<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
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 (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
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
1900 Market Street & Flom 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. [_]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
================================================================================
Title of Each Class Proposed Maximum
of Securities to be Aggregate Offering Amount of
Registered Price(1) Registration Fee
- --------------------------------------------------------------------------------
<S> <C> <C>
% Senior Subordinated $100,000,000 $30,303
- ----
Notes due 2007
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
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 11, 1997
PROSPECTUS
$100,000,000
Pierce Leahy Corp.
[LOGO OF PIERCE LEAHY CORP APPEARS HERE]
% 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 acquisitions completed
in 1997 to date, 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.
<TABLE>
<CAPTION>
===============================================================================
Underwriting
Price to Discounts and Proceeds to
Public(1) Commissions(2) Company(3)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Per Note
- --------------------------------------------------------------------------------
Total(3)
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</TABLE>
(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.
, 1997
<PAGE>
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."
[gatefold artwork]
<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 market information
regarding the Company in this Prospectus includes the 1997 Acquisitions
described under "Business--The 1997 Acquisitions." The pro forma financial
information included herein does not reflect the acquisition of Records
Management Services, Inc.
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
$150.8 million and $29.2 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.
<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 and 19.4% 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.
. 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.
2
<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.
3
<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.
4
<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
, commencing , 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%
Senior Subordinated Notes due 2006 (the "1996
Notes"). As of December 31, 1996, after giving
pro forma effect to the acquisitions completed in
1997 to date, 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). 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 senior to the
Notes (including trade payables).
Guarantees by Future
Subsidiaries............. The Notes will be unconditionally guaranteed, on
an unsecured senior subordinated basis, as to the
payment of principal, premium, if any, and
interest, jointly and severally (the
"Guarantees"), by all future direct and indirect
domestic Restricted Subsidiaries of the Company
having either 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 Canadian subsidiary, PLC Command (as
defined herein). See "Description of the Notes--
Certain Covenants--Limitation on Creation of
Subsidiaries." The pledge will be subordinate to a
pledge of such shares in favor of the lenders and
the administrative agent under the Credit Facility
and the holders of the 1996 Notes. See
"Description of the Notes--General."
5
<PAGE>
Mandatory Redemption..... There will be no mandatory redemption requirements
with respect to the Notes.
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 remain 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.
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
"Description 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 instances
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
investments; (v) repurchase stock; (vi) create
liens; (vii) enter into transactions with
affiliates; (viii) enter into sale and leaseback
transactions; (ix) merge or consolidate the
Company or any Guarantors; and (x) transfer and
sell assets. These covenants are subject to a
number of important 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.
6
<PAGE>
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
proceeds 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 possible
acquisitions.
7
<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 to
date in 1997, 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 and to date in 1997, 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.
The Company has signed a definitive agreement to purchase Records Management
Services, Inc. for approximately $62,000. The acquisition is subject to due
diligence and customary conditions. 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 do not contain adjustments to reflect this pending acquisition.
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------
Pro Forma
1992 1993 1994 1995 1996 1996 (a)
------------ ------------ ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues
Storage $ 37,633 $ 42,122 $ 47,123 $ 55,501 $ 75,900 $ 88,351
Service and storage material sales 25,202 31,266 35,513 39,895 53,848 62,437
----------- ---------- ----------- ----------- ----------- ---------
Total revenues 62,835 73,388 82,636 95,396 129,748 150,788
Cost of sales, excluding depreciation and
amortization 39,702 45,391 49,402 55,616 73,870 81,852
Selling, general and administrative 9,012 11,977 15,882 16,148 20,007 24,331
Depreciation and amortization 5,734 6,888 8,436 8,163 12,869 15,401
