be accepted for payment, and
otherwise subject to the terms and conditions set forth herein;
(2) the Change of Control Purchase Price and the purchase date (which
shall be a Business Day no earlier than 20 business days and no later than
60 days from the date such notice is mailed (the "Change of Control Payment
Date"));
(3) that any Note not tendered will continue to accrue interest;
(4) that, unless the Company defaults in the payment of the Change of
Control Purchase Price, any Notes accepted for payment pursuant to the
Change of Control Offer shall cease to accrue interest after the Change of
Control Payment Date;
(5) that holders accepting the offer to have their Notes purchased
pursuant to a Change of Control Offer will be required to surrender the
Notes to the Paying Agent at the address specified in the notice prior to
the close of business on the Business Day preceding the Change of Control
Payment Date;
(6) that holders will be entitled to withdraw their acceptance if the
Paying Agent receives, not later than the close of business on the third
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of the Notes delivered for purchase, and a
statement that such holder is withdrawing his election to have such Notes
purchased;
(7) that holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion of
the Notes surrendered, provided that each Note purchased and each such new
Note issued shall be in an original principal amount in denominations of
$1,000 and integral multiples thereof;
(8) any other procedures that a holder must follow to accept a Change of
Control Offer or effect withdrawal of such acceptance; and
(9) the name and address of the Paying Agent.
On the Change of Control Payment Date, the Company shall, to the extent
lawful, (i) accept for payment Notes or portions thereof or beneficial
interests under a Global Note properly tendered pursuant to the Change of
Control Offer, (ii) deposit with the Paying Agent money sufficient to pay the
purchase price of all Notes or portions thereof or beneficial interests so
tendered and (iii) deliver or cause to be delivered to the Trustee Notes so
accepted together with an Officers' Certificate stating the Notes or portions
thereof tendered to the Company. The Paying Agent shall promptly (1) mail to
each holder of Notes so accepted and (2) cause to be credited to the
respective accounts of the holders under a Global Note of beneficial interest
so accepted payment in an amount equal to the purchase price for such Notes,
and the Company shall execute and issue, and the Trustee shall promptly
authenticate and mail to such holder, a new Note equal in principal amount to
any unpurchased portion of the Notes surrendered and shall issue a Global Note
equal in principal amount to any unpurchased portion of beneficial interest so
surrendered; provided that each such new Note shall be issued in an original
principal amount in denominations of $1,000 and integral multiples thereof.
The Indenture will require that if the Credit Facility is in effect, or any
amounts are owing thereunder or in respect thereof, at the time of the
occurrence of a Change of Control, prior to the mailing of the notice to
holders described in the preceding paragraph, but in any event within 30 days
following any Change of Control, the Company covenants to (i) repay in full
all obligations under or in respect of the Credit Facility or offer to repay
in full all obligations under or in respect of the Credit Facility and repay
the obligations under or in respect of the Credit Facility of each lender who
has accepted such offer or (ii) obtain the requisite consent under the Credit
Facility to permit the repurchase of the Notes as described above. The Company
must first comply with the
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covenant described in the preceding sentence before it shall be required to
purchase Notes in the event of a Change of Control; provided that the
Company's failure to comply with the covenant described in the preceding
sentence constitutes an Event of Default described in clause (iii) under
"Events of Default" below if not cured within 60 days after the notice
required by such clause. As a result of the foregoing, a holder of the Notes
may not be able to compel the Company to purchase the Notes unless the Company
is able at the time to refinance all of the obligations under or in respect of
the Credit Facility or obtain requisite consents under the Credit Facility.
The Indenture will provide that, (A) if the Company or any Subsidiary
thereof has issued any outstanding (i) Indebtedness that is subordinated in
right of payment to the Notes or (ii) Preferred Stock, and the Company or such
Subsidiary is required to make a Change of Control Offer or to make a
distribution with respect to such subordinated Indebtedness or Preferred Stock
in the event of a change of control, the Company shall not consummate any such
offer or distribution with respect to such subordinated Indebtedness or
Preferred Stock until such time as the Company shall have paid the Change of
Control Purchase Price in full to the holders of Notes that have accepted the
Company's Change of Control Offer and shall otherwise have consummated the
Change of Control Offer made to holders of the Notes and (B) the Company will
not issue Indebtedness that is subordinated in right of payment to the Notes
or Preferred Stock with change of control provisions requiring the payment of
such Indebtedness or Preferred Stock prior to the payment of the Notes in the
event of a Change of Control under the Indenture.
In the event that a Change of Control occurs and the holders of Notes
exercise their right to require the Company to purchase Notes, if such
purchase constitutes a "tender offer" for purposes of Rule 14e-1 under the
Exchange Act at that time, the Company will comply with the requirements of
Rule 14e-1 as then in effect with respect to such repurchase.
The Company's ability to purchase the Notes will be limited by the Company's
then available financial resources and, if such financial resources are
insufficient, its ability to arrange financing to effect such purchases. There
can be no assurance that the Company will have sufficient funds to repurchase
the Notes upon a Change of Control or that the Company will be able to arrange
financing for such purpose. In addition, the Company has a similar obligation
with respect to the 1996 Notes upon a Change of Control. Such obligation ranks
pari passu with its obligation under the Notes.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Company will not and will not permit any Guarantor to consolidate with,
merge with or into, or transfer all or substantially all of its assets (as an
entirety or substantially as an entirety in one transaction or a series of
related transactions), to any Person unless: (i) the Company or the Guarantor,
as the case may be, shall be the continuing Person, or the Person (if other
than the Company or the Guarantor) formed by such consolidation or into which
the Company or the Guarantor, as the case may be, is merged or to which the
properties and assets of the Company or the Guarantor, as the case may be, are
transferred shall be a corporation organized and existing under the laws of
the United States or any State thereof or the District of Columbia and shall
expressly assume, by a supplemental indenture, executed and delivered to the
Trustee, in form satisfactory to the Trustee, all of the obligations of the
Company or the Guarantor, as the case may be, under the Notes and the
Indenture, and the obligations under the Indenture shall remain in full force
and effect; (ii) immediately before and immediately after giving effect to
such transaction, no Default or Event of Default shall have occurred and be
continuing; and (iii) immediately after giving effect to such transaction on a
pro forma basis the Company or such Person could incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) under the covenant
set forth under "Limitation on Additional Indebtedness"; provided, however,
that a Guarantor may merge into the Company or another Guarantor without
complying with this clause (iii).
In connection with any consolidation, merger or transfer of assets
contemplated by this provision, the Company shall deliver, or cause to be
delivered, to the Trustee, in form and substance reasonably satisfactory to
the Trustee, an Officers' Certificate and an opinion of counsel, each stating
that such consolidation, merger or transfer and the supplemental indenture in
respect thereto comply with this provision and that all conditions precedent
herein provided for relating to such transaction or transactions have been
complied with.
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FUTURE GUARANTEES
The Notes will be guaranteed on a senior subordinated basis by the
Guarantors. All payments pursuant to the Guarantees by the Guarantors will be
subordinated in right of payment to the prior payment in full of all Senior
Indebtedness of the Guarantor, to the same extent and in the same manner that
all payments pursuant to the Notes are subordinated in right of payment to the
prior payment in full of all Senior Indebtedness of the Company.
The obligations of each Guarantor will be limited to the maximum amount as
will, after giving effect to all other contingent and fixed liabilities of
such Guarantor (including, without limitation, any guarantees of Senior
Indebtedness) and after giving effect to any collections from or payments made
by or on behalf of any other Guarantor in respect of the obligations of such
other Guarantor under its Guarantee or pursuant to its contribution
obligations under the Indenture, result in the obligations of such Guarantor
under the Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under federal or state law. Each Guarantor that makes a payment or
distribution under a Guarantee will be entitled to a contribution from each
other Guarantor in a pro rata amount based on the Adjusted Net Assets of each
Subsidiary Guarantor.
A Guarantor will be released from all of its obligations under its Guarantee
if all or substantially all of its assets are sold or all of its Capital Stock
is sold, in each case in a transaction in compliance with the covenants
described under "Limitation on Certain Asset Sales" and "Merger, Consolidation
or Sale of Assets," or the Guarantor merges with or into or consolidates with,
or transfers all or substantially all of its assets to, the Company or another
Guarantor in a transaction in compliance with "Merger, Consolidation or Sale
of Assets," and such Guarantor has delivered to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent herein provided for relating to such transaction have been complied
with.
Events of Default
The following events are defined in the Indenture as "Events of Default":
(i) default in payment of any principal of, or premium, if any, on the
Notes;
(ii) default for 30 days in payment of any interest on the Notes after
such interest becomes due and payable;
(iii) default by the Company or any Guarantor in the observance or
performance of any other covenant in the Notes or the Indenture for 60 days
after written notice from the Trustee or the holders of not less than 25%
in aggregate principal amount of the Notes then outstanding;
(iv) default in the payment at final maturity of principal in an
aggregate amount of $3,000,000 or more with respect to any Indebtedness of
the Company or any Restricted Subsidiary thereof which default shall not be
cured, waived or postponed pursuant to an agreement with the holders of
such Indebtedness within 60 days after written notice as provided in the
Indenture, or the acceleration of any such Indebtedness aggregating
$3,000,000 or more which acceleration shall not be rescinded or annulled
within 20 days after written notice as provided in the Indenture;
(v) any final judgment or judgments which can no longer be appealed for
the payment of money in excess of $3,000,000 (which are not paid or covered
by third party insurance by financially sound insurers that have not
disclaimed coverage) shall be rendered against the Company or any
Restricted Subsidiary thereof, and shall not be discharged for any period
of 60 consecutive days during which a stay of enforcement shall not be in
effect; and
(vi) certain events involving bankruptcy, insolvency or reorganization of
the Company or any Restricted Subsidiary thereof.
The Indenture will provide that the Trustee may withhold notice to the
holders of the Notes of any default (except in payment of principal or
premium, if any, or interest on the Notes) if the Trustee in good faith
determines it to be in the best interest of the holders of the Notes to do so.
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The Indenture will provide that if an Event of Default (other than an Event
of Default resulting from certain events of bankruptcy, insolvency or
reorganization) shall have occurred and be continuing, then the Trustee or the
holders of not less than 25% in aggregate principal amount of the Notes then
outstanding may declare to be immediately due and payable the entire principal
amount of all the Notes then outstanding plus premium, if any, and accrued
interest to the date of acceleration and (i) such amounts shall become
immediately due and payable or (ii) if there are any amounts outstanding under
or in respect of the Credit Facility such amounts shall become due and payable
upon the first to occur of an acceleration of amounts outstanding under or in
respect of the Credit Facility or five business days after receipt by the
Company and the representative of the holders of Senior Indebtedness under or
in respect of the Credit Facility, of notice of the acceleration of the Notes;
provided, however, that after such acceleration but before a judgment or
decree based on acceleration is obtained by the Trustee, the holders of a
majority in aggregate principal amount of outstanding Notes may, under certain
circumstances, rescind and annul such acceleration if all Events of Default,
other than nonpayment of accelerated principal, premium, if any, or interest,
have been cured or waived as provided in the Indenture. In case an Event of
Default resulting from certain events of bankruptcy, insolvency or
reorganization shall occur, the principal, premium and interest amount with
respect to all of the Notes shall be due and payable immediately without any
declaration or other act on the part of the Trustee or the holders of the
Notes.
The holders of a majority in principal amount of the Notes then outstanding
shall have the right to waive any existing default or Event of Default or
compliance with any provision of the Indenture or the Notes and to direct the
time, method and place of conducting any proceeding for any remedy available
to the Trustee, subject to certain limitations specified in the Indenture.
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder
shall have previously given to the Trustee written notice of a continuing
Event of Default and unless also the holders of at least 25% in aggregate
principal amount of the outstanding Notes shall have made written request and
offered reasonable indemnity to the Trustee to institute such proceeding as a
trustee, and unless the Trustee shall not have received from the holders of a
majority in aggregate principal amount of the outstanding Notes a direction
inconsistent with such request and the Trustee shall have failed to institute
such proceeding within 60 days. However, such limitations do not apply to a
suit instituted for payment of principal, premium, if any, or interest on a
Note on or after the respective due dates expressed in such Note.
DEFEASANCE AND COVENANT DEFEASANCE
The Indenture will provide the Company may elect either (a) to defease and
be discharged from any and all obligations with respect to the Notes (except
for the obligations to register the transfer or exchange of such Notes, to
replace temporary or mutilated, destroyed, lost or stolen Notes, to maintain
an office or agency in respect of the Notes and to hold monies for payment in
trust) ("defeasance") or (b) to be released from its obligations with respect
to the Notes under certain covenants contained in the Indenture and described
above under "Certain Covenants" ("covenant defeasance"), upon the deposit with
the Trustee (or other qualifying trustee), in trust for such purpose, of money
and/or U.S. Government Obligations which through the payment of principal and
interest in accordance with their terms will provide money, in an amount
sufficient to pay the principal of, premium, if any, and interest on the
Notes, on the scheduled due dates therefor or on a selected date of redemption
in accordance with the terms of the Indenture. Such a trust may only be
established if, among other things, the Company has delivered to the Trustee
an opinion of counsel (as specified in the Indenture) (i) to the effect that
neither the trust nor the Trustee will be required to register as an
investment company under the Investment Company Act of 1940, as amended, and
(ii) to the effect that holders of the Notes or persons in their positions
will not recognize income, gain or loss for federal income tax purposes as a
result of such deposit, defeasance and discharge and will be subject to
federal income tax on the same amount and in the same manner and at the same
times, as would have been the case if such deposit, defeasance and discharge
had not occurred, which, in the case of defeasance only, must be based upon a
private letter ruling concerning the Notes, a published ruling of the Internal
Revenue Service or a change in applicable federal income tax law.
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MODIFICATION OF INDENTURE
From time to time, the Company, the Guarantors, if applicable, and the
Trustee may, without the consent of holders of the Notes, modify, amend, waive
or supplement the provisions of the Indenture or the Notes for certain
specified purposes, including providing for uncertificated Notes in addition
to certificated Notes, and curing any ambiguity, defect or inconsistency, or
making any other change that does not materially and adversely affect the
rights of any holder. The Indenture contains provisions permitting the
Company, the Guarantors, if applicable, and the Trustee, with the consent of
holders of at least a majority in principal amount of the outstanding Notes,
to modify, amend, waive or supplement the Indenture or the Notes, except that
no such modification shall, without the consent of each holder affected
thereby, (i) reduce the amount of Notes whose holders must consent to an
amendment, supplement, or waiver to the Indenture or the Notes, (ii) reduce
the rate of or change the time for payment of interest on any Note, (iii)
reduce the principal of or premium on or change the stated maturity of any
Note, (iv) make any Note payable in money other than that stated in the Note
or change the place of payment from New York, New York, (v) change the amount
or time of any payment required by the Notes or reduce the premium payable
upon any redemption of Notes, or change the time before which no such
redemption may be made, (vi) waive a default on the payment of the principal
of, interest on, or redemption payment with respect to any Note, or (vii) take
any other action otherwise prohibited by the Indenture to be taken without the
consent of each holder affected thereby.
The consent of the holders is not necessary to approve the particular form
of a proposed amendment. It is sufficient if such consent approves the
substance of the proposed amendment.
REPORTS TO HOLDERS
So long as the Company is subject to the periodic reporting requirements of
the Exchange Act, it will continue to furnish the information required thereby
to the Commission and to the holders of the Notes. The Indenture will provide
that even if the Company is entitled under the Exchange Act not to furnish
such information to the Commission or to the holders of the Notes, it will
nonetheless continue to furnish such information to the Commission and holders
of the Notes.
COMPLIANCE CERTIFICATE
The Company will deliver to the Trustee on or before 100 days after the end
of the Company's fiscal year and on or before 50 days after the end of each
the first, second and third fiscal quarters in each year an Officers'
Certificate stating whether or not the signers know of any Default or Event of
Default that has occurred. If they do, the certificate will describe the
Default or Event of Default and its status.
THE TRUSTEE
The Trustee under the Indenture is the Registrar and Paying Agent with
regard to the Notes. The Indenture provides that, except during the
continuance of an Event of Default which is continuing, the Trustee will
perform only such duties as are specifically set forth in the Indenture.
During the existence of an Event of Default which is continuing, the Trustee
will exercise such rights and powers vested in it under the Indenture and use
the same degree of care and skill in its exercise as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as amended,
incorporated by reference therein contain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that if it acquires any
conflicting interest, it must eliminate such conflict or resign.
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TRANSFER AND EXCHANGE
Holders of the Notes may transfer or exchange Notes in accordance with the
Indenture. The Registrar under such Indenture may require a holder, among
other things, to furnish appropriate endorsements and transfer documents, and
to pay any taxes and fees required by law or permitted by the Indenture. The
Registrar is not required to transfer or exchange any Note selected for
redemption. Also, the Registrar is not required to transfer or exchange any
Note for a period of 15 days before selection of the Notes to be redeemed.
The registered holder of a Note may be treated as the owner of it for all
purposes.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants contained in the Indenture. Reference is made to the Indenture for
the full definition of all such terms as well as any other capitalized terms
used herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person (including an
Unrestricted Subsidiary) existing at the time such Person becomes a Restricted
Subsidiary or assumed in connection with the acquisition of assets from a
Person.
