PROSPECTUS Exhibit 99
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[LOGO OF PIERCE LEAHY CORP.
APPEARS HERE]
PIERCE LEAHY CORP.
OFFER TO EXCHANGE ITS 11 1/8% SENIOR SUBORDINATED NOTES DUE 2006,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT, FOR ANY
AND ALL OF ITS OUTSTANDING 11 1/8% SENIOR SUBORDINATED NOTES DUE 2006
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
NOVEMBER 25, 1996, UNLESS EXTENDED
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Pierce Leahy Corp., a New York corporation ("Pierce Leahy" or the
"Company"), hereby offers to exchange (the "Exchange Offer"), upon the terms
and subject to the conditions set forth in this Prospectus and the
accompanying Letter of Transmittal (the "Letter of Transmittal"), up to
$200,000,000 in aggregate principal amount of the Company's new 11 1/8% Senior
Subordinated Notes due 2006 (the "Exchange Notes"), for $200,000,000 in
aggregate principal amount of the Company's outstanding 11 1/8% Senior
Subordinated Notes due 2006 (the "Original Notes"). The Original Notes and the
Exchange Notes are sometimes referred to herein collectively as the "Notes."
The terms of the Exchange Notes are substantially identical in all respects
(including principal amount, interest rate and maturity) to the terms of the
Original Notes for which they may be exchanged pursuant to this Exchange
Offer, except that (i) the Exchange Notes will be freely transferable by
holders thereof (other than as provided in the next paragraph) and issued free
of any covenant restricting transfer absent registration and (ii) holders of
the Exchange Notes will not be entitled to certain rights of holders of the
Original Notes under the Registration Rights Agreement (as defined herein),
which rights will terminate upon the consummation of the Exchange Offer. The
Exchange Notes will evidence the same debt as the Original Notes (which they
replace) and will be entitled to the benefits of an Indenture dated as of July
15, 1996 governing the Original Notes and the Exchange Notes (the
"Indenture"). For a complete description of the terms of the Exchange Notes,
see "Description of the Notes." There will be no cash proceeds to the Company
from the Exchange Offer.
The Notes are redeemable at the option of the Company, in whole or in part,
at any time on or after July 15, 2001, 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 35% of
the original principal amount of the Notes at any time and from time to time
prior to July 15, 1999 at 110% 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 $130,000,000 of the principal amount
of the Notes originally 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. See
"Description of the Notes--Optional Redemption."
Upon a Change of Control (as defined herein), each holder of the Notes will
be entitled to require the Company to purchase such holder's Notes at 101% of
the principal amount thereof, plus accrued and unpaid interest to the purchase
date. See "Description of the Notes--Change of Control Offer." 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 tendered by holders upon a Change of Control. In addition, the
Company is obligated in certain instances to make an offer 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."
The Exchange Notes will bear interest from the most recent date to which
interest has been paid on the Original Notes, or if no interest has been paid
on the Original Notes, from July 23, 1996. Holders whose Original Notes are
accepted for exchange will not receive any payment in respect of interest on
such Original Notes otherwise payable on any interest payment date the record
date for which occurs on or after consummation of the Exchange Offer. See "The
Exchange Offer--Terms of the Exchange Offer."
The Notes will be 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. As of August 31, 1996, after giving effect to the
offering of the Original Notes and the application of the net proceeds
therefrom, the Transactions (as defined herein) and the Pending Acquisitions
(as defined herein), the Company would have had $13,989,000 of Senior
Indebtedness outstanding and its Canadian subsidiary would have had $2,857,000
of outstanding indebtedness (including trade payables) which was structurally
senior to the Notes.
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SEE "RISK FACTORS" COMMENCING ON PAGE 16 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS OF THE NOTES.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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The date of this Prospectus is October 23, 1996
The Original Notes were sold on July 23, 1996, in a transaction not
registered under the Securities Act of 1933, as amended (the "Securities
Act"), in reliance upon an exemption provided in the Securities Act.
Accordingly, the Original Notes may not be offered, resold or otherwise
pledged, hypothecated or transferred in the United States unless registered
under the Securities Act or unless an exemption from the registration
requirements of the Securities Act is available. The Exchange Notes are being
offered to satisfy the obligations of the Company under the Registration
Rights Agreement relating to the Original Notes. See "The Exchange Offer--
Purposes and Effects of the Exchange Offer." Each holder receiving Exchange
Notes, other than a broker-dealer, will represent that the holder is not
engaging in or intending to engage in a distribution of such Exchange Notes.
Exchange Notes issued pursuant to the Exchange Offer in exchange for the
Original Notes may be offered for resale, resold or otherwise transferred by
the holders thereof (other than any holder that is an affiliate of the Company
within the meaning of Rule 405 under the Securities Act), without compliance
with the registration and prospectus delivery requirements of the Securities
Act, provided that such Exchange Notes are acquired in the ordinary course of
such holders' business and such holders have no arrangement or understanding
with any person to participate in the distribution of such Exchange Notes.
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. See "The Exchange Offer--Purposes and Effects of the
Exchange Offer" and "Plan of Distribution." Broker-dealers may use this
Prospectus, as amended or supplemented, in connection with resales of the
Exchange Notes received in exchange for the Original Notes where such Original
Notes were acquired by such broker-dealer as a result of market making
activities or other such trading.
The Exchange Offer is not conditioned on any minimum aggregate principal
amount of Original Notes being tendered for exchange. The Company will accept
for exchange any and all validly tendered Original Notes not withdrawn prior
to 5:00 p.m., New York City time, on November 25, 1996 unless extended by the
Company, in its sole discretion (the "Expiration Date"). Tenders of Original
Notes may be withdrawn at any time prior to the Expiration Date. The Exchange
Offer is subject to certain customary conditions. See "The Exchange Offer--
Conditions." Original Notes may be tendered only in integral multiples of
$1,000. The Company will pay all expenses incident to the Exchange Offer.
The Notes constitute securities for which there is no established trading
market. Any Original Notes not tendered and accepted in the Exchange Offer
will remain outstanding. The Company does not currently intend to list the
Exchange Notes on any securities exchange. To the extent that any Original
Notes are tendered and accepted in the Exchange Offer, a holder's ability to
sell untendered Original Notes could be adversely affected. No assurances can
be given as to the liquidity of the trading market for either the Original
Notes or the Exchange Notes.
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act with respect to the Exchange Notes offered
hereby. As permitted by the rules and regulations of the Commission, this
Prospectus omits certain information, exhibits and undertakings contained in
the Registration Statement. For further information with respect to the
Company and the Exchange Notes offered hereby, reference is made to the
Registration Statement, including the exhibits thereto and the financial
statements, notes and schedules filed as a part thereof. The Registration
Statement (and the exhibits and schedules thereto), as well as the periodic
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, and its
public reference facilities in New York, New York and Chicago, Illinois at
prescribed rates. Such information can also be reviewed through the
Commission's Electronic Data Gathering, Analysis and Retrieval System which is
publicly available through the Commission's Web Site (http: www.sec.gov).
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 document filed as an exhibit to the
Registration Statement, each such statement being qualified by such reference.
Pursuant to the Indenture, the Company has agreed to furnish to the Trustee
and to registered holders of the Notes, without cost to the Trustee or such
registered holders, copies of all reports and other information that would be
required to be filed by the Company with the Commission under the Exchange
Act, whether or not the Company is then required to file reports with the
Commission. As a result of the Exchange Offer, the Company will become subject
to the periodic reporting and other informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company
has agreed that, whether or not the Company is subject to filing requirements
under Section 13 or 15(d) of the Exchange Act, and so long as any Notes remain
outstanding, it will file with the Commission (but only if the Commission at
such time is accepting such voluntary filings) and will send the Trustee
copies of the financial information, documents and reports that would have
been required to be filed with the Commission pursuant to the Exchange Act.
The principal address of the Company is 631 Park Avenue, King of Prussia,
Pennsylvania 19406, telephone number 610-992-8200.
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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 "Pierce Leahy" and the "Company"
include Pierce Leahy Corp. and its consolidated subsidiary. Unless otherwise
indicated, the market information in this Prospectus includes the information
with respect to the Pending Acquisitions described under "Business--Pending
Acquisitions."
THE COMPANY
Pierce Leahy is the largest archive records management company in North
America, as measured by its approximately 39 million cubic feet of records
currently under management. The Company operates a total of 131 records
management facilities of which 118 are in the United States, serving 51 local
markets, including the 15 largest U.S. markets. In addition, the Company
operates 13 records management facilities in five of Canada's six largest
markets. The Company provides records management services to a diversified
group of over 15,000 customer accounts in a variety of industries including
financial services, manufacturing, transportation, healthcare and law. 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. Management believes the
PLUS(R) system allows the Company to efficiently manage records in multiple
markets for national customers, rapidly integrate acquisitions of records
management companies and maintain a low-cost operating structure.
Pierce Leahy 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 a wide range of other data management services, including customer
records management programs, imaging services and records management consulting
services. The Company's storage and related services are typically provided
pursuant to annual or multi-year 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. In 1995, revenues from storage and from service
and storage material sales accounted for 58% and 42% of the Company's total
revenues, respectively.
The Company's pro forma revenues and operating income for the year ended
December 31, 1995 were $133.2 million and $25.2 million, respectively. Pro
forma 1995 EBITDA (as defined herein) was $38.4 million. From 1991 to 1995,
Pierce Leahy's revenues, operating income and EBITDA grew at compound annual
growth rates of 14.4%, 25.6% and 19.4%, respectively, as a result of internal
growth in cubic feet from new and existing customers (which averaged 13.9% per
annum, net of permanent removals of existing customer records) and acquisitions
of other records management companies. The Company's productivity has
concurrently improved as measured by (i) cubic footage under management per
employee increasing from 18,702 at the end of 1991 to 24,521 at the end of 1995
and (ii) EBITDA as a percentage of total revenues increasing from 21.2% in 1991
to 24.8% in 1995. The Company believes that growth through acquisitions results
in operating improvements as redundant operating expenses are eliminated. This
is evidenced by the Company's pro forma 1995 operating income as a percentage
of total revenues which equalled 19.0% as compared to 15.7% on an actual basis,
while pro forma 1995 EBITDA as a percent of total revenues was 28.8% compared
to 24.8% on an actual basis.
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The Company believes that EBITDA is an important tool for measuring the
performance of records management companies (including potential acquisition
targets) in several areas, such as liquidity, operating performance and
leverage. In addition, lenders use EBITDA as a criterion in evaluating records
management companies, and substantially all of the Company's financing
agreements contain covenants in which EBITDA is used as a measure of financial
performance. However, EBITDA should not be considered an alternative to
operating or net income (as determined in accordance with generally accepted
accounting principles ("GAAP")) as an indicator of the Company's performance or
to cash flow from operations (as determined in accordance with GAAP) as a
measure of liquidity. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview" and "--Liquidity and Capital
Resources" for discussions of other measures of performance determined in
accordance with GAAP and the Company's sources and applications of cash flow.
The Company believes that it benefits from several positive industry
fundamentals, including (i) the diversified and recurring nature of storage and
service revenues, (ii) the ability of larger records management companies to
achieve economies of scale in both labor and real estate costs, (iii) the
continued trend toward corporate outsourcing of records management functions,
(iv) low maintenance capital expenditure requirements, (v) the historically
non-cyclical nature of the records management industry and (vi) the ongoing
consolidation of records management companies. The Company derives the majority
of its revenues from monthly fees charged for the storage of records. The
recurring nature of these revenues, which are derived from a diversified,
stable customer base (none of which accounted for more than 3% of total
revenues during 1995) and require relatively little direct ongoing labor and
marketing expenses, contributes significantly to the Company's operating income
and EBITDA. As the Company's volume of records under management grows, the
substantial investments made in its PLUS(R) system and centralized support
functions are amortized over a larger base of business, creating economies of
scale. These operating efficiencies, coupled with the Company's entry into new
markets, allow the Company to take advantage of the trend by larger companies
with multiple locations to outsource their records management functions. The
Company's capital expenditures are primarily growth related and are comprised
substantially of new shelving and other expenditures related to storing and
servicing new records. Pierce Leahy has not experienced a reduction of its
business as a result of economic downturns, in fact, management believes that
the outsourcing of records management may accelerate during such times as a
result of increased customer focus on noncore operating costs. Finally,
management believes the Company is well positioned to continue to participate
in the industry consolidation due to its ability to rapidly and efficiently
integrate in-market and new market acquisitions as a result of its PLUS(R)
system and centralized corporate administrative functions.
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 only four companies offer records storage and
services on a national basis in the United States and only two companies do so
in Canada. Other industry participants operate regionally, or more typically,
in single markets.
According to industry sources, an estimated four trillion documents are
created each year in the United States, many of which must be retained and
remain accessible for many years. 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. Management is not
aware of any definitive information about the size or nature of the North
American market (vended and unvended, active and inactive). Estimates of such
numbers and percentages
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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.
The Company believes that the records management industry is characterized
by the following trends:
. 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, and such technologies have actually promoted
the desire for hard copies of such electronic information.
. 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.
. 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.
. Industry Consolidation. The records management industry is undergoing a
period of consolidation as larger, better capitalized industry
participants acquire smaller regional or single-market participants.
Management believes that this trend is driven by larger records
management companies' desire to add to their revenue base quickly and
cost effectively, achieve broader market presence and realize economies
of scale, especially with respect to labor, real estate and management
information expenses. Industry consolidation also provides private
owners of smaller records management companies the ability to obtain
liquidity.
Business Strategy
Pierce Leahy's business strategy is to become the preferred provider of
records management services in each of its markets by offering premium services
while maintaining a low-cost operating structure. The Company seeks to expand
its business in current and new markets through increased business from
existing customers, the addition of new customers and acquisitions of other
records management companies. The Company expects to continue its growth and
enhance its market position by implementing its strategy based on the following
elements:
. Pursuing National and Unvended Customers. The Company focuses its sales
and marketing efforts on pursuing large regional and national accounts,
typically through multi-year contracts, where the Company believes its
national presence and sophisticated systems provide it with a
competitive advantage. The greatest source of potential business is from
large organizations which are currently managing their records
internally. These organizations are increasingly outsourcing such
noncore activities, enabling their management to focus on their core
business and to reduce capital requirements.
. Remaining a Low-Cost Operator. The Company strives to offer premium
services to its customers while remaining a low-cost operator through
achieving economies of scale in real estate, labor, transportation,
management information and administrative expenses. The Company believes
that it is one of the few records management companies with the size and
resources to realize significant economies of scale in these areas.
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. Using Sophisticated Centralized Systems. The Company believes that its
proprietary PLUS(R) system is the most technologically advanced computer
system in the industry. The PLUS(R) system coordinates the storage of
records and related services in each of its facilities on a real time
basis. PLUS(R), in tandem with a centralized customer service
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.
. Enhancing Facility Efficiency. The PLUS(R) system allows the Company to
enhance the efficiency of its facilities while reducing fixed and
operating costs and maintaining high customer service levels. PLUS(R)
provides the Company with a real time inventory tracking system, using
sophisticated bar-coding technology, designed to pinpoint the exact
location of any individual customer's records within any facility in
North America. This system eliminates the need to designate permanent
locations for an individual customer's records within a facility,
enabling 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.
Acquisition and Growth Strategy
Pierce Leahy 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. Since 1991, the Company has successfully completed and integrated 22
acquisitions, totaling approximately 9.3 million cubic feet of records at the
time of acquisition. From July 1994 through December 31, 1995, approximately
$45.2 million (including purchase price, capital expenditures and related
integration costs) was invested in eight acquisitions, which produced an
incremental $11.0 million of EBITDA on a full-year or annualized basis during
the first year following acquisition. In each of these acquisitions, staffing
levels were immediately reduced with further reductions typically taking place
in the following months as general and administrative functions were integrated
into the Company's corporate organization.
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 Pierce Leahy's corporate
organization in an efficient, standardized process allows the Company to
realize immediate cost savings as a result of reduced labor and overhead costs
and improved facility utilization.
The Company targets potential acquisitions in both its existing markets (in-
market) and in new markets which it is not yet servicing. In-market
acquisitions typically provide the highest degree of operating leverage since
in addition to eliminating redundant overhead, such as overlapping delivery
runs, an acquired company's storage facility can, when possible, be
consolidated into an existing Company facility within the same market area. New
market acquisitions allow the Company to both expand its business generally and
enhance its ability to serve national customer accounts.
In order to accommodate its growth strategy, the Company has made significant
new facility investments during the last twelve months, 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 addition of these facilities provides the Company with
substantial excess storage capacity and is expected to satisfy the Company's
facility expansion requirements in its Northeast region for several years.
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Ownership and Management
Pierce Leahy is the successor company to L. W. Pierce Co., Inc., which was
founded in 1957 by Leo W. Pierce, Sr. The Company is headquartered in King of
Prussia, Pennsylvania, and is a closely held corporation owned by members of
the Pierce family. Since 1984, the Company has been led by its President, J.
Peter Pierce, the son of the Company's founder. The members of the Company's
management team who are not current shareholders participate in a stock option
plan.
THE TRANSACTIONS
In connection with the offering of the Original Notes, the Company effected a
series of transactions to (i) repay its existing credit facility ($146.1
million) and enter into the Credit Facility (as defined herein),
(ii) consummate the purchase of a records management company in the San Diego
market for $3.5 million, (iii) purchase certain real estate interests in
properties currently leased or subleased by the Company from entities
affiliated with the Pierce family for $14.8 million (including the assumption
of a mortgage for $1.1 million) and (iv) redeem 100 shares of the Company's
Class A Common Stock from Leo W. Pierce, Sr. for $1.45 million. In addition,
the Company has recently purchased three additional records management
companies with proceeds of the Original Notes for an aggregate purchase price
of $8.4 million (such acquisitions, together with the transactions referred to
above are collectively referred to as the "Transactions"). See "The
Transactions."
The principal purposes of the Transactions were to (i) provide the Company
with a capital structure that will facilitate the continued growth of the
Company's records management operations, (ii) enhance the Company's financial
flexibility and (iii) eliminate certain related party real estate transactions.
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THE EXCHANGE OFFER
Purpose of the Exchange
Offer.................. The Original Notes were sold in a transaction exempt
from the registration requirements of the Securities
Act by the Company on July 23, 1996 to CIBC Wood
Gundy Securities Corp. (the "Initial Purchaser"). In
connection therewith, the Company executed and deliv-
ered, for the benefit of the holders of the Original
Notes, an Exchange Offer Registration Rights Agree-
ment dated July 23, 1996 (the "Registration Rights
Agreement"), which is filed as an exhibit to the Reg-
istration Statement of which this Prospectus is a
part, providing for, among other things, the Exchange
Offer so that the Exchange Notes will be freely
transferable by the holders thereof without registra-
tion or any prospectus delivery requirements under
the Securities Act, except that a "dealer" or any of
its "affiliates" as such terms are defined under the
Securities Act, who exchanges Original Notes held for
its own account will be required to deliver copies of
this Prospectus in connection with any resale of the
Exchange Notes issued in exchange for such Original
Notes. See "The Exchange Offer--Purposes and Effects
of the Exchange Offer" and "Plan of Distribution."
The Exchange Offer...... The Company is offering to exchange $1,000 principal
amount of Exchange Notes for each $1,000 principal
amount of Original Notes that are properly tendered
and accepted. The Company will issue Exchange Notes
on or promptly after the Expiration Date. There is
$200,000,000 aggregate principal amount of Original
Notes outstanding. The Original Notes and the Ex-
change Notes are collectively referred to herein as
the "Notes." The terms of the Exchange Notes are sub-
stantially identical in all respects (including prin-
cipal amount, interest rate and maturity) to the
terms of the Original Notes for which they may be ex-
changed pursuant to the Exchange Offer, except that
(i) the Exchange Notes are freely transferable by
holders thereof (other than as provided herein), and
are not subject to any covenant restricting transfer
absent registration under the Securities Act and (ii)
holders of the Exchange Notes will not be entitled to
certain rights of holders of the Original Notes under
the Registration Rights Agreement, which rights will
terminate upon the consummation of the Exchange
Offer. See "The Exchange Offer."
The Exchange Offer is not conditioned upon any mini-
mum aggregate principal amount of Original Notes be-
ing tendered for exchange.