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 25,950
Interest expense 6,388 6,160 7,216 9,622 17,225 24,650
----------- ---------- ----------- ----------- --------- ---------
Income before income taxes and
extraordinary charge 1,999 2,972 1,200 5,347 2,523 1,300
Income taxes -- -- -- -- -- 1,650 (e)
Extraordinary charge (d) -- 9,174 5,991 3,279 2,015 --
----------- ---------- ----------- ----------- --------- ---------
Net income (loss) 1,999 (6,202) (4,791) 2,068 508 (350)
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) $ (350)
========== ========== =========== =========== ========= =========
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
==========
</TABLE>
9
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA (CONTINUED)
(dollars in thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Other Data:
Total revenue growth 12.9% 16.8% 12.6% 15.4% 36.0% 58.1%
Operating income (before non-
recurring charges) margin 13.3% 12.4% 10.2% 15.7% 17.7% 19.4%
EBITDA (h) $ 14,121 $ 16,020 $ 17,352 $ 23,632 $ 35,871 $ 44,605
EBITDA margin 22.5% 21.8% 21.0% 24.8% 27.7% 29.6%
Cash interest expense $ 5,402 $ 4,677 $ 5,919 $ 9,089 $ 16,709 $ 23,733
Capital expenditures (i) $ 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 1.21x 1.30x 1.11x 1.37x 1.11x 1.05x
Ratio of EBITDA to
cash interest expense 2.61x 3.43x 2.93x 2.60x 1.95x 1.88x
Ratio of total debt to
EBITDA 3.90x 4.35x 4.48x 5.08x 6.67x 5.44x
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1996
---------------------------------------------
Pro Forma
for 1997
Actual Acquisitions (j) Pro Forma (k)
-------- ---------------- -------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) $ (23,933) $ (23,673) $ 56,829
Total assets 234,820 253,751 334,384
Total debt 217,423 235,970 242,478
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 to date in
1997, (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 change in
the 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 a charge
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.
(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 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 $___ and $____,respectively.
(g) Excluding the non-recurring charges incurred in 1996, pro forma net income
and net income per share would have been $___ 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) 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).
(j) Gives effect to the acquisitions completed to date in 1997 as if they
occurred on January 1, 1996. See "Pro Forma Financial Data," "The Equity
Offerings" and "Use of Proceeds."
(k) Gives effect to the (i) acquisitions completed to date in 1997, (ii)
termination of the Company's Subchapter S Corporation status upon
completion of the Equity Offerings and (iii) impact of the Offerings, if
each of these items had occurred on December 31, 1996. See "Pro Forma
Financial Data," "The Equity Offerings," "Use of Proceeds" and Note 2 to
Notes to Consolidated Financial Statements.
<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
acquisitions completed in 1997 to date, the Offerings and the estimated use of
the net proceeds therefrom, the Company's consolidated indebtedness would have
been approximately $242.5 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 acquisitions completed
in 1997 to date, 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 been rescinded or such
indebtedness has been repaid in full. Consequently, there can be no assurance
that the Company will have sufficient
12
<PAGE>
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
acquisitions completed to date in 1997 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 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 $ 1,254 $ 1,277 $ 75,785
============ ============ ============
Senior credit facility $ 5,327 $ 23,492 $ --
11 1/8 % Senior subordinated notes due 2006 200,000 200,000 130,000
__% Senior subordinated notes due 2007 -- -- 100,000
Seller notes 7,600 7,600 7,600
Other indebtedness 4,496 4,878 4,878
Less - Current portion (7,776) (7,870) (7,776)
------------ ------------- ------------
Total long term debt (a) 209,647 228,100 234,702
------------ ------------- ------------
Preferred stock (b) -- -- --
Common stock (c) -- -- 78,200
Additional paid-in capital -- -- --
Accumulated deficit (d) (25,438) (25,438) (38,113)
------------ ------------- ------------
Total shareholders' equity (deficit) (25,438) (25,438) 40,087
------------ ------------- ------------
Total capitalization $ 184,209 $ 202,662 $ 274,789
============ ============= ============
</TABLE>
(a) See Note 6 of the Notes to Financial Statements for information concerning
the Company's debt obligations.
(b) In connection with the Recapitalization, the Company authorized ___ shares
of undesignated Preferred Stock.
(c) Actual outstanding Common Stock consists of Class A and Class B Common
Stock.
(d) Does not include a 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 and the businesses
acquired by the Company in 1997 to date, 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
acquisitions completed in 1997 to date, as if they occurred on January 1, 1996.
The Offerings, the acquisitions completed in 1996 and 1997 to date and certain
management assumptions and adjustments are described in the accompanying notes
hereto. 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.
The Company has signed a definitive agreement to purchase Records Management
Services, Inc. for approximately $62,000. The acquisition is subject to due
diligence and customary conditions. 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 do not contain adjustments to reflect this pending acquisition.
