<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended September 30, 1998
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from ____________ to ___________
Commission file number 1-13045
PIERCE LEAHY CORP.
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-2588479
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
631 Park Avenue, King of Prussia, PA 19406
------------------------------------------
(Address of Principal Executive Offices, Including Zip Code)
(610) 992-8200
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of November 6, 1998, there were 17,025,990 shares of the Registrant's Common
Stock, par value $0.01 per share, outstanding.
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PIERCE LEAHY CORP.
INDEX
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<CAPTION>
Page
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the Three
Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Operations for the Nine
Months Ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7-10
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-16
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 17
Signatures 17
Exhibit 27 - Financial Data Schedule 18
</TABLE>
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PIERCE LEAHY CORP.
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
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<S> <C> <C>
CURRENT ASSETS:
Cash $ 4,358 $ 1,782
Accounts receivable, net of allowance for doubtful
accounts of $3,433 and $2,399 42,413 25,201
Inventories 1,339 813
Prepaid expenses and other 1,896 1,772
Deferred income taxes 2,569 2,621
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Total current assets 52,575 32,189
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PROPERTY AND EQUIPMENT 280,751 214,981
Less-Accumulated depreciation and amortization (64,754) (54,500)
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Net property and equipment 215,997 160,481
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OTHER ASSETS:
Intangible assets, net 383,010 196,750
Other 3,047 5,293
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Total other assets 386,057 202,043
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$ 654,629 $ 394,713
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 4,234 $ 1,084
Current portion of noncompete obligations 221 220
Accounts payable 10,485 8,838
Accrued expenses 38,273 24,754
Deferred revenues 13,014 10,199
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Total current liabilities 66,227 45,095
LONG-TERM DEBT 506,487 277,767
NONCOMPETE OBLIGATIONS - 126
DEFERRED RENT 5,622 3,993
DEFERRED INCOME TAXES 12,386 8,409
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY 63,907 59,323
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$ 654,629 $ 394,713
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
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PIERCE LEAHY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands except share and per share amounts)
<TABLE>
<CAPTION>
Three months ended September 30,
--------------- ---------------
1998 1997
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<S> <C> <C>
REVENUES:
Storage $ 40,820 $ 27,894
Service and storage material sales 33,777 19,355
--------------- ---------------
Total revenues 74,597 47,249
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OPERATING EXPENSES:
Cost of sales, excluding depreciation and amortization 41,961 25,943
Selling, general and administrative 9,882 7,087
Depreciation and amortization 9,385 5,627
Special compensation charge - 1,752
Foreign currency exchange 4,246 60
--------------- ---------------
Total operating expenses 65,474 40,469
--------------- ---------------
Operating income 9,123 6,780
INTEREST EXPENSE 12,089 7,352
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Loss before income taxes and extraordinary item (2,966) (572)
INCOME TAXES 1,648 7,298
--------------- ---------------
Loss before extraordinary item (4,614) (7,870)
Extraordinary item-loss on early extinguishment of debt,
net of $4,014 tax benefit in 1997 - 6,036
--------------- ---------------
NET LOSS $ (4,614) $ (13,906)
=============== ===============
Basic and diluted net loss per Common share:
Loss before extraordinary item $ (0.27) $ (0.49)
Extraordinary item, net of tax - (0.37)
--------------- ---------------
Net loss $ (0.27) $ (0.86)
=============== ===============
Shares used in computing basic and diluted net loss
per Common share 17,025,990 16,190,290
=============== ===============
The accompanying notes are an integral part of these financial statements.