Based on an interpretation by the staff of the Secu-
rities and Exchange Commission (the "Commission") set
forth in no-action letters issued to third parties,
the Company believes that the Exchange Notes issued
pursuant to the Exchange Offer in exchange for Origi-
nal Notes may be offered for resale, resold and oth-
erwise transferred by a holder thereof (other than
(i) a broker-dealer who purchases such Exchange Notes
directly from the Company to resell pursuant to Rule
144A under the Securities Act or any other available
exemption under the Securities Act or (ii) a person
that is an affiliate (as defined in Rule 405 under
the Securities Act) of the Company), without compli-
ance with the registration and prospectus delivery
provisions of the Securities Act, provided that the
holder is acquiring the Exchange Notes in the ordi-
nary course of its business and is not partici-
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pating, and had no arrangement or understanding with
any person to participate, in the distribution of the
Exchange Notes. Each broker-dealer that receives the
Exchange Notes for its own account in exchange for
the Original Notes, where such Notes were acquired by
such broker-dealer as a result of market-making ac-
tivities or other trading activities, must acknowl-
edge that it will deliver a prospectus in connection
with any resale of such Exchange Notes.
Registration Rights
Agreement.............. The Original Notes were sold by the Company on
July 23, 1996 to the Initial Purchaser pursuant to a
Purchase Agreement dated as of July 17, 1996 by and
be-tween the Company and the Initial Purchaser (the
"Purchase Agreement"). Pursuant to the Purchase
Agreement, the Company and the Initial Purchaser en-
tered into a Registration Rights Agreement dated as
of July 23, 1996 (the "Registration Rights Agree-
ment") which grants the holders of the Original Notes
certain exchange and registration rights. See "The
Exchange Offer--Termination of Certain Rights." This
Exchange Offer is intended to satisfy such rights,
which terminate upon the consummation of the Exchange
Offer. The holders of the Exchange Notes are not en-
titled to any exchange or registration rights with
respect to the Exchange Notes.
Expiration Date......... The Exchange Offer will expire at 5:00 p.m., New York
City time, on November 25, 1996, unless the Exchange
Offer is extended by the Company in its reasonable
discretion, in which case the term "Expiration Date"
shall mean the latest date and time to which the Ex-
change Offer is extended.
Accrued Interest on the
Exchange Notes and
Original Notes......... Interest on the Exchange Notes will accrue from (A)
the later of (i) the last interest payment date on
which interest was paid on the Notes surrendered in
exchange therefor or (ii) if the Notes are surren-
dered for exchange on a date in a period which in-
cludes the record date for an interest payment date
to occur on or after the date of such exchange and as
to which interest will be paid, the date of such in-
terest payment date, or (B) if no interest has been
paid on the Notes, from July 23, 1996. Holders whose
Original Notes are accepted for exchange will be
deemed to have waived the right to receive any inter-
est accrued on the Original Notes.
Conditions to the
Exchange Offer......... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See
"The Exchange Offer--Conditions. The Exchange Offer
is not conditioned upon any minimum aggregate princi-
pal amount of Original Notes being tendered for ex-
change. The Company reserves the right to terminate
or amend the Exchange Offer at any time prior to the
Expiration Date upon the occurrence of any such con-
ditions.
Procedures for
Tendering Original
Notes.................. Each holder of Original Notes wishing to accept the
Exchange Offer must complete, sign and date the Let-
ter of Transmittal, or a facsimile thereof, in accor-
dance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with the
Original Notes and any other required documentation
to the ex-
- --------------------------------------------------------------------------------
8
- --------------------------------------------------------------------------------
change agent (the "Exchange Agent") at the address
set forth herein. Original Notes may be physically
delivered, but physical delivery is not required if a
confirmation of a book-entry transfer of such Origi-
nal Notes to the Exchange Agent's account at The De-
pository Trust Company ("DTC" or the "Depository") is
delivered in a timely fashion. By executing the Let-
ter of Transmittal, each holder will represent to the
Company that, among other things, the Exchange Notes
acquired pursuant to the Exchange Offer are being ob-
tained in the ordinary course of business of the per-
son receiving such Exchange Notes, whether or not
such person is the holder, that neither the holder
nor any such other person is engaged in, or intends
to engage in, or has an arrangement or understanding
with any person to participate in, the distribution
of such Exchange Notes and that neither the holder
nor any such other person is an "affiliate," as de-
fined under Rule 405 of the Securities Act, of the
Company. Each broker or dealer that receives Exchange
Notes for its own account in exchange for Original
Notes, where such Original Notes were acquired by
such broker or dealer as a result of market-making
activities or other trading activities, must acknowl-
edge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "The Ex-
change Offer--Procedures for Tendering" and "Plan of
Distribution."
Special Procedures for
Beneficial Owners...... Any beneficial owner whose Original Notes are regis-
tered in the name of a broker, dealer, commercial
bank, trust company or other nominee and who wishes
to tender should contact such registered holder
promptly and instruct such registered holder to ten-
der on such beneficial owner's behalf. If such bene-
ficial owner wishes to tender on such owner's own be-
half, such owner must, prior to completing and exe-
cuting the Letter of Transmittal and delivering his
Original Notes, either make appropriate arrangements
to register ownership of the Original Notes in such
owner's name or obtain a properly completed bond
power from the registered holder. The transfer of
registered ownership may take considerable time. See
"The Exchange Offer--Procedures for Tendering."
Guaranteed Delivery
Procedures............. Holders of Original Notes who wish to tender their
Original Notes and whose Original Notes are not imme-
diately available or who cannot deliver their Origi-
nal Notes, the Letter of Transmittal or any other
documents required by the Letter of Transmittal to
the Exchange Agent prior to the Expiration Date, must
tender their Original Notes according to the guaran-
teed delivery procedures set forth in the "Exchange
Offer--Guaranteed Delivery Procedures."
Acceptance of the
Original Notes and
Delivery of the
Exchange Notes......... Subject to the satisfaction or waiver of the condi-
tions to the Exchange Offer, the Company will accept
for exchange any and all Original Notes which are
properly tendered in the Exchange Offer prior to the
Expiration Date. The Exchange Notes issued pursuant
to the Exchange Offer will be delivered on the earli-
est practicable date following the Expiration Date.
See "The Exchange Offer--Terms of the Exchange Offer."
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9
- --------------------------------------------------------------------------------
Withdrawal Rights....... Tenders of Original Notes may be withdrawn at any
time prior to the Expiration Date. See "The Exchange
Offer--Withdrawal of Tenders."
Certain Federal Income
Tax Considerations..... For a discussion of certain federal income tax con-
siderations relating to the exchange of the Exchange
Notes for the Original Notes, see "Certain Federal
Income Tax Considerations."
Exchange Agent.......... United States Trust Company of New York is serving as
the Exchange Agent in connection with the Exchange
Offer. See "The Exchange Offer--Exchange Agent."
Effect on Holders of
the Original Notes..... As a result of the making of, and upon acceptance for
exchange of all validly tendered Original Notes pur-
suant to the terms of this Exchange Offer, the Com-
pany will have fulfilled one of the covenants con-
tained in the Registration Rights Agreement and, ac-
cordingly, there will be no increase in the interest
rate on the Original Notes pursuant to the applicable
terms of the Registration Rights Agreement due to the
Exchange Offer. Holders of the Original Notes who do
not tender their Original Notes will be entitled to
all the rights and limitations applicable thereto un-
der the Indenture dated as of July 15, 1996, among
the Company and United States Trust Company of New
York, as trustee (the "Trustee"), relating to the
Original Notes and the Exchange Notes (the "Inden-
ture"), except for any rights under the Indenture or
the Registration Rights Agreement, which by their
terms terminate or cease to have further effective-
ness as a result of the making of, and the acceptance
for exchange of all validly tendered Original Notes
pursuant to, the Exchange Offer. All untendered Orig-
inal Notes will continue to be subject to the re-
strictions on transfer provided for in the Original
Notes and in the Indenture. To the extent that Origi-
nal Notes are tendered and accepted in the Exchange
Offer, the trading market for untendered Original
Notes could be adversely affected.
Use of Proceeds......... There will be no cash proceeds to the Company from
the exchange pursuant to the Exchange Offer.
THE NOTES
The Exchange Notes...... The Exchange Offer applies to $200,000,000 aggregate
principal amount of the Original Notes. The form and
terms of the Exchange Notes are the same as the form
and terms of the Original Notes except that (i) the
exchange will have been registered under the Securi-
ties Act and, therefore, the Exchange Notes will not
bear legends restricting their transfer pursuant to
the Securities Act, and (ii) holders of the Exchange
Notes will not be entitled to certain rights of hold-
ers of the Original Notes under the Registration
Rights Agreement, which rights will terminate upon
consummation of the Exchange Offer. The Exchange
Notes will evidence the same debt as the Notes (which
they replace) and will be issued under, and be enti-
tled to the benefits of, the Indenture. See "Descrip-
tion of the Notes" for further information and for
definitions of certain capitalized terms used below.
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10
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Issuer.................. Pierce Leahy Corp.
Maturity Date........... July 15, 2006.
Interest Rate........... The Notes will bear interest at a rate of 11 1/8% per
annum.
Interest Payment
Dates.................. Interest will be payable semiannually on each January
15 and July 15, commencing January 15, 1997 and will
accrue from July 23, 1996, the issue date of the
Original Notes.
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 Com-
pany and senior in right of payment to all subordi-
nated indebtedness of the Company. As of June 30,
1996, after giving effect to the offering of the
Original Notes and the application of the net pro-
ceeds therefrom, the Transactions and the Pending Ac-
quisitions, the Company would have had $14,009,000 of
Senior Indebtedness outstanding. As of August 31,
1996, the Company had $1,190,000 of outstanding in-
debtedness ranked pari passu with the Notes, and its
Canadian subsidiary had $2,857,000 of outstanding in-
debtedness (including trade payables) which was
structurally senior to the Notes.
Guarantees by Future
Subsidiaries........... The Notes will be unconditionally guaranteed, on an
unsecured senior subordinated basis, as to the pay-
ment of principal, premium, if any, and interest,
jointly and severally (the "Guarantees"), by all fu-
ture direct and indirect domestic Restricted Subsidi-
aries of the Company having either assets or share-
holders' equity in excess of $5,000 (the "Guaran-
tors"). Any such Guarantees will be subordinated to
all Senior Indebtedness of the respective Guarantors.
No Guarantees will be effective on the date of issu-
ance 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
is subordinate to a pledge of such shares in favor of
the lenders and the administrative agent under the
Credit Facility. See "Description of the Notes--
General."
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
July 15, 2001, at the redemption prices set forth
herein, plus accrued and unpaid interest to the date
of redemption. In addition, the Company, at its op-
tion, may redeem in the aggregate up to 35% of the
original principal amount of the Notes at any time
and from time to time prior to July 15, 1999 at a re-
demption price equal to 110% 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 $130,000,000 prin-
cipal amount of Notes issued remain outstanding imme-
diately after the occurrence of any such redemption
and that
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11
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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 out-
standing Notes at a price equal to 101% of the prin-
cipal 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 as-
surance that the Company will have sufficient funds
or will be contractually permitted by outstanding Se-
nior 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 Re-
stricted Subsidiaries (as defined herein) to: (i) in-
cur additional Indebtedness; (ii) pay dividends and
make distributions; (iii) issue stock of subsidiar-
ies; (iv) make certain investments; (v) repurchase
stock; (vi) create liens; (vii) enter into transac-
tions 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, including the allowance of Per-
mitted Tax Distributions (as defined herein) as a re-
sult of the Company's status as a Subchapter S corpo-
ration. See "Description of the Notes--Certain
Covenants."
RISK FACTORS
Prospective purchasers of the Notes 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 and the
Company.
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12
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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, 1995, has
been derived from the audited consolidated financial statements, including the
consolidated balance sheets at December 31, 1994 and 1995 and the related
consolidated statements of operations for each of the three years in the period
ended December 31, 1995 and the notes thereto appearing elsewhere in this
Prospectus. The summary historical and pro forma consolidated statement of
operations and balance sheet data as of and for the six months ended June 30,
1996 and summary historical statement of operations data for the six months
ended June 30, 1995 have been derived from unaudited consolidated financial
statements, which, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results for the unaudited interim periods. Results for the
six months ended June 30, 1996 are not necessarily indicative of results that
may be expected for the entire year.
The following summary pro forma statement of operations data and other data
give effect to, among other things, the Transactions and the Pending
Acquisitions, as if they had occurred on January 1, 1995. The following
unaudited pro forma condensed consolidated balance sheet data give effect to,
among other things, the Transactions and the Pending Acquisitions, as if they
had occurred on June 30, 1996. The Transactions, the Pending Acquisitions and
certain management assumptions and adjustments are described in the
accompanying notes hereto. The pro forma information should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto, as of December 31, 1995 and for the three years in the period ended
December 31, 1995, appearing elsewhere in this Prospectus. This pro forma
information is not necessarily indicative of the results that would have
occurred had the Transactions and the Pending Acquisitions been completed on
the dates indicated or the Company's actual or future results or financial
position. The summary historical and pro forma consolidated statement of
operations, balance sheet and other data 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 Result of Operations," "Selected Historical and Pro Forma Consolidated
Statement of Operations, Balance Sheet and Other Data" and "Pro Forma Financial
Data" included elsewhere herein.
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13
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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------- -------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(A) 1995 1996 1996(A)
------- ------- ------- ------- ------- --------- ------- ------- ---------
STATEMENT OF OPERATIONS
DATA:
Revenues
Storage................ $33,195 $37,633 $42,122 $47,123 $55,501 $82,238 $25,965 $35,485 $41,429
Service and storage ma-
terial sales.......... 22,437 25,202 31,266 35,513 39,895 50,965 18,599 25,837 29,886
------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues......... 55,632 62,835 73,388 82,636 95,396 133,203 44,564 61,322 71,315
Cost of sales, excluding
depreciation and
amortization........... 37,145 39,702 45,391 49,402 55,616 73,118 25,937 35,189 38,445
Selling, general and
administrative......... 6,693 9,012 11,977 15,882 16,148 21,725 7,815 9,911 11,732
Depreciation and amorti-
zation................. 5,783 5,734 6,888 8,436 8,163 12,621 4,304 5,612 6,965
Consulting payments to
related parties(b)..... -- -- -- 500 500 500 250 -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income....... 6,011 8,387 9,132 8,416 14,969 25,239 6,258 10,610 14,173
Interest expense........ 6,677 6,388 6,160 7,216 9,622 24,981 4,156 5,953 12,490
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary loss.... (666) 1,999 2,972 1,200 5,347 258 2,102 4,657 1,683
Extraordinary loss(c)... -- -- 9,174 5,991 3,279 -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... (666) 1,999 (6,202) (4,791) 2,068 258 2,102 4,657 1,683
Accretion (cancellation)
of redeemable
warrants............... -- -- (746) 16 889 -- 445 1,560 --
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)
applicable to Common
shareholders .......... $ (666) $ 1,999 $(5,456) $(4,807) $ 1,179 $ 258 $ 1,657 $ 3,097 $ 1,683
======= ======= ======= ======= ======= ======= ======= ======= =======
AS OF DECEMBER 31, AS OF JUNE 30, 1996
------------------------------------------------ ------------------------
PRO FORMA
1991 1992 1993 1994 1995 ACTUAL AS ADJUSTED(D)
-------- -------- -------- -------- -------- -------- --------------
BALANCE SHEET DATA:
Cash and cash equiva-
lents.................. $ 332 $ 461 $ 528 $ 358 $ 722 $ 860 $ 500
Working capital (defi-
cit)................... (10,402) (11,656) (9,143) (5,202) (8,139) (4,602) (3,810)
Total assets............ 59,726 65,869 74,621 79,746 131,328 162,796 221,431
Total debt.............. 52,695 55,027 69,736 77,683 120,071 147,139 214,665
Net debt (net of cash
balance)............... 52,363 54,566 69,208 77,325 119,349 146,279 214,165
Shareholders' deficit... (11,006) (9,028) (14,508) (19,341) (18,201) (15,105) (26,903)
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------- -----------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(A) 1995 1996 1996(A)
------- ------- -------- -------- -------- --------- -------- -------- ---------
OTHER DATA:
Ratio of earnings to
fixed charges(e)....... -- 1.21x 1.30x 1.11x 1.37x 1.01 1.33x 1.53x 1.11
Cash flows from opera-
tions.................. $ 7,088 $ 8,599 $ 8,019 $ 11,000 $ 17,522 -- $ 7,171 $ 6,629 --
Cash flows used in
investing activities... (3,541) (6,803) (13,784) (13,933) (51,315) -- (14,317) (32,120) --
Cash flows provided by
(used in) financing
activities............. (3,331) (1,667) 5,832 2,763 34,157 -- 7,030 25,629 --
EBITDA(f)............... 11,794 14,121 16,020 17,352 23,632 38,360 10,812 16,222 $21,138
EBITDA margin........... 21.2% 22.5% 21.8% 21.0% 24.8% 28.8% 24.3% 26.5% 29.6%
Capital
expenditures(g)........ $ 3,521 $ 5,565 $ 5,827 $ 6,352 $ 16,288 -- $ 4,790 $ 7,657 --
Cubic feet of storage
under management at end
of
period (000s).......... 13,858 16,248 19,025 22,160 29,523 32,264 23,549 34,347 37,890
(see footnotes on the following page)
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14
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NOTES TO SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(a) Gives effect to (i) acquisitions completed in 1995 and 1996 year to date
and (ii) the offering of the Original Notes, the Transactions, the Pending
Acquisitions and the application of the net proceeds from the sale of the
Original Notes, as if each had occurred as of January 1, 1995. See "Use of
Proceeds" and "Pro Forma Financial Data." In connection with the
Transactions, the Company incurred non-recurring charges of approximately
$5.3 million in the third quarter of 1996, the quarter in which the
offering of the Original Notes was consummated. Such charges are not
reflected in the Pro Forma Condensed Consolidated Statement of Operations.
See "Risk Factors--Non-Recurring Charges; Expected Loss in Third Quarter of
1996."
(b) Represents aggregate payments made to eight Pierce family members.
(c) Represents loss on early extinguishment of debt due to refinancings in
1993, 1994 and 1995. Amounts include write-off of unamortized deferred
financing costs and discount, along with prepayment penalties and other
costs. A similar charge of approximately $2.0 million occurred in the third
quarter of 1996, the quarter in which the debt was repaid, which has not
been reflected in the Pro Forma Condensed Consolidated Statement of
Operations. See "Risk Factors--Non-Recurring Charges; Expected Loss in
Third Quarter of 1996."
(d) Gives effect to the offering of the Original Notes, the Transactions, the
Pending Acquisitions and the application of the net proceeds from the sale
of the Original Notes, as if they each had occurred as of June 30, 1996.
See "Use of Proceeds" and "Pro Forma Financial Data."
(e) The earnings for the year ended December 31, 1991 were inadequate to cover
fixed charges by $0.7 million.
(f) "EBITDA" is defined as net income (loss) before interest expense, taxes,
depreciation and amortization, consulting payments to related parties and
extraordinary items. EBITDA is not a measure of performance under GAAP and
may not be comparable to other similarly titled measures of other
companies. 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 criterion in evaluating records management
companies. Moreover, substantially all of the Company's financing
agreements 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.
(g) Capital expenditures for 1995 are comprised of $7.2 million for new
shelving, $5.1 million for new facility purchases and related improvements,
$1.6 million for data processing, $1.5 million for leasehold and building
improvements and $0.9 million for the purchase of transportation, warehouse
and office equipment. Of the total 1995 capital expenditures, approximately
$2.5 million was for upgrading and restructuring of existing facilities to
accommodate growth or for maintenance capital expenditures.
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15
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 in the Notes.
HIGH LEVEL OF INDEBTEDNESS AND LEVERAGE
The Company is highly leveraged due to the substantial indebtedness it has
incurred primarily to finance acquisitions and expand its operations. The
Company and its Canadian subsidiary had approximately $214.7 million of pro
forma debt as of June 30, 1996 after giving effect to the Transactions, the
offering of the Original Notes and the Pending Acquisitions. Moreover, as of
June 30, 1996, the Company had pro forma shareholders' deficit of $26.9
million after giving effect to the Transactions, the Pending Acquisitions and
the offering of the Original Notes. Subject to the restrictions in the
Indenture and the Credit Facility and any other indebtedness that may be
incurred in the future, the Company expects to incur additional indebtedness
from time to time to finance acquisitions or capital expenditures or for other
purposes.