20
<PAGE>
PIERCE LEAHY CORP.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
Pro Forma
For 1997 Adjustments
Completed 1997 Completed From the
Actual Acquisitions (a) Acquisitions Offerings Pro Forma
-------- --------------- ------------ --------------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash $ 1,254 $ 23 $ 1,277 $ 175,000 (b) $ 75,785
(93,492) (b)
(7,000) (c)
Accounts receivable 17,828 667 18,495 -- 18,495
Inventories 611 -- 611 -- 611
Prepaid expenses and other 688 48 736 -- 736
Deferred income taxes 3,900 (c)
-- -- -- 2,000 (d) 5,900
-------- ----------- ---------- ---------- ---------
Total current assets 20,381 738 21,119 80,408 101,527
PROPERTY AND EQUIPMENT, net 113,134 2,289 115,423 -- 115,423
OTHER ASSETS, primarily intangibles 101,305 15,904 117,209 3,200 (b) 117,434
(2,975) (c)
-------- ----------- ---------- ---------- ---------
$234,820 $ 18,931 $ 253,751 $ 80,633 $ 334,384
======== =========== ========== ========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt
and noncompete obligations $ 7,776 $ 94 $ 7,870 $ (94) (b) $ 7,776
Accounts payable 6,757 216 6,973 -- 6,973
Accrued expenses 20,563 75 20,638 -- 20,638
Deferred revenues 9,218 93 9,311 -- 9,311
-------- ----------- ---------- ---------- ---------
Total current liabilities 44,314 478 44,792 (94) 44,698
LONG-TERM DEBT AND
NONCOMPETE OBLIGATIONS 209,647 18,453 228,100 100,000 (b) 234,702
(93,398) (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 $ 18,931 $ 253,751 $ 80,633 $ 334,384
======== =========== ========== ========== =========
</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, and Professional Records Storage and Delivery) (see
"Business--Acquisition History and Growth Strategy"), after application of
the purchase method of accounting. The purchase price of the acquisitions
completed in 1997 was $18,453, 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 commisions 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 $18,165 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 change in the
Subchapter S status, 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
Completed Completed Completed Adjustments
Actual Acquisitions(a) Acquisitions Acquisitions From Offerings Pro Forma
------------ --------------- ------------ ------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES $ 129,748 $ 21,040 $ -- $ 150,788 $ -- $ 150,788
------------ --------------- ------------ ------------- ----------- ---------
OPERATING EXPENSES
Cost of sales, excluding
depreciation and amortization 73,870 9,107 (1,125)(b) 81,852 -- 81,852
Selling, general and
administrative 20,007 7,194 (2,870)(c) 24,331 -- 24,331
Depreciation and amortization 12,869 1,343 1,189 (d) 15,401 -- 15,401
Non-recurring charges 3,254 -- -- 3,254 -- 3,254
------------ --------------- ------------ ------------ ----------- ---------
Total operating expenses 110,000 17,644 (2,806) 124,838 -- 124,838
------------ --------------- ------------ ------------ ----------- ---------
Operating income 19,748 3,396 2,806 25,950 -- 25,950
INTEREST EXPENSE 17,225 970 3,987 (e) 22,182 2,468 24,650(f)
------------ --------------- ------------ ------------ ----------- ---------
Income before income taxes 2,523 2,426 (1,181) 3,768 (2,468) 1,300
and extraordinary charge
INCOME TAXES -- -- -- -- 1,650(g) 1,650(g)
------------ --------------- ------------ ------------ ----------- ---------
INCOME (LOSS) BEFORE
EXTRAORDINARY CHARGE $ 2,523 $ 2,426 $ (1,181) $ 3,768 $ (4,118) $ (350)
============ =============== ============ ============ =========== =========
</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 acquisitions
completed to date in 1997. See "Business--Acquisition and Growth Strategy."
(b) Pro forma adjustments have been made to reduce cost of sales by $1,125 to
eliminate specific expenses that would not have been incurred had the
acquisitions completed in 1996 and to date in 1997 occurred as of January 1,
1996. Such cost savings relate to (i) the termination of certain employees
due to the integration and consolidation of the operations and (ii) a
reduction in warehouse rent expense related to facilities the Company has or
will vacate or has negotiated changes in lease terms.