</TABLE>
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PIERCE LEAHY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands except share and per share amounts)
<TABLE>
<CAPTION>
Nine months ended September 30,
---------------------------------
1998 1997
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<S> <C> <C>
REVENUES:
Storage $ 111,217 $ 77,907
Service and storage material sales 83,816 55,782
--------------- ---------------
Total revenues 195,033 133,689
--------------- ---------------
OPERATING EXPENSES:
Cost of sales, excluding depreciation and amortization 111,155 73,852
Selling, general and administrative 27,512 21,258
Depreciation and amortization 25,181 15,051
Special compensation charge - 1,752
Foreign currency exchange 7,908 180
--------------- ---------------
Total operating expenses 171,756 112,093
--------------- ---------------
Operating income 23,277 21,596
INTEREST EXPENSE 30,772 22,207
--------------- ---------------
Loss before income taxes and extraordinary item (7,495) (611)
INCOME TAXES 2,613 7,298
--------------- ---------------
Loss before extraordinary item (10,108) (7,909)
Extraordinary item-loss on early extinguishment of debt,
net of $4,014 tax benefit in 1997 - 6,036
--------------- ---------------
NET LOSS $ (10,108) $ (13,945)
=============== ===============
Basic and diluted net loss per Common share $ (0.60)
===============
Shares used in computing basic and diluted net loss
per Common share 16,730,772
===============
Pro forma data:
Historical loss before income taxes and extraordinary item $ (611)
Pro forma income taxes 1,326
Extraordinary item, net of tax 6,036
---------------
Pro forma net loss available to Common shareholders $ (7,973)
===============
Pro forma basic and diluted net loss per Common share:
Pro forma net loss before extraordinary item $ (0.16)
Extraordinary item, net of tax (0.48)
---------------
Pro forma basic and diluted net loss per Common share $ (0.64)
===============
Shares used in computing pro forma basic and diluted net loss per Common share 12,437,556
===============
The accompanying notes are an integral part of these financial statements.
</TABLE>
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PIERCE LEAHY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,108) $ (13,945)
Adjustments to reconcile net loss to net cash
provided by operating activites:
Extraordinary Item - 6,036
Special compensation charge - 1,752
Depreciation and amortization 25,181 15,051
Gain (loss) on sale of property and equipment 29 (5)
Deferred income tax provision 2,577 7,188
Amortization of deferred financing costs 1,017 776
Change in deferred rent 1,045 680
Foreign currency exchange and adjustment 10,422 180
Changes in assets and liabilities, excluding the effects
from the purchase of businesses:
(Increase) decrease in -
Accounts receivable, net (10,129) (6,214)
Inventories (385) (251)
Prepaid expenses and other 564 (638)
Other assets 2,324 979
Increase (decrease) in -
Accounts payable 1,367 (3,424)
Accrued expenses 2,062 (2,877)
Deferred revenue 1,108 981
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Net cash provided by operating activities 27,074 6,269
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CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for businesses acquired, net of cash acquired (186,499) (92,451)
Capital expenditures (30,468) (27,081)
Client acquisition costs (7,334) (6,875)
Increase in intangible assets (5,684) (7,449)
Payments on noncompete obligations (165) (442)
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Net cash used in investing activities (230,150) (134,298)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving line of credit 165,423 140,845
Payments on revolving line of credit (76,247) (139,614)
Proceeds from issuance of long-term debt 128,843 120,000
Proceeds from issuance of Common Stock - 93,514
Payments on long-term debt and capital lease obligations (9,856) (77,136)
Prepayment penalty on early redemption of notes - (7,000)
Payment of debt financing costs (2,511) (1,866)
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Net cash provided by financing activities 205,652 128,743
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NET INCREASE IN CASH 2,576 714
CASH, BEGINNING OF PERIOD 1,782 1,254
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CASH, END OF PERIOD $ 4,358 $ 1,968
============ ============
SUPPLEMENTAL DISCLOSURE-CASH PAID FOR INTEREST $ 30,188 $ 25,546
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
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PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in thousands except share and per share amounts)
1) GENERAL:
The interim consolidated financial statements presented herein have been
prepared by Pierce Leahy Corp. ("Pierce Leahy" or the "Company") without
audit and, in the opinion of management, reflect all adjustments of a
normal recurring nature necessary for a fair presentation. Interim results
are not necessarily indicative of results for a full year.
The consolidated balance sheet as of December 31, 1997 has been derived
from the Company's consolidated financial statements that have been
audited by the Company's independent public accountants. The unaudited
consolidated financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in the annual
financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to those rules and
regulations. The consolidated financial statements and notes included
herein should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended December 31, 1997, included
in the Company's Annual Report on Form 10-K for such year.