"Acquisition EBITDA" means, without duplication, (i) EBITDA for the last
four fiscal quarters for which financial statements are available at the date
of determination (the "Acquisition EBITDA Period") with respect to a business
or Person which has been acquired by the Company or one of its Restricted
Subsidiaries or which is the subject of a binding acquisition agreement
requiring the calculation of EBITDA for purposes of the covenant restricting
the incurrence of Indebtedness and, in each case, with respect to which
financial results on a consolidated basis with the Company have not been made
available for an entire fiscal quarter; plus (ii) in connection with any such
acquisition, projected quantifiable improvements in operating results due to
an established program of cost reductions (consistent with the cost reductions
actually achieved by the Company in connection with prior acquisitions)
adopted, in good faith, by the Company or one of its Restricted Subsidiaries
through a Board Resolution certified by an Officers' Certificate filed with
the Trustee (calculated on a pro forma basis for the Acquisition EBITDA Period
as if the program had been implemented at the beginning of the Acquisition
EBITDA Period), without giving effect to any operating losses of the acquired
Person. Such Officers' Certificate shall confirm that any such anticipated
cost reductions made in connection with an acquisition with a purchase price
in excess of $25,000,000 have been reviewed for reasonableness and consistency
with past practice by an independent nationally recognized investment banking
firm and such firm shall not have raised any material objections thereto. Each
such Officers' Certificate shall be signed by the Chief Financial Officer and
another officer of the Company. Acquisition EBITDA of a business shall be a
fixed number determined as of the date the calculation of EBITDA for purposes
of the covenant restricting the incurrence of Indebtedness is first required
with respect to the acquisition of such business (the "Determination Date")
and shall be utilized from the Determination Date through the date financial
results are available for the first full fiscal quarter following the
acquisition (following which the actual EBITDA of such business or Person
shall be included in the EBITDA of the Company). For purposes of determining
Acquisition EBITDA with respect to the acquisition of a particular business or
Person, Acquisition EBITDA shall include not only the Acquisition EBITDA of
such business or Person, but also the Acquisition EBITDA of any business
previously acquired by the Company or the subject of a pending acquisition
agreement to the extent that, as of the Determination Date, the financial
results for such business or Person on a consolidated basis with the Company
for a full fiscal quarter subsequent to its acquisition by the Company are not
yet available.
"Adjusted EBITDA" means for any Person, without duplication, the sum of (a)
EBITDA of such Person and its Restricted Subsidiaries for the most recent
fiscal quarter for which internal financial statements are available,
multiplied by four and (b) Acquisition EBITDA.
"Adjusted Net Assets" of a Guarantor at any date shall mean the lesser of
the amount by which (x) the fair value of the property of such Guarantor
exceeds the total amount of liabilities, including, without limitation,
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contingent liabilities (after giving effect to all other fixed and contingent
liabilities (including, without limitation, any guarantees of Senior
Indebtedness)), but excluding liabilities under the Guarantee of such
Guarantor at such date and (y) the present fair salable value of the assets of
such Guarantor at such date exceeds the amount that will be required to pay
the probable liability of such Guarantor on its debts (after giving effect to
all other fixed and contingent liabilities (including, without limitation, any
guarantees of Senior Indebtedness) and after giving effect to any collection
from any Subsidiary of such Guarantor in respect of the obligations of such
Subsidiary under the Guarantee), excluding Indebtedness in respect of the
Guarantee as they become absolute and matured.
"Affiliate" of any specified Person means any other Person which directly or
indirectly through one or more intermediaries controls, or is controlled by,
or is under common control with, such specified Person. For the purposes of
this definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by," and "under common control with"), as used with
respect to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise.
"Asset Sale" means the sale, transfer or other disposition (other than to
the Company or any of its Restricted Subsidiaries) in any single transaction
or series of related transactions involving assets with a fair market value in
excess of $500,000 of (a) any Capital Stock of or other equity interest in any
Restricted Subsidiary of the Company, (b) all or substantially all of the
assets of the Company or of any Restricted Subsidiary thereof, (c) real
property of the Company or a Restricted Subsidiary or (d) all or substantially
all of the assets of any business property, or part thereof, owned by the
Company or any Restricted Subsidiary thereof, or a division, line of business
or comparable business segment of the Company or any Restricted Subsidiary
thereof; provided that Asset Sales shall not include (i) sales, leases,
conveyances, transfers or other dispositions to the Company or to a Restricted
Subsidiary or to any other Person if after giving effect to such sale, lease,
conveyance, transfer or other disposition such other Person becomes a
Restricted Subsidiary, (ii) transactions complying with "Merger, Consolidation
or Sale of Assets" above and (iii) transfers or other distributions of assets
which constitute (1) Permitted Investments or (2) Restricted Payments made in
compliance with the covenant described under "Certain Covenants--Limitation on
Restricted Payments."
"Asset Sale Proceeds" means, with respect to any Asset Sale, (i) cash
received by the Company or any Restricted Subsidiary from such Asset Sale
(including cash received as consideration for the assumption of liabilities
incurred in connection with or in anticipation of such Asset Sale), after (a)
provision for all income or other taxes measured by or resulting from such
Asset Sale, (b) payment of all brokerage commissions, underwriting and other
fees and expenses related to such Asset Sale, (c) provision for minority
interest holders in any Restricted Subsidiary as a result of such Asset Sale,
(d) payments made to retire Indebtedness secured by the assets subject to such
Asset Sale and (e) deduction of appropriate amounts to be provided by the
Company or a Restricted Subsidiary as a reserve, in accordance with GAAP,
against any liabilities associated with the assets sold or disposed of in such
Asset Sale and retained by the Company or a Restricted Subsidiary after such
Asset Sale, including, without limitation, pension and other post employment
benefit liabilities and liabilities related to environmental matters or
against any indemnification obligations associated with the assets sold or
disposed of in such Asset Sale, and (ii) promissory notes and other non-cash
consideration received by the Company or any Restricted Subsidiary from such
Asset Sale or other disposition upon the liquidation or conversion of such
notes or non-cash consideration into cash.
"Attributable Indebtedness" under the Indenture in respect of a Sale and
Lease-Back Transaction means, as of the time of determination, the greater of
(i) the fair value of the property subject to such arrangement (as determined
by the Board of Directors) and (ii) the present value (discounted at the rate
of interest implicit in such transaction) of the total obligations of the
lessee for rental payments during the remaining term of the lease included in
such Sale and Lease-Back Transaction (including any period for which such
lease has been extended).
"Available Asset Sale Proceeds" means, with respect to any Asset Sale, the
aggregate Asset Sale Proceeds from such Asset Sales that have not been applied
in accordance with clauses (iii)(a) or (iii)(b), and which has
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not yet been the basis for an Excess Proceeds Offer in accordance with clause
(iii)(c), of the first paragraph of "Certain Covenants--Limitation on Certain
Asset Sales".
"Capital Stock" means, with respect to any Person, any and all shares or
other equivalents (however designated) of capital stock, partnership interests
or any other participation, right or other interest in the nature of an equity
interest in such Person or any option, warrant or other security convertible
into any of the foregoing.
"Capitalized Lease Obligations" means Indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP, and the amount of such
Indebtedness shall be the capitalized amount of such obligations determined in
accordance with GAAP.
A "Change of Control" of the Company will be deemed to have occurred at such
time as (i) any Person (including a Person's Affiliates and associates), other
than a Permitted Holder, becomes the beneficial owner (as defined under Rule
13d-3 or any successor rule or regulation promulgated under the Exchange Act)
of more than 50% of the total voting power of the Company's Common Stock, (ii)
any Person (including a Person's Affiliates and associates), other than a
Permitted Holder, becomes the beneficial owner of more than 33 1/3% of the
total voting power of the Company's Common Stock, and the Permitted Holders
beneficially own, in the aggregate, a lesser percentage of the total voting
power of the Common Stock of the Company than such other Person and do not
have the right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the Board of Directors of the Company,
(iii) there shall be consummated any consolidation or merger of the Company in
which the Company is not the continuing or surviving corporation or pursuant
to which the Common Stock of the Company would be converted into cash,
securities or other property, other than a merger or consolidation of the
Company in which the holders of the Common Stock of the Company outstanding
immediately prior to the consolidation or merger hold, directly or indirectly,
at least a majority of the Common Stock of the surviving corporation
immediately after such consolidation or merger, or (iv) during any period of
two consecutive years, individuals who at the beginning of such period
constituted the Board of Directors of the Company (together with any new
directors whose election by such Board of Directors or whose nomination for
election by the shareholders of the Company has been approved by a majority of
the directors then still in office who either were directors at the beginning
of such period or whose election or recommendation for election was previously
so approved) cease to constitute a majority of the Board of Directors of the
Company.
"Common Stock" of any Person means all Capital Stock of such Person that is
generally entitled to (i) vote in the election of directors of such Person or
(ii) if such Person is not a corporation, vote or otherwise participate in the
selection of the governing body, partners, managers or others that will
control the management and policies of such Person.
"Consolidated Interest Expense" means, with respect to any Person, for any
period, the aggregate amount of interest which, in conformity with GAAP, would
be set forth opposite the caption "interest expense" or any like caption on an
income statement for such Person and its Subsidiaries on a consolidated basis
for such period (including, but not limited to, Redeemable Dividends, whether
paid or accrued, on Preferred Stock of a Subsidiary, imputed interest included
in Capitalized Lease Obligations, all commissions, discounts and other fees
and charges owed with respect to letters of credit and bankers' acceptance
financing, the net costs associated with hedging obligations, the interest
portion of any deferred payment obligation, amortization of discount or
premium, if any, and all other non-cash interest expense (other than interest
amortized to cost of sales)) plus, without duplication, all net capitalized
interest for such period and all interest paid under any guarantee of
Indebtedness (including a guarantee of principal, interest or any combination
thereof) of any Person, plus the amount of all dividends or distributions paid
on Disqualified Capital Stock (other than dividends paid or payable in shares
of Capital Stock of the Company).
"Consolidated Net Income" means, with respect to any Person, for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP provided,
however, that (a) the Net Income of any Person (the "other Person") in which
the Person in question or any of its Subsidiaries has less than a 99% interest
(which interest does not cause the net income
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of such other Person to be consolidated into the net income of the Person in
question in accordance with GAAP) shall be included only to the extent of the
amount of dividends or distributions paid to the Person in question or the
Subsidiary, (b) the Net Income of any Subsidiary of the Person in question,
which Subsidiary is subject to any restriction or limitation on the payment of
dividends or the making of other distributions (other than pursuant to the
Notes or the Indenture), shall be excluded to the extent of such restriction
or limitation (provided that if any such restriction or limitation by its
terms takes effect upon the occurrence of a default or event of default, such
exclusion shall become effective only upon the occurrence of such default or
event of default which is continuing), (c)(i) the Net Income of any Person
acquired in a pooling of interests transaction for any period prior to the
date of such acquisition and (ii) any net gain (but not loss) resulting from
an Asset Sale by the Person in question or any of its Subsidiaries other than
in the ordinary course of business shall be excluded, and (d) extraordinary,
unusual and nonrecurring gains and losses shall be excluded.
"Credit Facility" means the credit agreement or credit agreements to be
entered into by and among the Company, the Restricted Subsidiaries and any one
or more lenders from time to time parties thereto, as the same may be amended,
extended, increased, renewed, restated, supplemented or otherwise modified (in
whole or in part, and without limitation as to amount, terms, conditions,
covenants and other provisions) from time to time, and any agreement or
agreements governing Indebtedness incurred to refinance, replace, restructure
or refund in whole or in part the borrowings and then maximum commitments
under the Credit Facility or such agreement (whether with the original
administrative agent and lenders or other agents and lenders or otherwise, and
whether provided under the original Credit Facility or other credit agreements
or otherwise). The Company shall promptly notify the Trustee of any such
refunding, replacement, restructuring or refinancing of the Credit Facility.
"Designated Senior Indebtedness," as to the Company or any Guarantor, as the
case may be, means any Senior Indebtedness (a) under the Credit Facility, or
(b) which at the time of determination exceeds $15,000,000 in aggregate
principal amount (or accreted value in the case of Indebtedness issued at a
discount) outstanding or available under a committed facility, and (i), unless
such designation is prohibited by the Credit Facility, which is specifically
designated in the instrument evidencing such Senior Indebtedness as
"Designated Senior Indebtedness" by such Person and (ii) as to which the
Trustee has been given written notice of such designation.
"Disqualified Capital Stock" means any Capital Stock of the Company or a
Restricted Subsidiary thereof which, by its terms (or by the terms of any
security into which it is convertible or for which it is exchangeable at the
option of the holder), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, in whole or in part, on or
prior to the maturity date of the Notes, for cash or securities constituting
Indebtedness. Without limitation of the foregoing, Disqualified Capital Stock
shall be deemed to include (i) any Preferred Stock of a Restricted Subsidiary
of the Company and (ii) any Preferred Stock of the Company, with respect to
either of which, under the terms of such Preferred Stock, by agreement or
otherwise, such Restricted Subsidiary or the Company is obligated to pay
current dividends or distributions in cash during the period prior to the
maturity date of the Notes; provided, however, that Preferred Stock of the
Company or any Restricted Subsidiary thereof that is issued with the benefit
of provisions requiring a change of control offer to be made for such
Preferred Stock in the event of a change of control of the Company or
Restricted Subsidiary, which provisions have substantially the same effect as
the provisions of the Indenture described under "Change of Control," shall not
be deemed to be Disqualified Capital Stock solely by virtue of such
provisions, and provided, further, that Capital Stock owned by the Company or
a Wholly-Owned Restricted Subsidiary shall not constitute Disqualified Capital
Stock.
"EBITDA" means, for any Person, for any period, an amount equal to (a) the
sum of (i) Consolidated Net Income for such period, plus (ii) the provision
for taxes for such period based on income or profits to the extent such income
or profits were included in computing Consolidated Net Income and any
provision for taxes utilized in computing net loss under clause (i) hereof,
plus (iii) Consolidated Interest Expense for such period (but only including
Redeemable Dividends in the calculation of such Consolidated Interest Expense
to the extent that such Redeemable Dividends have not been excluded in the
calculation of Consolidated Net Income), plus (iv) depreciation for such
period on a consolidated basis, plus (v) amortization of intangibles and other
deferred financing fees for such period on a consolidated basis, plus (vi) any
other non-cash items reducing Consolidated
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Net Income for such period, plus (vii) Permitted Tax Distributions, except
that with respect to the Company each of the foregoing items shall be
determined on a consolidated basis with respect to the Company and its
Restricted Subsidiaries only.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles consistently applied
as in effect in the United States from time to time.
"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise),
assume, guarantee or otherwise become liable in respect of such Indebtedness
or other obligation or the recording (other than previously recorded), as
required pursuant to GAAP or otherwise, of any such Indebtedness or other
obligation on the balance sheet of such Person (and "incurrence," "incurred,"
"incurrable," and "incurring" shall have meanings correlative to the
foregoing); provided that a change in GAAP that results in an obligation of
such Person that exists at such time becoming Indebtedness shall not be deemed
an incurrence of such Indebtedness.
"Indebtedness" means (without duplication), with respect to any Person, any
indebtedness at any time outstanding, secured or unsecured, contingent or
otherwise, which is for borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such Person or only to a portion
thereof), or evidenced by bonds, notes, debentures or similar instruments or
representing the balance deferred and unpaid of the purchase price of any
property (excluding, without limitation, any balances that constitute accounts
payable or trade payables, and other accrued liabilities arising in the
ordinary course of business) if and to the extent any of the foregoing
indebtedness would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, and shall also include, to the extent not
otherwise included (i) any Capitalized Lease Obligations, (ii) obligations
secured by a Lien to which the property or assets owned or held by such Person
is subject, whether or not the obligation or obligations secured thereby shall
have been assumed (provided, however, that if such obligation or obligations
shall not have been assumed, the amount of such Indebtedness shall be deemed
to be the lesser of the principal amount of the obligation or the fair market
value of the pledged property or assets), (iii) guarantees of items of other
Persons which would be included within this definition for such other Persons
(whether or not such items would appear upon the balance sheet of the
guarantor), (iv) all obligations for the reimbursement of any obligor on any
letter of credit, banker's acceptance or similar credit transaction (provided
that, in the case of any such letters of credit, the items for which such
letters of credit provide credit support are those of other Persons which
would be included within this definition for such other Persons), (v) in the
case of the Company, Disqualified Capital Stock of the Company or any
Restricted Subsidiary thereof, and (vi) obligations of any such Person under
any Interest Rate Agreement applicable to any of the foregoing (if and to the
extent such Interest Rate Agreement obligations would appear as a liability
upon a balance sheet of such Person prepared in accordance with GAAP). The
amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and,
with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation, provided (i) that
the amount outstanding at any time of any Indebtedness issued with original
issue discount is the principal amount of such Indebtedness less the remaining
unamortized portion of the original issue discount of such Indebtedness at
such time as determined in conformity with GAAP and (ii) that Indebtedness
shall not include any liability for federal, state, local or other taxes.
Notwithstanding any other provision of the foregoing definition, any trade
payable arising from the purchase of goods or materials or for services
obtained in the ordinary course of business or contingent obligations arising
out of customary indemnification agreements with respect to the sale of assets
or securities shall not be deemed to be "Indebtedness" of the Company or any
Restricted Subsidiaries for purposes of this definition. Furthermore,
guarantees of (or obligations with respect to letters of credit supporting)
Indebtedness and Liens securing Indebtedness otherwise included in the
determination of such amount shall not also be included.
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"Interest Rate Agreement" means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or
other similar agreement designed to protect the party indicated therein
against fluctuations in interest rates.
"Investments" means, directly or indirectly, any advance, account receivable
(other than an account receivable arising in the ordinary course of business
or acquired as a part of the assets acquired by the Company in connection with
an acquisition of assets which is otherwise permitted by the terms of the
Indenture), loan or capital contribution to (by means of transfers of property
to others, payments for property or services for the account or use of others
or otherwise), the purchase of any stock, bonds, notes, debentures,
partnership or joint venture interests or other securities of, the
acquisition, by purchase or otherwise, of all or substantially all of the
business or assets or stock or other evidence of beneficial ownership of, any
Person or the making of any investment in any Person. Investments shall
exclude (i) extensions of trade credit on commercially reasonable terms in
accordance with normal trade practices and (ii) the repurchase or redemption
of securities of any Person by such Person.
"Issue Date" means the date the Notes are first issued by the Company and
authenticated by the Trustee under the Indenture.
"Lien" means with respect to any property or assets of any Person, any
mortgage or deed of trust, pledge, hypothecation, assignment, deposit
arrangement, security interest, lien, charge, easement, encumbrance,
preference, priority, or other security agreement or preferential arrangement
of any kind or nature whatsoever on or with respect to such property or assets
(including without limitation, any Capitalized Lease Obligation, conditional
sales, or other title retention agreement having substantially the same
economic effect as any of the foregoing).
"Net Income" means, with respect to any Person for any period, the net
income (loss) of such Person determined in accordance with GAAP minus
Permitted Tax Distributions with respect to such period, and excluding any
foreign currency translation gains or losses added or deducted, as applicable,
in the computation of Net Income.