(c) Pro forma adjustments have been made to reduce selling, general and
administrative expenses by $2,870 to eliminate specific expenses that would
not have been incurred had the acquisitions completed in 1996 and to date in
1997 occurred as of January 1, 1996. Such cost savings relate to the
termination of certain employees and a reduction in computer and certain
other operating costs. Additional cost savings that the Company expects to
realize through the integration of the acquisitions into the Company's
operations have not been reflected.
(d) 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 to date in 1997 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.
(e) Represents interest expense of $3,987 on debt incurred to finance the
acquisitions completed in 1996 and to date in 1997, using an effective
annual interest rate of 8.3%.
(f) 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 $272 on other pro
forma indebtedness 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
24
<PAGE>
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.
(g) 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 taxes represent taxes on pro forma income before income
taxes and extraordinary charge after addback of all pro forma non-deductible
expenses of approximately $2,600, at an assumed effective rate of
approximately 42%.
25
<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 to date in 1997, 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.
The Company has signed a definitive agreement to purchase Records Management
Services, Inc. for approximately $62,000. The acquisition is subject to due
diligence and customary conditions. 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 do not contain adjustments to reflect this pending acquisition.
26
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED STATEMENTS OF
OPERATIONS, OTHER DATA AND BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
Pro Forma
1992 1993 1994 1995 1996 1996(a)
---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues
Storage $ 37,633 $ 42,122 $ 47,123 $ 55,501 $ 75,900 $ 88,351
Service and storage material sales 25,202 31,266 35,513 39,895 53,848 62,437
--------- --------- ---------- --------- ---------- ------------
Total revenues 62,835 73,388 82,636 95,396 129,748 150,788
Cost of sales, excluding depreciation and
amortization 39,702 45,391 49,402 55,616 73,870 81,852
Selling, general and administrative 9,012 11,977 15,882 16,148 20,007 24,331
Depreciation and amortization 5,734 6,888 8,436 8,163 12,869 15,401
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 25,950
Interest expense 6,388 6,160 7,216 9,622 17,225 24,650
--------- --------- ---------- --------- ---------- ------------
Income before income taxes and extraordinary
charge 1,999 2,972 1,200 5,347 2,523 1,300
Income taxes -- -- -- -- -- 1,650 (e)
Extraordinary charge (d) -- 9,174 5,991 3,279 2,015 --
--------- --------- ---------- --------- ---------- ------------
Net income (loss) 1,999 (6,202) (4,791) 2,068 508 (350)
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) $ (350)
========= ========= ========== ========= ========== ============
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
============
</TABLE>
27
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED STATEMENTS OF
OPERATIONS, OTHER DATA AND BALANCE SHEETS (CONTINUED)
(dollars in thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Other Data:
Total revenue growth rate 12.9% 16.8% 12.6% 15.4% 36.0% 58.1%
Operating income (before non-recurring
charges) margin 13.3% 12.4% 10.2% 15.7% 17.7% 19.4%
EBITDA (h) $ 14,121 $ 16,020 $ 17,352 $ 23,632 $ 35,871 $ 44,605
EBITDA margin 22.5% 21.8% 21.0% 24.8% 27.7% 29.6%
Cash interest expense $ 5,402 $ 4,677 $ 5,919 $ 9,089 $ 16,709 $ 23,733
Capital expenditures (i) $ 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 1.21x 1.30x 1.11x 1.37x 1.11x 1.05x
Ratio of EBITDA to cash interest expense 2.61x 3.43x 2.93x 2.60x 1.95x 1.88x
Ratio of total debt to EBITDA 3.90x 4.35x 4.48x 5.08x 6.67x 5.44x
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------
Pro
1992 1993 1994 1995 1996 Forma (j)
---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) $ (11,656) $ (9,143) $ (5,202) $ (8,139) $ (23,933) $ 56,829
Total assets 65,869 74,621 79,746 131,328 234,820 334,384
Total debt (including redeemable warrants) 55,027 69,736 77,683 120,071 217,423 242,478
Shareholders' equity (deficit) (9,028) (14,508) (19,341) (18,201) (25,438) 40,087
</TABLE>
28
<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 to date in 1997,
(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 change in the 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 a charge 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.