2) ACQUISITIONS:
During 1997, the Company purchased 17 records management businesses. For
the nine months ended September 30, 1998, 15 records management businesses
and one marketing literature fulfillment business were purchased by the
Company. All 1998 acquisitions were accounted for using the purchase
method of accounting and, accordingly, the results of operations for such
acquisitions have been included in the consolidated results of the Company
from their respective acquisition dates. The aggregate purchase price for
the 1998 acquisitions exceeded the underlying estimated fair value of the
net assets acquired by $177,989, which has been assigned to goodwill and is
being amortized over the estimated benefit period of 30 years. For the nine
months ended September 30, 1998, the Company paid an aggregate of
approximately $204,090 for the acquisitions, of which $186,499 was in cash
provided primarily through borrowings under the Company's credit facility
(the "Credit Facility"), and from the proceeds from the issuance of
$135,000 principal amount of 8 1/8% Senior Notes by the Company's principal
Canadian subsidiary. The remainder of the purchase price was comprised of
shares of Common Stock with a deemed value of $14,416, and $3,175 in seller
notes. Certain purchase agreements contain purchase price adjustments and
earn-out provisions contingent upon future performance and other criteria
that could affect the ultimate net cash paid for such acquisitions.
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3) LONG-TERM DEBT:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
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<S> <C> <C>
11 1/8% Senior Subordinated Notes due 2006 $130,000 $130,000
9 1/8% Senior Subordinated Notes due 2007 120,000 120,000
8 1/8% Senior Notes due 2008 134,534 -
U.S. Revolver 110,000 -
Canadian Revolver - 22,303
Mortgage Notes 7,463 5,369
Seller Notes 4,142 1,051
Other 4,582 128
----------------------- --------------------
510,721 278,851
Less: Current portion (4,234) (1,084)
----------------------- --------------------
$506,487 $277,767
======================= ====================
</TABLE>
On April 7, 1998, Pierce Leahy Command Company, the Company's principal
Canadian subsidiary, completed the issuance of $135,000 principal amount of
8 1/8% Senior Notes due 2008. Such notes are guaranteed on a senior
subordinated basis by the Company. The notes were issued at a discount of
99.641% and such amount will be accreted through interest expense over the
term of the Notes.
4) PRO FORMA INCOME TAXES AND BASIC AND DILUTED NET LOSS PER SHARE:
Prior to July 1, 1997, the Company was an S Corporation for federal and
state income tax purposes. The pro forma income tax provision for the nine
months ended September 30, 1997 reflects taxes which would have been
recorded on the historical loss before income taxes, at an effective rate
of 39%, had the Company not been an S Corporation during such period. The
basic and diluted pro forma net loss per share is computed by dividing pro
forma net loss by the weighted average number of shares outstanding during
such period.
5) EARNINGS PER SHARE:
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." SFAS No. 128 requires dual presentation of basic and diluted
earnings per share. According to SFAS No. 128, basic earnings per share,
which replaces
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primary earnings per share, is calculated by dividing net income (loss) by
the weighted average number of Commo n shares outstanding for the period.
Diluted earnings per share, which replaces fully diluted earnings per
share, reflects the potential dilution from the exercise or conversion of
securities into Common stock, such as stock options and warrants. The
Company was required to and did adopt SFAS No. 128 during the period ended
December 31, 1997. For the three- and nine-months ended September 30, 1998
and 1997, there was no dilutive effect of stock options or warrants as the
Company incurred a net loss for such periods. Options to purchase 1,270,424
shares of Common stock at prices ranging from $5.09 to $20.50 per share
were outstanding at September 30, 1998.
6) COMPREHENSIVE INCOME:
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which is effective for financial statements issued for fiscal
years beginning after December 15, 1997. The Company's comprehensive
income includes net income and unrealized gains and losses from foreign
currency translation adjustments. The unrealized foreign currency
translation gains and losses for the three- and nine-month periods ended
September 30, 1998 and 1997 were immaterial.
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7) SUBSIDIARY INFORMATION:
The following summarized financial information of the Company's Canadian
subsidiaries has been prepared from the books and records maintained by
such subsidiaries. The summarized financial information may not necessarily
be indicative of the results of operations or financial position had the
Canadian subsidiaries operated as independent entities. Certain
intercompany sales and charges are included in the subsidiaries' records
and are eliminated in consolidation.