"Net Proceeds" means (i) in the case of any sale of Capital Stock by the
Company, the aggregate net proceeds received by the Company, after payment of
expenses, commissions and the like incurred in connection therewith, whether
such proceeds are in cash or in property (valued at the fair market value
thereof, as determined in good faith by the board of directors, at the time of
receipt), (ii) in the case of any exchange, exercise, conversion or surrender
of outstanding securities of any kind for or into shares of Capital Stock of
the Company which is not Disqualified Capital Stock, the net book value of
such outstanding securities on the date of such exchange, exercise, conversion
or surrender (plus any additional amount required to be paid by the holder to
the Company upon such exchange, exercise, conversion or surrender, less any
and all payments made to the holders, e.g., on account of fractional shares
and less all expenses incurred by the Company in connection therewith) and
(iii) in the case of any issuance of any Indebtedness by the Company or any
Restricted Subsidiary, the aggregate net cash proceeds received by such Person
after payment of expenses, commissions, underwriting discounts and the like
incurred in connection therewith.
"Non-Payment Event of Default" means any event (other than a Payment
Default) the occurrence of which entitles one or more Persons to accelerate
the maturity of any Designated Senior Indebtedness.
"Notes" means the securities that are issued under the Indenture, as amended
or supplemented from time to time pursuant to the Indenture.
"Officers' Certificate" means, with respect to any Person, a certificate
signed by the Chief Executive Officer, the Controller, the President or any
Vice President and the Chief Financial Officer or any Treasurer of such Person
that shall comply with applicable provisions of the Indenture.
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"Payment Default" means any default, whether or not any requirement for the
giving of notice, the lapse of time or both, or any other condition to such
default becoming an event of default has occurred, in the payment of principal
of (or premium, if any) or interest on or any other amount payable in
connection with Designated Senior Indebtedness.
"Permitted Holders" means, collectively, Leo W. Pierce, Sr., his children or
other lineal descendants (whether adoptive or biological), the spouses of any
of the foregoing and any probate estate of any such individual and any trust,
so long as one or more of the foregoing individuals is the principal
beneficiary of such trust, and any other partnership, corporation or other
entity all of the partners, shareholders, members or owners of which are any
one or more of the foregoing.
"Permitted Indebtedness" means:
(i) Indebtedness of the Company or any Restricted Subsidiary arising
under or in connection with the Credit Facility in an amount not to exceed
$ above the amount that could be borrowed at the time of determination
under the first paragraph under "Certain Covenants--Limitation on
Additional Indebtedness";
(ii) Indebtedness of the Company's Canadian subsidiary (and related
guarantees) under the Credit Facility in an aggregate amount at any one
time outstanding not to exceed Cdn $30,300,000;
(iii) Indebtedness under the 1996 Notes and guarantees thereof;
(iv) Indebtedness under the Notes and the Guarantees;
(v) Indebtedness not covered by any other clause of this definition which
is outstanding on the date of the Indenture;
(vi) Indebtedness of the Company to any Restricted Subsidiary and
Indebtedness of any Restricted Subsidiary to the Company or another
Restricted Subsidiary;
(vii) Purchase Money Indebtedness and Capitalized Lease Obligations
incurred to acquire property in the ordinary course of business which
Indebtedness and Capitalized Lease Obligations do not in the aggregate
exceed 5% of the Company's consolidated total assets;
(viii) Interest Rate Agreements;
(ix) additional Indebtedness of the Company not to exceed $3,000,000 in
principal amount outstanding at any time; and
(x) Refinancing Indebtedness.
"Permitted Investments" means, for any Person, Investments made on or after
the date of the Indenture consisting of
(i) Investments by the Company, or by a Restricted Subsidiary thereof, in
the Company or a Restricted Subsidiary; and
(ii) Temporary Cash Investments; and
(iii) Investments by the Company, or by a Restricted Subsidiary thereof,
in a Person (or in all or substantially all of the business or assets of a
business or a Person), if as a result of such Investment (a) such Person
becomes a Restricted Subsidiary of the Company, (b) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Restricted Subsidiary thereof or (c) such business or assets are owned by
the Company or a Restricted Subsidiary; and
(iv) reasonable and customary loans made to employees not to exceed
$500,000 in the aggregate at any one time outstanding, plus any loans which
may be required to be made under the Nonqualified Stock Option Plan in an
amount not to exceed $2,000,000; and
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(v) an Investment that is made by the Company or a Restricted Subsidiary
thereof in the form of any stock, bonds, notes, debentures, partnership or
joint venture interests or other securities that are issued by a third
party to the Company or Restricted Subsidiary solely as partial
consideration for the consummation of an Asset Sale that is otherwise
permitted under the covenant described under "Certain Covenants--Limitation
on Certain Asset Sales"; and
(vi) accounts receivable of the Company and its Restricted Subsidiaries
generated in the ordinary course of business; and
(vii) Investments existing on the Issue Date; and
(viii) Investments for any purpose not to exceed $2,000,000.
"Permitted Liens" means (i) Liens on property or assets of, or any shares of
stock of or secured debt of, any Person or business existing at the time such
Person becomes a Restricted Subsidiary of the Company or at the time such
Person is merged into or consolidated with the Company or any of its
Restricted Subsidiaries or at the time such business is acquired by the
Company or a Restricted Subsidiary, provided that such Liens are not incurred
in anticipation of such Person becoming a Restricted Subsidiary of the Company
or merging into or consolidating with the Company or any of its Restricted
Subsidiaries or such business being acquired by the Company or a Restricted
Subsidiary, (ii) Liens securing Refinancing Indebtedness, provided that any
such Lien does not extend to or cover any Property, shares or debt other than
the Property, shares or debt securing the Indebtedness so refunded, refinanced
or extended, (iii) Liens in favor of the Company or any of its Restricted
Subsidiaries, (iv) Liens securing industrial revenue bonds, (v) Liens to
secure Purchase Money Indebtedness that is otherwise permitted under the
Indenture, provided that (a) any such Lien is created solely for the purpose
of securing Indebtedness representing, or incurred to finance, refinance or
refund, the cost (including sales and excise taxes, installation and delivery
charges and other direct costs of, and other direct expenses paid or charged
in connection with, such purchase or construction) of such Property, (b) the
principal amount of the Indebtedness secured by such Lien does not exceed 100%
of such costs, and (c) such Lien does not extend to or cover any Property
other than such item of Property and any improvements on such item, (vi)
statutory liens or landlords', carriers', warehousemen's, mechanics',
suppliers', materialmen's, repairmen's or other like Liens arising in the
ordinary course of business and with respect to amounts not yet delinquent or
being contested in good faith by appropriate proceedings, (vii) other Liens
securing obligations incurred in the ordinary course of business which
obligations do not exceed $1,000,000 in the aggregate at any one time
outstanding, (viii) Liens for taxes, assessments or governmental charges that
are being contested in good faith by appropriate proceedings, (ix) Liens
securing Capitalized Lease Obligations permitted to be incurred under clause
(v) of the definition of "Permitted Indebtedness," provided that such Lien
does not extend to any property other than that subject to the underlying
lease, (x) Liens securing Designated Senior Indebtedness, (xi) easements or
minor defects or irregularities in title and other similar charges or
encumbrances on property not interfering in any material respect with the
Company's or any Restricted Subsidiary's use of such property, (xii) Liens
existing on the date of the Indenture and (xiii) pledges or deposits made in
the ordinary course of business (a) in connection with (1) leases, performance
bonds and similar bonds or (2) workers' compensation, unemployment insurance
and other social security legislation or (b) securing the performance of
surety bonds and appeal bonds required (1) in the ordinary course of business
or in connection with the enforcement of rights or claims of the Company or a
Subsidiary thereof or (2) in connection with judgments that do not give rise
to an Event of Default and which do not exceed $3,000,000 in the aggregate,
(xiv) Liens securing Interest Rate Agreements entered into with any lender
under the Credit Facility or any Affiliate thereof and any guarantees thereof
and (xv) any extensions, substitutions, replacements or renewals of the
foregoing.
"Permitted Tax Distributions" means, with respect to any periods for which
the Company is taxed as an S corporation or other pass-through entity for
federal income tax purposes, distributions to the holders of Capital Stock of
the Company based on estimates of the highest amount of federal, state and
local income tax per share of Capital Stock that any holder of Capital Stock
of the Company would be required to pay as a result of the Company's being
treated as a pass-through entity for income tax purposes.
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"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government (including any agency or political subdivision thereof).
"Preferred Stock" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such Person over the holders of other
Capital Stock issued by such Person.
"Property" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included in
the most recent consolidated balance sheet of such Person and its Subsidiaries
under GAAP.
"Public Equity Offering" means a public offering by the Company of shares of
its Capital Stock and any and all rights, warrants or options to acquire such
Capital Stock.
"Purchase Money Indebtedness" means any Indebtedness incurred in the
ordinary course of business by a Person to finance the cost (including the
cost of construction) of an item of Property, the principal amount of which
Indebtedness does not exceed the sum of (i) 100% of such cost and (ii)
reasonable fees and expenses of such Person incurred in connection therewith.
"Redeemable Dividend" means, for any dividend or distribution with regard to
Disqualified Capital Stock, the quotient of the dividend or distribution
divided by the difference between one and the maximum statutory federal income
tax rate (expressed as a decimal number between 1 and 0) then applicable to
the issuer of such Disqualified Capital Stock.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances,
renews, replaces or extends any Indebtedness of the Company outstanding on the
Issue Date or other Indebtedness permitted to be incurred by the Company or
its Restricted Subsidiaries pursuant to the terms of the Indenture, whether
involving the same or any other lender or creditor or group of lenders or
creditors, but only to the extent that (i) the Refinancing Indebtedness is
subordinated to the Notes to at least the same extent as the Indebtedness
being refunded, refinanced or extended, if at all, (ii) the Refinancing
Indebtedness is scheduled to mature either (a) no earlier than the
Indebtedness being refunded, refinanced or extended, or (b) after the maturity
date of the Notes, (iii) the portion, if any, of the Refinancing Indebtedness
that is scheduled to mature on or prior to the maturity date of the Notes has
a weighted average life to maturity at the time such Refinancing Indebtedness
is incurred that is equal to or greater than the weighted average life to
maturity of the portion of the Indebtedness being refunded, refinanced or
extended that is scheduled to mature on or prior to the maturity date of the
Notes, (iv) such Refinancing Indebtedness is in an aggregate principal amount
that is equal to or less than the sum of (a) the aggregate principal amount
then outstanding under the Indebtedness being refunded, refinanced or
extended, (b) the amount of accrued and unpaid interest, if any, and premiums
owed, if any, not in excess of preexisting prepayment provisions on such
Indebtedness being refunded, refinanced or extended and (c) the amount of
customary fees, expenses and costs related to the incurrence of such
Refinancing Indebtedness, and (v) such Refinancing Indebtedness is incurred by
the same Person that initially incurred the Indebtedness being refunded,
refinanced or extended, except that the Company may incur Refinancing
Indebtedness to refund, refinance or extend Indebtedness of any Wholly-Owned
Subsidiary of the Company.
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution or payment on Capital Stock
of the Company or any Restricted Subsidiary of the Company or any payment made
to the direct or indirect holders (in their capacities as such) of Capital
Stock of the Company or any Restricted Subsidiary of the Company (other than
(x) dividends or distributions payable solely in Capital Stock (other than
Disqualified Capital Stock) or in options, warrants or other rights to
purchase Capital Stock (other than Disqualified Stock), and (y) in the case of
Restricted Subsidiaries of the Company, dividends or distributions payable to
the Company or to a Wholly-Owned Subsidiary of the Company); (ii) the
purchase, redemption or other acquisition or retirement for value of any
Capital Stock of the Company or any of its
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Restricted Subsidiaries (other than Capital Stock owned by the Company or a
Wholly-Owned Subsidiary of the Company, excluding Disqualified Capital Stock);
(iii) the purchase, defeasance, repurchase, redemption or other acquisition or
retirement for value, prior to any scheduled maturity, scheduled repayment or
scheduled sinking fund payment of, or the making of any principal payment on,
any Indebtedness which is subordinated in right of payment to the Notes other
than subordinated Indebtedness acquired in anticipation of satisfying a
scheduled sinking fund obligation, principal installment or final maturity, in
each case due within one year of the date of acquisition); (iv) the making of
any Investment or guarantee of any Investment in any Person other than a
Permitted Investment; (v) any designation of a Restricted Subsidiary as an
Unrestricted Subsidiary on the basis of the Investment by the Company therein;
and (vi) forgiveness of any Indebtedness of an Affiliate of the Company (other
than a Restricted Subsidiary) to the Company or a Restricted Subsidiary. For
purposes of determining the amount expended for Restricted Payments, cash
distributed or invested shall be valued at the face amount thereof and
property other than cash shall be valued at its fair market value in the good
faith determination of the Board of Directors. It is agreed that any payments
made to Leo W. Pierce, Sr. or his spouse pursuant to a pension obligation of
the Company in the annual amount of $96,000 shall not constitute a Restricted
Payment.
"Restricted Subsidiary" means a Subsidiary of the Company other than an
Unrestricted Subsidiary and includes all of the Subsidiaries of the Company
existing as of the Issue Date. The Board of Directors of the Company may
designate any Unrestricted Subsidiary or any Person that is to become a
Subsidiary as a Restricted Subsidiary if immediately after giving effect to
such action (and treating any Acquired Indebtedness as having been incurred at
the time of such action), the Company could have incurred at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
"Limitation on Additional Indebtedness" covenant.
"Sale and Lease-Back Transaction" means any arrangement with any Person
providing for the leasing by the Company or any Restricted Subsidiary of the
Company of any real or tangible personal property, which property (i) has been
or is to be sold or transferred by the Company or such Restricted Subsidiary
to such Person in contemplation of such leasing and (ii) would constitute an
Asset Sale if such property had been sold in an outright sale thereof.
"Senior Indebtedness" means the principal of and premium, if any, and
interest (including, without limitation, interest accruing or that would have
accrued but for the filing of a bankruptcy, reorganization or other insolvency
proceeding whether or not such interest constitutes an allowable claim in such
proceeding) on, and any and all other fees, expense reimbursement obligations
and other amounts due pursuant to the terms of all agreements, documents and
instruments providing for, creating, securing or evidencing or otherwise
entered into in connection with (a) all Indebtedness of the Company owed to
lenders under or in respect of the Credit Facility, (b) all obligations of the
Company with respect to any Interest Rate Agreement, (c) all obligations of
the Company to reimburse any bank or other person in respect of amounts paid
under letters of credit, acceptances or other similar instruments, (d) all
other Indebtedness of the Company which does not provide that it is to rank
pari passu with or subordinate to the Notes and (e) all deferrals, renewals,
extensions, replacements, refundings, refinancings and restructurings of, and
amendments, modifications and supplements to, any of the Senior Indebtedness
described above. Notwithstanding anything to the contrary in the foregoing,
Senior Indebtedness will not include (i) Indebtedness of the Company to any of
its Subsidiaries, (ii) Indebtedness represented by the Notes and any
Guarantees, (iii) any Indebtedness which by the express terms of the agreement
or instrument creating, evidencing or governing the same is junior or
subordinate in right of payment to any item of Senior Indebtedness, (iv) any
trade payable arising from the purchase of goods or materials or for services
obtained in the ordinary course of business, or (v) Indebtedness (other than
that described in clause (a) above) incurred in violation of the Indenture.
"Subsidiary" of any specified Person means any corporation, partnership,
joint venture, association or other business entity, whether now existing or
hereafter organized or acquired, (i) in the case of a corporation, of which
more than 50% of the total voting power of the Capital Stock entitled (without
regard to the occurrence of any
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contingency) to vote in the election of directors, officers or trustees
thereof is held by such first-named Person or any of its Subsidiaries; or (ii)
in the case of a partnership, joint venture, association or other business
entity, with respect to which such first-named Person or any of its
Subsidiaries has the power to direct or cause the direction of the management
and policies of such entity by contract or otherwise or if in accordance with
GAAP such entity is consolidated with the first-named Person for financial
statement purposes.
"Temporary Cash Investments" means (i) Investments in marketable direct
obligations issued or guaranteed by the United States of America, or of any
governmental agency or political subdivision thereof, maturing within 365 days
of the date of purchase; (ii) Investments in demand deposits or certificates
of deposit issued by a bank organized under the laws of the United States of
America or any state thereof or the District of Columbia, in each case having
capital, surplus and undivided profits totaling more than $500,000,000 and
rated at least A by Standard & Poor's Corporation and A-2 by Moody's Investors
Service, Inc., maturing within 365 days of purchase; (iii) Investments not
exceeding 365 days in duration in money market funds that invest substantially
all of such funds' assets in the Investments described in the preceding
clauses (i) and (ii); (iv) any security maturing not more than 180 days after
the date of acquisition, backed by a stand-by or direct pay letter of credit
issued by a bank meeting the qualifications described in clause (ii) above; or
(v) commercial paper, maturing not more than one year after the date of
acquisition, issued by a corporation (other than an Affiliate or Subsidiary of
the Company) organized and existing under the laws of the United States of
America or any state thereof or the District of Columbia with a rating, at the
time as of which any investment therein is made, of "P-1" by Moody's Investors
Service, Inc. or "A-1" by Standard & Poor's Corporation.
"Unrestricted Subsidiary" means (i) any Subsidiary of an Unrestricted
Subsidiary and (ii) any Subsidiary of the Company which is classified after
the Issue Date as an Unrestricted Subsidiary by a resolution adopted by the
Board of Directors of the Company; provided that a Subsidiary organized or
acquired after the Issue Date may be so classified as an Unrestricted
Subsidiary only if such classification is in compliance with the covenant set
forth under "Limitation on Restricted Payments." The Trustee shall be given
prompt notice by the Company of each resolution adopted by the Board of
Directors of the Company under this provision, together with a copy of each
such resolution adopted.
"Wholly-Owned Subsidiary" means any Restricted Subsidiary, 99% or more of
the outstanding Capital Stock (other than directors' qualifying shares) of
which are owned, directly or indirectly, by the Company.