(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 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 $___ and $____,respectively.
(g) Excluding the non-recurring charges incurred in 1996, pro forma net income
and net income per share would have been $___ 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) 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).
(j) Gives effect to the (i) acquisitions completed to date in 1997, (ii)
termination of the Company's Subchapter S Corporation status upon completion
of the Equity Offerings and (iii) impact of the Offerings, if each of these
items had occured on December 31, 1996. See "Pro Forma Financial Data," "The
Equity Offerings," "Use of Proceeds" and Note 2 to Notes to Consolidated
Financial Statements.
29
<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%.
30
<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)
Year Ended December 31,
- ---------------------------------------------
<TABLE>
<CAPTION>
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.
31
<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>
Pro Forma
1992 1993 1994 1995 1996 1996(a)
------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cubic Feet Under Management Per Employee(b).. 19,961 23,033 24,405 24,521 26,021 26,135
EBITDA Per Employee(c)....................... $18,162 $19,537 $20,014 $22,379 $26,021 $27,676
Number of Employees at End of Period......... 814 826 908 1,204 1,553 1,607
</TABLE>
- -----------------
(a) Pro forma cubic feet under management is equal to (i) cubic feet of records
under management as of December 31, 1996, plus (ii) the number of cubic
feet of records added upon the closing of each of the 1997 Acquisitions.
Pro forma number of employees equals (a) the actual number of employees as
of the end of 1996, plus (b) the number of employees added as a result of
the 1997 Acquisitions, less (c) the number of employees from (b) that were
eliminated in the Company's pro forma calculations. See Note (2) to Notes
to Pro Forma Condensed Consolidated Statement of Operations. Pro forma
EBITDA gives effect to the 1997 Acquisitions, the acquisitions completed in
1996, the Offerings and the application of the net proceeds therefrom, as
if each had occurred as of January 1, 1996. See "Use of Proceeds" and "Pro
Forma Financial Data."
(b) Based on end of period cubic footage under management and end of period
number of employees.
(c) 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 other
warehouses over
- -----------
/*/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.
32
<PAGE>
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 (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
33
<PAGE>
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 a charge of approximately $___ 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.
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
34
<PAGE>
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%.
35
<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 improve its
36
<PAGE>
financial flexibility. As of December 31, 1996, on a pro forma basis after
giving effect to the acquisitions completed to date in 1997, the Offerings and
the estimated use of the net proceeds therefrom, the Company's consolidated
indebtedness would have been approximately $242.5 million. As of December 31,
1996, the Company's consolidated indebtedness was $217.4 million, and adjusted
for the acquisitions completed to date in 1997, the Company's consolidated
indebtedness would have been $236.4 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.
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.
37
<PAGE>
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.
38
<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
$150.8 million and $29.2 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%.
39
<PAGE>
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 "--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 19.4% 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.
40
<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.
41
<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 Long Island Existing April 1992
Management
Arcus Data New York Existing July 1992
File Away Baltimore/Washington, Existing July 1992
D.C.
Taylor Document Richmond New August 1992
Data Management of Nashville New April 1993
Tennessee
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 San Diego New July 1996
Diego
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 Las Vegas New October 1996
Vegas
Records Management Birmingham Existing December 1996
Security Archives & Wilmington Existing January 1997
Storage Company
The Records Center Tampa Existing January 1997
Data Archives Trenton Existing January 1997
Professional Records West Palm Beach Existing January 1997
Storage & Delivery
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 customers which may have operations
42
<PAGE>
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.
43
<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 provides the Company
44
<PAGE>
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
45
<PAGE>
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.
. 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.
46
<PAGE>
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 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
47
<PAGE>
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.
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
48
<PAGE>
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.
49
<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
---- --- --------
<S> <C> <C>
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.
50
<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
51
<PAGE>
joining the Company, Mr. Grogan worked for Dunn, Dunn and Associates in public
accounting from 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.
52
<PAGE>
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 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>
J. Peter Pierce................. 1996 $251,485 $93,400 -- -- $6,967(a)
President and Chief Executive 1995 186,800 93,400 -- -- 6,681(a)
Officer
Ross M. Engelman................ 1996 130,500 65,000 -- 5,216(b)
Vice President, 1995 130,422 65,000 -- 4,830(b)
Operations--South
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, 1995 133,020 97,841(e) -- 5,748(f)
Sales and Marketing
Christopher J. Williams......... 1996 130,000 65,000 -- 5,339(g)
Vice President, 1995 129,905 65,000 -- 5,089(g)
Operations--West
</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.