<TABLE>
<CAPTION>
For the Three Months Ended Sept 30, For the Nine Months Ended Sept 30,
-------------------------------------- -------------------------------------
1998 1997 1998 1997
--------------- ------------------ ----------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 9,746 $4,252 $ 24,877 $12,806
Gross Margin $ 4,496 $2,192 $ 11,561 $ 6,324
Operating income $ 2,412 $1,186 $ 6,333 $ 3,254
Net income (loss) $(6,656) $ (360) $(11,990) $ 238
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
----------------------------- -------------------------
<S> <C> <C>
Current assets $ 8,174 $ 3,587
Total assets $116,552 $33,056
Current liabilities $ 10,426 $ 2,018
Long-term liabilities $136,699 $25,652
</TABLE>
In addition, the Company's domestic, wholly-owned subsidiaries are Monarch
Box, Inc., and Advanced Box, Inc. These subsidiaries were established in
1997 to hold investments and certain intangible assets of the Company. They
do not have any other operations. There are no restrictions on the ability
of any of the subsidiaries to transfer funds to the Company in the form of
loans, advances or dividends, except as provided by applicable law.
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<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition and
results of operations for the three-month and nine-month periods ended
September 30, 1998 and 1997 should be read in conjunction with the consolidated
financial statements and notes thereto for the three-month and nine-month
periods ended September 30, 1998 and 1997, included herein, and the consolidated
financial statements and notes thereto for the year ended December 31, 1997,
included in the Company's Annual Report on Form 10-K for such year.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Total revenues increased from $47.2 million for the three months ended September
30, 1997 to $74.6 million for the three months ended September 30, 1998, an
increase of $27.4 million, or 57.9%. Twenty-six acquisitions were completed from
July 1997 through September 1998, which accounted for $19.2 million, or 70.1%,
of such increase in total revenues. The balance of the revenue growth resulted
from sales to new customers and from net increases in cubic feet stored from
existing customers.
Storage revenues increased from $27.9 million for the three months ended
September 30, 1997 to $40.8 million for the three months ended September 30,
1998, an increase of $12.9 million, or 46.3%. Service and storage material
sales revenue increased from $19.4 million for the three months ended September
30, 1997 to $33.8 million for the three months ended September 30, 1998, an
increase of $14.4 million, or 74.5%.
Cost of sales (excluding depreciation and amortization) increased from $25.9
million in the three months ended September 30, 1997 to $42.0 million in the
three months ended September 30, 1998, an increase of $16.1 million, or 61.7%,
and increased as a percentage of total revenues from 54.9% in the 1997 period to
56.3% in the 1998 period. The increase in dollars resulted primarily from an
additional number of employees and an increase in facility occupancy costs
resulting from the growth in cubic feet stored from existing customers and
acquisitions. The increase as a percentage of total revenues resulted primarily
from increased cost of sales from acquisitions not yet integrated into the
Company's PLUS(R) system.
Selling, general and administrative expenses increased from $7.1 million for the
three months ended September 30, 1997 to $9.9 million for the three months ended
September 30, 1998, an increase of $2.8 million, or 39.4%, but decreased as a
percentage of total revenues from 15.0% in the 1997 period to 13.2% in the 1998
period. The dollar increase was primarily attributable to increases in staffing,
including increases in sales force and administrative staff. The decrease as a
percentage of total revenues was attributable to economies realized from
administrative efficiencies of operating in a centralized manner including the
use of the Company's PLUS(R) system.
Depreciation and amortization expense increased from $5.6 million for the three
months ended September 30, 1997 to $9.4 million for the three months ended
September 30, 1998, an increase
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of $3.8 million, or 66.8%, and increased as a percentage of total revenues from
11.9% for the three months ended September 30, 1997 to 12.6% for the three
months ended September 30, 1998. The increase in both dollars and as a
percentage of total revenues was primarily attributable to the additional
depreciation and amortization expense related to the 26 acquisitions completed
from July 1997 through September 1998 and to capital expenditures for buildings,
shelving, improvements to records management facilities and information systems,
and client acquisition costs.