GLOBAL NOTES
The Notes will be issued in the form of one or more fully registered global
notes (each a "Global Note") deposited with The Depository Trust Company (the
"Depository") or a nominee thereof. Unless and until it is exchanged in whole
or in par for Notes in definitive registered form, a Global Note may not be
transferred except as a whole by the Depositary to a nominee of the Depositary
or by a nominee of the Depositary to the Depositary or another nominee of the
Depositary or by the Depositary or any such nominee to a successor of the
Depositary or a nominee of such successor.
Ownership of beneficial interests in a Global Note will be limited to
persons that have accounts with the Depositary ("participants") or persons
that may hold interests through participants. Upon the issuance of a Global
Note, the Depositary for such Global Note will credit, on its book-entry
registration and transfer system, the participants' accounts with the
respective principal amounts of the Notes represented by such Global Note
beneficially owned by such participants. The accounts to be credited will be
designated by the Underwriters. Ownership of beneficial interests in such
Global Note will be shown on, and the transfer of such ownership interests
will be effected only through, records maintained by the Depositary (with
respect to interests of participants) and on the records of participants (with
respect to interests of persons holding through participants). The laws of
some states may require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and such laws may
impair the ability to own, transfer or pledge beneficial interests in Global
Notes.
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So long as the Depositary or its nominee is the owner of record of a Global
Note, the Depositary or such nominee, as the case may be, will be considered
the sole owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture. Except as set forth below, owners of beneficial
interests in a Global Note will not be entitled to have the Note represented
by such Global Note registered in their names, and will not receive or be
entitled to receive physical delivery of such Notes in definitive form and
will not be considered the owners or holders thereof under the Indenture.
Accordingly, each person owning a beneficial interest in a Global Note must
rely on the procedures of the Depositary and, if such person is not a
participant, on the procedures of the participant through which such person
owns its interest, to exercise any rights of a holder of record under the
Indenture. The Company understands that under existing industry practices, if
the Company requests any action of holders or if any owner of a beneficial
interest in a Global Note desires to give or take any action which a holder is
entitled to give or take under the Indenture, the Depositary would authorize
the participants holding the relevant beneficial interests to give or take
such action, and such participants would authorize beneficial owners owning
through such participants to give or take such action or would otherwise act
upon the instruction of beneficial owners holding through them.
Payments of principal of, premium, if any, and interest on Notes represented
by a Global Note registered in the name of the Depositary or its nominee will
be made to such Depositary of such nominee, as the case may be, as the
registered owner of such Global Note. None of the Company, the Trustee or any
other agent of the Company or agent of the Trustee will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in such Global Note
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company expects that the Depositary, upon receipt of any payment of
principal, premium, if any, or interest in respect of such Global Note, will
immediately credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in such Global Note as
shown on the records of the Depositary. The Company also expects that payments
by participants to owners of beneficial interests in such Global Note held
through such participants will be governed by standing customer instructions
and customary practices, as is now the case with securities held for the
accounts of customers in bearer form or registered in "street name", and will
be the responsibility of such participants.
If the Depositary notifies the Company that it is at any time unwilling or
unable to continue as Depositary or ceases to be eligible under applicable
law, and a successor Depositary eligible under applicable law is not appointed
by the Company within 90 days, the Company will issue such Notes in definitive
form in exchange for such Global Note. In addition, the Company may at any
time and in its sole discretion determine not to have any of the Notes
represented by one or more Global Notes and, in such event, will issues Notes
in definitive form in exchange for all of the Global Note or Global Notes
representing such Notes. Any Notes issued in definitive form in exchange for a
Global Note will be registered in such name or names as the Depositary shall
instruct the Trustee. It is expected that such instructions will be based upon
directions received by the Depositary from participants with respect to
ownership of beneficial interests in such Global Note.
SAME-DAY SETTLEMENT IN RESPECT OF GLOBAL NOTES
So long as any Notes are represented by Global Notes registered in the name
of the Depositary or its nominee, such Notes will trade in the Depositary's
Same-Day Funds Settlement System, and secondary market trading activity in
such Notes will therefore be required by the Depositary to settle in
immediately available funds. No assurance can be given as to the effect, if
any, of settlement in immediately available funds on trading activity in the
Notes.
NO PERSONAL LIABILITY OF INCORPORATORS, SHAREHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal of,
premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon
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any obligation, covenant or agreement of the Company in the Indenture, or in
any of the Notes or because of the creation of any Indebtedness represented
thereby, shall be had against any incorporator, shareholder, officer,
director, employee or controlling person of the Company, of any of its
Subsidiaries or of any predecessor or successor Person thereof. Each Holder,
by accepting the Notes, waives and releases all such liability.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of shares of Common
Stock, par value $.001 per share, and shares of Preferred Stock, par value
$.001 per share (the "Preferred Stock"). As of , 1997, there were shares
of Common Stock outstanding. No shares of Preferred Stock are currently
outstanding.
Prior to the Stock Recapitalization, the Company had outstanding two classes
of Common Stock: Class A Common Stock, which was voting, and Class B Common
Stock, which was nonvoting. In connection with the Stock Recapitalization, all
of the shares of Class A and Class B Common Stock were converted into an
aggregate of shares of Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on each
matter to be decided by the shareholders and do not have cumulative voting
rights. Accordingly, the holders of a majority of Common Stock entitled to
vote in any election of directors may elect all of the directors standing for
election. The holders of Common Stock have no preemptive, redemption or
conversion rights. The holders of Common Stock will be entitled to receive
ratably such dividends, if any, as the Board of Directors may declare from
time to time out of funds legally available for such purpose. In the event of
liquidation, dissolution or winding up of the affairs of the Company, after
payment or provision for payment of all of the Company's debts and obligations
and any preferential distributions to holders of Preferred Stock, if any, the
holders of the Common Stock will be entitled to share ratably in the Company's
remaining assets. All outstanding shares of Common Stock are, and the Common
Stock offered hereby will be, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, without further action by the
shareholders, to provide for the issuance of shares of Preferred Stock as a
class without series or in one or more series, to establish the number of
shares in each class or series and to fix the designations, powers,
preferences and rights of each such class or series and the qualifications,
limitations or restrictions thereof. Because the Board of Directors has the
power to establish the preferences and rights of each class or series of
Preferred Stock, the Board of Directors may afford the holders of any class or
series of Preferred Stock preferences, powers and rights, voting or otherwise,
senior to the rights of holders of Common Stock. The issuance of Preferred
Stock could have the effect of delaying or preventing a change in control of
the Company. As of the date of this Prospectus, the Company has not authorized
the issuance of any Preferred Stock and there are no plans, agreements or
understandings for the issuance of any shares of Preferred Stock.
CERTAIN PROVISIONS OF PENNSYLVANIA LAW AND THE COMPANY'S ARTICLES OF
INCORPORATION AND BYLAWS
The Company is subject to the provisions of Section 2538 and Sections 2551-
2556 of the Pennsylvania Business Corporation Law of 1988, as amended (the
"PBCL"), which in certain cases provide for supermajority shareholder approval
of business combinations involving the Company and any "interested
shareholder" (as defined in such statute and includes generally, in the case
of Section 2538, shareholders who are a party to the business combination or
who are treated differently from other shareholders, and, in the case of
Sections 2551-2556, shareholders beneficially owning 20% or more of the voting
power of a "registered" corporation, such as the Company). In addition,
Sections 2551-2556 also impose certain restrictions on business combinations
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involving the Company and any "interested shareholder." The term "business
combination" includes a merger, asset sale or other transaction involving an
interested shareholder.
The PBCL also provides that the directors of a corporation, making decisions
concerning takeovers or any other matters, may consider, to the extent that
they deem appropriate, among other things, (i) the effects of any proposed
transaction upon any or all groups affected by such action, including, among
others, shareholders, employees, suppliers, customers and creditors, (ii) the
short-term and long-term interests of the corporation and (iii) the resources,
intent and conduct of the person seeking control.
The Company's Articles of Incorporation provides that the Company's Board of
Directors is to be composed of three classes, with staggered three-year terms,
each class to contain as nearly as possible one-third of the number of members
of the Board. Accordingly, at each annual meeting of shareholders, only
approximately one-third of the Company's directors will be elected.
Certain other provisions of the Company's Articles of Incorporation and
Bylaws could also have the effect of preventing or delaying any change in
control of the Company, including (i) the advance notification procedures
governing certain shareholder nominations of candidates for the Board of
Directors and for certain other shareholder business to be conducted at an
annual meeting, (ii) the absence of authority for shareholders to call special
shareholder meetings of the Company, except in certain limited circumstances
mandated by the PBCL, and (iii) the absence of authority for shareholder
action by written consent by less than all of the Company's shareholders.
These provisions, the classified board and "supermajority" voting rights,
could have the effect of making it more difficult for a third party to
acquire, or discouraging a third party from seeking to acquire, control of the
Company.
As permitted by the PBCL, the Bylaws provide that a director shall not be
personally liable in such capacity for monetary damages for any action taken,
or any failure to take any action, unless the director breaches or fails to
perform the duties of his office under the PBCL, and the breach or failure to
perform constitutes self-dealing, willful misconduct or recklessness. These
provisions of the Bylaws, however, do not apply to the responsibility or
liability of a director pursuant to any criminal statute, or to the liability
of a director for the payment of the Company's taxes pursuant to local,
Pennsylvania or federal law. These provisions offer persons who serve on the
Board of Directors of the Company protection against awards of monetary
damages for negligence in the performance of their duties.
The Bylaws also provide that every person who is or was a director or
executive officer of the Company, or of any corporation which he served as
such at the request of the Company, shall be indemnified by the Company to the
fullest extent permitted by law against all expenses and liabilities recently
incurred by or imposed upon him, in connection with any proceeding to which he
may be made, or threatened to be made, a party, or in which he may become
involved by reason of his being or having been a director or executive officer
of the Company, or such other corporation, whether or not he is a director,
executive officer of the Company or such other corporation at the time the
expenses or liabilities are incurred.
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UNDERWRITING
Under the terms and subject to the conditions of the Underwriting Agreement,
each Underwriter named below has severally agreed to purchase, and the Company
has agreed to sell to each Underwriter, the principal amount of Notes set
forth opposite the names of such Underwriter below:
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
----------- ------------
<S> <C>
Smith Barney Inc........................................... $
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................
CIBC Wood Gundy Securities Corp. ..........................
------------
Total.................................................... $100,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Notes are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all of the Notes offered
hereby if any such Notes are taken.
The Underwriters have advised the Company that they propose initially to
offer part of the Notes directly to the public at the public offering price
set forth on the cover page of this Prospectus and part to certain dealers at
a price that represents a concession not in excess of 0. % of the public
offering price of the Notes. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of 0. % of the public offering price of
the Notes to certain other dealers. After the Notes Offering, the public
offering price and such concessions may be changed from time to time by the
Underwriters. The Underwriters have informed the company that the Underwriters
do not intend to confirm sales of the Notes to accounts over which they
exercise discretionary authority.
In order to facilitate the offering of the Notes, the Underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price
of the Notes. In addition, to stabilize the price of the Notes, the
Underwriters may bid for, and purchase, Notes, in the open market. Finally,
the underwriting syndicate may reclaim selling concessions allowed to an
underwriter or a dealer for distributing the Notes in the Notes Offering, if
the syndicate repurchases previously distributed Notes in transactions to
cover syndicate short positions, in stabilization transactions or otherwise.
Any of these activities may stabilize or maintain the market price of the
Notes above independent market levels. The Underwriters are not required to
engage in these activities, and may end any of these activities at any time.
The Company has agreed to indemnify the Underwriters, and the Underwriters
have agreed to indemnify the Company, against certain liabilities, including
liabilities under the Securities Act.
The Notes are a new issue of securities with no existing trading market. See
"Risk Factors--Absence of Public Market for the Notes." The Underwriters have
informed the Company that the Underwriters intend to make a market in the
Notes, as permitted by applicable laws and regulations; however, the
Underwriters are not obligated to do so, and any such market activity may be
terminated at any time without notice to the Holders. No assurance can be
given as to the liquidity of or the trading market for the Notes. See "Risk
Factors--Absence of Public Market for the Notes."
CVF will receive a fee estimated to be approximately of $ in connection
with the Offerings.
85
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the Notes will be passed upon for the
Company by Cozen and O'Connor, Philadelphia, Pennsylvania. Two members of
Cozen and O'Connor are limited partners in certain limited partnerships that
lease facilities to the Company. Certain legal matters will be passed upon for
the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New
York.
EXPERTS
The consolidated financial statements and schedules of Pierce Leahy Corp. as
of December 31, 1995 and 1996, and for each of the three years in the period
ended December 31, 1996, included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and
are included herein in reliance upon the authority of said firm as experts in
giving said reports.
The financial statements of Security Archives, Inc. as of June 30, 1994 and
1995, and for the years then ended, included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
The financial statements of Records Management Services, Inc. as of
September 30, 1996 and for the year then ended, included in this Prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein and are included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Notes offered hereby
(including all amendments and supplements thereto, the "Registration
Statement"). As permitted by the rules and regulations of the Commission, this
Prospectus, which constitutes part of the Registration Statement, omits
certain information, exhibits and undertakings contained in the Registration
Statement. For further information with respect to the Company and the Notes
offered hereby, reference is made to the Registration Statement. Statements
contained 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 document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
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 (and the exhibits and schedules thereto), as well as
such reports and other information filed by the Company with the Commission,
may be inspected and copied at the Public Reference Section of the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the regional offices of the Commission located at Room 1400, 75 Park
Place, New York, New York 10007 and Suite 1400, Northwestern Atrium Center,
500 West Madison Street, Chicago, Illinois 60661. Copies of such materials may
be obtained from the Public Reference Section of the Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Copies of such material will be available for inspection at the offices
of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
Such information can also be reviewed through the Commission's Electronic Data
Gathering, Analysis and Retrieval System ("EDGAR") which is publicly available
through the Commission's Web Site on the Internet (http: \\www.sec.gov).
86
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements of Pierce Leahy Corp.:
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Shareholders' Deficit......................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Financial Statements of Security Archives, Inc............................. F-17
Financial Statements of Records Management Services, Inc. ................. F-23
</TABLE>
F-1
<PAGE>
After the recapitalization discussed in Note 2 to the Company's consolidated
financial statements is effected, we expect to be in a position to render the
following audit report.
/s/ Arthur Andersen LLP
February 28, 1997, except for the
recapitalization discussed in Note
2, as to which the date is
.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pierce Leahy Corp.:
We have audited the accompanying consolidated balance sheets of Pierce Leahy
Corp. (a New York corporation) and Subsidiary as of December 31, 1995 and
1996, and the related consolidated statements of operations, shareholders'
deficit and cash flows for each of the three years in the period 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 financial position of Pierce Leahy Corp. and
Subsidiary as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Philadelphia, Pa.
F-2
<PAGE>
PIERCE LEAHY CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1995 1996
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash..................................................... $ 722 $ 1,254
Accounts receivable, net of allowance for doubtful
accounts of $487 and $795............................... 14,182 17,828
Inventories.............................................. 762 611
Prepaid expenses and other............................... 1,025 688
-------- --------
Total current assets................................... 16,691 20,381
-------- --------
PROPERTY AND EQUIPMENT..................................... 109,755 158,154
Less--Accumulated depreciation and amortization.......... (35,328) (45,020)
-------- --------
Net property and equipment............................. 74,427 113,134
-------- --------
OTHER ASSETS:
Intangible assets, net................................... 38,621 97,544
Other.................................................... 1,589 3,761
-------- --------
Total other assets..................................... 40,210 101,305
-------- --------
$131,328 $234,820
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt........................ $ 1,478 $ 7,310
Current portion of noncompete obligations................ 200 466
Accounts payable......................................... 4,641 6,757
Accrued expenses......................................... 9,533 20,563
Deferred revenues........................................ 8,978 9,218
-------- --------
Total current liabilities.............................. 24,830 44,314
LONG-TERM DEBT............................................. 116,812 209,330
NONCOMPETE OBLIGATIONS..................................... 517 317
DEFERRED RENT.............................................. 2,814 2,841
DEFERRED INCOME TAXES...................................... 3,492 3,456
COMMITMENTS AND CONTINGENCIES (Note 9)
REDEEMABLE WARRANTS........................................ 1,064 --
SHAREHOLDERS' DEFICIT...................................... (18,201) (25,438)
-------- --------
$131,328 $234,820
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
PIERCE LEAHY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
-------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
REVENUES:
Storage........................................... $47,123 $55,501 $ 75,900
Service and storage material sales................ 35,513 39,895 53,848
------- ------- --------
Total revenues.................................. 82,636 95,396 129,748
------- ------- --------
OPERATING EXPENSES:
Cost of sales, excluding depreciation and
amortization..................................... 49,402 55,616 73,870
Selling, general and administrative............... 15,882 16,148 20,007
Depreciation and amortization..................... 8,436 8,163 12,869
Consulting payments to related parties............ 500 500 --
Non-recurring charges............................. -- -- 3,254
------- ------- --------
Total operating expenses........................ 74,220 80,427 110,000
------- ------- --------
Operating income................................ 8,416 14,969 19,748
INTEREST EXPENSE.................................... 7,216 9,622 17,225
------- ------- --------
Income before extraordinary item................ 1,200 5,347 2,523
EXTRAORDINARY CHARGE--Loss on early extinguishment
of debt............................................ 5,991 3,279 2,015
------- ------- --------
NET INCOME (LOSS)................................... (4,791) 2,068 508
ACCRETION OF REDEEMABLE WARRANTS.................... 16 889 1,561
------- ------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS....................................... $(4,807) $ 1,179 $ (1,053)
======= ======= ========
PRO FORMA DATA (UNAUDITED) (Note 2):
Historical net loss applicable to Common
shareholders..................................... $ (1,053)
Pro forma provision for income taxes.............. 905
========
Pro forma net loss................................ $ (1,958)
========
Pro forma net loss per share...................... $
========
Shares used in computing pro forma net loss per
share............................................
========
Supplemental pro forma net loss per share......... $
========
Shares used in computing supplemental pro forma
net loss per share...............................