53
<PAGE>
(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 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.
54
<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 Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at December 31, 1996(a)
December 31, 1996 --------------------
-----------------
Shares
Acquired on Value
Name Exercise(#) Realized Exercisable/Unexercisable(b) Exercisable/Unexercisable
---- ----------- -------- ---------------------------- -------------------------
<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
55
<PAGE>
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, 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.
56
<PAGE>
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 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.
57
<PAGE>
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 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."
58
<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
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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 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.
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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 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
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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.
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),
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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
acquisitions completed in 1997 to date, $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 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
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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 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
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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.
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
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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.
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.
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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).
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,
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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.
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
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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.
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
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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 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
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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.
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
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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.
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
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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.
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
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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.
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.
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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, 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.
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"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 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.
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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 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.
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"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 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,"
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"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.
"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.
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"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.
"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;
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(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
(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.
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"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.
"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.
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"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 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
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<PAGE>
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 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
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<PAGE>
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.
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
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<PAGE>
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 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.
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<PAGE>
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 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
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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.
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...............
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
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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.
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.
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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).
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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-20
</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
---------------------------
ASSETS 1995 1996
------ ----------- -----------
<S> <C> <C>
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."
F-7
<PAGE>
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.
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
F-8
<PAGE>
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.
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.
F-9
<PAGE>
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
notes. The redemption will result in an extraordinary charge of approximately
$10,000 in the quarter in which the redemption occurs.
F-10
<PAGE>
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,
F-11
<PAGE>
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 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
F-12
<PAGE>
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 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.
F-13
<PAGE>
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.
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.
F-14
<PAGE>
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 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.
F-15
<PAGE>
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-16
<PAGE>
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-17
<PAGE>
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>
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>
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.
F-18
<PAGE>
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-19
<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-20
<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-21
<PAGE>
SECURITY ARCHIVES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED ENDED
JUNE 30, 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 PRIN-
CIPLE......................... 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-22
<PAGE>
SECURITY ARCHIVES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEARS ENDED MONTHS ENDED
JUNE 30, 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-23
<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-24
<PAGE>
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-25
<PAGE>
[inside back cover artwork]
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information 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
authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer of any securities other than those to which it relates or an
offer 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
information herein is correct as of any time subsequent to its date.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................................................... 1
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.......................... 26
Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 30
Business............................................................. 39
Management........................................................... 50
Certain Transactions................................................. 58
Principal Shareholders............................................... 59
Description of Certain Indebtedness.................................. 61
Description of the Notes............................................. 62
Description of Capital Stock......................................... 86
Underwriting......................................................... 88
Legal Matters........................................................ 89
Experts.............................................................. 89
Available Information................................................ 90
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.
================================================================================
<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
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
<PAGE>
independent legal counsel; or by the shareholders.
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 $200,000,000 aggregate principal amount of
11-1/8% Senior Subordinated Notes due 2006 (the "1996 Notes") to "qualified
institutional buyers," as defined in Rule 144A under the Securities Act. The
sale of the 1996 Notes was exempt from the registration provisions of the
Securities Act pursuant to Section 4(2) thereof.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
- ------- -------
<S> <C>
1 Form of Underwriting Agreement
3.1 Articles of Incorporation of the Company
3.2 Bylaws of the Company
4.1 Indenture dated as of _________________, 1997, among the Company, as
issuer, and ____________________, as trustee
4.2 Form of Note
5 Opinion of Cozen and O'Connor
9 Voting Trust Agreement dated April __, 1997 by and among certain
shareholders of the Company
10.1 Pierce Leahy Corp. Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement on
Form S-4, File No. 333-9963)
10.2 Pierce Leahy Corp. 1997 Stock Option Plan
10.3 Credit Agreement, dated as of August 13, 1996, among the Company,
Pierce Leahy Command Company, the several lenders from time to time
parties thereto, Canadian Imperial Bank of Commerce, as Canadian
Administrative Agent, and Canadian Imperial Bank of Commerce, New York
Agency, as U.S. administrative agent, together with certain collateral
documents attached thereto, including the form of US$ 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 on Form 10-K for the year ended
December 31, 1996)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
-------- -------
<S> <C>
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
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.