The Company experienced net losses in three of the last five fiscal years,
although it has generated cash flow from operations in excess of debt service
requirements in each of such years. Management believes, based upon current
operations and internal growth at historical rates, 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 during the term of the
Notes. There can be no assurance, however, that the Company will continue to
generate cash flows at levels sufficient to meet these requirements. The
Company's ability to meet its debt service obligations will be dependent upon
its future performance (including the performance of any acquired businesses)
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. If the Company is unable to generate
sufficient cash flows to service its indebtedness, it may be forced to adopt
an alternative strategy that may include actions such as slowing or
terminating the Company's acquisition program, reducing or delaying capital
expenditures, selling assets, refinancing all or a portion of its existing
indebtedness or obtaining additional financing. There can be no assurance that
such actions would be possible or successful, particularly in view of the
Company's high level of indebtedness.
The level of the Company's indebtedness could have important consequences to
holders of the Notes, including: (i) a substantial part of the Company's cash
flow from operations must be dedicated to debt service and will not be
available for other purposes; (ii) the Company's ability to obtain needed
additional financing in the future may be limited; (iii) the Company's
leveraged position and covenants contained in the Indenture and the Credit
Facility (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. Certain
of the Company's competitors currently operate on a less leveraged basis and
have significantly greater operating and financing flexibility than the
Company.
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. 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 the stock of the Company's subsidiary) are pledged
to secure the Company's obligations under the Credit Facility. In addition,
under the Indenture, provided certain incurrence tests are met, the Company
will be able to borrow additional 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
16
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 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 subordinated pledge of a portion of the capital
stock of such subsidiary. 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.
NON-RECURRING CHARGES; EXPECTED LOSS IN THIRD QUARTER OF 1996
In connection with the Transactions and the establishment of a pension for
Leo W. Pierce, Sr. and his spouse, the Company incurred non-recurring charges
of approximately $5.3 million in the third quarter of 1996. These charges
relate to the accounting for the Real Estate Transactions, as hereinafter
defined (approximately $2.8 million), the acceleration of certain deferred
financing charges currently being amortized in connection with the Company's
previous credit facility which was refinanced (approximately $2.0 million) and
the establishment of an annual pension for Leo W. Pierce, Sr. and his spouse
(approximately $0.5 million). As a result of these charges, the Company
expects to incur a net loss for the third quarter of 1996.
RISKS ASSOCIATED WITH ACQUISITIONS
The Company has pursued and intends to continue to pursue acquisitions of
records management businesses as a key component of its growth strategy.
Certain risks are inherent in an acquisition strategy, such as increasing
leverage and debt service requirements, 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. The
process of integrating such acquired businesses may involve unforeseen
difficulties and may utilize a substantial portion of the Company's financial
and other resources. No assurance can be given that additional suitable
acquisition candidates will be identified, financed and purchased on
acceptable terms, or that the Pending Acquisitions or other future
acquisitions, if completed, will be successful. See "Business--Pending
Acquisitions."
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.
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
17
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 Credit Facility."
COMPETITION
The Company faces competition from one or more 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. As a result of this competition and the decline in the commercial
real estate market in the early 1990s, 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 markets, 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. 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 tendered by holders upon a
Change of Control. See "Description of the Notes--Change of Control";
"Description of Credit Facility."
DEPENDENCE ON KEY PERSONNEL
The Company's business depends 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.
18
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."
FRAUDULENT CONVEYANCE CONSIDERATIONS
The incurrence by the Company of the indebtedness evidenced by the Notes to
finance the Real Estate Transactions and the Stock Redemption (as defined
herein) is subject to review under relevant federal and state fraudulent
conveyance statutes in a bankruptcy or reorganization case or a lawsuit by or
on behalf of creditors of the Company. Under these statutes, if a court were
to find that the payments were made with the intent of hindering, delaying or
defrauding creditors or that the Company received less than a reasonably
equivalent value or fair consideration for those payments and, at the time
they were made, the Company either (i) was insolvent or rendered insolvent by
reason thereof, (ii) was engaged in a business or transaction for which its
remaining unencumbered assets constituted unreasonably small capital or (iii)
intended to or believed that it would incur debts beyond its ability to pay
them as they matured or became due, the court could void those payments or
take other action detrimental to the holders of the Notes, such as possibly
reversing the Real Estate Transactions which would increase the Company's
annual rental expense by approximately $2.0 million. If a court were to
determine that the payments to be financed with the proceeds of the offering
of the Original Notes were incurred in a fraudulent transfer under the
foregoing standards, a fraudulent conveyance claim could also be asserted with
respect to the Notes.
The measure of insolvency for purposes of a fraudulent conveyance will vary
depending upon the law of the jurisdiction being applied. Generally, however,
a company will be considered insolvent at a particular time if the sum of its
debts at that time is greater than the fair market value of its assets at such
time or if the fair saleable value of its assets at that time is less than the
amount that would be required to pay its probable liability on its existing
debts as they become absolute and mature.
ENVIRONMENTAL MATTERS
The Company owns or leases approximately 8.3 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
19
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.
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."
ABSENCE OF PUBLIC MARKET
There is no existing trading market for the Notes, and the Company does not
intend to list any Notes on any securities exchange. Although the Company has
been advised that the Initial Purchaser currently intends to make a market in
the Notes, the Initial Purchaser is not obligated to do so and may discontinue
any such market making at any time without notice. In addition, any market
making activities in the Original Notes may be limited during the pendency of
the Exchange Offer. There can be no assurance that an active trading market
for the Notes will develop, or, if it develops, that it will continue. Future
trading prices for the Notes will depend on many factors, including, among
other things, the Company's operating results, the market for similar
securities and changes in prevailing interest rates.
PROCEDURES FOR TENDER OF ORIGINAL NOTES
The Exchange Notes will be issued in exchange for Original Notes only after
timely receipt by the Exchange Agent of such Original Notes, a properly
completed and duly executed Letter of Transmittal and all other required
documents. Therefore, holders of Original Notes desiring to tender such
Original Notes in exchange for Exchange Notes should allow sufficient time to
ensure timely delivery. Neither the Exchange Agent nor the Company is under
any duty to give notification of defects or irregularities with respect to
tenders of Original Notes for exchange. Any holder of Original Notes who
tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Notes will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Notes, where such Original
Notes were acquired by such broker-dealer as a result of market-making
activities or any other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. See
"Plan of Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE ORIGINAL NOTES
The Original Notes have not been registered under the Securities Act and are
subject to substantial restrictions on transfer. Original Notes that are not
tendered in exchange for Exchange Notes or are tendered but
20
not accepted will, following consummation of the Exchange Offer, continue to
be subject to the existing restrictions upon transfer thereof. The Company
does not currently anticipate that it will register the Original Notes under
the Securities Act. To the extent that Original Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Original Notes could be adversely affected. See "The Exchange--
Consequences of Failure to Exchange."
THE EXCHANGE OFFER
PURPOSES AND EFFECTS OF THE EXCHANGE OFFER
The Original Notes were sold by the Company on July 23, 1996 (the "Issue
Date") to the Initial Purchaser pursuant to a Purchase Agreement dated as of
July 17, 1996 (the "Purchase Agreement"). As a condition to the sale of the
Original Notes, the Company and the Initial Purchaser entered into the
Registration Rights Agreement on the Issue Date. Pursuant to the Registration
Rights Agreement, the Company agreed that, unless the Exchange Offer is not
permitted by applicable law or Commission policy, it would (i) file with the
Commission a Registration Statement under the Securities Act with respect to
the Exchange Notes within 45 days after the Issue Date, (ii) use its best
efforts to cause such Registration Statement to become effective under the
Securities Act within 135 days after the Issue Date and (iii) upon
effectiveness of the Registration Statement, commence the Exchange Offer, keep
the Exchange Offer open for at least 30 days (or a longer period if required
by law) and deliver to the Exchange Agent Exchange Notes in the same aggregate
principal amount at maturity as the Original Notes that were tendered by
holders thereof pursuant to the Exchange Offer. Under existing Commission
interpretations, the Exchange Notes would in general be freely transferable
after the Exchange Offer without further registration under the Securities
Act; provided, that in the case of broker-dealers, a prospectus meeting the
requirements of the Securities Act will be delivered as required. The Company
has agreed to make available a prospectus meeting the requirements of the
Securities Act to any broker-dealer for use in connection with any resale of
any such Exchange Notes acquired as described below for such period of 180
days after the Expiration Date. A broker-dealer that delivers such a
prospectus to purchasers in connection with such resales will be subject to
certain of the civil liability provisions under the Securities Act, and will
be bound by the Registration Rights Agreement (including certain
indemnification rights and obligations). A copy of the Registration Rights
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The Registration Statement of which this Prospectus
is a part is intended to satisfy certain of the Company's obligations under
the Registration Rights Agreement and the Purchase Agreement.
The Company is generally not required to file any registration statement to
register any outstanding Original Notes. Holders of Original Notes who do not
tender their Original Notes or whose Original Notes are tendered but not
accepted will have to rely on exemptions to registration requirements under
the securities laws, including the Securities Act, if they wish to sell their
Original Notes.
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a holder (other than (i) a broker-dealer
who purchases such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii)
any such holder which is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) who exchanges Original Notes for Exchange
Notes in the ordinary course of business and who is not participating, does
not intend to participate, and has no arrangement with any person to
participate, in the distribution of the Exchange Notes, will be allowed to
resell the Exchange Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the Exchange Notes
a prospectus that satisfies the requirements of Section 10 of the Securities
Act. However, if any holder acquires the Exchange Notes in the Exchange Offer
for the purpose of distributing or participating in the distribution of the
Exchange Notes or is a broker-dealer, such holder cannot rely on the position
of the staff of the Commission enumerated in certain no-action letters issued
to third parties and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction,
unless an exemption from registration is otherwise available. Each broker-
dealer that receives
21
Exchange Notes for its own account in exchange for Original Notes, where such
Original Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of Exchange Notes received in exchange for
Original Notes where such Original Notes were acquired by such broker-dealer
as a result of market-making or other trading activities. Pursuant to the
Registration Rights Agreement, the Company has agreed to make this Prospectus,
as it may be amended or supplemented from time to time, available to broker-
dealers for use in connection with any resale for a period of 180 days after
the Expiration Date. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept any and
all Original Notes validly tendered and not withdrawn prior to the Expiration
Date. The Company will issue $1,000 principal amount of Exchange Notes in
exchange for each $1,000 principal amount of outstanding Original Notes
surrendered pursuant to the Exchange Offer. Holders may tender some or all of
their Original Notes pursuant to the Exchange Offer; provided, however, that
Original Notes may be tendered only in integral multiples of $1,000. The
Exchange Offer is not conditioned upon any minimum aggregate principal amount
of Original Notes being tendered for exchange.
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes except that (i) the Exchange Notes will be registered
under the Securities Act and, therefore, will not bear legends restricting
their transfer and (ii) holders of the Exchange Notes will not be entitled to
the certain rights of holders of Original Notes under the Registration Rights
Agreement, which rights will terminate upon the consummation of the Exchange
Offer. The Exchange Notes will evidence the same debt as the Original Notes
(which they replace) and will be issued under, and be entitled to the benefits
of, the Indenture, which also authorized the issuance of the Original Notes,
such that all outstanding Notes will be treated as a single class of debt
securities under the Indenture.
Interest on the Exchange Notes will accrue from the most recent date to
which interest has been paid on the Original Notes or, if no interest has been
paid, from July 23, 1996. Accordingly, registered holders of Exchange Notes on
the relevant record date for the first interest payment date following the
consummation of the Exchange Offer will receive interest accruing from the
most recent date to which interest has been paid or, if no interest has been
paid, from July 23, 1996. Original Notes accepted for exchange will cease to
accrue interest from and after the date of the consummation of the Exchange
Offer. Holders whose Original Notes are accepted for exchange will not receive
any payment in respect of interest on such Original Notes otherwise payable on
any interest payment date, the record date for which occurs on or after
consummation of the Exchange Offer.
As of the date of this Prospectus, $200,000,000 aggregate principal amount
of the Original Notes are outstanding and registered in the name of Cede &
Co., as nominee for the Depository Trust Company (the "Depository" or "DTC").
Only a registered holder of the Original Notes (or such holder's legal
representative or attorney-in-fact) as reflected on the records of the Trustee
under the Indenture may participate in the Exchange Offer. There will be no
fixed record date for determining registered holders of the Original Notes
entitled to participate in the Exchange Offer.
Holders of the Original Notes do not have any appraisal or dissenters'
rights under the Indenture in connection with the Exchange Offer. The Company
intends to conduct the Exchange Offer in accordance with the provisions of the
Registration Rights Agreement and the applicable requirements of the
Securities Act, the Exchange Act and the rules and regulations of the
Commission thereunder.
22
The Company shall be deemed to have accepted validly tendered Original Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Original Notes for the purposes of receiving the Exchange Notes from the
Company.
If any tendered Original Notes are not accepted for exchange because of an
invalid tender, or due to the occurrence of certain other events set forth
herein or otherwise, certificates for any such unaccepted Original Notes will
be returned without expense to the tendering holders thereof (or in the case
of Original Notes tendered by book-entry transfer, such Original Notes will be
credited to the account of such holder maintained at the Depository), as
promptly as practicable after the expiration or termination of the Exchange
Offer.
Holders who tender Original Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes described below, in connection with the
Exchange Offer. See "The Exchange Offer--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; TERMINATION
The term "Expiration Date" shall mean 5:00 p.m., New York City time on
November 25, 1996 unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer the Company will notify the Exchange
Agent of any extension by oral (promptly confirmed in writing) or written
notice and will make a public announcement thereof, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
expiration date of the Exchange Offer. Without limiting the manner in which
the Company may choose to make a public announcement of any delay, extension,
amendment or termination of the Exchange Offer, the Company shall have no
obligation to publish, advertise or otherwise communicate any such public
announcement, other than by making a timely release to an appropriate news
agency.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Original Notes, (ii) to extend the Exchange Offer, (iii) if any
conditions set forth below under "--Certain Conditions to the Exchange Offer"
shall not have been satisfied, to terminate the Exchange Offer by giving oral
or written notice of such delay, extension or termination to the Exchange
Agent or (iv) to amend the terms of the Exchange Offer in any manner. Any such
delay in acceptance, extension, termination or amendment will be followed as
promptly as practicable by oral or written notice thereof to the registered
holders. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, the Company will promptly disclose
such amendment by means of a prospectus supplement that will be distributed to
the registered holders of Original Notes, and the Company will extend the
Exchange Offer for a period of five to ten business days, depending upon the
significance of the amendment and the manner of disclosure to such registered
holders, if the Exchange Offer would otherwise expire during such five to ten
business day period. The rights reserved by the Company in this paragraph are
in addition to the Company's rights set forth below under the caption "--
Certain Conditions of the Exchange Offer."
If the Company extends the period of time during which the Exchange Offer is
open, or if it is delayed in accepting for exchange of, or in issuing and
exchanging the Exchange Notes for, any Original Notes, or is unable to accept
for exchange of, or issue Exchange Notes for, any Original Notes pursuant to
the Exchange Offer for any reason, then, without prejudice to the Company's
rights under the Exchange Offer, the Exchange Agent may, on behalf of the
Company, retain all Original Notes tendered, and such Original Notes may not
be withdrawn except as otherwise provided below in "--Withdrawal of Tenders."
The adoption by the Company of the right to delay acceptance for exchange of,
or the issuance and the exchange of the Exchange Notes, for any Original Notes
is subject to applicable law, including Rule 14e-1(c) under the Exchange Act,
which requires that the
23
Company pay the consideration offered or return the Original Notes deposited
by or on behalf of the holders thereof promptly after the termination or
withdrawal of the Exchange Offer.
PROCEDURES FOR TENDERING
Only a registered holder of Original Notes may tender such Original Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder must complete,
sign and date the Letter of Transmittal, or facsimile thereof, have the
signature thereon guaranteed if required by the Letter of Transmittal and mail
or otherwise deliver such Letter of Transmittal or such facsimile to the
Exchange Agent at the address set forth below under "The Exchange Offer--
Exchange Agent" for receipt prior to the Expiration Date. In addition, either
(i) certificates for such Notes must be received by the Exchange Agent along
with the Letter of Transmittal, or (ii) a timely confirmation of a book-entry
transfer of such Notes, if such procedure is available, into the Exchange
Agent's account at DTC pursuant to the procedure for book-entry transfer
described below, must be received by the Exchange Agent prior to the
Expiration Date, or (iii) the holder must comply with the guaranteed delivery
procedures described below.
Any financial institution that is a participant in the Depository's Book-
Entry Transfer Facility system may make book-entry delivery of the Original
Notes by causing the Depository to transfer such Original Notes into the
Exchange Agent's account in accordance with the Depository's procedure for
such transfer. Although delivery of Original Notes may be effected through
book-entry transfer into the Exchange Agent's account at the Depository, the
Letter of Transmittal (or facsimile thereof), with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received or confirmed by the Exchange Agent at its addresses set forth
under "--Exchange Agent" below prior to 5:00 p.m., New York City time, on the
Expiration Date. DELIVERY OF DOCUMENTS TO THE DEPOSITORY IN ACCORDANCE WITH
ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a holder which is not withdrawn prior to the Expiration Date
will constitute a binding agreement between such holder and the Company in
accordance with the terms and subject to the conditions set forth herein and
in the Letter of Transmittal.
THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IF DELIVERY IS BY MAIL,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS
RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF
TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR
RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO
EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner of the Original Notes whose Original Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Original Notes, either make
appropriate arrangements to register ownership of the Notes in such owner's
name (to the extent permitted by the Indenture) or obtain a properly completed
assignment from the registered holder. The transfer of registered ownership
may take considerable time.
If the Letter of Transmittal is signed by a person other than the registered
holder of any Original Notes (which term includes any participants in DTC
whose name appears on a security position listing as the owner of
24
the Original Notes) or if delivery of the Exchange Notes is to be made to a
person other than the registered holder, such Original Notes must be endorsed
or accompanied by a properly completed bond power, in either case signed by
such registered holder as such registered holder's name appears on such
Original Notes with the signature on the Original Notes or the bond power
guaranteed by an Eligible Institution (as defined below).
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution unless the Original Notes tendered pursuant thereto
are tendered (i) by a registered holder who has not completed the box entitled
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter
of Transmittal or a notice of withdrawal, as the case may be, are required to
be guaranteed, such guarantee must be made by a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States, or another "Eligible Guarantor
Institution" within the meaning of Rule 17Ad-15 under the Exchange Act (any of
the foregoing, an "Eligible Institution").
If the Letter of Transmittal or any Original Notes or assignments are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
The Exchange Agent and the Depository have confirmed that any financial
institution that is a participant in the Depository's system may utilize the
Depository's Automated Tender Offer Program to tender Original Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Original Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and
all Original Notes not properly tendered or any Original Notes, the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including
the instructions in the Letter of Transmittal) will be final and binding on
all parties. Unless waived, any defects or irregularities in connection with
tenders of Original Notes must be cured within such time as the Company shall
determine. Although the Company intends to request the Exchange Agent to
notify holders of defects or irregularities with respect to tenders of
Original Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Original Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived.
While the Company has no present plan to acquire any Original Notes which
are not tendered in the Exchange Offer or to file a registration statement to
permit resales of any Original Notes which are not tendered pursuant to the
Exchange Offer, the Company reserves the right in its sole discretion to
purchase or make offers for any Original Notes that remain outstanding
subsequent to the Expiration Date or, as set forth below under "--Certain
Conditions to the Exchange Offer," to terminate the Exchange Offer and, to the
extent permitted by applicable law, purchase Original Notes in the open
market, in privately negotiated transactions or otherwise. The terms of any
such purchases or offers could differ from the terms of the Exchange Offer.