========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
PIERCE LEAHY CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------- ADDITIONAL
CLASS CLASS PAID-IN ACCUMULATED
A B CAPITAL DEFICIT TOTAL
------ ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994........ $ -- $ -- $ 24 $(14,532) $(14,508)
Accretion of redeemable
warrants..................... -- -- -- (16) (16)
Net loss...................... -- -- -- (4,791) (4,791)
Distributions to
shareholders................. -- -- -- (26) (26)
------ ------ ---- -------- --------
BALANCE, DECEMBER 31, 1994...... -- -- 24 (19,365) (19,341)
Accretion of redeemable
warrants..................... -- -- -- (889) (889)
Net income.................... -- -- -- 2,068 2,068
Distributions to
shareholders................. -- -- -- (39) (39)
------ ------ ---- -------- --------
BALANCE, DECEMBER 31, 1995...... -- -- 24 (18,225) (18,201)
Accretion of redeemable
warrants..................... -- -- -- (1,561) (1,561)
Repurchase of Class A common
stock (Note 7)............... -- -- -- (1,450) (1,450)
Deemed distribution due to
purchase of real estate and
other assets from related
parties (Note 10)............ -- -- -- (4,132) (4,132)
Net income.................... -- -- -- 508 508
Distributions to
shareholders................. -- -- -- (602) (602)
------ ------ ---- -------- --------
BALANCE, DECEMBER 31, 1996...... $ -- $ -- $ 24 $(25,462) $(25,438)
====== ====== ==== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
PIERCE LEAHY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
-----------------------------
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ (4,791) $ 2,068 $ 508
Adjustments to reconcile net income (loss) to
net cash provided by operating activities--
Extraordinary charge.......................... 5,991 3,279 2,015
Depreciation and amortization................. 8,436 8,163 12,869
Gain on sale of property and equipment........ -- -- (32)
Amortization of deferred financing costs...... 1,068 533 516
Imputed interest on long-term debt and
noncompete obligation........................ 229 -- --
Increase in deferred rent..................... 50 29 302
Foreign currency adjustment of long-term
debt......................................... -- -- 31
Change in assets and liabilities, net of the
effects from the purchase of businesses--
(Increase) decrease in--
Accounts receivable, net.................... (2,061) (360) (2,408)
Inventories................................. (46) (347) 150
Prepaid expenses and other.................. (91) 57 747
Other assets................................ 255 (536) (486)
Increase (decrease) in--
Accounts payable............................ 1,763 (978) 1,630
Accrued expenses............................ (170) 4,693 10,732
Deferred revenues........................... 367 921 (8)
Deferred income taxes....................... -- -- (128)
-------- -------- ---------
Net cash provided by operating activities.... 11,000 17,522 26,438
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for businesses acquired, net of cash
acquired...................................... (4,663) (28,355) (61,176)
Capital expenditures........................... (6,352) (16,288) (23,493)
Purchase of real estate and other assets from
related parties............................... -- -- (11,018)
Client acquisition costs....................... (1,905) (2,245) (6,477)
Deposits on pending acquisitions............... -- -- (850)
Increase in intangible assets.................. (943) (4,274) (5,618)
Payments on noncompete agreements.............. (70) (153) (333)
Proceeds from sale of property and equipment... -- -- 123
-------- -------- ---------
Net cash used in investing activities........ (13,933) (51,315) (108,842)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on revolving line of
credit........................................ (7,700) (900) 5,237
Proceeds from issuance of long-term debt....... 76,850 128,420 210,229
Payments on long-term debt and capital lease
obligations................................... (61,195) (90,958) (118,570)
Prepayment penalties and cancellation of
warrants...................................... (1,781) -- (2,625)
Payment of debt financing costs................ (3,385) (2,366) (9,283)
Repurchase of Common stock..................... -- -- (1,450)
Distributions to shareholders.................. (26) (39) (602)
-------- -------- ---------
Net cash provided by financing activities.... 2,763 34,157 82,936
-------- -------- ---------
NET INCREASE (DECREASE) IN CASH................. (170) 364 532
CASH, BEGINNING OF YEAR......................... 528 358 722
-------- -------- ---------
CASH, END OF YEAR............................... $ 358 $ 722 $ 1,254
======== ======== =========
SUPPLEMENTAL DISCLOSURE--CASH PAID FOR
INTEREST....................................... $ 6,738 $ 8,356 $ 7,443
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(IN THOUSANDS EXCEPT SHARE DATA)
1. BACKGROUND:
Pierce Leahy Corp. and its majority-owned subsidiary, Pierce Leahy Command
Company (together, the "Company"), stores and services business records for
clients throughout the United States and Canada. The Company also sells
storage containers and provides records management consulting services and
imaging services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of Pierce Leahy
Corp. and its 99%-owned subsidiary, Pierce Leahy Command Company. All
intercompany accounts and transactions have been eliminated in consolidation.
The minority interest in Pierce Leahy Command Company is not material to the
consolidated financial statements.
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 amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Inventories
Inventories, which consist of storage containers, are stated at the lower of
cost (first-in, first-out) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
straight-line and accelerated methods over the estimated useful lives of the
assets.
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, estimated at 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 No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of."
Client Acquisition Costs
The unreimbursed costs of moving the records of new clients into the
Company's facilities and sales commissions related to new client contracts
have been capitalized and are included in intangible assets in the
accompanying balance sheets (see Note 4). All such costs are being amortized
on a straight-line basis over six years, which represent the average initial
contract term.
Deferred Rent
Certain of the Company's leases for warehouse space provide for scheduled
rent increases over the lease terms. The Company recognizes rent expense on a
straight-line basis over the lease terms, with the excess of the rent charged
to expense over the amount paid recorded as deferred rent in the accompanying
balance sheets.
F-7
<PAGE>
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Health Insurance Reserve
The Company self-insures for benefit claims under a health insurance plan
provided to employees. The self-insurance was limited to $75 and $100 in
claims per insured individual per year in 1995 and 1996, respectively, and a
liability for claims incurred but not reported is reflected in the
accompanying balance sheets. Specific stop loss insurance coverage is
maintained to cover claims in excess of the coverage per insured individual
per year.
Income Taxes
The Company is a Subchapter S corporation and, therefore, any taxable income
or loss for federal income tax purposes is passed through to the shareholders.
While not subject to federal income taxes, the Company is subject to income
taxes in certain states. The Company reports certain expenses in different
periods for financial reporting and income tax purposes.
The Tax Reform Act of 1986 provides for a tax at the corporate level on
gains realized on asset sales for a specified period following the election of
Subchapter S status. Deferred taxes have been provided for taxes which may be
triggered if the Company disposes of certain assets acquired in connection
with an acquisition.
Recapitalization
In 1997, the Company effected a stock split, reclassified its Class A
and Class B common stock as common stock, authorized shares of
undesignated preferred stock and increased its authorized common stock to
shares. All references in the accompanying financial statements to the number
of common shares and per-share amounts have been retroactively restated to
reflect the stock split.
Revenue Recognition
Storage and service revenues are recognized in the month the respective
service is provided. Storage material sales are recognized when shipped to the
customer. Deferred revenues represent amounts invoiced for storage services in
advance of the rendering of the services. The costs of storage and service
revenues are not separately distinguishable, as the revenue producing
activities are interdependent and costs are not directly attributable or
allocable in a meaningful way to those activities.
Change in Accounting Estimates
Effective January 1, 1995, the Company revised its estimates of the useful
lives of certain long-term assets, as management re-evaluated in 1995 the
appropriate useful lives of these types of assets given the significant
increase in the level of capital expenditures and payments for businesses
acquired (see Note 13) over prior years. The revised useful lives were
determined based on an analysis of the Company's actual experiences in the use
of such assets, along with other information gained during the acquisition
process and the availability of other industry data. The revised useful lives
are as follows:
<TABLE>
<CAPTION>
USEFUL LIFE (YEARS)
--------------------
LONG-TERM ASSET OLD NEW
--------------- --------- ----------
<S> <C> <C>
Buildings............................................. 25 40
Warehouse equipment................................... 12 12-20
Client acquisition costs.............................. 3 6
Other intangibles..................................... 3 10
Goodwill.............................................. 5-20 30
</TABLE>
The change in accounting estimates was effective January 1, 1995, and the
aggregate effect of adopting these revised lives was to decrease amortization
and depreciation expense and increase net income for the year ended December
31, 1995 by approximately $4,868.
F-8
<PAGE>
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Foreign Currency Translation
The balance sheets and statements of operations of the Canadian operations
are translated into U.S. dollars using the rates of exchange at period end.
All foreign currency transaction gains and losses are included in operations
in the period in which they occur. The cumulative translation adjustment at
December 31, 1995 and 1996 was not material to the consolidated financial
statements.
New Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The
Company has adopted the disclosure requirement of this pronouncement for the
year ended December 31, 1996 (see Note 8). The adoption of this pronouncement
had no impact on the Company's consolidated statements of operations.
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including accounts
receivable, accounts payable and accrued expenses, management believes that
the carrying amounts approximate fair value due to their short maturities. The
carrying amount and estimated fair value of the Company's Senior Subordinated
Notes at December 31, 1996 were $200,000 and $182,648. The fair value of the
Senior Subordinated Notes was estimated based on the quoted market prices
offered for the Company's publicly traded debt securities.
Pro Forma Statement of Operations
Upon completion of the equity offerings referred to in this prospectus, the
Company will terminate its status as a Subchapter S Corporation and will be
subject to federal and state income taxes thereafter. Accordingly, for
informational purposes, the accompanying statement of operations for the year
ended December 31, 1996 includes an unaudited pro forma provision of $905 for
the income taxes which would have been recorded if the Company had not been a
Subchapter S Corporation, based on the tax laws in effect during the period.
Based on the tax effect of the cumulative difference between the financial
reporting and income tax bases of assets and liabilities at December 31, 1996,
a deferred income tax provision of approximately $6,600 would have been
recorded had the Subchapter S Corporation status been terminated at that time.
The actual deferred income tax provision to be recorded will reflect the
effect of operations of the Company for the period from January 1, 1997
through the termination of its Subchapter S Corporation status.
Pro Forma Net Loss Per Share
Pro forma net loss per share was calculated by dividing pro forma net loss
by the weighted average number of shares of common stock outstanding, adjusted
for the dilutive effect of common stock equivalents, which consist of stock
options, using the treasury stock method. Pursuant to the requirements of the
Securities and Exchange Commission, common stock equivalents issued by the
Company during the 12 months immediately preceding the equity offerings
contemplated by this prospectus have been included in the calculation of the
shares used in computing pro forma net loss per share as if they were
outstanding for the period presented (using the treasury stock method and the
equity offerings price of $ per share).
Supplemental Pro Forma Net Loss Per Share
Supplemental pro forma net loss per share is based on the weighted average
number of shares of common stock and common stock equivalents used in the
calculation of pro forma net loss per share plus the number of shares that
would need to be issued in the equity offerings contemplated by this
prospectus to repay $70,000 of senior subordinated notes and the related
prepayment penalties. Pro forma net loss is increased by $ for the year
ended December 31, 1996 for the elimination of interest expense, net of tax,
on the senior subordinated
F-9
<PAGE>
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
notes. The redemption will result in an extraordinary charge of approximately
$10,000 in the quarter in which the redemption occurs.
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
LIFE 1995 1996
----------- -------- --------
<S> <C> <C> <C>
Land....................................... -- $ 4,780 $ 7,353
Buildings and improvements................. 10-40 years 35,758 57,296
Warehouse equipment (primarily shelving)... 12-20 years 53,943 71,773
Data processing equipment and software..... 7 years 10,684 14,363
Furniture and fixtures..................... 7 years 2,970 3,823
Transportation equipment................... 5 years 1,620 3,546
-------- --------
109,755 158,154
Less--Accumulated depreciation and
amortization.............................. (35,328) (45,020)
-------- --------
Net property and equipment............... $ 74,427 $113,134
======== ========
</TABLE>
Depreciation expense was $5,066, $4,325 and $6,652 for the years ended
December 31, 1994, 1995, and 1996, respectively.
4. INTANGIBLE ASSETS:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1995 1996
-------- --------
<S> <C> <C>
Goodwill................................................. $ 25,857 $ 69,417
Client acquisition costs................................. 8,680 15,157
Noncompete agreements.................................... 6,980 11,287
Deferred financing costs................................. 2,248 9,267
Other intangible assets.................................. 9,399 13,377
-------- --------
53,164 118,505
Less--Accumulated amortization........................... (14,543) (20,961)
-------- --------
Net intangible assets.................................. $ 38,621 $ 97,544
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------
ACCUMULATED NET BOOK
LIFE COST AMORTIZATION VALUE
---------- --------- ------------ --------
<S> <C> <C> <C> <C>
Goodwill......................... 30 years $ 69,417 $ (3,817) $ 65,600
Client acquisition costs......... 6 years 15,157 (5,052) 10,105
Noncompete agreements............ 1-7 years 11,287 (6,976) 4,311
Deferred financing costs......... 10 years 9,267 (385) 8,882
Other intangible assets.......... 3-15 years 13,377 (4,731) 8,646
--------- --------- --------
$ 118,505 $ (20,961) $ 97,544
========= ========= ========
</TABLE>
Amortization of all intangible assets, other than deferred financing costs
which are charged to interest expense, was $3,370, $3,838 and $6,217 for the
years ended December 31, 1994, 1995, and 1996, respectively. Amortization of
deferred financing costs was $1,068, $533, and $516 for the years ended
December 31, 1994, 1995, and 1996, respectively. Capitalized client
acquisition costs were $1,905, $2,245, and $6,477 and related
F-10
<PAGE>
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
amortization expense was $1,536, $909 and $1,688 for the years ended December
31, 1994, 1995, and 1996, respectively.
The Company continually evaluates whether events or circumstances have
occurred that indicate that the remaining useful lives of the intangible
assets should be revised or that the remaining balance of such assets may not
be recoverable. As of December 31, 1996, the Company believes that no
revisions to the remaining useful lives or write-downs of intangible assets
are required.
5. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
DECEMBER 31
--------------
1995 1996
------ -------
<S> <C> <C>
Accrued salaries and commissions............................. $2,190 $ 2,613
Accrued vacation............................................. 2,140 2,866
Accrued interest............................................. 583 9,840
Other........................................................ 4,620 5,244
------ -------
$9,533 $20,563
====== =======
</TABLE>
6. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1995 1996
-------- --------
<S> <C> <C>
11 1/8% Senior Subordinated Notes, due 2006............ $ -- $200,000
Canadian Revolver, interest at prime (5.4% at December
31, 1996)............................................. -- 5,327
Seller Notes........................................... -- 7,600
Mortgage Notes......................................... -- 3,679
Borrowings under previous credit agreement (repaid in
July 1996)............................................ 118,208 --
Other.................................................. 82 34
-------- --------
118,290 216,640
Less--Current portion.................................. (1,478) (7,310)
-------- --------
$116,812 $209,330
======== ========
</TABLE>
In July 1996, the Company issued $200,000 of Senior Subordinated Notes (the
"Notes") in a private offering. The Notes are general unsecured obligations of
the Company, subordinated in right of payment to the senior indebtedness of
the Company and senior in right of payment to any current or future
subordinated indebtedness. The Notes mature on July 15, 2006, and bear
interest at 11 1/8% per year, payable semiannually in arrears on January 15
and July 15, commencing January 15, 1997. The proceeds from the sale of the
Notes were used to retire certain existing indebtedness of the Company under
its previous credit facilities, to purchase certain properties from related
party partnerships (see Note 10), to redeem stock from a shareholder (see Note
7), to fund an acquisition and for general purposes. The Company must comply
with all financial and operating covenants under the indenture for the Notes
while the Notes are outstanding.
In August 1996, the Company entered into a new credit facility (the "Credit
Facility") providing a revolving line of credit of U.S. $100 million in
borrowings and CDN $35 million in borrowings by the Company's Canadian
subsidiary. The Credit Facility is senior to all other indebtedness the
Company may have and is secured by the stock of the Company's shareholders.
Borrowings under the facility bear interest at prime plus an applicable
margin, or at LIBOR plus an applicable margin, at the option of the Company.
In addition to
F-11
<PAGE>
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
interest and other customary fees, the Company is obligated to remit a fee of
0.375% per year on unused commitments, payable quarterly. The aggregate
available commitment under the Credit Facility will be reduced on a quarterly
basis, beginning September 30, 1999. The Credit Facility matures on June 30,
2002, unless previously terminated. The Company must comply with all financial
and operating covenants under the Credit Facility during the term of the
agreement. The Company's available borrowing capacity under the Credit
Facility is contingent upon the Company meeting certain financial ratios and
other criteria.
The highest amount outstanding under the current Canadian revolver during
the year ended December 31, 1996, was $5,691. The average amount outstanding
on the Canadian revolver during the year was $5,037, while the weighted
average interest rate was 5.8%. There were no borrowings under the current
U.S. revolver in 1996. The highest amount outstanding under the previous
credit facility for the year ended December 31, 1996 was $6,582, the average
amount outstanding was $3,251, and the weighted average interest rate was
9.62%.
In connection with certain acquisitions completed in 1996, notes for $7,600
were issued to the sellers. The notes bear interest at 5% per year and $7,100
was repaid in 1997. The remaining note is due in 1998.
In connection with the purchase of real estate from related parties (see
Note 10) and an acquisition completed in 1996, the Company assumed $1,114 and
$2,630 of mortgage notes, respectively. The notes bear interest at 10.5% and
8%, respectively, and require monthly principal and interest payments of $20
and $22, with balloon payments due in 2002 and 2001, respectively.
Future scheduled principal payments on the Company's long-term debt at
December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 7,310
1998.............................................................. 705
1999.............................................................. 207
2000.............................................................. 218
2001.............................................................. 231
2002 and thereafter............................................... 207,969
--------
$216,640
========
</TABLE>
Upon entering into the previous credit facilities in 1993 and 1994, the
Company issued warrants to certain lenders to purchase common stock. Warrants
to purchase shares at $ per share were issued in 1993 and shares at
$ per share were issued in 1994.
Management assigned an initial value of $338 to the 1993 warrants and $87 to
the 1994 warrants for financial reporting purposes. The Company called the
warrants in February 1996 at an amount which was determined by a formula
defined in the credit agreement. The change in value of the redeemable
warrants from the initial value has been accreted through a charge to
shareholders' deficit in the accompanying financial statements. The warrants
were redeemed for $2,625 in 1996 and there are no outstanding warrants at
December 31, 1996.