A special compensation charge of $1.8 million was incurred during the three
months ended September 30, 1997. This charge related to the write-off of the
unamortized compensation expense due to the acceleration of vesting of stock
options granted on January 1, 1997 in conjunction with the Company's initial
public offering of Common Stock.
The Company had a foreign currency exchange loss for the three months ended
September 30, 1997 of $0.1 million (.1% of total revenues) and $4.2 million
(5.7% of total revenues) for the three months ended September 30, 1998. The
increase in the foreign currency exchange loss is primarily due to a decrease in
the value of the Canadian dollar as compared to the U.S. dollar. This movement
affects U.S. dollar denominated liabilities of the Company's Canadian
subsidiaries, primarily the $135.0 million principal amount of 8 1/8% Senior
Notes issued by Pierce Leahy Command Company, a Canadian subsidiary of the
Company ("Command").
Interest expense increased from $7.4 million for the three months ended
September 30, 1997 to $12.1 million for the three months ended September 30,
1998, an increase of $4.7 million, or 64.4%. The increase was primarily
attributable to increased indebtedness incurred to finance acquisitions and
capital expenditures.
As a result of the foregoing factors, the Company had a loss before income taxes
and extraordinary item of $0.6 million (-1.2% of total revenues) for the three
months ended September 30, 1997 compared to a loss before income taxes of $3.0
million (-4.0% of total revenues) for the three months ended September 30, 1998.
The Company recorded a provision for income taxes of $7.3 million (15.4% of
total revenues) for the three months ended September 30, 1997 compared to a
provision for income taxes of $1.6 million (2.2% of total revenues) for the
three months ended September 30, 1998. The decrease in dollars and as a
percentage of total revenues is primarily due to the inclusion of a $6.6 million
income tax expense, related to the termination of the Company's Subchapter S
status in the results for the three months ended September 30, 1997.
The Company recorded an extraordinary item of $6.0 million (12.8% of total
revenues) for the three months ended September 30, 1997 related to the early
extinguishment of debt. The $6.0 million extraordinary item for the three months
ended September 30, 1997 is net of a tax benefit of $4.0 million.
As a result of the foregoing items, the net loss for the three months ended
September 30, 1997 was $13.9 million (-29.4% of total revenues) and the net loss
was $4.6 million (-6.2% of total revenues) for the three months ended
September 30, 1998.
Earnings before interest expense, income taxes, depreciation and amortization,
special compensation charge, and foreign currency exchange ("EBITDA") increased
from $14.2
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million for the three months ended September 30, 1997 to $22.8 million for the
three months ended September 30, 1998, an increase of $8.6 million, or 60.0%. As
a percentage of total revenues, EBITDA was 30.1% for the three months ended
September 30, 1997 and 30.5% for the three months ended September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Total revenues increased from $133.7 million for the nine months ended
September 30, 1997 to $195.0 million for the nine months ended September 30,
1998, an increase of $61.3 million, or 45.9%. Thirty-three acquisitions were
completed from January 1997 through September 1998, which accounted for $43.1
million, or 70.3%, of such increase in total revenues. The balance of the
revenue growth resulted from sales to new customers and from net increases in
cubic feet stored from existing customers.
Storage revenues increased from $77.9 million for the nine months ended
September 30, 1997 to $111.2 million for the nine months ended September 30,
1998, an increase of $33.3 million, or 42.8%. Service and storage material
sales revenues increased from $55.8 million for the nine months ended September
30, 1997 to $83.8 million for the nine months ended September 30, 1998, an
increase of $28.0 million, or 50.3%.
Cost of sales (excluding depreciation and amortization) increased from $73.9
million in the nine months ended September 30, 1997 to $111.2 million in the
nine months ended September 30, 1998, an increase of $37.3 million, or 50.5%,
and increased as a percentage of total revenues from 55.2% in the 1997 period to
57.0% in the 1998 period. The increase in dollars resulted primarily from an
additional number of employees and an increase in facility occupancy costs
resulting from the growth in cubic feet stored from existing customers and
acquisitions. The increase as a percentage of total revenues resulted primarily
from increased cost of sales from acquisitions not yet integrated into the
Company's PLUS(R) system.