By tendering, each holder will represent to the Company that, among other
things, (i) the Exchange Notes to be acquired by the holder of the Original
Notes in connection with the Exchange Offer are being acquired by the holder
in the ordinary course of business of the holder, (ii) the holder has no
arrangement or understanding with any person to participate in the
distribution of Exchange Notes, (iii) the holder acknowledges and agrees that
any person who is a broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purpose of distributing the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the Exchange Notes acquired by such person and cannot rely on
the position of the staff of the Commission set forth in certain no-action
letters, (iv) the holder understands that a secondary resale transaction
described in clause (iii) above
25
and any resales of Exchange Notes obtained by such holder in exchange for
Original Notes acquired by such holder directly from the Company should be
covered by an effective registration statement containing the selling
securityholder information required by Item 507 or Item 508, as applicable, of
Regulation S-K of the Commission, and (v) the holder is not an "affiliate," as
defined in Rule 405 of the Securities Act, of the Company. If the holder is a
broker-dealer that will receive Exchange Notes for its own account in exchange
for Original Notes that were acquired as a result of market-making activities
or other trading activities, the holder is required to acknowledge in the
Letter of Transmittal that it will deliver a prospectus in connection with any
resale of such Exchange Notes; however, by so acknowledging and by delivering
a prospectus, the holder will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
RETURN OF NOTES
If any tendered Original Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Original Notes are
withdrawn or are submitted for a greater principal amount than the holders
desire to exchange, such unaccepted, withdrawn or non-exchanged Original Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Original Notes tendered by book-entry transfer into the Exchange
Agent's account at the Depository pursuant to the book-entry transfer
procedures described below, such Original Notes will be credited to an account
maintained with the Depository) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Original Notes at the Depository for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depository's system may make book-
entry delivery of Original Notes by causing the Depository to transfer such
Original Notes into the Exchange Agent's account at the Depository in
accordance with the Depository's procedures for transfer. However, although
delivery of Original Notes may be effected through book-entry transfer at the
Depository, the Letter of Transmittal or facsimile thereof, with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at the address set forth
below under "--Exchange Agent" on or prior to the Expiration Date or pursuant
to the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Original Notes and (i) whose Original Notes
are not immediately available or (ii) who cannot deliver their Original Notes
(or complete the procedures for book-entry transfer), the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder, the certificate number(s) of such Original Notes (if
available) and the principal amount of Original Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within five
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or a facsimile thereof) together with the certificate(s)
representing the Original Notes in proper form for transfer (or a
confirmation of a book-entry transfer into the Exchange Agent's account at
the Depository of Original Notes delivered electronically), and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) such properly executed Letter of Transmittal (or facsimile thereof),
as well as the certificate(s) representing all tendered Original Notes in
proper form for transfer (or a confirmation of a book-entry transfer into
the Exchange Agent's account at the Depository of Original Notes delivered
electronically),
26
and all other documents required by the Letter of Transmittal are received
by the Exchange Agent within five New York Stock Exchange trading days
after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Original Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Original Notes may be
withdrawn at any time prior to the Expiration Date.
To withdraw a tender of Original Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Original Notes to be withdrawn (the "Depositor"), (ii) identify the
Original Notes to be withdrawn (including the certificate number or numbers
(if applicable) and principal amount of such Original Notes), and (iii) be
signed by the holder in the same manner as the original signature on the
Letter of Transmittal by which such Original Notes were tendered (including
any required signature guarantees). All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company in its sole discretion, whose determination shall be final and
binding on all parties. Any Original Notes so withdrawn will be deemed not to
have been validly tendered for purposes of the Exchange Offer and no Exchange
Notes will be issued with respect thereto unless the Original Notes so
withdrawn are validly retendered. Properly withdrawn Notes may be retendered
by following one of the procedures described above under "--Procedures for
Tendering" at any time prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any
Original Notes not theretofore accepted for exchange, and may terminate or
amend the Exchange Offer as provided herein before the acceptance of such
Original Notes, if any of the following conditions exist:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Company, might impair the ability
of the Company to proceed with the Exchange Offer or have a material
adverse effect on the contemplated benefits of the Exchange Offer to the
Company or there shall have occurred any material adverse development in
any existing action or proceeding with respect to the Company or any of its
subsidiaries; or
(b) there shall have been any material change, or development involving a
prospective change, in the business or financial affairs of the Company or
any of its subsidiaries which, in the reasonable judgment of the Company,
could reasonably be expected to materially impair the ability of the
Company to proceed with the Exchange Offer or materially impair the
contemplated benefits of the Exchange Offer to the Company; or
(c) there shall have been proposed, adopted or enacted any law, statute,
rule or regulation which, in the judgment of the Company, could reasonably
be expected to materially impair the ability of the Company to proceed with
the Exchange Offer or materially impair the contemplated benefits of the
Exchange Offer to the Company; or
(d) any governmental approval which the Company shall, in its reasonable
discretion, deem necessary for the consummation of the Exchange Offer as
contemplated hereby shall have not been obtained.
If the Company determines in its reasonable discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any
Original Notes and return all tendered Original Notes to the tendering
holders, (ii) extend the Exchange Offer and retain all Original Notes tendered
prior to the expiration of the
27
Exchange Offer, subject, however, to the rights of holders to withdraw such
Original Notes (see "The Exchange Offer--Withdrawal of Tenders") or (iii)
waive such unsatisfied conditions with respect to the Exchange Offer and
accept all properly tendered Original Notes which have not been withdrawn. If
such waiver constitutes a material change to the Exchange Offer, the Company
will promptly disclose such waiver by means of a prospectus supplement that
will be distributed to the registered holders of the Original Notes, and the
Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the waiver and the manner of
disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
Holders may have certain rights and remedies against the Company under the
Registration Rights Agreement should the Company fail to consummate the
Exchange Offer, notwithstanding a failure of the conditions stated above. Such
conditions are not intended to modify those rights or remedies in any respect.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to such
condition or may be waived by the Company in whole or in part at any time and
from time to time in the Company's reasonable discretion. The failure by the
Company at any time to exercise the foregoing rights shall not be deemed a
waiver of any such right and each such right shall be deemed an ongoing right
which may be asserted at any time and from time to time.
TERMINATION OF CERTAIN RIGHTS
All rights under Registration Rights Agreement (including registration
rights) of holders of the Original Notes eligible to participate in this
Exchange Offer will terminate upon consummation of the Exchange Offer except
with respect to the Company's continuing obligations (i) to indemnify the
holders (including any broker-dealers) and certain parties related to the
holders against certain liabilities (including liabilities under the
Securities Act), (ii) to provide, upon the request of any holder of a
transfer-restricted Original Note, the information required by Rule 144A(d)(4)
under the Securities Act in order to permit resales of such Original Notes
pursuant to Rule 144A, (iii) to use its best efforts to keep the Registration
Statement effective to the extent necessary to ensure that it is available for
resales of transfer-restricted Notes by broker-dealers for a period of 180
days from the date on which the Registration Statement is declared effective
and (iv) to provide copies of the latest version of the Prospectus to broker-
dealers upon their request for a period of 180 days from the date on which the
Registration Statement is declared effective. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted pursuant to the
foregoing provisions, the Company has been informed 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.
28
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. All questions and requests for assistance as well as
all correspondence in connection with the Exchange Offer and the Letter of
Transmittal should be addressed to the Exchange Agent, as follows:
By Facsimile: By Overnight Courier:
(212) 420-6152 United States Trust Company of New York
(For Eligible Institutions Only) 770 Broadway, 13th Floor
New York, NY 10003
Confirm by Telephone: Attention: Corporate Trust Services
(800) 548-6565 Window
By Hand: By Mail:
United States Trust Company of (insured or registered recommended)
New York United States Trust Company of
111 Broadway, Lower Level New York
New York, NY 10006 P.O. Box 843
Attention: Corporate Trust Peter Cooper Station
New York, NY 10276
Attention: Corporate Trust
Requests for additional copies of this Prospectus, the Letter of Transmittal
or the Notice of Guaranteed Delivery should be directed to the Exchange Agent.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager or other soliciting agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptance of the Exchange Offer. The Company,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$250,000. Such expenses include fees and expenses of the Exchange Agent and
Trustee, accounting and legal fees and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Original Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes, or Original Notes for principal amounts not
tendered or acceptable for exchange, are to be delivered to, or are to be
issued in the name of, any person other than the registered holders of the
Original Notes tendered, or if tendered Original Notes are registered in the
name of any person other than the person signing the Letter of Transmittal, or
if a transfer tax is imposed for any reason other than the exchange of
Original Notes pursuant to the Exchange Offer, then the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment
of such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder of Original Notes.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Original Notes as reflected in the Company's accounting records on the date of
the exchange. Accordingly, no gain or loss for accounting purposes will be
recognized. The expenses of the Exchange Offer will be amortized over the term
of the Exchange Notes.
29
CONSEQUENCE OF FAILURE TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Original
Notes are urged to consult their financial and tax advisors in making their
own decisions on what action to take.
The Original Notes which are not exchanged for the Exchange Notes pursuant
to the Exchange Offer will remain restricted securities. Accordingly, such
Original Notes may be resold only (i) to a person whom the seller reasonably
believes is a qualified institutional buyer (as defined in Rule 144A under the
Securities Act) in a transaction meeting the requirements of Rule 144A, (ii)
in a transaction meeting the requirements of Rule 144 under the Securities
Act, (iii) outside the United States to a foreign person in a transaction
meeting the requirements of Rule 904 under the Securities Act, (iv) in
accordance with another exemption from the registration requirements of the
Securities Act (and based upon an opinion of counsel if the Company so
requests), (v) to the Company or (vi) pursuant to an effective registration
statement and, in each case, in accordance with any applicable securities laws
of any state of the United States or any other applicable jurisdiction.
30
THE COMPANY
Pierce Leahy is the largest archive records management company in North
America, as measured by its approximately 39 million cubic feet of records
currently under management in 131 facilities throughout North America. The
Company provides extensive records management services to a diversified group
of over 15,000 customer accounts in a variety of industries including
financial services, manufacturing, transportation, healthcare and law.
Pierce Leahy'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. The Company was formed at that
time from the consolidation of the predecessor company with Leahy Business
Archives.
Since its incorporation in 1990, the Company has 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"). The Company has made, and
intends to continue to make, distributions to its shareholders to pay their
tax obligations as a result of the Company's status as a Subchapter S
corporation. 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 the
Company's status as a Subchapter S corporation, 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.
THE TRANSACTIONS
In connection with the offering of the Original Notes, the Company effected
a series of transactions described below:
(i) the repayment of the amounts outstanding under the Company's previous
credit facility ($146.1 million) and entering into the Credit Facility. See
"Description of Credit Facility";
(ii) the consummation of the purchase of a records management company in
the San Diego market for $3.5 million;
(iii) in order to eliminate or reduce certain related party rental
expenses, the Company purchased from two partnerships owned by members of
the Pierce family (the "Pierce Family Partnerships") six facilities located
in the following locations which are currently leased by the Company from
the Pierce Family Partnerships: Atlanta, Georgia; Chester, New York;
Folcroft, Pennsylvania; Sharon Hill, Pennsylvania (two properties); and
Midland, Texas. The purchase prices for five of these six properties were
based on independent valuations prepared by various subsidiaries of Cushman
& Wakefield, Inc. and the purchase price of the Midland, Texas property was
based on the recent acquisition price for such property. In addition, the
Company had been subleasing from one of the Pierce Family Partnerships 16
other facilities at a cost in excess of the amount being paid by such
Pierce Family Partnership to the owner of the property. The Company
purchased the leasehold interests from such Pierce Family Partnership,
thereby reducing the Company's rental expense. In addition, one of the
Pierce Family Partnerships had minority interests in five of the properties
currently leased by the Company, which interests were purchased by the
Company. The total purchase price for all of the above transactions (the
"Real Estate Transactions") was $14.8 million
31
(including the assumption of a mortgage for $1.1 million), and the purchase
of the real property and leasehold interests from the Pierce Family
Partnerships will reduce the Company's annual rental expense by $2.0
million; and
(iv) the redemption of 100 shares of Class A Common Stock from Leo W.
Pierce, Sr. (representing 1% of the Company's Common Stock and approximately
19% of Mr. Pierce's beneficial holdings) for an aggregate price of $1.45
million (the "Stock Redemption").
In addition, the Company has recently purchased three additional records
management companies with proceeds of the Original Notes for an aggregate
purchase price of $8.4 million (such acquisitions, together with the
transactions referred to above are collectively referred to as the
"Transactions").
32
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
as contemplated in this Prospectus, the Company will receive in exchange
Original Notes in like principal amount, the terms of which are substantially
identical to the Exchange Notes. The Original Notes surrendered in exchange for
Exchange Notes will be retired and cancelled and cannot be reissued.
Accordingly, issuance of the Exchange Notes will not result in any increase in
the indebtedness of the Company.
The net proceeds to the Company from the sale of the Original Notes was or
will be used to finance the Transactions and certain of the the Pending
Acquisitions and for general corporate purposes. The remaining Pending
Acquisitions will be financed through borrowings under the Credit Facility. The
anticipated sources and uses of funds from the sale of the Original Notes are
set forth below (dollars in thousands).
Sources of proceeds:
Offering of Original Notes.................................... $200,000
Credit Facility--U.S. ........................................ 12,885
--------
Total souces of proceeds...................................... $212,885
========
Uses of proceeds:
Retirement of existing Credit Facility--U.S. ................. $123,988(a)
Retirement of existing Credit Facility--Canadian.............. 22,110(a)
Real Estate Transactions...................................... 13,717(b)
Stock Redemption.............................................. 1,450
Completed acquisitions........................................ 11,849
Pending Acquisitions.......................................... 30,326
General corporate purposes.................................... 945
Estimated fees and expenses................................... 8,500
--------
Total uses of proceeds...................................... $212,885
========
- --------
(a) Based on actual outstanding indebtedness as of the closing of the sale of
the Original Notes.
(b) In connection with the Real Estate Transactions, the Company also assumed a
mortgage for $1.1 million.
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
June 30, 1996 and (ii) as adjusted to give effect to the sale of the Original
Notes, the Transactions, the Pending Acquisitions and the accrual of a pension
obligation for Leo W. Pierce, Sr. as if they had occurred as of June 30, 1996.
This table should be read in conjunction with the information contained in "Use
of Proceeds" as well as the Company's consolidated financial statements and
notes thereto included elsewhere herein (U.S. dollars in thousands):
AS OF JUNE 30, 1996
---------------------
ACTUAL AS ADJUSTED
-------- -----------
Cash on hand........................................... $ 860 $ 500
======== ========
Existing Credit Facility--U.S.(a)...................... $124,888 $ --
Existing Credit Facility--Canadian(a).................. 21,595 --
Credit Facility--U.S................................... -- 12,885
Credit Facility--Canadian.............................. -- --
Original Notes......................................... -- 200,000
Other indebtedness..................................... 656 1,780
-------- --------
Total debt........................................... 147,139 214,665
Shareholders' deficit.................................. (15,105) (26,903)
-------- --------
Total capitalization................................. $132,034 $187,762
======== ========
- --------
(a) Does not include approximately $0.9 million of U.S. repayments and $0.5
million of additional Canadian borrowings after June 30, 1996 but prior to
repayment.
33
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS,
BALANCE SHEET AND OTHER DATA
The following selected consolidated statement of operations, balance sheet
and other data as of December 31, 1991, 1992, 1993, 1994 and 1995, and for the
years then ended, 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,
1993, 1994 and 1995 appears elsewhere in this Prospectus. The selected
consolidated statement of operations, balance sheet and other data as of June
30, 1995 and 1996, and for the six months then ended, is derived from the
unaudited Consolidated Financial Statements of the Company which, in
management's opinion, includes all material adjustments (consisting only of
normal recurring adjustments) necessary for the fair presentation of the
information set forth therein. The results of operations for the six months
ended June 30, 1996 are not necessarily indicative of the results that may be
expected for a full year.
The following selected pro forma statement of operations data and other data
give effect to, among other things, the Transactions, the Pending Acquisitions
and the offering of the Original Notes, as if they had occurred on January 1,
1995. The following unaudited pro forma condensed consolidated balance sheet
data give effect to, among other things, the Transactions, the Pending
Acquisitions and the offering of the Original Notes, as if they had occurred
on June 30, 1996. The Transactions, the Pending Acquisitions and certain
management assumptions and adjustments are described in the accompanying notes
hereto. The pro forma information should be read in conjunction with the
Company's consolidated financial statements and the notes thereto, as of
December 31, 1995 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 Transactions, the
Pending Acquisitions and the offering of the Original Notes 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.
34
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS, BALANCE
SHEET AND OTHER DATA
(DOLLARS IN THOUSANDS)
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------- -------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(A) 1995 1996 1996(A)
------- ------- ------- ------- ------- --------- ------- ------- ---------
STATEMENT OF OPERATIONS
DATA:
Revenues
Storage................ $33,195 $37,633 $42,122 $47,123 $55,501 $82,238 $25,965 $35,485 $41,429
Service and storage
material sales........ 22,437 25,202 31,266 35,513 39,895 50,965 18,599 25,837 29,886
------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues......... 55,632 62,835 73,388 82,636 95,396 133,203 44,564 61,322 71,315
Cost of sales, excluding
depreciation and
amortization........... 37,145 39,702 45,391 49,402 55,616 73,118 25,937 35,189 38,445
Selling, general and
administrative......... 6,693 9,012 11,977 15,882 16,148 21,725 7,815 9,911 11,732
Depreciation and
amortization........... 5,783 5,734 6,888 8,436 8,163 12,621 4,304 5,612 6,965
Consulting payments to
related parties (b).... -- -- -- 500 500 500 250 -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income....... 6,011 8,387 9,132 8,416 14,969 25,239 6,258 10,610 14,173
Interest expense........ 6,677 6,388 6,160 7,216 9,622 24,981 4,156 5,953 12,490
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary loss.... (666) 1,999 2,972 1,200 5,347 258 2,102 4,657 1,683
Extraordinary loss(c)... -- -- 9,174 5,991 3,279 -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... (666) 1,999 (6,202) (4,791) 2,068 258 2,102 4,657 1,683
Accretion (cancellation)
of redeemable
warrants............... -- -- (746) 16 889 -- 445 1,560 --
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss
applicable to Common
shareholders........... $ (666) $ 1,999 $(5,456) $(4,807) $ 1,179 $ 258 $ 1,657 $ 3,097 $ 1,683
======= ======= ======= ======= ======= ======= ======= ======= =======
AS OF DECEMBER 31, AS OF JUNE 30, 1996
------------------------------------------------ ---------------------
PRO FORMA
AS
1991 1992 1993 1994 1995 ACTUAL ADJUSTED(D)
-------- -------- -------- -------- -------- -------- -----------
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 332 $ 461 $ 528 $ 358 $ 722 $ 860 $ 500
Working capital
(deficit).............. (10,402) (11,656) (9,143) (5,202) (8,139) (4,602) (3,810)
Total assets............ 59,726 65,869 74,621 79,746 131,328 162,796 221,431
Total debt.............. 52,695 55,027 69,736 77,683 120,071 147,139 214,665
Net debt (net of cash
balance)............... 52,363 54,566 69,208 77,325 119,349 146,279 214,165
Shareholders' deficit... (11,006) (9,028) (14,508) (19,341) (18,201) (15,105) (26,903)
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------- ---------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(A) 1995 1996 1996(A)
------ ------ ------- ------- ------- --------- ------- ------- ---------
OTHER DATA:
Ratio of earnings to
fixed charges(e)....... -- 1.21x 1.30x 1.11x 1.37x 1.01 1.33x 1.53x 1.11
Cash flows from
operations............. $7,088 $8,599 $ 8,019 $11,000 $17,522 -- $ 7,171 $ 6,629 --
Cash flows used in
investing activities... (3,541) (6,803) (13,784) (13,933) (51,315) -- (14,317) (32,120) --
Cash flows provided by
(used in) financing
activities............. (3,331) (1,667) 5,832 2,763 34,157 -- 7,030 25,629 --
EBITDA(f)............... 11,794 14,121 16,020 17,352 23,632 $38,360 10,812 16,222 $21,138
EBITDA margin........... 21.2% 22.5% 21.8% 21.0% 24.8% 28.8% 24.3% 26.5% 29.6%
Capital
expenditures(g)........ $3,521 $5,565 $ 5,827 $ 6,352 $16,288 -- $ 4,790 $ 7,657 --
Cubic feet of storage
under management at end
of period (000s)....... 13,858 16,248 19,025 22,160 29,523 32,264 23,549 34,347 37,890
(see footnotes on the following page)
35
NOTES TO SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED STATEMENT OF
OPERATIONS, BALANCE SHEET AND OTHER DATA
(a) Gives effect to (i) acquisitions completed in 1995 and 1996 year to date
and (ii) the offering of the Original Notes, the Transactions, the Pending
Acquisitions and the application of the net proceeds from the sale of the
Original Notes, as if each had occurred as of January 1, 1995. See "Use of
Proceeds" and "Pro Forma Financial Data." In connection with the
Transactions, the Company incurred non-recurring charges of approximately
$5.3 million in the third quarter of 1996, the quarter in which the
offering of the Original Notes was consummated. Such charges are not
reflected in the Pro Forma Condensed Consolidated Statement of Operations.
See "Risk Factors--Non-Recurring Charges; Expected Loss in Third Quarter
of 1996."
(b) Represents aggregate payments made to eight Pierce family members.
(c) Represents loss on early extinguishment of debt due to refinancings in
1993, 1994 and 1995. Amounts include write-off of unamortized deferred
financing costs and discount, along with prepayment penalties and other
costs. A similar charge of approximately $2.0 million occurred in the
third quarter of 1996, the quarter in which the debt was repaid, which has
not been reflected in the Pro Forma Condensed Consolidated Statement of
Operations. See "Risk Factors--Non-Recurring Charges; Expected Loss in
Third Quarter of 1996."