Debt refinancings occurred in 1994, 1995 and 1996, resulting in the write-
off of previously deferred financing costs of $3,980, $2,779 and $2,015,
respectively, and prepayment and other charges (including the write-off of
unamortized debt discount) of $2,011 in 1994 and $500 in 1995. Such write-offs
and charges have been recorded as extraordinary items in the accompanying
consolidated statements of operations.
F-12
<PAGE>
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. COMMON STOCK:
At December 31, 1995 and 1996, the Company's common stock was comprised of
the following:
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
Par value.................................................. $.01 $.01
Shares authorized..........................................
Shares issued and outstanding--1996........................
Shares issued and outstanding--1995........................
</TABLE>
In 1996, the Company redeemed 100 shares of Class A common stock for $1,450
and canceled these shares.
8. STOCK OPTIONS:
In September 1994, the Company established a nonqualified stock option plan
which provides for the granting to key employees of options to purchase an
aggregate of shares of common stock. The shares available for grant were
increased by in December 1996. Options to purchase shares at $ per
share were granted on January 1, 1995 and options to purchase shares at
$ per share were granted on January 1, 1996. Option grants, when vested, are
exercisable at the earlier of the tenth anniversary of the date of grant or
the first date on which the Company ceases to be an S Corporation, and have an
exercise price equal to the fair market value of the common stock on the date
of grant. Fair market value is determined based on a formula, as defined in
the option plan. The options vest in five equal annual installments beginning
on the first anniversary of the date of grant. At December 31, 1996, options
for shares were vested. As of December 31, 1995 and 1996, no options were
exercisable.
At December 31, 1996, the total options outstanding are with exercise
prices between $ to $ and a weighted average exercise price of $ . The
options contain no expiration dates, however, no options are exercisable. The
fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following assumptions used for
the grants in 1995 and 1996.
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Risk free interest rates................................... 8.0% 5.6%
Expected lives of options.................................. 7 years 7 years
Expected dividend yields................................... N/A N/A
Expected volatility........................................ 15% 15%
</TABLE>
The fair value of each option granted in 1995 and 1996 is $2, as determined
under the provisions of Statement of Financial Accounting Standards No. 123.
The Company's net income would have been reduced and the following pro forma
results would have been reported had compensation cost been recorded for the
fair value of the options granted:
<TABLE>
<CAPTION>
1995 1996
------ ----
<S> <C> <C>
Net income, as reported....................................... $2,068 $508
Pro forma net income.......................................... 1,799 91
</TABLE>
The Statement of Financial Accounting Standards No. 123 method of accounting
is applied only to options granted after January 1, 1995. The resulting pro
forma compensation cost may not be representative of the amount to be expected
in future years due to the vesting schedule of the options.
On January 1, 1997, the Company granted options to acquire shares of
common stock at $ per share. The deferred compensation related to these
options will be amortized over the vesting period. Due to the
F-13
<PAGE>
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
acceleration of the vesting of these options which will occur upon the
completion of the equity offerings contemplated by this prospectus, the
Company will record a charge of approximately $ for the estimated
unamortized compensation on these options.
9. COMMITMENTS AND CONTINGENCIES:
Operating Leases
At December 31, 1996, the Company was obligated under noncancelable
operating leases, including the related-party leases discussed below, for
warehouse space, office equipment and transportation equipment. These leases
expire at various times through 2015 and require minimum rentals, subject to
escalation, as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 22,632
1998.............................................................. 21,136
1999.............................................................. 18,870
2000.............................................................. 16,761
2001.............................................................. 15,566
2002 and thereafter............................................... 39,487
--------
$134,452
========
</TABLE>
Rent expense was approximately $12,262, $14,098, and $17,008 for the years
ended December 31, 1994, 1995 and 1996, respectively. Some of the leases for
warehouse space provide for purchase options on the facilities at certain
dates.
The Company leases office and warehouse space at prices which, in the
opinion of management, approximate market rates from entities which are owned
by certain shareholders, officers and employees of the Company. Rent expense
on these leases was approximately $7,658, $8,201, and $9,019 for the years
ended December 31, 1994, 1995, and 1996, respectively. A significant portion
of the related party rent expense was reduced through the purchase of certain
real estate and the buy-out of certain lease interests in July 1996 (see Note
10).
Other Matters
The Company has entered into a consulting agreement with a shareholder of
the Company and consulting agreements with several of the former owners of
acquired businesses (see Note 12). These agreements require the following
minimum payments:
<TABLE>
<S> <C>
1997.................................................................. $480
1998.................................................................. 98
1999.................................................................. 40
2000.................................................................. 40
2001.................................................................. 40
2002 and thereafter................................................... 130
----
$828
====
</TABLE>
The Company is party to various claims arising in the ordinary course of
business. Although the ultimate outcome of these matters is presently not
determinable, management, after consultation with legal counsel, does not
believe that the resolution of these matters will have a material adverse
effect on the Company's financial position or results of operations.
F-14
<PAGE>
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. RELATED PARTY TRANSACTIONS:
In July 1996, the Company purchased certain real estate previously leased
and other assets from two partnerships, whose partners are shareholders of the
Company. The payment for the purchased real estate and other assets was
$11,018 plus the assumption of a $1,114 mortgage. Since the transaction was
with related parties, the real estate was recorded at its depreciated cost and
the deferred rent liability on the leases was eliminated as a credit to
shareholders' deficit. The $4,312 difference between the purchase price and
the depreciated cost was charged to shareholders' deficit as a deemed
distribution. In addition, the Company bought out certain lease commitments
from a related party partnership for $2,764. This lease buy-out cost was
recorded as a non-recurring charge in the 1996 consolidated statement of
operations.
The Company had an agreement with a shareholder of the Company that required
payments of $60 per year for five years upon the death of the shareholder. The
present value of this benefit was recorded as a liability by the Company. In
July 1996, the Company decided to make monthly pension payments to the
shareholder and terminated the previous agreement. The pension payments are $8
per month until the death of the shareholder or his spouse. The $490
difference between the present value of this benefit and the liability
previously reported was recorded as a non-recurring charge in the 1996
consolidated statement of operations.
The Company paid financial advisory fees to an investment banking firm of
which a director of the Company is the managing director. The fees were
approximately $800, $700 and $800 in 1996, 1995 and 1994 respectively.
In December 1993, the Company borrowed $80 from a shareholder which bears
interest at 7%. The note was repaid in 1996.
11. EMPLOYEE BENEFIT PLANS:
The Company maintains a discretionary profit sharing and a 401(k) plan for
substantially all full-time employees over the age of 20 1/2 and with more
than 1,000 hours of service. Participants in the 401(k) plan may elect to
defer a specified percentage of their compensation on a pretax basis. The
Company is required to make matching contributions equal to 25% of the
employee's contribution up to a maximum of 2% of the employee's annual
compensation. Participants become vested in the Company's matching
contribution over three to seven years. The expense relating to these plans
was $506, $591, and $1,122 for the years ended December 31, 1994, 1995 and
1996, respectively.
12. STOCK PURCHASE AGREEMENTS:
The Company and certain shareholders are parties to an agreement which
provides that, in the event of a shareholder's desire to transfer his
ownership interest, the other shareholders party to the agreement and/or the
Company have the right of first refusal to purchase the stock under the terms
specified in the agreement. The agreement also provides that, in the event of
a shareholder's death, the Company will purchase the stock from the estate of
the deceased under the terms and at the amount per share, subject to periodic
adjustment, specified in the agreement. The purchase would be funded, in part,
from the proceeds of insurance policies currently in place ($37,700 face
value). The stock purchase agreement will be terminated upon completion of the
equity offerings.
F-15
<PAGE>
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. ACQUISITIONS:
In 1995, the Company completed five acquisitions of records management
businesses for an aggregate cash purchase price of $28,994. The most
significant of these acquisitions was for $16,022 in October 1995; all others
were individually less than $5,000. In 1996, the Company completed 12
acquisitions for an aggregate cash purchase price of $62,165 (of which $14,000
was for one transaction in May 1996 and $13,500 was for another transaction in
October 1996). In addition to these cash payments, an acquisition in 1995
provided for a $800 noncompete obligation payable over three years and an
acquisition during 1996 provided for a $400 noncompete obligation payable over
one year. The noncompete liability at December 31, 1996 was $783. 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 acquired has been allocated to goodwill
($17,549 and $43,062 in 1995 and 1996, respectively) and is being amortized
over the estimated benefit period of 30 years. In connection with certain of
the acquisitions, the Company entered into consulting agreements with several
of the former owners of the acquired businesses which require aggregate
commitments of $498 at December 31, 1996 (see Note 9).
A summary of the cash paid for the purchase price as of the acquisitions is
as follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Fair value of assets acquired............................ $36,171 $82,515
Liabilities assumed...................................... (7,177) (1,896)
Cash acquired............................................ (639) (1,013)
------- -------
Net cash paid.......................................... $28,355 $79,606
======= =======
</TABLE>
Included in the 1996 amounts are $18,917 of fair value of assets acquired,
$464 of liabilities assumed, $23 of cash acquired and $18,430 of net cash paid
on acquisitions that were completed subsequent to December 31, 1996.
The following unaudited pro forma information shows the results of the
Company's operations for the years ended December 31, 1995 and 1996 as though
each of the completed acquisitions had occurred as of January 1, 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1995 1996
----------- -----------
<S> <C> <C>
Total revenues..................................... $ 139,755 $ 150,788
Net income......................................... 2,357 1,721
</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 January 1, 1995, 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 acquired companies.
Subsequent to December 31, 1996, the Company signed a definitive agreement
to purchase a regional records management company for approximately $62,000,
which it intends to finance through borrowings under its Credit Facility. The
acquisition is subject to due diligence and customary conditions.
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Security Archives, Inc.:
We have audited the accompanying balance sheets of Security Archives, Inc.
as of June 30, 1995 and 1994, and the related statements of income and
retained earnings and of cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Security Archives, Inc. as of June 30,
1995 and 1994, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
As discussed in Notes 1, 2 and 4 to the financial statements, during 1994,
the Company changed its methods of accounting for investments in equity
securities and income taxes to conform with Statements of Financial Accounting
Standards No. 115 and No. 109, respectively.
Deloitte & Touche LLP
Dallas, Texas
August 14, 1995
F-17
<PAGE>
SECURITY ARCHIVES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------ MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents............. $ 465,058 $ 387,354 $ 703,129
Accounts receivable................... 205,599 245,839 253,966
Prepaid expenses...................... 169,191 243,886 325,272
----------- ----------- -----------
Total current assets................ 839,848 877,079 1,282,367
PROPERTY, PLANT AND EQUIPMENT:
Land.................................. 1,128,822 1,128,822 1,128,822
Buildings and improvements............ 2,533,200 2,646,548 3,260,627
Equipment............................. 4,106,862 4,430,263 4,449,706
----------- ----------- -----------
7,768,884 8,205,633 8,839,155
Less accumulated depreciation......... (3,892,935) (3,849,502) (3,845,308)
----------- ----------- -----------
3,875,949 4,356,131 4,993,847
INVESTMENTS--Available for sale (Note
2)..................................... 989,795 341,264 --
DEFERRED INCOME TAXES (Note 4).......... 13,495 -- --
OTHER ASSETS............................ 112,835 136,447 123,191
----------- ----------- -----------
TOTAL ASSETS........................ $ 5,831,922 $ 5,710,921 $ 6,399,405
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt
(Note 3)............................. $ 157,564 $ -- $ --
Accounts payable...................... 76,239 243,682 92,917
Accrued expenses...................... 123,201 153,768 107,788
Deferred income taxes (Note 4)........ 51,877 52,659 55,234
Other................................. 23,000 23,000 23,000
----------- ----------- -----------
Total current liabilities........... 431,881 473,109 278,939
LONG-TERM DEBT, NET OF CURRENT
MATURITIES (Note 3).................... 1,477,994 -- --
DEFERRED INCOME TAXES (Note 4).......... -- 3,485 6,699
COMMITMENTS (Note 5)....................
STOCKHOLDERS' EQUITY (Notes 3 and 5):
Common stock--par value $50 per share;
100 shares authorized and issued..... 5,000 5,000 5,000
Treasury stock--56 shares, at cost.... (2,475,958) (2,475,958) (2,475,958)
Unrealized losses on investments (Note
2)................................... (46,877) (10,384) --
Retained earnings..................... 6,439,882 7,715,669 8,584,725
----------- ----------- -----------
Total stockholders' equity.......... 3,922,047 5,234,327 6,113,767
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................. $ 5,831,922 $ 5,710,921 $ 6,399,405
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-18
<PAGE>
SECURITY ARCHIVES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED JUNE 30, ENDED MARCH 31,
------------------------------ ----------------------
1994 1995 1995 1996
-------------- -------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE:
Storage charges....... $ 2,470,703 $ 2,812,673 $2,095,542 $2,295,615
Pickup and delivery... 840,040 857,638 652,376 593,938
Retrieval, refile and
catalog.............. 497,428 510,573 377,658 385,756
Document
disintegration....... 293,869 363,311 272,621 225,732
Cart service.......... 78,630 81,397 62,640 58,010
Deposit on boxes...... 71,326 70,151 55,112 59,601
Miscellaneous......... 105,141 287,997 162,965 322,105
-------------- -------------- ---------- ----------
4,357,137 4,983,740 3,678,914 3,940,757
EXPENSES:
Storage............... 553,977 651,482 483,724 393,011
Handling.............. 1,115,739 1,082,665 712,810 793,837
General and
administrative....... 1,085,490 1,192,996 1,000,197 1,462,215
-------------- -------------- ---------- ----------
2,755,206 2,927,143 2,196,731 2,649,063
-------------- -------------- ---------- ----------
OPERATING PROFIT........ 1,601,931 2,056,597 1,482,183 1,291,694
OTHER INCOME (EXPENSE):
Interest income....... 69,285 87,400 20,458 9,172
Interest expense...... (154,326) (112,938) (106,068) --
Other................. 60,684 (52,624) (16,082) 8,190
-------------- -------------- ---------- ----------
INCOME BEFORE INCOME
TAXES AND CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE... 1,577,574 1,978,435 1,380,491 1,309,056
PROVISION FOR INCOME
TAXES (Note 4)......... (616,491) (702,648) (485,000) (440,000)
-------------- -------------- ---------- ----------
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE... 961,083 1,275,787 895,491 869,056
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE (Note 4)..... 53,283 -- -- --
-------------- -------------- ---------- ----------
NET INCOME.............. 1,014,366 1,275,787 895,491 869,056
RETAINED EARNINGS,
BEGINNING OF YEAR...... 5,425,516 6,439,882 6,439,882 7,715,669
-------------- -------------- ---------- ----------
RETAINED EARNINGS, END
OF YEAR................ $ 6,439,882 $ 7,715,669 $7,335,373 $8,584,725
============== ============== ========== ==========
</TABLE>
See notes to financial statements.
F-19
<PAGE>
SECURITY ARCHIVES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED JUNE 30, ENDED MARCH 31,
------------------------------ -----------------------
1994 1995 1995 1996
-------------- -------------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income............. $ 1,014,366 $ 1,275,787 $ 895,491 $ 869,056
Adjustments to
reconcile net income
to net cash provided
by operating
activities............
Depreciation........... 463,797 509,516 371,980 437,161
Loss (gain) on disposal
of assets............. (44,441) 28,454 -- 61,556
Loss on sale of
investments........... 19,435 24,813 20,615 10,384
Deferred income tax
expense............... 26,400 (3,747) 17,763 5,789
Changes in operating
assets and
liabilities:
(Increase) decrease in
accounts receivable.. 9,563 (40,240) (96,301) (8,127)
Decrease in income
taxes receivable..... 31,066 -- -- --
(Increase) decrease in
prepaid expenses..... (140,247) (74,695) 1,380 (81,386)
(Increase) decrease in
other assets......... (100,758) (23,612) 19,171 13,256
Increase (decrease) in
accounts payable..... 17,107 167,443 (33,472) (150,765)
Increase (decrease) in
accrued expenses..... (73,916) 30,567 108,681 (45,980)
Increase in other
liabilities.......... 23,000 -- -- --
-------------- -------------- ---------- -----------
Net cash provided by
operating
activities......... 1,245,372 1,894,286 1,305,308 1,110,944
-------------- -------------- ---------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property,
plant and equipment... (1,193,989) (1,018,150) (660,593) (1,136,433)
Proceeds from sale of
property.............. 79,771 -- -- --
Purchases of
investments........... (1,070,373) (58,250) (52,145) --
Proceeds from sale of
investments........... 1,012,178 739,968 20,316 341,264
-------------- -------------- ---------- -----------
Net cash used in
investing
activities......... (1,172,413) (336,432) (692,422) (795,169)
-------------- -------------- ---------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES--
Principal payments of
long-term debt......... (144,051) (1,635,558) (116,844) --
-------------- -------------- ---------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ (71,092) (77,704) 496,042 315,775
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD.............. 536,150 465,058 465,058 387,354
-------------- -------------- ---------- -----------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................. $ 465,058 $ 387,354 $ 961,100 $ 703,129
-------------- -------------- ---------- -----------
SUPPLEMENTAL DISCLOSURE:
Cash payments for:
Interest.............. $ 154,326 $ 112,938 $ 106,068 $ --
-------------- -------------- ---------- -----------
Income taxes.......... $ 413,255 $ 485,000 $ 400,000 $ 400,000
-------------- -------------- ---------- -----------
Noncash Investing
activities:
Unrealized loss on
investments.......... $ 46,877 $ 10,384 $ 12,576 $ --
============== ============== ========== ===========
</TABLE>
See notes to financial statements.
F-20
<PAGE>
SECURITY ARCHIVES, INC.
NOTES TO FINANCIAL STATEMENTS, YEARS ENDED JUNE 30, 1995 AND 1994
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE NINE MONTHS ENDED MARCH 31, 1995
AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General--Security Archives, Inc. (the "Company"), a Texas corporation, is
engaged in the storage, delivery, retrieval and destruction of documents for
companies in the north Texas area.