Selling, general and administrative expenses increased from $21.3 million for
the nine months ended September 30, 1997 to $27.5 million for the nine months
ended September 30, 1998, an increase of $6.2 million, or 29.4%, but decreased
as a percentage of total revenues from 15.9% in the 1997 period to 14.1% in the
1998 period. The dollar increase was primarily attributable to increases in
staffing, including increases in sales force and administrative staff. The
decrease as a percentage of total revenues was attributable to economies
realized from administrative efficiencies of operating in a centralized manner
including the use of the Company's PLUS(R) system.
Depreciation and amortization expense increased from $15.1 million for the nine
months ended September 30, 1997 to $25.2 million for the nine months ended
September 30, 1998, an increase of $10.1 million, or 67.3%, and increased as a
percentage of revenues from 11.3% for the nine months ended September 30, 1997
to 12.9% for the nine months ended September 30, 1998. The increase in both
dollars and percentage of total revenues was primarily attributable to the
additional depreciation and amortization expense related to the 33 acquisitions
completed from January 1997 through September 1998 and to capital expenditures
for buildings, shelving, improvements to records management facilities and
information systems, and client acquisition costs.
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A special compensation charge of $1.8 million was incurred during the nine
months ended September 30, 1997. This charge relates to the write-off of the
unamortized compensation expense due to the acceleration of vesting of stock
options granted on January 1, 1997 in conjunction with the Company's initial
public offering of Common Stock.
The Company had a foreign currency exchange loss for the nine months ended
September 30, 1997 of $.2 million (.1% of total revenues) and $7.9 million (4.1%
of total revenues) for the nine months ended September 30, 1998. The increase
in the foreign currency exchange loss is primarily due to a decrease in the
value of the Canadian dollar compared to the U.S. dollar. This movement affects
U.S. dollar denominated liabilities of the Company's Canadian subsidiaries,
primarily the $135.0 million principal amount of 8 1/8% Senior Notes issued by
Command.
Interest expense increased from $22.2 million for the nine months ended
September 30, 1997 to $30.8 million for the nine months ended September 30,
1998, an increase of $8.6 million, or 38.6%. The increase was primarily
attributable to increased indebtedness incurred to finance acquisitions and
capital expenditures.
As a result of the foregoing factors, the Company had a loss before income taxes
and extraordinary item of $0.6 million (-0.5% of total revenues) for the nine
months ended September 30, 1997 compared to a loss before income taxes of $7.5
million (-3.8% of total revenues) for the nine months ended September 30, 1998.
The Company recorded a provision for income taxes of $7.3 million (5.5% of total
revenues) for the nine months ended September 30, 1997 compared to a provision
for income taxes of $2.6 million (1.3% of total revenues) for the nine months
ended September 30, 1998. The decrease in dollars and as a percentage of total
revenues is primarily due to the inclusion of a $6.6 million income tax expense,
related to the termination of the Company's Subchapter S status in the results
for the nine months ended September 30, 1997.
The Company recorded an extraordinary item of $6.0 million (4.5% of total
revenues) for the nine months ended September 30, 1997 related to a loss on the
early extinguishment of debt. The $6.0 million extraordinary item for the nine
months ended September 30, 1997 is net of a tax benefit of $4.0 million.
As a result of the foregoing items, net loss for the nine months ended September
30, 1997 was $13.9 million (-10.4% of total revenues) and net loss was $10.1
million (-5.2% of total revenues) for the nine months ended September 30, 1998.
EBITDA increased from $38.6 million for the nine months ended September 30, 1997
to $56.4 million for the nine months ended September 30, 1998, an increase of
$17.8 million, or 46.1%. As a percentage of total revenues, EBITDA remained the
same at 28.9% for the nine months ended September 30, 1997 and September 30,
1998.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has made significant investments, consisting primarily of (i)
acquisitions, (ii) capital expenditures for buildings, shelving, improvements to
records management facilities and information systems, and (iii) client
acquisition costs. Cash paid for these investments during the nine months ended
September 30, 1998 was $186.5 million, $30.5 million and $7.3 million,
respectively. These investments were primarily funded with borrowings under the
Credit Facility and through the issuance of $135.0 million principal amount of 8
1/8% Senior Notes due 2008 by Command. The notes are guaranteed on a senior
subordinated basis by the Company.