(d) Gives effect to: the offering of the Original Notes, the Transactions, the
Pending Acquisitions and the application of the net proceeds from the sale
of the Original Notes, as if they each had occurred as of June 30, 1996.
See "Use of Proceeds" and "Pro Forma Financial Data."
(e) The earnings for the year ended December 31, 1991 were inadequate to cover
fixed charges by $0.7 million.
(f) "EBITDA" is defined as net income (loss) before interest expense, taxes,
depreciation and amortization, consulting payments to related parties and
extraordinary items. EBITDA is not a measure of performance under GAAP and
may not be comparable to other similarly titled measures of other
companies. 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 criterion in evaluating records management
companies. Moreover, substantially all of the Company's financing
agreements 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.
(g) Capital expenditures for 1995 are comprised of $7.2 million for new
shelving, $5.1 million for facility purchases and related improvements,
$1.6 million for data processing, $1.5 million for leasehold and building
improvements and $0.9 million for the purchase of transportation,
warehouse and office equipment. Of the total 1995 capital expenditures,
approximately $2.5 million was for upgrading and restructuring of existing
facilities to accommodate growth or for maintenance capital expenditures.
36
PRO FORMA FINANCIAL DATA
The pro forma condensed consolidated balance sheet as of June 30, 1996 gives
effect to, among other things, the Transactions and the Pending Acquisitions,
as if they occurred on June 30, 1996. The unaudited pro forma condensed
consolidated statement of operations and other data for the year ended
December 31, 1995 and the six months ended June 30, 1996 give effect to, among
other things, the Transactions and the Pending Acquisitions, as if they
occurred on January 1, 1995. The Transactions, the Pending Acquisitions and
certain management assumptions and adjustments are described in the
accompanying notes hereto. The pro forma condensed consolidated balance sheet
and statements of operations should be read in conjunction with the Company's
consolidated financial statements and notes thereto, as of December 31, 1995
and for each of the three years in the period ended December 31, 1995,
appearing elsewhere in this Prospectus.
37
PIERCE LEAHY CORP.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
COMPLETED OFFERING AND PRO FORMA
AND PENDING PRO OTHER AS
ACTUAL ACQUISITION(A) FORMA TRANSACTIONS ADJUSTED
-------- -------------- -------- ------------ ---------
ASSETS
CURRENT ASSETS:
Cash.................. $ 860 $ 684 $ 1,544 $22,623 (b) $ 500
(8,500)(c)
(13,717)(d)
(1,450)(e)
Accounts receivable... 18,234 1,957 20,191 -- 20,191
Inventories........... 633 371 1,004 -- 1,004
Prepaid expenses and
other................ 2,091 47 2,138 -- 2,138
-------- ------- -------- ------- --------
Total current
assets............. 21,818 3,059 24,877 (1,044) 23,833
PROPERTY AND EQUIPMENT,
net.................... 88,541 6,878 95,419 7,008 (d) 102,427
OTHER ASSETS, primarily
intangibles............ 52,437 36,250 88,687 6,484 (c) 95,171
-------- ------- -------- ------- --------
$162,796 $46,187 $208,983 $12,448 $221,431
======== ======= ======== ======= ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of
long-term debt and
noncompete
obligations.......... $ 1,923 $ -- $ 1,923 $(1,684)(b) $ 239
Accounts payable...... 7,116 69 7,185 -- 7,185
Accrued expenses...... 8,706 2,206 10,912 499 (e) 11,411
Deferred revenues..... 8,675 133 8,808 -- 8,808
-------- ------- -------- ------- --------
Total current
liabilities........ 26,420 2,408 28,828 (1,185) 27,643
LONG-TERM DEBT AND
NONCOMPETE
OBLIGATIONS............ 145,216 43,779 188,995 24,307 (b) 214,426
1,124 (d)
DEFERRED RENT........... 2,899 -- 2,899 -- 2,899
DEFERRED INCOME TAXES... 3,366 -- 3,366 -- 3,366
SHAREHOLDERS' DEFICIT... (15,105) -- (15,105) (2,016)(c) (26,903)
(5,069)(d)
(2,764)(d)
(1,949)(e)
-------- ------- -------- ------- --------
$162,796 $46,187 $208,983 $12,448 $221,431
======== ======= ======== ======= ========
The accompanying notes are an integral part of this statement.
38
PIERCE LEAHY CORP.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
(a) Represents the balance sheets for the businesses acquired by the Company
after June 30, 1996 (Archives America of San Diego; Security Archives of
Denver; Data Protection Services; and Info-Stor Business Archives) and the
Pending Acquisitions (see "Business--Acquisition History and Growth
Strategy" and "Business--Pending Acquisitions"), after application of the
purchase method of accounting. Expected total cash purchase price of the
completed acquisitions and the Pending Acquisitions is $42,175, including
transaction costs.
(b) Reflects the sale of $200,000 in Original Notes and borrowings of $12,885
under the Credit Facility, the proceeds of which are being used to repay
existing indebtedness of $146,483 at June 30, 1996 and debt of $43,779
incurred in connection with the completed acquisitions and the Pending
Acquisitions.
(c) Represents the payment of the estimated transaction costs and expenses of
$8,500 and the write-off of $2,016 of unamortized deferred financing costs
related to previous debt financing. This write-off of unamortized deferred
financing costs will be recorded in the third quarter of 1996, the period
in which the debt repayment occurred.
(d) Reflects the payment of $13,717 for the Real Estate Transactions and the
assumption of a $1,124 mortgage. Since the Real Estate Transactions
involved land, buildings and joint venture interests purchased from the
Pierce Family Partnerships, for financial reporting purposes, the assets
will be recorded at their depreciated cost of $7,008, and the $5,069
excess of the purchase price over the depreciated basis will be charged to
shareholders' deficit. In addition, payments to the Pierce Family
Partnerships of $2,764 for certain leases will be charged to expense in
the third quarter of 1996.
(e) Represents the accrual of a pension obligation due to Leo W. Pierce, Sr.
of $499 and the Stock Redemption of $1,450.
39
PIERCE LEAHY CORP.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
ADJUSTMENTS
FROM
COMPLETED ADJUSTMENTS OFFERING PRO FORMA
AND PENDING FROM PRO AND OTHER AS
ACTUAL ACQUISITION(A) ACQUISITIONS FORMA TRANSACTIONS ADJUSTED
------- -------------- ------------ -------- ------------ ---------
REVENUES................ $95,396 $37,807 $ -- $133,203 $ -- $133,203
------- ------- ------- -------- ------- --------
OPERATING EXPENSES:
Cost of sales, excluding
depreciation and amor-
tization............... 55,616 21,384 (1,866)(b) 75,134 (2,016)(f) 73,118
Selling, general and ad-
ministrative........... 16,148 10,353 (4,776)(c) 21,725 -- 21,725
Depreciation and amorti-
zation................. 8,163 2,838 1,364 (d) 12,365 256 (f) 12,621
Consulting payments to
related parties........ 500 -- -- 500 -- 500
------- ------- ------- -------- ------- --------
Total operating ex-
penses............. 80,427 34,575 (5,278) 109,724 (1,760) 107,964
------- ------- ------- -------- ------- --------
Operating income.... 14,969 3,232 5,278 23,479 1,760 25,239
INTEREST EXPENSE........ 9,622 1,085 6,659 (e) 17,366 7,615 (g) 24,981
------- ------- ------- -------- ------- --------
INCOME BEFORE
EXTRAORDINARY ITEM..... $ 5,347 $ 2,147 $(1,381) $ 6,113 $(5,855) $ 258
======= ======= ======= ======== ======= ========
The accompanying notes are an integral part of this statement.
40
PIERCE LEAHY CORP.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS)
ADJUSTMENTS
COMPLETED ADJUSTMENTS FROM OFFERING PRO FORMA
AND PENDING FROM PRO AND OTHER AS
ACTUAL ACQUISITION(A) ACQUISITIONS FORMA TRANSACTIONS ADJUSTED
------- -------------- ------------ ------- ------------- ---------
REVENUES................ $61,322 $9,993 $ -- $71,315 $ -- $71,315
------- ------ ------- ------- ------- -------
OPERATING EXPENSES:
Cost of sales,
excluding
depreciation and
amortization......... 35,189 4,640 (375)(b) 39,454 (1,009)(f) 38,445
Selling, general and
administrative....... 9,911 2,918 (1,097)(c) 11,732 -- 11,732
Depreciation and
amortization......... 5,612 734 491 (d) 6,837 128 (f) 6,965
Consulting payments to
related parties...... -- -- -- -- -- --
------- ------ ------- ------- ------- -------
Total operating
expenses........... 50,712 8,292 (981) 58,023 (881) 57,142
------- ------ ------- ------- ------- -------
Operating income.... 10,610 1,701 981 13,292 881 14,173
INTEREST EXPENSE........ 5,953 361 2,288 (e) 8,602 3,888 (g) 12,490
------- ------ ------- ------- ------- -------
INCOME BEFORE
EXTRAORDINARY ITEM..... $ 4,657 $1,340 $(1,307) $ 4,690 $(3,007) $ 1,683
======= ====== ======= ======= ======= =======
The accompanying notes are an integral part of this statement.
41
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 1995 and 1996 for periods prior to their acquisition by the Company and
the results of operations of the Pending Acquisitions. See "Business--
Acquisition and Growth Strategy" and "Business--Pending Acquisitions."
(b) Pro forma adjustments have been made to reduce cost of sales by $1,866 in
1995 and $375 for the six months ended June 30, 1996, to eliminate
specific expenses that would not have been incurred had the completed
acquisitions and the Pending Acquisitions occurred as of January 1, 1995.
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 negotiated changes in lease terms.
(c) Pro forma adjustments for the year ended December 31, 1995 and for the six
months ended June 30, 1996 have been made to reduce selling, general and
administrative expenses by $4,776 and $1,097, respectively, to eliminate
specific expenses that would not have been incurred had the completed
acquisitions and the Pending Acquisitions occurred as of January 1, 1995.
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 completed acquisitions and the Pending Acquisitions
had occurred as of January 1, 1995. Property and equipment are depreciated
over five to 40 years, goodwill is amortized over 30 years and covenants
not to compete are amortized over four to five years on a straight-line
basis. Such depreciation and amortization 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 on debt incurred to finance the completed
acquisitions and the Pending Acquisitions of $6,659 in 1995, using an
effective annual interest rate of 9.33%, and $2,288 for the six months
ended June 30, 1996, using an effective annual interest rate of 9.58%.
(f) Reflects the purchase of land and buildings as part of the Real Estate
Transactions from the Pierce Family Partnerships that previously leased
such facilities to the Company. In addition, the Company will pay $2,764
to one of the Pierce Family Partnerships to assume such Partnership's
position in certain leases with third-parties. These operating leases with
third-parties were "passed through" to the Company with a mark-up. Rent
expense of $2,016 in 1995 and $1,013 for the six months ended June 30,
1996 has been eliminated based on these transactions. Depreciation expense
of $256 in 1995 and $128 for the six months ended June 30, 1996 has been
recorded based on the depreciated cost of the buildings and improvements
acquired as part of the Real Estate Transactions for $6,382, using an
estimated remaining useful life of 25 years. The $2,764 payment to assume
leases will result in a one-time charge in the statement of operations in
the third quarter of 1996, the quarter in which the Real Estate
Transactions were consummated, and has not been reflected in the Pro Forma
Condensed Consolidated Statement of Operations. These pro forma statements
also do not include the accrual for a pension obligation due Leo W.
Pierce, Sr. See "Risk Factors--Non-Recurring Charges; Expected Loss in
Third Quarter of 1996."
(g) Reflects interest expense on the $200,000 proceeds from the sale of the
Original Notes, the $12,885 of borrowings under the Credit Facility and
amortization of deferred debt issuance costs, which costs are
42
expected to be approximately $8,500, offset by the elimination of interest
expense on the indebtedness that will be repaid with a portion of the
proceeds of the offering of the Original Notes. The repayment of such
indebtedness will result in the write-off of deferred financing costs of
approximately $2,016 in the statements of operations in the third quarter
of 1996, the quarter in which the repayment occurred and has not been
reflected in the Pro Forma Condensed Consolidated Statement of Operations.
See "Risk Factors--Non-Recurring Charges; Expected Loss in Third Quarter of
1996." Pro forma adjusted interest expense represents the interest on the
$200,000 of Original Notes (including the amortization of deferred
financing costs) and the unpaid existing indebtedness which will not be
repaid, along with certain costs under the Credit Facility.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Historical and Pro Forma Consolidated Statement of Operations, Balance Sheet
and Other Data" and the Consolidated Financial Statements and the Notes
thereto and the other financial and operating information included elsewhere
in this Prospectus.
GENERAL
The Company is the largest archive records management company in North
America, as measured by its approximately 39 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
1991, the Company has pursued an expansion strategy combining growth from new
and existing customers with the completion and successful integration of 22
acquisitions.
The Company has experienced significant growth in its revenues and EBITDA as
a result of its successful expansion and acquisition strategy, which has been
facilitated by the implementation of the PLUS(R) system. During the four-year
period ended December 31, 1995, revenues increased from $55.6 million to $95.4
million, representing a compound annual growth rate of 14.4%. 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 EBITDA as a
percentage of total revenues improved from 21.2% in 1991 to 24.8% in 1995,
while EBITDA increased from $11.8 million to $23.6 million, over the same
period, representing a compound annual growth rate of 19.4%. 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.
The following table illustrates the growth in stored cubic feet from
existing customers, new customers and acquisitions from 1991 through 1995 and
for the six-month period ended June 30, 1996:
NET ADDITIONS OF CUBIC FEET OF STORAGE BY CATEGORY
(CUBIC FEET IN THOUSANDS)
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ----------
Additions of Cubic Feet:
Existing Customer
Accounts(a)............ 950 1,101 1,166 1,657 722(b) 851(b)
New Customer
Accounts(c)............ 376 995 1,494 1,038 2,018 1,429
Acquisitions............ -- 294 117 440 4,623 2,544
------ ------ ------ ------ ------ ------
Total................. 1,326 2,390 2,777 3,135 7,363 4,824
% Increase............ 11% 17% 17% 16% 33% *
Breakdown of % Increase:
Existing Customer
Accounts(a)............ 8% 8% 7% 9% 3% *
New Customer
Accounts(c)............ 3% 7% 9% 5% 9% *
Acquisition............. 0% 2% 1% 2% 21% *
------ ------ ------ ------ ------ ------
Total................. 11% 17% 17% 16% 33% *
Cubic Feet Under
Management:
Beginning of Period..... 12,532 13,858 16,248 19,025 22,160 29,523
End of Period........... 13,858 16,248 19,025 22,160 29,523 34,347
- --------
* Not applicable
(a) Net of permanent removals.
(b) Includes effects of a records destruction program for a major customer
recommended by the Company pursuant to a consulting agreement.
(c) For the first twelve months after the establishment of an account,
records added to such account are classified as additions to new customer
accounts in the period in which they are received.
44
Revenues
The Company's revenues consist of storage revenues (58.2% of total revenues
in 1995), and related service and storage material sales revenues (41.8% of
total revenues in 1995). 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 $0.175 per cubic foot (or $2.10
per year). Permanent removal fees 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 EBITDA.
While the Company's total revenues have increased at a compound annual
growth rate of 14.4% from 1991 to 1995, total revenue per annual average cubic
foot during such period has declined 10.0% from $4.22 to $3.80.* The decline
is 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) industry-wide pricing pressures (based in large part on
reductions related to the cost of commercial real estate since the late
1980s). 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.
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 1991 to 1995, annual operating expenses
(before depreciation, amortization and consulting payments) per average annual
cubic foot declined 13.9% from $3.32 to $2.86.*
The installation of the PLUS(R) system (which took approximately five years
and over $8 million to develop and implement) 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 acquisitions sites
concurrently and to reduce the workforce of acquired businesses by at least
20%.
- --------
* 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.
45
The following table illustrates the Company's improvement in labor
productivity from 1991 to 1995:
ANALYSIS OF LABOR PRODUCTIVITY
DECEMBER 31
-------------------------------------------------
PRO FORMA
1991 1992 1993 1994 1995 1995(A)
------- ------- ------- ------- ------- ---------
Cubic Feet Under Management
Per Employee(b)............ 18,702 19,961 23,033 24,405 24,521 25,305
EBITDA Per Employee(c)...... $15,916 $18,174 $19,537 $20,014 $22,379 $32,927
Number of Employees at End
of Period.................. 741 814 826 908 1,204 1,422
- --------
(a) Pro forma cubic feet under management is equal to (i) cubic feet of
records under management as of December 31, 1995, plus (ii) cubic feet of
records under management on the closing of each acquisition consummated
during 1996, plus (iii) the number of cubic feet of records expected to
be added upon the closing of the Pending Acquisitions. Pro forma number
of employees equals (a) the actual number of employees as of the end of
1995, plus (b) the number of employees added as a result of the 1996
acquisitions, plus (c) the number of employees expected to be added upon
the closing of the Pending Acquisitions, less (d) the number of employees
from (b) and (c) 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 completed
1996 acquisitions, the Pending Acquisitions, the offering of the Original
Notes, the Transactions and the application of the net proceeds from the
sale of the Original Notes, as if each had occurred as of January 1,
1995. 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 is consolidating certain individual warehouses into larger, more
efficient regional facilities, which generate economies of scale in both labor
and occupancy costs. The majority of the Company's available storage capacity
is in two new facilities located in Massachusetts and New Jersey. These
facilities have high storage densities (cubic feet of storage capacity divided
by square footage) which allow the Company to allocate its fixed real estate
costs over a larger revenue base and increase its storage capacity per
employee. The Massachusetts and New Jersey facilities, when fully occupied,
will have over 17 million cubic feet of combined storage capacity, and as a
result, warehouse utilization has declined to approximately 59% from
historical levels of between 70% and 80%. The added capacity is expected to
satisfy the Company's growth requirements in its Northeast region for several
years.
In addition to the reduction in rental expense expected to result from the
Real Estate Transactions, the Company has attempted to reduce administrative
expenses as it grows. During 1995, the Company implemented a new medical plan
which reduced its health care expenditures per employee by over 30% annually
while maintaining comparable coverage levels. The Company also reduced its
telephone rates through a competitive bid process and is reviewing other areas
for cost savings.
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 goodwill, deferred
financing costs and noncompetition agreements arising from acquisitions and
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. Accordingly, as the
Company expands by making such acquisitions, amortization charges will
increase, thereby continuing to affect net income negatively.
Capital Expenditure Requirements
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. Shelving costs total approximately
$2.00 per cubic foot on a fully installed basis. Shelving has a relatively
long life and rarely needs
46
to be replaced. 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. New facilities (leased or purchased) require certain
improvements such as installation of lighting and security systems and other
storage related modifications. The Company's data processing capital
expenditures are also largely related to growth. As new facilities are added,
on-site computer enhancements are needed.
In 1995, over 80% of total capital expenditures of $16.3 million was related
to expansion items. Capital expenditures consisted of $7.2 million for new
shelving, $5.1 million for new facility purchases and related improvements,
$1.6 million for data processing, $1.5 million for leasehold and building
improvements, and $0.9 million for the purchase of transportation, warehouse
and office equipment. Of the total 1995 capital expenditures, approximately
$2.5 million was for upgrading and restructuring of existing facilities to
accommodate growth or for maintenance capital expenditures.
Since the majority of the Company's capital expenditures are growth related,
the Company has the ability to adjust a major component of its use of funds by
slowing its rate of growth. Under a slow growth strategy, the Company's
capital expenditures would be significantly reduced, as minimal additional
shelving and other expansionary capital expenditures would be required. The
Company capitalizes, as client acquisition costs, certain costs related to
new, large multi-year storage contracts. Client acquisition costs totaled $2.9
million during 1995 and included sales commissions and certain client move-in
costs. Client acquisition costs are amortized over six years, the average
initial contract term.
Extraordinary Losses
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 and
insurance company debt, which have resulted in one-time charges including the
repurchase of warrants, prepayment penalties and the write-off of deferred
financing costs aggregating $18.4 million from 1993 to 1995. Similarly, the
Company will recognize a one-time charge of approximately $2.0 million in the
third quarter of 1996 from the write-off of deferred financing costs in
connection with the repayment of the existing indebtedness in such quarter.
See "Risk Factors--Non-Recurring Charges; Expected Loss in Third Quarter of
1996."