Interim Consolidated Financial Statements--The consolidated balance sheets
as of March 31, 1996 and the consolidated statements of operations for the
three months ended March 31, 1995 and 1996 are unaudited and, in the opinion
of management of the Company, include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the results
for those interim periods. The results of operations for the three months
ended March 31, 1995 and 1996 are not necessarily indicative of the results to
be expected for the full year.
Investments--The Company adopted Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"), effective June 30, 1994. Under SFAS 115, investments are
classified as held-to-maturity, available-for-sale, or trading, depending on
the Company's ability and intent with respect to the use of individual
securities. The Company's investments at June 30, 1995 and 1994, are
classified as available-for-sale and are carried at fair value.
Property, Plant and Equipment--Property, plant and equipment are carried at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets, ranging from 3 to 18 years. When
assets are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
reflected in income for the period. The cost of maintenance and repairs is
charged to expense as incurred; significant renewals and betterments are
capitalized. Deductions are made for retirements resulting from the renewals
or betterments.
Income Taxes--Effective July 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"), which changed the method of accounting for income taxes from the
deferred method to the liability method. Under the liability method, deferred
income taxes are recognized for the tax consequences of temporary differences
by applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities.
Cash Equivalents--The Company considers all highly liquid investments with
an original maturity of three months or less to be cash equivalents.
2. INVESTMENTS
The Company adopted SFAS 115 effective June 30, 1994. Investments at June
30, 1995 and 1994, consisting of shares of the Phoenix Tax-Exempt Bond
Portfolio, are classified as available-for-sale and have a cost of $357,438
and $1,063,968 and a fair value, as determined by quoted market prices, of
$341,264 and $989,795, at June 30, 1995 and 1994, respectively. The net
unrealized losses included in stockholders' equity at June 30, 1995 and 1994,
was $10,384 and $46,877, net of income taxes of $5,790 and $27,296,
respectively.
In fiscal year 1995, the Company sold shares with a cost of $764,781 for
$739,968, resulting in a realized loss of $24,813. The losses were calculated
using the average cost method.
F-21
<PAGE>
SECURITY ARCHIVES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. LONG-TERM DEBT
Long-term debt at June 30, 1994, consisted of a 9% note payable to the
former majority stockholder for the purchase of 56 shares of common stock in
the amount of $1,635,558, of which $157,564 represented amounts due in 1995.
During June 1995, the Company paid off the note in full.
4. INCOME TAXES
Effective July 1, 1993, the Company adopted SFAS 109. The cumulative effect
of this accounting change has been credited to 1994 income as a separate item.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Current federal......................................... $641,704 $471,383
Current state........................................... 78,706 58,260
Deferred................................................ (17,762) 86,848
-------- --------
Total................................................. $702,648 $616,491
======== ========
</TABLE>
Deferred income taxes at June 30, 1995 and 1994, principally related to the
use of accelerated depreciation methods for tax purposes on property, plant
and equipment and prepaid insurance.
The Company's effective income tax rate differs from the federal statutory
rate primarily from state income taxes (net of federal tax benefit).
5. COMMITMENTS
During 1989, the Company entered into a stock repurchase agreement with a
stockholder. Under the terms of the agreement, the Company will purchase the
stockholder's shares upon the stockholder's death at the greater of the book
value of the shares or the amount of the life insurance proceeds received by
the Company from a policy on the stockholder's life. Payment of the purchase
price would be made in quarterly payments over four years, bearing interest at
8% per annum. At June 30, 1995, the stockholder held 12 shares of stock at a
book value of $118,962 per share. The Company owns a $500,000 face value life
insurance policy on the stockholder.
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Records Management Services, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Records
Management Services, Inc. and subsidiaries (the "Company") as of September 30,
1996, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Records Management Services,
Inc. and subsidiaries as of September 30, 1996, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
As described in Note 1, the Company changed its method of accounting for
customer acquisition costs effective October 1, 1995.
DELOITTE & TOUCHE LLP
Chicago, Illinois
November 22, 1996
(January 10, 1997 as to Note 11)
F-23
<PAGE>
RECORDS MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.............................................. $ 453,842 $ 176,116
Accounts receivable (net of allowance for doubtful
accounts of $51,433
and $51,523)..................................... 2,117,947 2,370,139
Carton inventory.................................. 120,940 133,444
Deposits.......................................... 179,909 120,120
Deferred income tax benefit (Note 9).............. 20,500 20,500
Other current assets.............................. 45,077 75,297
----------- -----------
Total current assets............................ 2,938,215 2,895,616
PROPERTY AND EQUIPMENT--Net......................... 6,075,578 6,119,988
OTHER ASSETS:
Investment in partnership (Note 3)................ 148,738 148,738
Deferred customer acquisition costs (Note 1)...... 444,905 443,298
Deferred income tax benefit (net of valuation
allowance of $76,600)
(Note 9)......................................... 359,300 318,300
Goodwill.......................................... 199,295 192,488
----------- -----------
Total other assets.............................. 1,152,238 1,102,824
----------- -----------
TOTAL............................................... $10,166,031 $10,118,428
=========== ===========
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................... $ 1,264,004 $ 1,257,884
Accrued liabilities................................ 1,319,690 1,200,627
Notes payable to shareholders (Note 6)............. 225,000 300,000
Current portion of notes payable (Note 6).......... 48,395 50,843
Current portion of capital lease obligations (Note
7)................................................ 288,579 279,500
----------- -----------
Total current liabilities........................ 3,145,668 3,088,854
BANK REVOLVING CREDIT AND TERM LOANS (Note 6)........ 3,000,001 2,966,668
NOTES PAYABLE (Note 6)............................... 136,399 120,350
CAPITAL LEASE OBLIGATIONS (Note 7)................... 632,913 615,389
SHAREHOLDERS' EQUITY:
Common stock and additional paid-in capital, no
par; 1,000,000 shares authorized; 384,493 shares
outstanding (Note 10)............................. 151,738 151,738
Loan to shareholder for purchase of common stock... (71,899) (71,899)
Retained earnings.................................. 3,171,211 3,247,328
----------- -----------
Total shareholders' equity....................... 3,251,050 3,327,167
----------- -----------
TOTAL................................................ $10,166,031 $10,118,428
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-24
<PAGE>
RECORDS MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31
SEPTEMBER 30, ----------------------
1996 1996 1995
------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUE:
Storage................................ $10,533,695 $2,790,142 $2,474,880
Service................................ 6,515,598 1,608,370 1,315,189
----------- ---------- ----------
17,049,293 4,398,512 3,790,069
OPERATING EXPENSES:
Cost of storage and service, excluding
depreciation and amortization......... 10,885,766 2,649,841 2,290,967
Selling, general and administrative.... 5,176,789 1,289,888 1,214,588
Depreciation and amortization.......... 820,274 238,238 208,741
----------- ---------- ----------
16,882,829 4,177,967 3,714,296
----------- ---------- ----------
Operating income..................... 166,464 220,545 75,773
OTHER INCOME (EXPENSE):
Interest income........................ 4,113 3,965 2,243
Interest expense....................... (374,594) (107,393) (71,304)
Loss on disposal of division........... (225,000)
Equity in income of partnership........ 4,834
----------- ---------- ----------
(590,647) (103,428) (69,057)
----------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES........ (424,183) 117,117 6,716
PROVISION (CREDIT) FOR INCOME TAXES (Note
9)...................................... (125,400) 41,000 2,500
----------- ---------- ----------
NET INCOME (LOSS)........................ $ (298,783) $ 66,117 $ 4,216
=========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-25
<PAGE>
RECORDS MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON
STOCK AND
ADDITIONAL LOAN
PAID-IN TO RETAINED
CAPITAL SHAREHOLDER EARNINGS TOTAL
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1995........ $ 61,864 $3,469,994 $3,531,858
Issuance of common stock upon
exercise of options.......... 89,874 $(71,899) 17,975
Net loss...................... (298,783) (298,783)
-------- -------- ---------- ----------
BALANCE, SEPTEMBER 30, 1996..... 151,738 (71,899) 3,171,211 3,251,050
Net income (unaudited)........ 76,117 76,117
-------- -------- ---------- ----------
BALANCE, DECEMBER 31, 1996
(UNAUDITED).................... $151,738 $(71,899) $3,247,328 $3,327,167
======== ======== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-26
<PAGE>
RECORDS MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31
SEPTEMBER 30, --------------------
1996 1996 1995
------------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................ $ (298,783) $ 76,117 $ 4,216
Adjustments to reconcile net income
(loss) to net cash flows from operating
activities:
Deferred income tax provision........... (167,400) 41,000 2,500
Depreciation and amortization........... 820,274 238,238 208,741
Equity in income of partnership......... (4,834)
Provision for loss on disposal of
division............................... 225,000
Changes in:
Accounts receivable.................... 1,187 (252,192) 211,460
Carton inventory....................... 3,081 (12,504) (88,216)
Deposits and other current assets...... 18,173 29,569 (223,015)
Accounts payable....................... 192,400 (6,120) 247,931
Accrued liabilities.................... 357,868 (119,063) (14,776)
---------- --------- ---------
Net cash flows from operating
activities........................... 1,146,966 (4,955) 348,841
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment....... (1,262,224) (225,693) (516,945)
Customer acquisition costs............... (522,950) (25,541) (105,600)
Repayment of loans to unconsolidated
partnership............................. 91,500 11,500
---------- --------- ---------
Net cash flows from investing
activities........................... (1,693,674) (251,234) (611,045)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under term
loan and revolving line of credit....... 925,001 (33,333) 237,000
Proceeds from notes payable to
shareholders............................ 225,000 75,000
Proceeds from exercise of stock options.. 17,975
Payments under capital leases............ (217,007) (49,603) (16,014)
Payment of notes payable................. (13,601)
---------- --------- ---------
Net cash flows from financing
activities........................... 950,969 (21,537) 220,986
---------- --------- ---------
NET CHANGE IN CASH......................... 404,261 (277,726) (41,218)
CASH--Beginning of year.................... 49,581 453,842 49,581
---------- --------- ---------
CASH--End of year.......................... $ 453,842 $ 176,116 $ 8,363
========== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for:
Interest................................ $ 334,089 $ 117,518 $ 70,179
Income taxes............................ 47,628 67,060 27,070
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES--Year
ended September 30, 1996:
The Company incurred equipment capital
lease obligations of $630,668.
The purchase price of a 1995 acquisition
was adjusted, reducing notes payable and
goodwill by $30,206.
The Company purchased all the tangible
assets of McClatchy Business Archives
for cash of $150,000 and notes payable
of $150,000.
The Company issued common stock valued at
$89,874 for cash of $17,975 and a note
receivable of $71,899.
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE>
RECORDS MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED SEPTEMBER 30, 1996
(INFORMATION FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1995 IS
UNAUDITED.)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS--Records Management Services, Inc. (Illinois) (the
"Company") is a provider of business records management services including
storage, consulting, micro-imaging and contract management services.
PRINCIPLES OF CONSOLIDATION--The accompanying financial statements include
the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts, transactions and profits have been eliminated.
The Company's 50% interest in an unconsolidated partnership is accounted for
by the equity method.
INTERIM FINANCIAL STATEMENTS--The consolidated balance sheet as of December
31, 1996 and the consolidated statements of operations and cash flows for the
three months ended December 31, 1996 and 1995 are unaudited and, in the
opinion of management of the Company, include all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
results for those interim periods. The results of operations for the three
months ended December 31, 1996 and 1995 are not necessarily indicative of the
results to be expected for the full year.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT--Depreciation is computed using accelerated and
straight-line methods over the following estimated useful lives: buildings and
improvements, 31.5 years; equipment, 3-12 years.
GOODWILL--Goodwill represents the excess of purchase price of certain
subsidiaries over the fair value of net assets acquired and is amortized on a
straight-line basis over ten years. Accumulated amortization was $141,608 at
September 30, 1996.
CHANGE IN ACCOUNTING PRINCIPLE--Effective October 1, 1995, the Company began
capitalizing customer acquisition costs. Costs, net of revenues received for
the initial transfer of the records, related to the acquisition of large
volume accounts (accounts consisting of 5,000 or more cartons) are capitalized
and amortized over the life of the related contract (currently ranging from
three to five years). Management believes such treatment to be preferable
because it conforms with prevalent industry practice. As of September 30,
1996, acquisition costs of $522,950 have been capitalized, including $105,600
capitalized in the three months ended December 31, 1995; accumulated
amortization totaled $78,045 at September 30, 1996.
2. ACQUISITION
Effective November 30, 1995, the Company acquired all of the records storage
business of McClatchy Business Archives ("McClatchy") of Houston, Texas, for
$300,000 in a transaction accounted for as a purchase. The purchase price
included $150,000 in cash and a $150,000 note payable to the seller (see Note
6).
F-28
<PAGE>
RECORDS MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED SEPTEMBER 30, 1996
(INFORMATION FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1995 IS
UNAUDITED.)
3. UNCONSOLIDATED PARTNERSHIP
The Company owns a 50% partnership interest in Certified Document
Destruction of Illinois ("CDDI"). CDDI provided document destruction services
to the Company and others until it sold its business to Crown Recycling &
Waste Services, Inc. ("Crown") effective September 30, 1996 for approximately
$500,000. The Company's 50% share of the gain recognized on the sale was
$53,581 and its 50% share of CDDI's operating loss for fiscal year 1996 was
$48,747. In connection with the sale agreement, the Company agreed to provide
at least 15 million pounds of material for destruction or disposal by Crown
during the five-year period ending September 30, 2001 for a total cost, based
on current market prices, of approximately $600,000.
4. DISPOSAL OF GEORGIA DIVISION
The Company closed the Georgia division effective September 30, 1996.
Existing assets will be transferred to other divisions. Property rental
agreements were terminated and approximately $225,000 was accrued at September
30, 1996 for these and other costs.
5. BALANCE SHEET INFORMATION
Property and equipment as of December 31, 1996 comprises the following:
<TABLE>
<S> <C>
Land............................................................ $ 164,804
Buildings and improvements...................................... 2,645,666
Equipment....................................................... 9,415,568
-----------
12,226,038
Accumulated depreciation........................................ (6,150,460)
-----------
Property and equipment--net..................................... $ 6,075,578
===========
Accrued liabilities as of September 30, 1996 comprise the following:
Payroll......................................................... $ 246,327
Real estate taxes............................................... 272,791
401(k) plan contributions....................................... 335,094
Disposal of Georgia division.................................... 225,000
Other........................................................... 240,478
-----------
Total........................................................... $ 1,319,690
===========
</TABLE>
6. DEBT
Effective December 1, 1995, the Company entered into a $2,000,000 secured
term loan (the "Term Loan") agreement and a $1,200,000 secured revolving line
of credit agreement (the "Line") with a bank. The Term Loan and the Line
(collectively, the "Loans") bear interest due monthly at the prime rate plus
1%. The Term Loan also requires monthly principal payments of $11,111. All
unpaid principal is due February 1, 1997. At September 30, 1996, total
outstanding borrowings were $3,000,001.
The Term Loan is secured by first mortgages on certain real estate owned by
the Company. The Line is secured by a first priority lien on all of the
Company's assets. The Loans are cross-collateralized and cross-defaulted.
F-29
<PAGE>
RECORDS MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED SEPTEMBER 30, 1996
(INFORMATION FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1995 IS
UNAUDITED.)
See Note 11 regarding refinancing of the Loans.
The $150,000 note payable issued in connection with the purchase of
McClatchy bears interest at 9% per annum and is payable in eight annual
installments of principal and interest of $27,101 (see Note 2). The $34,794
balance of a note payable issued in connection with a fiscal year 1995
acquisition is payable upon demand. Annual maturities of notes payable amount
to $48,395 for the year ending September 30, 1997 and range from $15,000 to
$19,200 for the succeeding four years.
In 1996, certain shareholders agreed to loan $300,000 to the Company, of
which $225,000 was advanced prior to September 30, 1996. The notes bear
interest at 11% per annum and are due on September 30, 1997.
7. LEASING ARRANGEMENTS
The Company has operating lease agreements for warehouse space expiring at
various dates through 2004. Leases covering a portion of the total leased
space are with entities controlled by directors and shareholders of the
Company. The leases contain renewal options for additional periods and
generally provide for rent adjustments based on changes in the Consumer Price
Index and actual real estate taxes and interest.
The Company has guaranteed payment of all principal and interest due on a
loan payable by Morris West Limited Partnership ("Morris West"), which is
owned by certain directors and shareholders of the Company, to LaSalle
National Bank in the amount of $640,000. Morris West is one of the related
entities from which the Company leases warehouse space.
The estimated future minimum rental payments required under the operating
leases as of September 30, 1996 are as follows:
<TABLE>
<CAPTION>
RELATED UNRELATED
FISCAL YEAR ENTITIES ENTITIES TOTAL
----------- ---------- ---------- ----------
<S> <C> <C> <C>
1997........................................ $ 504,833 $ 913,224 $1,418,057
1998........................................ 314,833 866,368 1,181,201
1999........................................ 241,558 736,601 978,159
2000........................................ 69,833 656,319 726,152
2001........................................ 69,833 656,319 726,152
Thereafter.................................. 151,305 1,460,228 1,611,533
---------- ---------- ----------
Total................................... $1,352,195 $5,289,059 $6,641,254
========== ========== ==========
</TABLE>
During fiscal year 1996, the Company recorded rent expense totaling
$1,638,953, including $732,900 of rent to related entities.
F-30
<PAGE>
RECORDS MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED SEPTEMBER 30, 1996
(INFORMATION FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1995 IS
UNAUDITED.)
The Company has entered into capitalized long-term leasing agreements for
shelving and various other equipment with an aggregate cost of $1,181,902 and
accumulated amortization of $137,297 at September 30, 1996. The future minimum
lease payments under the capitalized leases as of September 30, 1996 are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1997.............................................................. $ 389,591
1998.............................................................. 373,042
1999.............................................................. 268,283
2000.............................................................. 54,730
2001.............................................................. 29,983
---------
1,115,629
Less amount representing interest................................. 194,137
---------
Present value of future minimum lease payments.................... 921,492
Less principal due in one year.................................... 288,579
---------
Total......................................................... $ 632,913
=========
</TABLE>
8. EMPLOYEE BENEFIT PLAN
Eligible employees participate in the Records Management Services, Inc.