(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 10, 1997.
PIERCE LEAHY CORP.
By:/s/ J. Peter Pierce
-----------------------------------
J. Peter Pierce, President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below in so signing also makes, constitutes and appoints J. Peter Pierce
and Douglas B. Huntley, and each of them, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to execute and cause to be
filed with the Securities and Exchange Commission any and all amendments and
post-effective amendments to this Registration Statement and to sign any and all
additional registration statements relating to the same offering of securities
as this Registration Statement that are filed pursuant to Rule 462(b) under the
Securities Act of 1933, and in each case to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
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>
/s/ Leo W. Pierce, Sr. Chairman of the Board of March 10, 1997
- ------------------------ Directors
Leo W. Pierce, Sr.
/s/ J. Peter Pierce President, Chief March 10, 1997
- ------------------------ Executive Officer
J. Peter Pierce and Director
(Principal Executive
Officer)
/s/ Douglas B. Huntley Vice President, Chief March 10, 1997
- ------------------------ Financial
Douglas B. Huntley Officer and Director
(Principal Financial and
Accounting Officer)
/s/ Leo W. Pierce, Jr. Director March 10, 1997
- ------------------------
Leo W. Pierce, Jr.
</TABLE>
[Signatures Continued on Next Page]
II-5
<PAGE>
[Signatures Continued from Previous Page]
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Michael J. Pierce Director March 10, 1997
- ------------------------
Michael J. Pierce
/s/ Alan B. Campell Director March 10, 1997
- ------------------------
Alan B. Campell
/s/ Delbert S. Conner Director March 10, 1997
- ------------------------
Delbert S. Conner
</TABLE>
II-6
<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 $554
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
- ------- -------
<S> <C>
1 Form of Underwriting Agreement
3.1 Articles of Incorporation of the Company
3.2 Bylaws of the Company
4.1 Indenture dated as of _____________, 1997, among the Company, as
issuer, and ____________________, as trustee
4.2 Form of Note
5 Opinion of Cozen and O'Connor
9 Voting Trust Agreement dated April __, 1997 by and among certain
shareholders of the Company
10.1 Pierce Leahy Corp. Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement on
Form S-4, File No. 333-9963)
10.2 Pierce Leahy Corp. 1997 Stock Option Plan
10.3 Credit Agreement, dated as of August 13, 1996, among the Company,
Pierce Leahy Command Company, the several lenders from time to time
parties thereto, Canadian Imperial Bank of Commerce, as Canadian
Administrative Agent, and Canadian Imperial Bank of Commerce, New
York Agency, as U.S. administrative agent, together with certain
collateral documents attached thereto, including the form of US$
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
- ------- -------
<S> <C>
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 on 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
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.
<PAGE>
Exhibit 23.2
------------
ARTHUR ANDERSEN LLP
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 10, 1997
<PAGE>
Exhibit 23.3
------------
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement 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 10, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 722 1,254
<SECURITIES> 0 0
<RECEIVABLES> 14,669 18,623
<ALLOWANCES> 487 795
<INVENTORY> 762 611
<CURRENT-ASSETS> 16,691 20,381
<PP&E> 109,755 158,154
<DEPRECIATION> 35,328 45,020
<TOTAL-ASSETS> 131,328 234,820
<CURRENT-LIABILITIES> 24,830 44,314
<BONDS> 117,329 209,647
0 0
0 0
<COMMON> 0 0
<OTHER-SE> (17,137) (25,438)
<TOTAL-LIABILITY-AND-EQUITY> 131,328 234,820
<SALES> 0 0
<TOTAL-REVENUES> 95,396 129,748
<CGS> 0 0
<TOTAL-COSTS> 80,427 110,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 418 467
<INTEREST-EXPENSE> 9,622 17,225
<INCOME-PRETAX> 5,347 2,523
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 5,347 2,523
<DISCONTINUED> 0 0
<EXTRAORDINARY> 3,279 2,015
<CHANGES> 0 0
<NET-INCOME> 2,068 508
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