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.
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ ----------------
1993 1994 1995 1995 1996
-------- -------- -------- ------- -------
Revenues:
Storage..................... 57.4% 57.0% 58.2% 58.3% 57.9%
Service and storage material
sales...................... 42.6% 43.0% 41.8% 41.7% 42.1%
-------- -------- -------- ------- -------
Total revenues.............. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales, excluding de-
preciation and amortiza-
tion........................ 61.9% 59.8% 58.3% 58.2% 57.4%
Selling, general and adminis-
trative..................... 16.3% 19.2% 16.9% 17.5% 16.2%
Depreciation and amortiza-
tion........................ 9.4% 10.2% 8.6% 9.7% 9.2%
Consulting payments to re-
lated parties............... 0% 0.6% 0.5% 0.6% 0%
-------- -------- -------- ------- -------
Operating income............ 12.4% 10.2% 15.7% 14.0% 17.2%
Interest expense............. 8.4% 8.7% 10.1% 9.3% 9.7%
-------- -------- -------- ------- -------
Income (loss) before ex-
traordinary loss........... 4.0% 1.5% 5.6% 4.7% 7.5%
Extraordinary loss........... 12.5% 7.2% 3.4% 0% 0%
-------- -------- -------- ------- -------
Net income (loss)........... (8.5%) (5.7%) 2.2% 4.7% 7.5%
======== ======== ======== ======= =======
EBITDA...................... 21.8% 21.0% 24.8% 24.3% 26.5%
======== ======== ======== ======= =======
47
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Storage revenues increased from $26.0 million in the six months ended June
30, 1995 to $35.5 million in the six months ended June 30, 1996, an increase
of $9.5 million or 36.6%. Service and storage material sales revenues
increased from $18.6 million in the six months ended June 30, 1995 to $25.8
million in the six months ended June 30, 1996, an increase of $7.2 million or
38.9%.
Total revenues increased from $44.6 million in the six months ended June 30,
1995 to $61.3 million in the six months ended June 30, 1996, an increase of
$16.7 million or 37.6%. Seven acquisitions completed from July 1995 to June
1996 accounted for $12.3 million or 73.7% of such increase in total revenues.
The balance of the revenue growth resulted from net increases in cubic feet
stored from existing customers and from sales to new 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.
The monthly average cubic feet of storage increased approximately 34.2% for
the first six months of 1996 as compared to the first six months of 1995, from
approximately 23.7 million cubic feet to approximately 31.8 million cubic
feet.
Cost of sales (excluding depreciation and amortization) increased from $25.9
million in the six months ended June 30, 1995 to $35.2 million in the six
months ended June 30, 1996, an increase of $9.3 million or 35.9%, but
decreased slightly as a percentage of total revenues from 58.2% in 1995 to
57.4% in 1996. The $9.3 million increase resulted primarily from an increase
in cubic feet stored from internal growth and acquisitions. The decrease as a
percentage of total revenues was due primarily to operating efficiencies
partially offset by the effect of the severe winter weather in 1996 as
compared to 1995.
Selling, general and administrative expenses increased from $7.8 million in
the six months ended June 30, 1995 to $9.9 million in the six months ended
June 30, 1996, an increase of $2.1 million or 26.8%, but decreased as a
percentage of total revenues from 17.5% in 1995 to 16.2% in 1996. The $2.1
million increase was due primarily to increases in administrative staffing,
including increases due to acquisitions.
As a result of the foregoing factors, EBITDA increased from $10.8 million in
the six months ended June 30, 1995 to $16.2 million in the six months ended
June 30, 1996, an increase of $5.4 million or 50% and increased as a
percentage of total revenues from 24.3% in 1995 to 26.5% in 1996.
Depreciation and amortization expenses increased from $4.3 million in the
six months ended June 30, 1995 to $5.6 million in the six months ended June
30, 1996, an increase of $1.3 million or 30.4%, but decreased as a percentage
of total revenues from 9.7% in 1995 to 9.2% in 1996. Depreciation and
amortization expenses continued to increase primarily as a result of the
Company's acquisitions and capital investments for shelving, improvements to
records management facilities, information systems and client acquisition
costs.
Interest expense increased from $4.2 million in the six months ended June
30, 1995 to $6.0 million in the six months ended June 30, 1996. This increase
was due primarily to increased levels of indebtedness, primarily to finance
acquisitions, as well as higher interest rates. The Company's future interest
expense will increase significantly as a result of the higher interest rate on
the Exchange Notes and additional indebtedness the Company may incur to
finance possible future growth.
As a result of the foregoing factors, net income increased from $2.1 million
in the six months ended June 30, 1995 to $4.7 million in the six months ended
June 30, 1996, an increase of $2.6 million or 121.6%, and increased as a
percentage of total revenues from 4.7% in 1995 to 7.6% in 1996.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
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 12.4%.
48
Total revenues increased from $82.6 million in 1994 to $95.4 million in
1995, an increase of $12.8 million or 15.5%. 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. Five
acquisitions completed from February 1995 to October 1995 accounted for $7.4
million (or 57.8%) of the increase.
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%.
The percentage increase in average cubic feet stored was greater than that of
total revenues for the reasons discussed in the second paragraph under "--
General--Revenues" above.
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 1.3%, 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.
As a result of the foregoing factors, EBITDA increased from $17.4 million in
1994 to $23.6 million in 1995, an increase of $6.2 million or 35.6%, 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.
Depreciation and amortization expenses decreased from $8.4 million in 1994
to $8.2 million in 1995, a decrease of $0.2 million or 2.4%, 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.
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 losses 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 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.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Storage revenues increased from $42.1 million in 1993 to $47.1 million in
1994, an increase of $5.0 million or 11.9%. Service and storage material sales
revenues increased from $31.3 million in 1993 to $35.5 million in 1994, an
increase of $4.2 million or 13.4%.
49
Total revenues increased from $73.4 million in 1993 to $82.6 million in
1994, an increase of $9.2 million or 12.5%. The substantial majority of the
revenue growth resulted from sales to new customers and increases in cubic
feet stored from existing customers. Four acquisitions completed from April to
October 1994 accounted for $1.0 million (or 10.9%) of the increase.
The annual average cubic feet stored increased from approximately 17.6
million in 1993 to approximately 20.6 million in 1994, an increase of 17.1%.
The percentage increase in cubic feet stored was greater than that of total
revenues for the reasons discussed in the second paragraph under "--General--
Revenues" above.
Cost of sales (excluding depreciation and amortization) increased from $45.4
million in 1993 to $49.4 million in 1994, an increase of $4.0 million or 8.8%,
but decreased as a percentage of total revenues from 61.9% in 1993 to 59.8% in
1994. The $4.0 million increase was due primarily to increases in storage
volume and the cost of additional storage capacity. The decrease as a
percentage of total revenues was due primarily to increased storage
efficiencies.
Selling, general and administrative expenses increased from $12.0 million in
1993 to $15.9 million in 1994, an increase of $3.9 million or 32.5%, and
increased as a percentage of total revenues from 16.3% in 1993 to 19.2% in
1994. The increase in such expenses was due primarily to increased staffing
principally related to the Company's investment in its corporate and sales
infrastructure, the cost of converting its facilities to the PLUS(R) system,
and the need to operate duplicate information systems in this period.
As a result of the foregoing factors, EBITDA increased from $16.0 million in
1993 to $17.4 million in 1994, an increase of $1.4 million or 8.8%, but
decreased as a percentage of total revenues from 21.8% in 1993 to 21.0% in
1994.
Depreciation and amortization expenses increased from $6.9 million in 1993
to $8.4 million in 1994, an increase of $1.5 million or 21.7%, and increased
as a percentage of total revenues from 9.4% in 1993 to 10.2% in 1994. This
increase, both in dollars and as a percentage of total revenues, was due
primarily to an increase in depreciation charges resulting from capital
expenditures for shelving and improvements to records management facilities
and information systems and amortization of goodwill resulting from
acquisitions.
Interest expense increased from $6.2 million in 1993 to $7.2 million in
1994, an increase of $1.0 million or 16.1%, due primarily to increased levels
of indebtedness. The Company incurred an extraordinary loss in 1994 of $6.0
million related to the early extinguishment of debt and cancellation of
warrants when it refinanced and expanded its existing credit facility in 1994
as compared to a $9.2 million extraordinary loss in 1993 for the same reasons.
As a result of the foregoing factors, the net loss decreased from $6.2
million in 1993 to $4.8 million in 1994, a decrease of $1.4 million and
decreased from 8.5% of total revenues to 5.7% of total revenues.
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 Company's expansion program has negatively affected shareholders'
deficit and the ratio of earnings to fixed charges, primarily as a result of
extraordinary losses related to the early extinguishment of debt as a result
of refinancings, increased interest expense from borrowings, increased
depreciation and amortization expenses and the amortization of goodwill.
Capital Investments
For 1993, 1994 and 1995 and the six months ended June 30, 1996, capital
expenditures were $5.8 million, $6.4 million, $16.3 million and $7.7 million,
respectively, and client acquisition costs were $2.8 million, $1.9
50
million, $2.2 million and $2.3 million, respectively. Capital expenditures for
1995 were comprised of $7.2 million for new shelving, $5.1 million for new
facility purchases and related improvements, $1.6 million for data processing,
$1.5 million for leasehold and building improvements and $0.9 million for the
purchase of transportation, warehouse and office equipment. In each period,
the largest component of capital expenditures was for the purchase and
installation of shelving to store additional records. The Company's Canadian
subsidiary purchased a facility in Montreal for approximately Cdn $5.15
million (approximately U.S. $3.8 million). The Canadian subsidiary financed
the purchase through a combination of mortgage financing and the proceeds of
the Original Notes offering.
Excluding the Transactions and the Pending Acquisitions, the Company expects
capital expenditures for 1996 will approximate $27.0 million, including $3.8
million for the purchase of the Montreal facility and $6.0 million to exercise
an option to purchase a storage facility currently being leased by the
Company. The Company expects client acquisition costs for 1996 will
approximate $5.0 million. The non-real estate 1996 estimated capital
expenditures are primarily growth related and, like estimated client
acquisition costs, are based on assumed continued growth of the Company's
business consistent with levels for the first half of 1996. There can be no
assurance that the Company's business will continue to grow at such rate, and
for any variance there will be a corresponding change in growth-related
capital expenditures. The Company expects to fund such expenditures with cash
flows from existing operating activities and by borrowings under the Credit
Facility.
Recent and Pending Acquisitions
In order to capitalize on industry consolidation opportunities, the Company
has actively pursued acquisitions since the beginning of 1993, which has
significantly impacted liquidity and capital resources through the investment
of approximately $112.8 million in acquisitions. The Company has historically
financed its acquisitions with borrowings under its credit agreements and with
cash flows from existing operating activities. The Pending Acquisitions have
an aggregate purchase price of $30.7 million, $17.8 of which is expected to be
financed with the proceeds of the Original Notes with the remainder to be
financed through borrowings under the Credit Facility.
To the extent that future acquisitions are financed by additional borrowings
under the Credit Facility or other borrowings, the resulting increase in debt
and interest expense could have a negative effect on such measures of
liquidity as the ratio of debt to equity and the ratio of earnings to fixed
charges.
Sources of Funds
Net cash provided by operating activities totaled $8.0 million, $11.0
million, $17.5 million and $6.6 million for 1993, 1994 and 1995 and the six
months ended June 30, 1996, respectively. The $3.0 million increase from 1993
to 1994 is primarily accounted for by a $1.4 million increase in EBITDA, which
was partially offset by a $1.0 million increase in interest expense and no
increase in working capital in 1994 as compared to an increase in working
capital of $3.2 million in 1993. The $6.5 million increase from 1994 to 1995
is primarily comprised of a $6.2 million increase in EBITDA and a $3.4 million
decrease in working capital, partially offset by a $2.4 million increase in
interest expense.
Net cash flows provided by financing activities were $5.8 million, $2.8
million, $34.2 million and $25.6 million for 1993, 1994 and 1995 and the six
months ended June 30, 1996, respectively. In 1993, the Company entered into a
$75.0 million credit agreement which allowed it to refinance its existing
indebtedness, cancel the warrants issued in connection with the acquisition of
Leahy Business Archives in 1990 and provided for working capital. In 1994, the
credit agreement was expanded to $120.0 million and included a substantial
acquisition facility. In 1995, the credit agreement was expanded to $170.0
million, including a substantial acquisition facility, and provided funds for
the acquisition of PLC Command in Canada.
The Company entered into the Credit Facility on August 13, 1996 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
51
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 Notes will restrict borrowings under the Credit
Facility. As of June 30, 1996, after giving effect to the acquisitions
completed after June 30, 1996 and to the Pending Acquisitions, the Company
could have borrowed an additional $23.2 million under the Credit Facility. The
Company expects that its borrowing capacity under the Credit Facility will
increase as it makes additional acquisitions because the Credit Facility takes
into account pro forma EBITDA (as defined in the Credit Facility) from
acquisitions in determining borrowing capacity under the facility. See
"Description of Credit Facility" and "Description of the Notes--Certain
Covenants--Limitation on Additional Indebtedness."
As a Subchapter S corporation, the Company does not pay federal income
taxes. However, the Company does make distributions to its shareholders to
allow them to pay federal and state taxes related to the Company's taxable
income. As of December 31, 1995, the shareholders for federal tax purposes had
net operating loss carryforwards of approximately $18.5 million. Consequently,
there have been minimal distributions to shareholders for tax payments in
recent years.
Future Capital Needs
The Company's ability to generate cash adequate to fund its needs depends
primarily on the results of its operations and the availability of financing.
Management believes that cash flow from operations in conjunction with the
proceeds of the Original Notes and borrowings under the Credit Facility will
be sufficient for the foreseeable future to meet debt service requirements and
to make possible future acquisitions and capital expenditures. Depending on
the pace of acquisitions, the Company may elect to seek additional financing
during the next two years. The Company anticipates that any such financing
will be debt financing, including the issuance of debt securities. However,
depending on market conditions and the preferences of acquisition candidates,
the Company might consider issuing equity securities. 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.
52
BUSINESS
GENERAL
Pierce Leahy is the largest archive records management company in North
America, as measured by its approximately 39 million cubic feet of records
currently under management. The Company operates a total of 131 records
management facilities of which 118 are in the United States, serving 51 local
markets, including the 15 largest U.S. markets. In addition, the Company
operates 13 records management facilities in five of Canada's six largest
markets. The Company provides records management services to a diversified
group of over 15,000 customer accounts in a variety of industries including
financial services, manufacturing, transportation, healthcare and law. The
Company believes it is the most technologically advanced records management
company in the industry by virtue of its Pierce Leahy User Solution (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. Management believes the
PLUS(R) system allows the Company to efficiently manage records in multiple
markets for national customers, rapidly integrate acquisitions of records
management companies and maintain a low-cost operating structure.
Pierce Leahy is a full-service provider of records management and related
services, enabling customers with the ability 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 a wide range of other data management
services, including customer records management programs, imaging services and
records management consulting services. The Company's storage and related
services are typically provided pursuant to annual or multi-year 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. In 1995, revenues
from storage and from service and storage material sales accounted for 58% and
42% of the Company's total revenues, respectively.
The Company believes that it benefits from several positive industry
fundamentals, including (i) the diversified and recurring nature of storage
and service revenues, (ii) the ability of larger records management companies
to achieve economies of scale in both labor and real estate costs, (iii) the
continued trend toward corporate outsourcing of records management functions,
(iv) low maintenance capital expenditure requirements, (v) the historically
non-cyclical nature of the records management industry and (vi) the ongoing
consolidation of records management companies. The Company derives the
majority of its revenues from monthly fees charged for the storage of records.
The recurring nature of these revenues, which are derived from a diversified,
stable customer base (none of which accounted for more than 3% of total
revenues during 1995) and require relatively little direct ongoing labor and
marketing expenses, contributes significantly to the Company's EBITDA. As the
Company's volume of records under management grows, the substantial
investments made in its PLUS(R) system and centralized support functions are
amortized over a larger base of business, creating economies of scale. These
operating efficiencies, coupled with the Company's entry into new markets,
allow the Company to take advantage of the trend by larger companies with
multiple locations to outsource their records management functions. The
Company's capital expenditures are primarily growth related and are comprised
substantially of new shelving and other expenditures related to storing and
servicing new records. Pierce Leahy has not experienced a reduction of its
business as a result of economic downturns, in fact, management believes that
the outsourcing of records management may accelerate during such times as a
result of increased customer focus on noncore operating costs. Finally,
management believes the Company is well positioned to continue to participate
in the industry consolidation due to its ability to rapidly and efficiently
integrate in-market and new market acquisitions as a result of its PLUS(R)
system and centralized corporate administrative functions.
53
THE RECORDS MANAGEMENT INDUSTRY
According to a 1994 study by 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 only four companies offer
records storage and services on a national basis in the United States and only
two companies do so in Canada. Other industry participants operate regionally,
or more typically, in single markets.
According to industry sources, an estimated four trillion documents are
created each year in the United States, many of which must be retained and
remain accessible for many years. 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.
Management is not aware of any definitive information about the size or nature
of the North American 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.
The Company believes that the records management industry is characterized
by the following trends:
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, and
such technologies have actually promoted the desire for hard copies of such
electronic information.
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.
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. For example,
it may be more cost effective for a company to store inactive records at an
off-site facility rather than at a corporate headquarters where real estate
costs can be substantially greater. Moreover, third party records management
companies are able to create real estate and labor efficiencies relative to a
single customer by spreading multiple customers' records storage needs over a
single fixed cost base.
Industry Consolidation. The records management industry is undergoing a
period of consolidation as larger, better capitalized industry participants
acquire smaller regional or single-market participants. Management believes
that this trend is driven by larger records management companies' desire to
add to their revenue base quickly and cost effectively, achieve broader market
presence and realize economies of scale, especially with respect to labor,
real estate and management information expenses. Industry consolidation also
provides private owners of smaller records management companies the ability to
obtain liquidity.
54
BUSINESS STRATEGY
Pierce Leahy's business strategy is to become the preferred provider of
records management services in each of its markets by offering premium
services while maintaining a low-cost operating structure. The Company seeks
to expand its business in current and new markets through increased business
from existing customers, the addition of new customers and acquisitions of
other records management companies. The Company expects to continue its growth
and enhance its market position by implementing its strategy based on the
following elements:
Pursuing National and Unvended Customers. The Company focuses its sales and
marketing efforts on pursuing large regional and national accounts, typically
through multi-year contracts, where the Company believes its national presence
and sophisticated systems provide it with a competitive advantage. The
greatest source of potential business is from large organizations which are
currently managing their records internally. These organizations are
increasingly outsourcing such noncore activities, enabling their management to
focus on their core business and to reduce capital requirements. For example,
during the first eight months of 1996, the Company entered into 53 contracts,
each to manage initially at least 10,000 cubic feet of records, including
eight contracts for at least 100,000 cubic feet of records.
Remaining a Low-Cost Operator. The Company strives to offer premium services
to its customers while remaining a low-cost operator through achieving
economies of scale in real estate, labor, transportation, management
information and administrative expenses. The Company believes that it is one
of the few records management companies with the size and resources to realize
significant economies of scale in these areas.
Using Sophisticated Centralized Systems. The Company believes that its
proprietary PLUS(R) system is the most technologically advanced computer
system in the industry, and allows the Company to maintain a centralized
management approach to its business. All customer calls are fielded by one of
the Company's two centralized customer service departments located at the
Company's U.S. and Canadian corporate headquarters which can take customer
calls 24 hours a day, seven days a week. Routine pick-up and delivery requests
are dispatched directly by customer service representatives to local
facilities as directed by PLUS(R). All billing functions are also handled
centrally by PLUS(R) system software. The Company's centralized customer
service and billing functions eliminate the need for redundant functions at
individual facilities. 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.
Although PLUS(R) is centralized so that the customer has real-time access to
the database, the system offers local management flexibility in meeting a
customer's needs. Through a variety of pre-programmed options, local
management can customize the system to 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.
Enhancing Facility Efficiency. The PLUS(R) system allows the Company to
enhance the efficiency of its facilities while reducing fixed and operating
costs and maintaining high customer service levels. PLUS(R) provides the
Company with a real time inventory tracking system, using sophisticated bar-
coding technology, designed to pinpoint the exact location of any individual
customer's records within any facility in North America. This system
eliminates the need to designate permanent locations for an individual
customer's records within a facility, enabling 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.