401(k) Profit Sharing Plan. Company contributions, consisting of a
discretionary profit-sharing contribution and a partial matching of employee
contributions, totaled approximately $161,000 for the year ended September 30,
1996.
9. INCOME TAXES
The components of the income tax benefit for the year ended September 30,
1996 are as follows:
<TABLE>
<S> <C>
Current......................................................... $ 42,000
Deferred........................................................ (186,700)
---------
(144,700)
Change in valuation allowance................................... 19,300
---------
Total....................................................... $(125,400)
=========
A reconciliation of the U.S. federal statutory rate of 35% to the effective
rate of tax benefit for the year ended September 30, 1996 is as follows:
Statutory rate.................................................. 35.0%
Nondeductible expenses.......................................... (2.8)
Adjustment of valuation allowance............................... (4.5)
Other, net...................................................... 1.9
---------
Effective rate.................................................. 29.6%
=========
</TABLE>
F-31
<PAGE>
RECORDS MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED SEPTEMBER 30, 1996
(INFORMATION FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1995 IS
UNAUDITED.)
<TABLE>
The components of deferred tax assets as of September 30, 1996 are as
follows:
<S> <C>
Current:
Allowance for doubtful accounts................................. $ 20,500
========
Long-term:
AMT credit carry-forwards....................................... $100,500
Net operating loss carry-forwards............................... 522,100
Accrued expenses................................................ 222,800
Accumulated depreciation........................................ (372,600)
Other........................................................... (36,900)
Valuation allowance............................................. (76,600)
--------
Total......................................................... $359,300
========
</TABLE>
The valuation allowance relates to state operating loss carry-forwards of
subsidiaries that have not achieved profitable operations.
10. STOCK OPTIONS
In March 1996, the president of the Company exercised an option to purchase
4,993 shares of the Company's common stock at $18.00 per share in exchange for
cash of $17,975 (20%) and a note payable in the amount of $71,899 (80%). The
note bears interest at 6% per annum and requires monthly payments of principal
and interest of $607 from October 1996 until September 2002 when the remaining
principal ($51,143) is due.
The president of the Company holds two other options, each to purchase 4,993
shares at $12.00 per share. One option expires July 31, 1997, while the other
expires September 30, 1998.
11. SUBSEQUENT EVENTS
On January 10, 1997, the Company entered into a $2,500,000 secured term loan
agreement and a $1,500,000 secured revolving line of credit agreement bearing
interest at the prime rate. Proceeds were used to repay the existing Term Loan
and Line. The Term Loan requires monthly principal payments of $33,334. All
unpaid principal of both loans is due June 30, 1998. The Term Loan is secured
by certain equipment of the Company. The Line is secured by the Company's
accounts receivable. The loans are cross-collateralized and cross-defaulted.
In December 1996, the Company issued another option to the president of the
Company to purchase 4,993 shares at $12.00 per share. This option expires
November 30, 1999.
F-32
<PAGE>
[INSIDE BACK COVER ARTWORK]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER CONTAINED
HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OF-
FER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT RELATES
IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH
STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE IN-
FORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 12
The Company.............................................................. 17
Concurrent Offering...................................................... 17
Use of Proceeds.......................................................... 18
Capitalization........................................................... 19
Pro Forma Financial Data................................................. 20
Selected Historical and Pro Forma Consolidated Statements of Operations,
Other Data and Balance Sheets........................................... 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 28
Business................................................................. 37
Management............................................................... 47
Certain Transactions..................................................... 55
Principal Shareholders................................................... 56
Description of Certain Indebtedness...................................... 57
Description of the Notes................................................. 58
Description of Capital Stock............................................. 83
Underwriting............................................................. 85
Legal Matters............................................................ 86
Experts.................................................................. 86
Available Information.................................................... 86
Index to Consolidated Financial Statements............................... F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE NOTES OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$100,000,000
PIERCE LEAHY CORP.
% SENIOR SUBORDINATED
NOTES DUE 2007
[LOGO]
-------
PROSPECTUS
, 1997
-------
SMITH BARNEY INC.
MERRILL LYNCH & CO.
CIBC WOOD GUNDY SECURITIES CORP.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth fees payable to the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc. and other
expenses expected to be incurred in connection with the issuance and
distribution of the securities being registered. All of the fees and expenses
will be paid by the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................. $30,303
National Association of Securities Dealers, Inc. Filing Fee......... 10,500
Legal Fees and Expenses............................................. *
Accounting Fees and Expenses........................................ *
Blue Sky Fees and Expenses.......................................... *
Rating Agency Fee................................................... *
Trustee's Fees and Expenses......................................... *
Printing Expenses................................................... *
Miscellaneous....................................................... *
-------
Total............................................................. $ *
=======
</TABLE>
- --------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subchapter D (Sections 1741 through 1750) of Chapter 17 the Pennsylvania
Business Corporation Law of 1988, as amended (the "PBCL"), contains provisions
for mandatory and discretionary indemnification of a corporation's directors,
officers, employees and agents (collectively "Representatives"), and related
matters.
Under Section 1741, subject to certain limitations, a corporation has the
power to indemnify directors, officers and other Representatives under certain
prescribed circumstances against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with a threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or investigative, to which
any of them is a party or threatened to be made a party by reason of his being
a Representative of the corporation or serving at the request of the
corporation as a Representative of another corporation, partnership, joint
venture, trust or other enterprise, if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal proceeding, had no reasonable
cause to believe his conduct was unlawful.
Section 1742 provides for indemnification with respect to derivative and
corporate actions similar to that provided by Section 1741. However,
indemnification is not provided under Section 1742 in respect of any claim,
issue or matter as to which a Representative has been adjudged to be liable to
the corporation unless and only to the extent that the proper court determines
upon application that, despite the adjudication of liability but in view of
all the circumstances of the case, a Representative is fairly and reasonably
entitled to indemnity for the expenses that the court deems proper.
Section 1743 provides that indemnification against expenses is mandatory to
the extent that a Representative has been successful on the merits or
otherwise in defense of any such action or proceeding referred to in Section
1741 or 1742.
Section 1744 provides that unless ordered by a court, any indemnification
under Section 1741 or 1742 shall be made by the corporation as authorized in
the specific case upon a determination that indemnification of a
Representative is proper because the Representative met the applicable
standard of conduct, and such determination will be made by the board of
directors by a majority vote of a quorum of directors not parties to the
action or proceeding; if a quorum is not obtainable or if obtainable and a
majority of disinterested directors so directs, by independent legal counsel;
or by the shareholders.
II-1
<PAGE>
Section 1745 provides that expenses incurred by a Representative in
defending any action or proceeding referred to in Subchapter D of Chapter 17
of the PBCL may be paid by the corporation in advance of the final disposition
of such action or proceeding upon receipt of an undertaking by or on behalf of
the Representative to repay such amount if it shall ultimately be determined
that he is not entitled to be indemnified by the corporation.
Section 1746 provides generally that except in any case where the act or
failure to act giving rise to the claim for indemnification is determined by a
court to have constituted willful misconduct or recklessness, the
indemnification and advancement of expenses provided by Subchapter D of
Chapter 17 of the PBCL shall not be deemed exclusive of any other rights to
which a Representative seeking indemnification or advancement of expenses may
be entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding that office.
Section 1747 grants a corporation the power to purchase and maintain
insurance on behalf of any Representative against any liability incurred by
him in his capacity as a Representative, whether or not the corporation would
have the power to indemnify him against that liability under Subchapter D of
Chapter 17 of the PBCL.
Sections 1748 and 1749 apply the indemnification and advancement of expenses
provisions contained in Subchapter D of Chapter 17 of the PBCL to successor
corporations resulting from consolidation, merger or division and to service
as a representative of a corporation or an employee benefit plan.
Section of the Company's Bylaws provides indemnification to directors and
officers for all actions taken by them and for all failures to take action to
the fullest extent permitted by Pennsylvania law against all expense,
liability and loss reasonably incurred or suffered by them in connection with
any threatened, pending or completed action, suit or proceeding (including,
without limitation, an action, suit or proceeding by or in the right of the
Company), whether civil, criminal, administrative, investigative or through
arbitration. Section also permits the Company, by action of its Board of
Directors, to indemnify officers, employees and other persons to the same
extent as directors. Amendments, repeals or modifications of Section can
only be prospective and such changes require the affirmative vote of not less
than all of the directors then serving or holders of a majority of the
outstanding shares of stock of the Company entitled to vote in elections of
directors. Section further permits the Company to maintain insurance, at
its expense, for the benefit of any person on behalf of whom insurance is
permitted to be purchased by Pennsylvania law against any such expenses,
liability or loss, whether or not the Company would have the power to
indemnify such person against such expense, liability or loss under
Pennsylvania or other law.
See Section of the Underwriting Agreement filed as Exhibit 1.1 hereto
pursuant to which the Underwriters agree to indemnify the Company, its
directors, officers and controlling persons against certain liabilities,
including liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In April 1997, the Company undertook a recapitalization in which shares of
voting and nonvoting Common Stock were reclassified into one class of shares
of Common Stock. The Company was then redomesticated into Pennsylvania
pursuant to a merger (all such transactions, the "Stock Recapitalization").
The Stock Recapitalization was exempt from registration under Section 3(a)(9)
of the Securities Act of 1933 (the "Securities Act").
In July 1996, the Company sold $200,000,000 aggregate principal amount of 11
1/8% Senior Subordinated Notes due 2006 (the "1996 Notes") to "qualified
institutional buyers," as defined in Rule 144A under the Securities Act. The
sale of the 1996 Notes was exempt from the registration provisions of the
Securities Act pursuant to Section 4(2) thereof.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
1 Form of Underwriting Agreement
3.1 Articles of Incorporation of the Company
3.2 Bylaws of the Company
4.1 Indenture dated as of , 1997, among the Company, as issuer, and
, as trustee
4.2 Form of Note
5 Opinion of Cozen and O'Connor
9 Voting Trust Agreement dated April , 1997 by and among certain
shareholders of the Company
10.1 Pierce Leahy Corp. Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement on
Form S-4, File No. 333-9963)
10.2 Pierce Leahy Corp. 1997 Stock Option Plan
10.3 Credit Agreement, dated as of August 13, 1996, among the Company,
Pierce Leahy Command Company, the several lenders from time to time
parties thereto, Canadian Imperial Bank of Commerce, as Canadian
Administrative Agent, and Canadian Imperial Bank of Commerce, New York
Agency, as U.S. administrative agent, together with certain collateral
documents attached thereto, including the form of US$ Note, the form
of Canadian$ Note, the form of the U.S. Global Guarantee and Security
Agreement made by the Company, certain of its affiliates and
subsidiaries and its shareholders in favor of the U.S. Administrative
Agent, the form of Canadian Security Agreement between Pierce Leahy
Command Company and the Canadian Administrative Agent and the form of
Pledge and Intercreditor Agreement among certain of the Company's
affiliates, the US Administrative Agent and the Canadian
Administrative Agent (incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-4, File No. 333-9963)
10.4 Indenture, dated as of July 15, 1996, among the Company, as issuer,
and United States Trust Company of New York, as trustee (incorporated
by reference to Exhibit 4.4 to the Company's Registration Statement on
Form S-4, File No. 333-9963)
10.5 Share Purchase Agreement dated September 30, 1995 between the Company
and Moore Corporation Limited (incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-4, File No.
333- 9963)
10.6 Stock Purchase Agreement dated April 17, 1996 among the Company and
Security Archives, Inc. and Patrick G. Clayton, Carol A. Clayton and
Byron Wood Clayton (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-4, File No. 333-9963)
10.7 Stock Purchase Agreement dated as of February 27, 1997 between the
Company, Records Management Services, Inc. and certain shareholders of
Records Management Services, Inc. (incorporated by reference to
Exhibit 10.7 to the Company's Annual Report of Form 10-K for the year
ended December 31, 1996)
10.8 Tax Indemnification Agreement dated , 1997 among the Company and
certain of its shareholders
12 Statement re: computation of ratios
21 Subsidiaries of the Registrant
23.1 Consent of Cozen and O'Connor (included in Exhibit 5)
23.2* Consent of Arthur Andersen LLP
23.3* Consent of Deloitte & Touche LLP
23.4* Consent of Deloitte & Touche LLP
24** Power of Attorney (included on signature page)
25 Statement of Eligibility of Trustee, , on Form T-1
27 Financial Data Schedule
</TABLE>
- --------
* Filed herewith.
** Previously filed.
II-3
<PAGE>
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430(A) and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4),
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For determining any liability under the Securities Act, each post-
effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered in the
registration statement, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under Section 305(b)(2) of the Act.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN KING OF PRUSSIA, PENNSYLVANIA, ON
MARCH 14, 1997.
Pierce Leahy Corp.
By: /s/ J. Peter Pierce
----------------------------------
J. PETER PIERCE,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the March 14, 1997
- ------------------------------------ Board of Directors
LEO W. PIERCE, SR.
/s/ J. Peter Pierce President, Chief March 14, 1997
- ------------------------------------ Executive Officer
J. PETER PIERCE and Director
(Principal
Executive Officer)
/s/ Douglas B. Huntley Vice President, March 14, 1997
- ------------------------------------ Chief Financial
DOUGLAS B. HUNTLEY Officer and
Director
(Principal
Financial and
Accounting
Officer)
* Director March 14, 1997
- ------------------------------------
LEO W. PIERCE, JR.
* Director March 14, 1997
- ------------------------------------
MICHAEL J. PIERCE
* Director March 14, 1997
- ------------------------------------
ALAN B. CAMPELL
* Director March 14, 1997
- ------------------------------------
DELBERT S. CONNER
By: /s/ J. Peter Pierce
---------------------------
J. PETER PIERCE
By: /s/ Douglas B. Huntley
----------------------------
DOUGLAS B. HUNTLEY
</TABLE>
Attorneys-in-fact pursuant to the powers of attorney
previously provided as part of this Registration Statement
II-5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pierce Leahy Corp.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements for Pierce Leahy Corp. and have issued
our report thereon dated February 28, 1997. Our audit was made for the purpose
of forming an opinion on the basic financial statements taken as a whole. The
schedule of valuation and qualifying accounts is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Philadelphia, Pa.,
February 28, 1997
S-1
<PAGE>
PIERCE LEAHY CORP.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE, CHARGES BALANCE,
BEGINNING OF TO DEDUCTIONS END OF
PERIOD EXPENSE FROM RESERVE PERIOD
------------ ------- ------------ --------
<S> <C> <C> <C> <C>
December 31, 1996:
Reserve for doubtful accounts...... $487 $467 $159 $795
December 31, 1995:
Reserve for doubtful accounts...... $554 $418 $485 $487
December 31, 1994:
Reserve for doubtful accounts...... $513 $180 $139 $554
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
1 Form of Underwriting Agreement
3.1 Articles of Incorporation of the Company
3.2 Bylaws of the Company
4.1 Indenture dated as of , 1997, among the Company, as issuer, and
, as trustee
4.2 Form of Note
5 Opinion of Cozen and O'Connor
9 Voting Trust Agreement dated April , 1997 by and among certain
shareholders of the Company
10.1 Pierce Leahy Corp. Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement on
Form S-4, File No. 333-9963)
10.2 Pierce Leahy Corp. 1997 Stock Option Plan
10.3 Credit Agreement, dated as of August 13, 1996, among the Company,
Pierce Leahy Command Company, the several lenders from time to time
parties thereto, Canadian Imperial Bank of Commerce, as Canadian
Administrative Agent, and Canadian Imperial Bank of Commerce, New York
Agency, as U.S. administrative agent, together with certain collateral
documents attached thereto, including the form of US$ Note, the form
of Canadian$ Note, the form of the U.S. Global Guarantee and Security
Agreement made by the Company, certain of its affiliates and
subsidiaries and its shareholders in favor of the U.S. Administrative
Agent, the form of Canadian Security Agreement between Pierce Leahy
Command Company and the Canadian Administrative Agent and the form of
Pledge and Intercreditor Agreement among certain of the Company's
affiliates, the US Administrative Agent and the Canadian
Administrative Agent (incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-4, File No. 333-9963)
10.4 Indenture, dated as of July 15, 1996, among the Company, as issuer,
and United States Trust Company of New York, as trustee (incorporated
by reference to Exhibit 4.4 to the Company's Registration Statement on
Form S-4, File No. 333-9963)
10.5 Share Purchase Agreement dated September 30, 1995 between the Company
and Moore Corporation Limited (incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-4, File No.
333-9963)
10.6 Stock Purchase Agreement dated April 17, 1996 among the Company and
Security Archives, Inc. and Patrick G. Clayton, Carol A. Clayton and
Byron Wood Clayton (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-4, File No. 333-9963)
10.7 Stock Purchase Agreement dated as of February 27, 1997 between the
Company, Records Management Services, Inc. and certain shareholders of
Records Management Services, Inc. (incorporated by reference to
Exhibit 10.7 to the Company's Annual Report of Form 10-K for the year
ended December 31, 1996)
10.8 Tax Indemnification Agreement dated , 1997 among the Company and
certain of its shareholders
12 Statement re: computation of ratios
21 Subsidiaries of the Registrant
23.1 Consent of Cozen and O'Connor (included in Exhibit 5)
23.2* Consent of Arthur Andersen LLP
23.3* Consent of Deloitte & Touche LLP
23.4* Consent of Deloitte & Touche LLP
24** Power of Attorney (included on signature page)
25 Statement of Eligibility of Trustee, , on Form T-1
27 Financial Data Schedule
</TABLE>
- --------
* Filed herewith.
** Previously filed.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
Philadelphia, PA
March 14, 1997
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-23119 of Pierce Leahy Corp. on Form S-1 of our report dated August 14,
1995, on the financial statements of Securities Archives, Inc. appearing in
the Prospectus, which is a part of this Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.
Deloitte & Touche LLP
Dallas, Texas
March 14, 1997
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-23119 of Pierce Leahy Corp. on Form S-1 of our report dated November 22,
1996 (January 10, 1997 as to Note 11) on the consolidated financial statements
of Records Management Services, Inc. and subsidiaries appearing in the
Prospectus, which is a part of this Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.
Deloitte & Touche LLP
Chicago, Illinois
March 14, 1997