During the nine months ended September 30, 1998, the Company generated $27.1
million in net cash provided by operating activities as compared to net cash
provided by operating activities of $6.3 million for the nine months ended
September 30, 1997. The increase in net cash provided by operating activities of
$20.8 million primarily resulted from the $17.8 million increase in EBITDA and
an $8.4 million increase in working capital, which was offset by an increase in
cash paid for interest of $4.6 million.
The net cash provided by financing activities for the nine months ended
September 30, 1998 was $205.7 million, consisting primarily of the net proceeds
from issuance by Command of $135.0 million principal amount of 8 1/8% Senior
Subordinated Notes on April 7, 1998, and $165.4 million of borrowings under the
Credit Facility, offset by payments of $76.2 to the Credit Facility. As of
September 30, 1998, the Company had $4.4 million of available cash and the
Credit Facility providing for $150.0 million of U.S. dollar borrowings and $40.0
million of Canadian dollar borrowings, subject to certain limitations and
amounts already outstanding. As of September 30, 1998, $110.0 million was
outstanding under the Credit Facility. On the basis of its reported third
quarter results, as of September 30, 1998, the Company had available
approximately $50.0 million of additional borrowing capacity under the Credit
facility, Senior Subordinated Notes and the Senior Notes.
YEAR 2000 COMPLIANCE
The Company uses a number of computer software programs and systems in its
operations, including the PLUS(R) system and embedded systems contained in the
Company's buildings, plant, equipment and other infrastructure. The Company has
developed a plan designed to make its system compliant with the requirements to
process transactions in the year 2000. Review of the Company's core PLUS(R)
system databases and programs has been completed and code modifications and
testing are scheduled to be completed by December 31, 1998. The present version
of the Company's internal financial accounting system is not year 2000 compliant
and is scheduled to be upgraded by December 31, 1998. The Company is also
working with its other internal information systems and network providers so
that all systems are year 2000 compliant. The Company's estimates that the
expenses and capital expenditures associated with achieving year 2000 compliance
will approximate $0.4 million of which approximately $0.3 million had been
expended as of September 30, 1998. The Company estimates that its remediation
costs incurred to date in connection with the Year 2000 issue, including the
replacement of non-compliant systems, software modifications and validation,
have been approximately $0.3 million. In addition, the Company estimates the
cost to complete its Year 2000 evaluation, remediation and validation of all
systems will approximate an additional $0.1 million. Funding for costs incurred
to date has come from cash flows from
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<PAGE>
operations, and future costs are expected to be funded in a similar manner. The
Company has not deferred any significant system projects due to its Year 2000
efforts.
FORWARD-LOOKING STATEMENTS
This report 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 its acquisitions
and their integration into the Company's existing operations. Such statements
involve known and unknown risks, uncertainties and other factors 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. The
factors that could cause such a difference include, among others, the following:
general economic and business condition; 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
report. The forward-looking statements are made as of the date of this report,
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>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule for the nine months ended
September 30, 1998 submitted to the Securities and
Exchange Commission in electronic format
(b) Reports on Form 8-K
The Company filed a Form 8-K on July 6, 1998 reporting, under
item 2 of such form, the acquisition of Kestrel Holdings, Inc.
Included in the Form 8-K were the following financial
statements:
(i) Consolidated Financial Statements of Kestrel Holdings,
Inc.:
Auditor's Report
Consolidated Balance Sheets
Consolidated Statements of Earnings
Consolidated Statements of Retained Earnings
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(ii) Consolidated Financial Statements of Archivex Limited:
Auditor's Report
Consolidated Balance Sheets
Consolidated Statements of Earnings
Consolidated Statements of Retained Earnings
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIERCE LEAHY CORP.
November 12, 1998 By: / s / Douglas B. Huntley
----------------- -------------------------------
(date) Douglas B. Huntley
Vice President and Chief Financial Officer
(Principal Financial Officer)
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