The system also provides the local archive manager a number of pre-
programmed options for managing the archive workforce (e.g., where to shelve
new boxes in a labor efficient manner, the sequence in which to perform
55
non-rush deliveries), as well as providing management comprehensive labor
productivity and warehouse utilization data to monitor archive efficiency.
ACQUISITION HISTORY AND GROWTH STRATEGY
Pierce Leahy 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. Since 1991, the Company has successfully completed and
integrated 22 acquisitions, totaling approximately 9.3 million cubic feet of
records at the time of acquisition. From July 1994 through December 31, 1995,
approximately $45.2 million (including purchase price, capital expenditures
and related integration costs) was invested in eight acquisitions, which
produced an incremental $11.0 million of EBITDA on a full-year or annualized
basis during the first year following acquisition. In each of these
acquisitions, staffing levels were immediately reduced with further reductions
typically taking place in the following months as general and administrative
functions were integrated into the Company's corporate organization.
The following table summarizes the market or markets for each acquisition
since 1990 and its date of acquisition:
DATE OF
ACQUISITION MARKET ACQUISITION
----------- ------ -----------
Leahy Business Archives Multiple* February 1990
Muhlenhaupt Records Management Long Island April 1992
Arcus Data New York July 1992
File Away Baltimore/Washington, D.C. July 1992
Taylor Document Richmond August 1992
Data Management of Tennessee Nashville April 1993
Command Records Chicago June 1994
Fidelity Archives Philadelphia July 1994
ProFilers Jacksonville October 1994
Fileminders Jacksonville October 1994
Vital Archives New York February 1995
Bestway Archival Services Miami May 1995
Curtis Archives Seattle August 1995
Command Records Service Canada** October 1995
AMK Documents Phoenix October 1995
Brambles (Ottawa Division) Ottawa March 1996
The File Cabinet Atlanta March 1996
File Box Austin April 1996
Security Archives Dallas May 1996
Archives America of San Diego San Diego July 1996
Security Archives of Denver Denver August 1996
Data Protection Services Birmingham September 1996
Info-Stor Business Archives Calgary October 1996
- --------
* Los Angeles, Houston, New York, New Jersey, Boston, Connecticut, Chicago,
Dallas and Miami/Ft. Lauderdale.
** Toronto, Montreal, Vancouver, Ottawa and Calgary.
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 Pierce Leahy's corporate
organization in an efficient, standardized process allows the Company to
realize immediate cost savings as a result of reduced labor and overhead costs
and improved facility utilization.
The Company targets potential acquisitions in both its existing markets (in-
market) and in new markets which it is not yet servicing. In-market
acquisitions typically provide the highest degree of operating leverage since
in addition to eliminating redundant overhead, such as overlapping delivery
runs, an acquired company's
56
storage facility can, when possible, be consolidated into an existing Company
facility within the same market area. New market acquisitions allow the
Company to both expand its business generally and enhance its ability to serve
national customer accounts.
PENDING ACQUISITIONS
The Company has entered into agreements to purchase records management
companies with operations in Denver, Las Vegas, Birmingham, Albuquerque and
Ft. Wayne for an aggregate purchase price of approximately $30.7 million (the
"Pending Acquisitions"). The closing of each Pending Acquisition is subject to
various conditions, and there can be no assurance that any Pending Acquisition
will be completed. See "Risk Factors--Risks Associated with Acquisitions." The
Exchange Offer is not contingent upon completion of the Pending Acquisitions,
and no Pending Acquisition is dependent upon the completion of the Exchange
Offer. The Pending Acquisitions are expected to be financed with the proceeds
of the issuance of the Original Notes and through borrowings under the Credit
Facility.
DESCRIPTION OF SERVICES
Pierce Leahy'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 1995, Pierce Leahy generated 93% of its storage
revenues from hard copy storage and 7% 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 the 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, 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 next-day service (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 300 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.
All of the Company's services are centrally coordinated by the PLUS(R)
system, permitting the Company to cost-effectively provide its customers with
a high level of service. The centralized order entry system allows
57
(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
markets in Florida, Texas and California, and French-speaking representatives
serving Canada.
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
also enhances its ability to attract large accounts.
In addition to providing traditional storage, customers may contract with
Pierce Leahy to manage their on-site records or file services center. Such
management services generally include providing Company personnel and/or the
Company's Recordminder(R) PC-based file management software program 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. Pierce Leahy 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.
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 national accounts in multiple cities and
acquiring other records management companies. The PLUS(R) system, together
with the Company's Recordminder(R) program (a PC-based file management program
which a customer can pay to utilize on-site at its own facilities), 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. Company-
wide installation of PLUS(R) was completed during the first quarter of 1995.
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 to locate each unit of a customer's records,
regardless of 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 multi-market 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, Pierce Leahy is able
to reduce the labor and overhead costs associated with the acquisition,
resulting in immediate cost savings.
58
. 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 Pierce Leahy 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 facility, PLUS(R) automatically assigns the box a
new location.
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 Pierce Leahy 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 customer does not have the specific number of
the box it is seeking.
SALES AND MARKETING
During the past four years, the Company has invested significant effort in
developing its sales and marketing department, which is comprised of 61
employees in the United States and Canada. 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. Sales representatives
are instructed to offer recommendations on how to implement a system
responsive to a particular customer's needs. Since the beginning of 1992, the
Company's sales representatives secured over 2,600 new customer accounts
comprising over eight million cubic feet of new records.
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. 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 15,000 customers accounts in
a variety of industries, including financial services, manufacturing,
transportation, healthcare and law. The Company tracks customer accounts,
which are based on billing invoices. Accordingly, depending on how billings
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 4% 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 are located in
one market) to large Fortune 500-type companies that have operations in
multiple locations. 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 markets in conjunction with the PLUS(R) system enable it to provide
the sophisticated file management services frequently required by such
customers on a regional or national basis.
The Company typically enters into contracts with customers which provide for
an initial term of one or more years and 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 1995, less than
2% 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
59
attrition rate is due to a number of factors, including satisfaction with the
Company's services as well as the effort and expense of transferring records
to another service provider or back in-house.
FACILITIES
The Company operates a total of 131 records management facilities of which
118 are in the United States, serving 51 local markets, including the 15
largest U.S. markets, and 13 facilities in Canada serving five major markets.
Of the 8.3 million square feet of floor space in the Company's records storage
facilities, approximately 34% and 66% are in owned and leased facilities,
respectively. The Company's facilities are located as follows:
RECORDS
MANAGEMENT
LOCATION FACILITIES
-------- ----------
United States
Alabama.......................... 4
Arizona.......................... 4
California....................... 7
Colorado......................... 11
Connecticut...................... 8
Florida.......................... 8
Georgia.......................... 4
Illinois......................... 3
Indiana.......................... 3
Maryland......................... 2
Massachusetts.................... 7
Michigan......................... 1
New Mexico....................... 3
Nevada........................... 1
New Jersey....................... 11
New York......................... 4
North Carolina................... 4
Pennsylvania..................... 8
Tennessee........................ 2
Texas............................ 15
Virginia......................... 3
Washington....................... 5
---
Total U.S........................ 118
===
Canada
Calgary.......................... 3
Montreal......................... 3
Ottawa........................... 2
Toronto.......................... 4
Vancouver........................ 1
---
Total Canada..................... 13
---
Total............................ 131
===
In order to accommodate its growth strategy, the Company has made
significant new facility investments during the last fifteen months,
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 addition of these facilities provides the
Company with substantial excess storage capacity and is expected to satisfy
the Company's facility expansion requirements in its Northeast region for
several years.
COMPETITION
The Company believes it competes with three other large multi-market
companies in the U.S. and one in Canada, as well as a large number of local
and regional concerns. The Company believes that competition for customers is
based on price, reputation for reliability, quality of service and scope and
scale of technology, and
60
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 has
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.
EMPLOYEES
As of June 30, 1996, the Company had 1,266 employees, including 173
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 with insurers which it
believes to be reputable and in amounts which it believes to be appropriate,
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 $20.5 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 operated 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. All of
the USTs are registered, as 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 recently acquired 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
which expires in 1997. The Company has purchased an environmental liability
insurance policy covering the cleanup costs to the Company, if any, resulting
from any on- or off-site environmental condition existing at the time of the
Company's acquisition of this property, with a $250,000 deductible and policy
limits of $4 million per occurrence/$8 million in the aggregate, provided the
claim first arises during the term of the policy, which is August 10, 1995
through August 11, 1998.
The Company has not received any written notice from any governmental
authority or third party asserting, and is not otherwise aware of, any
material noncompliance, liability or claim under environmental laws applicable
to the Company other than as described above. No assurance can be given that
there are no
61
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.
62
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is certain information regarding the Company's directors,
executive officers and other significant management personnel:
NAME AGE POSITION
---- --- --------
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........ 37 Vice President, Operations--West
Leo W. Pierce, Jr.............. 52 Vice President, Contracts Administration
and Director
Michael J. Pierce.............. 46 Vice President, Equipment Sales and
Distribution Group and Director
Raul A. Fernandez.............. 46 Vice President, Information Services
Joseph P. Linaugh.............. 47 Vice President, Treasurer
Lisa G. Goldschmidt............ 28 General Counsel
Alan B. Campell................ 46 Director
Delbert S. Conner.............. 67 Director
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 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.
63
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. 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.
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,
64
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 Pierce Leahy. See "The Company."
BOARD COMMITTEES
The Company's Board of Directors appointed a Compensation Committee in
September 1994. The Compensation Committee is 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 non-qualified stock
option plan. Until September 1994, the Compensation Committee's functions were
exercised by the Board of Directors.
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.
65
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.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------- ------------
OTHER SECURITIES
NAME AND ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS COMPENSATION
------------------ -------- ------- ------------ ------------ ------------
J. Peter Pierce ........ $186,800 $93,400 -- -- $6,680(a)
President and Chief Ex-
ecutive Officer
Ross M. Engelman ....... 130,422 65,000 -- 85 4,938(b)
Vice President, Opera-
tions--South
J. Michael Gold ........ 129,905 65,000 -- 85 3,416(c)
Vice President, Opera-
tions--Northeast
Douglas B. Huntley ..... 129,520 65,000 -- 85 4,802(d)
Vice President and
Chief Financial Officer
Joseph A. Nezi ......... 133,020 97,841(e) -- 85 5,739(f)
Vice President, Sales
and Marketing
Christopher J. Williams 129,905 65,000 -- 85 4,810(g)
.......................
Vice President, Opera-
tions--West
- --------
(a) Included in such amount is $2,310 representing an employer match under the
401(k) Plan (as defined herein), $1,371 in net premiums for a guaranteed
term life insurance policy on behalf of Mr. Pierce and $3,000 representing
contributions made by the Company under the Profit Sharing Plan (as
defined herein).
(b) Included in such amount is $2,107 representing an employer match under the
401(k) Plan, $98 in net premiums for a guaranteed term life insurance
policy on behalf of Mr. Engelman and $2,608 representing contributions
made by the Company under the Profit Sharing Plan.
(c) Included in such amount is $700 representing an employer match under the
401(k) Plan, $119 in net premiums for a guaranteed term life insurance
policy on behalf of Mr. Gold and $2,598 representing contributions made by
the Company under the Profit Sharing Plan.
(d) Included in such amount is $2,093 representing an employer match under the
401(k) Plan, $119 in net premiums for a guaranteed term life insurance
policy on behalf of Mr. Huntley and $2,590 representing contributions made
by the Company under the Profit Sharing Plan.
(e) Includes $32,842 paid as commissions.
(f) Included in such amount is $2,310 representing an employer match under the
401(k) Plan, $438 in net premiums for a guaranteed term life insurance
policy on behalf of Mr. Nezi and $3,000 representing contributions made by
the Company under the Profit Sharing Plan.
(g) Included in such amount is $2,066 representing an employer match under the
401(k) Plan, $125 in net premiums for a guaranteed term life insurance
policy on behalf of Mr. Williams and $2,598 representing contributions
made by the Company under the Profit Sharing Plan.
66
OPTION GRANTS IN 1995
The following table sets forth certain information concerning stock options
granted to the Named Executive Officers during 1995.
OPTION GRANTS IN 1995
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT
------------------------------------------- ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(B)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -------------------
NAME GRANTED(A) 1995 (SHARE) DATE 5% 10%
---- ---------- ------------ -------- ---------- --------- ---------
J. Peter Pierce......... -- -- -- -- -- --
Ross M. Engelman........ 85 15 $5,406 * $ 288,983 $ 732,341
J. Michael Gold......... 85 15 5,406 * 288,983 732,341
Douglas B. Huntley...... 85 15 5,406 * 288,983 732,341
Joseph A. Nezi.......... 85 15 5,406 * 288,983 732,341
Christopher J.
Williams............... 85 15 5,406 * 288,983 732,341
- --------
* The options have no specified expiration date.
(a) All options were granted under the Plan (as defined herein) and are for
the purchase of shares of Class B Common Stock of the Company. 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 Class B
Common Stock when the options were granted. There is no established
trading market for the Class B Common Stock and, accordingly, the market
price is based upon the formula set forth in the Plan based upon a
multiple of EBITDA, plus cash and cash equivalents, and less 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.
STOCK OPTION EXERCISES AND HOLDINGS
The following table sets forth the value of options held by each of the
Named Executives at December 31, 1995. None of the Named Executives exercised
any options during 1995.
AGGREGATED OPTION EXERCISES IN 1995 AND
OPTION VALUES AT DECEMBER 31, 1995
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1995(A) DECEMBER 31, 1995(B)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
J. Peter Pierce......... -- -- -- -- -- --
Ross M. Engelman........ -- -- -- 85 -- $68,255
J. Michael Gold......... -- -- -- 85 -- 68,255
Douglas B. Huntley...... -- -- -- 85 -- 68,255
Joseph A. Nezi.......... -- -- -- 85 -- 68,255
Christopher J.
Williams............... -- -- -- 85 -- 68,255
- --------
(a) All options are for the purchase of shares of Class B Common Stock.
(b) There is no established market for the Class B Common Stock and,
accordingly, the values are based on the exercise price of options
granted on January 1, 1996 in accordance with the formula set forth in
the Plan.
67
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is 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.
The Company previously leased six facilities from the Pierce Family
Partnerships and subleased 16 properties from one of the Pierce Family
Partnerships. 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 $7,036,000, $7,658,000 and $8,201,000 in 1993, 1994 and
1995, respectively. Pursuant to the Real Estate Transactions, the Company
purchased for $14.8 million (including the assumption of a mortgage for $1.1
million) all of the interests of the Pierce Family Partnerships in such
properties 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. See
"The Transactions."
The Company also leases from four separate limited partnerships its
corporate headquarters in King of Prussia, Pennsylvania and its facilities in
Suffield, Connecticut, Orlando, Florida and Charlotte, North Carolina. J.
Peter Pierce, the Company's President and Chief Executive Officer, is the
general partner of three of the limited partnerships and members of the Pierce
family and certain other officers 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 1993, 1994 and 1995 were $327,000, $531,000 and $773,000,
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.
As part of the Transactions, the Company redeemed 100 shares of 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 previously undertook to pay $60,000
per year for a five-year period to Mr. Pierce's spouse upon his death. The
Company intends to replace 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.
Substantially all of the shareholders of the Company, including Leo W.
Pierce, Sr. and J. Peter Pierce, have pledged their stock in the Company as
security for the payment of all obligations under the Credit Facility.
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 1993, 1994 and 1995, the Company paid CVF $1.5
million, $0.8 million and $0.7 million, respectively, with respect to
investment banking services. In addition, CVF was paid investment banking fees
of $0.7 million for advisory services in connection with the Transactions and
the offering of the Original Notes.
STOCK INCENTIVE PLAN
The Company established a Nonqualified Stock Option Plan (the "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 Plan is administered by the Compensation
Committee of the Board of Directors.
68
The Plan provides for the issuance of non-qualified stock options to "Key
Employees," defined as employees of the Company who are members of a select
group of management or highly compensated employees. As of May 31, 1996, there
were 13 Key Employees. Under the Plan, options exercisable for an aggregate of
1,141 shares of Class B Common Stock are available for grant. The exercise
price per share of Class B Common Stock of options granted under the Plan
shall be equal to or greater than the fair market value of the Class B 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 Plan
become exercisable, to the extent they are vested, at the earlier of the tenth
anniversary of the date of grant or the date the Company is no longer a
Subchapter S Corporation.
The Board, in its sole discretion, may direct the Company to make a loan to
a Key Employee whose Vested Percentage (defined below) with respect to one or
more stock options is at least 60%. The maximum amount of any such loan shall
be 25% of the amount which would be payable to the Key Employee had he
terminated employment other than on account of death or total and permanent
disability as of the date of the loan as set forth in the following paragraph.
Vested Percentage is based upon the options vesting in five equal annual
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 Plan), less (i) the principal amount of any outstanding loans pursuant
to the Plan and (ii) the aggregate exercise price of the underlying shares.
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.
69
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, of which the entire principal amount,
together with interest accruing at a rate of 8.875%, was outstanding as of
August 31, 1996.
See also "Management--Compensation Committee Interlocks and Insider
Participation."
70
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of October 15, 1996, information as to
the Company's stock beneficially owned by (i) each director of the Company,
(ii) each Named Executive Officer, (iii) all directors and executive officers
of the Company as a group, and (iv) each person who is known by the Company to
be the beneficial owner of more than 5% of the Company's Class A Common Stock,
the only class of voting stock outstanding.
CLASS A CLASS B
COMMON STOCK COMMON STOCK PERCENTAGE OF PERCENTAGE
-------------------- -------------------- BENEFICIAL OF VOTING
PERCENT OF PERCENT OF OWNERSHIP OF POWER OF ALL
NO. OF CLASS A NO. OF CLASS B ALL COMMON COMMON
NAME(A) SHARES(B) SHARES SHARES(B) SHARES STOCK STOCK
------- --------- ---------- --------- ---------- ------------- ------------
Leo W. Pierce, Sr. (c).. 410 45.6% 20 * 4.2% 45.6%
J. Peter Pierce (d)..... 90 10.0 1,480 16.4% 15.9 10.0
Leo W. Pierce, Jr. (e).. 90 10.0 1,300 14.4 14.0 10.0
Michael J. Pierce (f)... 70 7.8 1,265 14.1 13.5 7.8
Mary E. Pierce.......... 50 5.6 1,265 14.1 13.3 5.6
Barbara P. Quinn (g).... 50 5.6 1,255 13.9 13.2 5.6
Constance P. Buckley
(h).................... 50 5.6 1,255 13.9 13.2 5.6
Maurice Cox, Jr. (i).... 90 10.0 1,160 12.9 12.6 10.0
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 (12 persons)..... 660 73.3% 4,065 45.2% 47.7% 73.3%
- --------
* Less than one percent.
(a) The address of all persons in this table who are shown to beneficially own
5% or more of the Class A Common Stock, unless otherwise specified, is c/o
Pierce Leahy Corp., 631 Park Avenue, King of Prussia, Pennsylvania 19406.
(b) As used in this table, "beneficial ownership" means sole or shared power
to vote or direct the voting of a security, or the sole or shared
investment power with respect to a security (i.e., the power to dispose,
or direct the disposition, of a security). A person is deemed for any date
to have "beneficial ownership" of any security that such person has a
right to acquire within 60 days after such date. For purposes of computing
the percentage of outstanding shares held by each person named above, any
security that such person has the right to acquire within 60 days of the
date of calculation is deemed to be outstanding, but is not deemed to be
outstanding for purposes of computing the percentage ownership of any
other person.
(c) Includes 10 shares of Class B Common Stock held by Mr. Pierce's wife.
(d) Includes 340 shares of Class B Common Stock held for the benefit of Mr.
Pierce's children.
(e) Includes 213 shares of Class B Common Stock held for the benefit of Mr.
Pierce's children.
(f) Includes 100 shares of Class B Common Stock held for the benefit of Mr.
Pierce's child.
(g) Includes 523 shares of Class B Common Stock held for the benefit of Ms.
Quinn's children.
(h) Includes 144 shares of Class B Common Stock held for the benefit of Ms.
Buckley's children.
(i) The address of Mr. Cox is 731 E. Manoa Road, Havertown, Pennsylvania
19083. Includes 10 shares of Class A Common Stock and 320 shares of Class
B Common Stock held by Mr. Cox's wife and 120 shares held by or for the
benefit of Mr. Cox's children.
71
SHAREHOLDERS' AGREEMENT
The Company and its shareholders, with the exception of Leo W. Pierce, Sr.
(collectively, with the exclusion of Mr. Pierce, the "Shareholders"), are
parties to a buy/sell agreement which imposes certain restrictions on the
issuance and transfer of the Company's stock. Transfers of the Company's stock
during a Shareholder's lifetime may only be made to (i) lineal descendants of
Mr. Pierce and his wife, (ii) any trust for the benefit of any such lineal
descendant, provided that at least one trustee of such trust at all times is a
lineal descendant of Mr Pierce and his wife or (iii) to the spouse of a lineal
descendant of Mr. Pierce and his wife as custodian under a Uniform Transfers
to Minors Act for a lineal descendant of Mr. Pierce and his wife who has not
attained age 21 (collectively, "Permitted Transferees"). Shareholders are
permitted to make testamentary transfers to Permitted Transferees or to any
trust for the benefit of a lineal descendant of Mr. Pierce and his wife,
provided that at least one trustee of such trust at all times is a lineal
descendant of Mr. Pierce and his wife.
Within 270 days after a permitted testamentary transfer, the transferee may
elect to require the Company to purchase all or any part of the stock that was
acquired in such testamentary transfer. Upon the death of a Shareholder (other
than in the event of a permitted testamentary transfer), commencement of
bankruptcy or similar proceeding by or against a Shareholder, receipt by a
Shareholder of a bona fide written offer from a person other than a Permitted
Transferee to acquire all of the Shareholder's stock or a transfer or
attempted transfer by a Shareholder of any of his stock in violation of the
buy/sell agreement, the Company and the remaining Shareholders have the option
to purchase all or any of the stock owned by the affected Shareholder;
provided, however, that the Company is required to purchase any such stock not
purchased under such options, to the extent not prohibited by law or
agreement. The purchase price for such purchases is the agreed value, to be
determined at least annually by a qualified third party appraiser selected by
the Company, except that with respect to bona fide offers from third parties,
the purchaser may elect either the offer price or the agreed value. The
purchase of stock by the Company and/or remaining Shareholders following the
death of a Shareholder or a permitted testamentary transfer shall be funded,
to the extent available, with the proceeds of any life insurance policies
received by the Company and/or remaining Shareholders on the deceased
Shareholder or transferor, respectively. The Company currently maintains life
insurance policies on the lives of various of the Shareholders with an
aggregate death benefit of $3.75 million.
72
DESCRIPTION OF CREDIT FACILITY
As of August 13, 1996, the Company entered into a new credit facility with
Canadian Imperial Bank of Commerce ("CIBC" or "Agent") as the Agent. The
credit facility (the "Credit Facility") is 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 summary 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 aggregate available commitment under the Credit Facility will be reduced
incrementally on a quarterly basis, beginning September 30, 1999. The Credit
Facility matures on June 30, 2002, unless previously terminated. Prior to any
advance being made under the Credit Facility, the Company will be required to
be in compliance with all financial and operating covenants. The lenders under
the Credit Facility will be paid a commitment fee at a rate of 0.375% per
annum on unused commitments, payable quarterly. In addition, the Agent will
receive other customary fees.
Borrowings under the U.S. Dollar portion of the Credit Facility will 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 will also bear interest
based on various methods plus an applicable margin.
The obligations of the Company under the Credit Facility will be
unconditionally guaranteed, jointly and severally, by all subsidiaries of the
Company. The obligations of the Company and such guarantors under the Credit
Facility will be 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. In addition, substantially all
of the shareholders of the Company have pledged their stock as additional
security for payment of all obligations under the Credit Facility. Recourse to
the Company's shareholders will be limited to their stock. Obligations under
the Canadian facility will be 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 the following financial covenants:
maintenance of a fixed charge ratio of 1:1; maintenance of an interest
coverage ratio ranging from 1.5:1 to 2:1; maintenance of a leverage ratio
(total net debt to Adjusted EBITDA) ranging from 5.75:1 to 5.5:1; maintenance
of a Net Senior Debt to Adjusted EBITDA ratio ranging from 2.75:1 to 1.75:1;
and limitations on aggregate capital expenditures and acquisitions (all such
terms as defined in the Credit Agreement).
Events of default under the Credit Facility include those usual and
customary for facilities of this type, including among other things, default
in the payment of principal and interest in respect of material amounts of
indebtedness of the Company or its subsidiaries, any non-payment on
indebtedness under the Credit Facility, a Change of Control (as defined in the
Credit Facility), any material breach of the covenants, representations and
warranties included in the Credit Facility and related documents, the
institution of any bankruptcy proceedings and the failure of any security
agreement related to the Credit Facility or lien granted thereunder to be
valid and enforceable. Upon the occurrence and continuance of an event of
default under the Credit Facility, the lenders may terminate their commitments
to lend and declare the outstanding advances due and payable.
73
DESCRIPTION OF THE NOTES
The Original Notes were, and the Exchange Notes will be, issued under an
Indenture, dated as of July 15, 1996 (the "Indenture") between the Company and
the United States Trust Company of New York, 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. The form of the Exchange Notes and the
Original Notes are identical in all material respects except that the Exchange
Notes will have been registered under the Securities Act and, therefore, will
not bear legends restricting their transfer. The Exchange Notes will not
represent new indebtedness of the Company, will be entitled to the benefits of
the same Indenture which governs the Original Notes and will rank pari passu
with the Original Notes. Any provisions of the Indenture which require actions
by or approval of a specified percentage of Original Notes shall require the
approval of the holders of such percentage of principal amount of Original
Notes and Exchange Notes, in the aggregate.
GENERAL
The Notes are limited in aggregate principal amount to $200,000,000. 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 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"). None of the Company's current Restricted
Subsidiaries are guaranteeing the Notes and accordingly, as of the date
hereof, there are 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 second priority basis,
junior to the pledge of such shares in favor of the lenders and the
administrative agent under the Credit Facility. 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 have been paid in full and the
commitments under the Credit Facility have expired or been terminated.
MATURITY, INTEREST AND PRINCIPAL
The Notes will mature on July 15, 2006. The Notes will bear interest at a
rate of 11 1/8% per annum from the date of original issuance until maturity.
Interest is payable semi-annually in arrears on January 15 and July 15,
commencing January 15, 1997, to holders of record of the Notes at the close of
business on the immediately preceding January 1, and July 1, respectively.
Interest on the Exchange Notes will accrue from (A) the later of (i) the last
interest payment date on which interest was paid on the Notes surrendered in
exchange therefor or (ii) if the Notes are surrendered for exchange on a date
in a period which includes the record date for an interest payment date to
occur on or after the date of such exchange and as to which interest will be
paid, the date of such interest payment date, or (B) if no interest has been
paid on the Notes, from the Issue Date.
74
The interest rate on the Notes is subject to increase, and such Additional
Interest will be payable on the payment dates set forth above, in certain
circumstances, if the Notes (or other securities substantially similar to the
Notes) are not registered with the Commission within the prescribed time
periods. Upon consummation of the Exchange Offer, such registration
requirements will have been met and no Additional Interest will be payable
with respect the Notes, except as set forth below. In the event that the
Company does not exchange Exchange Notes for all Original Notes validly
tendered in accordance with the terms of the Exchange Offer on or prior to 60
days after the date of this Prospectus or the Registration Statement of which
this Prospectus forms a part ceases to be effective at any time prior to the
consummation of the Exchange Offer (either such event, a "Registration
Default"), the sole remedy available to holders of the Notes will be the
immediate assessment of additional interest ("Additional Interest") as
follows: the per annum interest rate on the Notes will increase by 50 basis
points; and the per annum interest rate will increase by an additional 25
basis points for each subsequent 90-day period during which the Registration
Default remains uncured, up to a maximum additional interest rate of 200 basis
points per annum in excess of the interest rate on the cover of this
Prospectus. All Additional Interest will be payable to holders of the Notes in
cash on the same original issue payment dates as the Notes, commencing with
the first such date occurring after any such Additional Interest commences to
accrue, until such Registration Default is cured. After the date on which such
Registration Default is cured, the interest rate on the Notes will revert to
the interest rate originally borne by the Notes (as shown on the cover of this
Prospectus).
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Registration Rights
Agreement, which has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part, a copy of which will be available upon
request to the Company.
OPTIONAL REDEMPTION
The Notes are redeemable at the option of the Company, in whole or in part,
at any time on or after July 15, 2001 at the following redemption prices
(expressed as a percentage of principal amount), together, in each case, with
accrued and unpaid interest to the redemption date, if redeemed during the
twelve-month period beginning on July 15, of each year listed below:
YEAR PERCENTAGE
---- ----------
2001.............................................................. 105.563%
2002.............................................................. 103.708%
2003.............................................................. 101.854%
2004 and thereafter............................................... 100.000%
Notwithstanding the foregoing, the Company may redeem in the aggregate up to
35% of the original principal amount of Notes at any time and from time to
time prior to July 15, 1999 at a redemption price equal to 110% 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 $130,000,000 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.
75
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 March 31, 1996, after
giving pro forma effect to the application of the net proceeds of the offering
of the Original Notes, no 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 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
76
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 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 6.0 to 1
if the Indebtedness is incurred prior to July 15, 2001 and 5.5 to 1 if the
Indebtedness is incurred thereafter; 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
77
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 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) $1,000,000. 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) the Real Estate Transactions, (vii) the Stock Redemption, (viii)
distributions or other payments
78
to the Permitted Holders, whether or not pro rata, provided, however, that the
aggregate amount of all such distributions or payments under this clause
(viii) made in any one year does not exceed $700,000 or (ix) additional
payments to the Permitted Holders or 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 (ix) does not exceed $2,000,000 in the aggregate, exclusive of amounts
funded by insurance proceeds and, provided, further, that with respect to
clauses (viii) and (ix) (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 clauses (viii) and (ix) (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.
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
79
"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.
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 or recognized real estate firm (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, 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
80
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, 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"). 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, a notice to the
holders stating, among other things: (1) that such holders have the right to
require the Company to apply the Available Asset Sale Proceeds to repurchase
such Notes at a purchase price in cash equal to 100% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase; (2)
the purchase date, which shall be no earlier than 30 days and not later than
60 days from the date such notice is mailed; (3) the instructions, determined
by the Company, that each holder must follow in order to have such Notes
repurchased; and (4) the calculations used in determining the amount of
Available Asset Sale Proceeds to be applied to the repurchase of such Notes.
Limitation on Preferred Stock of Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary to issue any Preferred
Stock (except Preferred Stock to the Company or a Restricted Subsidiary) or
permit any Person (other than the Company or a Subsidiary) to hold any such
Preferred Stock unless the Company or such Restricted Subsidiary would be
entitled to incur or assume Indebtedness under the covenant described under
"Limitation on Additional Indebtedness" in the aggregate principal amount
equal to the aggregate liquidation value of the Preferred Stock to be issued;
provided, however, that any Restricted Subsidiary that guarantees the Notes
pursuant to the covenant described under "Limitation on Creation of
Subsidiaries" shall be permitted to issue Preferred Stock that is not
Disqualified Capital Stock.
Limitation on Capital Stock of Restricted Subsidiaries
The Company will not (i) sell, pledge, hypothecate or otherwise convey or
dispose of any Capital Stock of a Restricted Subsidiary (other than under the
terms of the Credit Facility or under the terms of any Designated Senior
Indebtedness) or (ii) permit any of its Restricted Subsidiaries to issue any
Capital Stock, other than to the Company or a Wholly-Owned Subsidiary of the
Company. The foregoing restrictions shall not apply to an Asset Sale made in
compliance with "Limitation on Certain Asset Sales" or the issuance of
Preferred Stock in compliance with the covenants described under "Limitation
on Preferred Stock of Restricted Subsidiaries."
Limitation on Sale and Lease-Back Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any Sale and Lease-Back Transaction unless (i) the consideration
received in such Sale and Lease-Back Transaction is at least equal to the fair
market value of the property sold, as determined by a board resolution of the
Company, and (ii) the Company could incur the Attributable Indebtedness in
respect of such Sale and Lease-Back Transaction in compliance with the
covenant described under "Limitation on Additional Indebtedness."
Payments for Consent
Neither the Company nor any of its Subsidiaries shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any holder of any Notes for or as an inducement
81
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 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
82
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 requires 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 provides that, (A) if the Company or any Subsidiary thereof
has issued any outstanding (i) Indebtedness that is subordinated in right of
payment to the Notes or (ii) Preferred Stock, and the Company or such
Subsidiary is required to make a Change of Control Offer or to make a
distribution with respect to such subordinated Indebtedness or Preferred Stock
in the event of a change of control, the Company shall not consummate any such
offer or distribution with respect to such subordinated Indebtedness or
Preferred Stock until such time as the Company shall have paid the Change of
Control Purchase Price in full to the holders of Notes that have accepted the
Company's Change of Control Offer and shall otherwise have consummated the
Change of Control Offer made to holders of the Notes and (B) the Company will
not issue Indebtedness that is subordinated in right of payment to the Notes
or Preferred Stock with change of control provisions requiring the payment of
such Indebtedness or Preferred Stock prior to the payment of the Notes in the
event of a Change of Control under the Indenture.
In the event that a Change of Control occurs and the holders of Notes
exercise their right to require the Company to purchase Notes, if such
purchase constitutes a "tender offer" for purposes of Rule 14e-1 under the
Exchange Act at that time, the Company will comply with the requirements of
Rule 14e-1 as then in effect with respect to such repurchase.
The Company's ability to purchase the Notes will be limited by the Company's
then available financial resources and, if such financial resources are
insufficient, its ability to arrange financing to effect such purchases. There
can be no assurance that the Company will have sufficient funds to repurchase
the Notes upon a Change of Control or that the Company will be able to arrange
financing for such purpose.
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
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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 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;
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(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 provides 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 provides that if an Event of Default (other than an Event of
Default resulting from certain events of bankruptcy, insolvency or
reorganization) shall have occurred and be continuing, then the Trustee or the
holders of not less than 25% in aggregate principal amount of the Notes then
outstanding may declare to be immediately due and payable the entire principal
amount of all the Notes then outstanding plus premium, if any, and accrued
interest to the date of acceleration and (i) such amounts shall become
immediately due and payable or (ii) if there are any amounts outstanding under
or in respect of the Credit Facility such amounts shall become due and payable
upon the first to occur of an acceleration of amounts outstanding under or in
respect of the Credit Facility or five business days after receipt by the
Company and the representative of the holders of Senior Indebtedness under or
in respect of the Credit Facility, of notice of the acceleration of the Notes;
provided, however, that after such acceleration but before a judgment or
decree based on acceleration is obtained by the Trustee, the holders of a
majority in aggregate principal amount of outstanding Notes may, under certain
circumstances, rescind and annul such acceleration if all Events of Default,
other than nonpayment of accelerated principal, premium, if any, or interest,
have been cured or waived as provided in the Indenture. In case an Event of
Default resulting from certain events of bankruptcy, insolvency or
reorganization shall occur, the principal, premium and interest amount with
respect to all of the Notes shall be due and payable immediately without any
declaration or other act on the part of the Trustee or the holders of the
Notes.
The holders of a majority in principal amount of the Notes then outstanding
shall have the right to waive any existing default or Event of Default or
compliance with any provision of the Indenture or the Notes and to direct the
time, method and place of conducting any proceeding for any remedy available
to the Trustee, subject to certain limitations specified in the Indenture.
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder
shall have previously given to the Trustee written notice of a continuing
Event of Default and unless also the holders of at least 25% in aggregate
principal amount of the outstanding Notes shall have made written request and
offered reasonable indemnity to the Trustee to institute such proceeding as a
trustee, and unless the Trustee shall not have received from the holders of a
majority in aggregate principal amount of the outstanding Notes a direction
inconsistent with such request and the Trustee shall have failed to institute
such proceeding within 60 days. However, such limitations do not apply to a
suit instituted for payment of principal, premium, if any, or interest on a
Note on or after the respective due dates expressed in such Note.
DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides 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
85
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 the consent of each holder affected
thereby, (i) reduce the amount of Notes whose holders must consent to an
amendment, modification, 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, modification, supplement or waiver. It is sufficient
if such consent approves the substance thereof.
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 provides 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, so long as
the Commission will accept such filings, 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
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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.
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 Original Notes were issued in a transaction exempt from registration
under the Securities Act and are subject to restrictions on transfer.
The registered holder of a Note may be treated as the owner of it for all
purposes.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants contained in the Indenture. Reference is made to the Indenture for
the full definition of all such terms as well as any other capitalized terms
used herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person (including an
Unrestricted Subsidiary) existing at the time such Person becomes a Restricted
Subsidiary or assumed in connection with the acquisition of assets from a
Person.
"Acquisition EBITDA" means, without duplication, (i) EBITDA for the last
four fiscal quarters for which financial statements are available at the date
of determination (the "Acquisition EBITDA Period") with respect to a business
or Person which has been acquired by the Company or one of its Restricted
Subsidiaries or which is the subject of a binding acquisition agreement
requiring the calculation of EBITDA for purposes of the covenant restricting
the incurrence of Indebtedness and, in each case, with respect to which
financial results on a consolidated basis with the Company have not been made
available for an entire fiscal quarter; plus (ii) in connection with any such
acquisition, projected quantifiable improvements in operating results due to
an established program of cost reductions (consistent with the cost reductions
actually achieved by the Company in connection with prior acquisitions)
adopted, in good faith, by the Company or one of its Restricted Subsidiaries
through a Board Resolution certified by an Officers' Certificate filed with
the Trustee (calculated on a pro forma basis for the Acquisition EBITDA Period
as if the program had been implemented at the beginning of the Acquisition
EBITDA Period), without giving effect to any operating losses of the acquired
Person. Such Officers' Certificate shall confirm that any such anticipated
cost reductions made in connection with an acquisition with a purchase price
in excess of $25,000,000 have been reviewed for reasonableness and consistency
with past practice by an independent nationally recognized investment banking
firm and such firm shall not have raised any material objections thereto. Each
such Officers' Certificate shall be signed by the Chief Financial Officer and
another officer of the Company. Acquisition EBITDA of a business shall be a
fixed number determined as of the date the calculation of EBITDA for purposes
of the covenant restricting the incurrence of Indebtedness is first required
with respect to the acquisition of such business (the "Determination Date")
and shall be utilized from the Determination Date through the date financial
results are available for the first full fiscal quarter following the
acquisition (following which the actual EBITDA of such business or Person
shall be included in the EBITDA of the Company). For purposes of determining
Acquisition EBITDA with respect to the acquisition of a particular business or
Person, Acquisition EBITDA shall include not only the Acquisition EBITDA of
such business or Person, but also the Acquisition EBITDA of any business
previously acquired by the Company or the subject of a pending acquisition
agreement to the extent that, as of the Determination Date, the financial
87
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.
"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; provided, however, that so long as the Company is taxed as an S
corporation or other pass-through entity for federal income tax purposes,
taxes shall be determined on a pro forma basis as if the Company was a C
corporation, (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
88
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.
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, (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 or (v)
J. Peter Pierce shall no longer be involved in the strategic planning of the
Company (as President, Chairman of the Board or otherwise), other than by
reason of his death or disability; provided, however, that upon the
consummation of an initial public offering of common equity securities of the
Company yielding gross proceeds to the Company of at least $20,000,000 this
clause (v) shall cease to constitute a "Change of Control" under the
Indenture.
"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.
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"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.
"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
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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) any payments to Permitted Holders not exceeding $700,000 per year
permitted under clause (vi) of "Certain Covenants--Limitation on Restricted
Payments," plus (viii) 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, plus (ix) for any calculation of EBITDA utilizing the three month period
ending June 30, 1996 or September 30, 1996, the amount of pro forma savings
with respect to the Real Estate Transactions set forth in this Prospectus
(without duplication for amounts actually realized and included in EBITDA).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles consistently applied
as in effect in the United States from time to time.
"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise),
assume, guarantee or otherwise become liable in respect of such Indebtedness
or other obligation or the recording (other than previously recorded), as
required pursuant to GAAP or otherwise, of any such Indebtedness or other
obligation on the balance sheet of such Person (and "incurrence," "incurred,"
"incurrable," and "incurring" shall have meanings correlative to the
foregoing); provided that a change in GAAP that results in an obligation of
such Person that exists at such time becoming Indebtedness shall not be deemed
an incurrence of such Indebtedness.
"Indebtedness" means (without duplication), with respect to any Person, any
indebtedness at any time outstanding, secured or unsecured, contingent or
otherwise, which is for borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such Person or only to a portion
thereof), or evidenced by bonds, notes, debentures or similar instruments or
representing the balance deferred and unpaid of the purchase price of any
property (excluding, without limitation, any balances that constitute accounts
payable or trade payables, and other accrued liabilities arising in the
ordinary course of business) if and to the extent any of the foregoing
indebtedness would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, and shall also include, to the extent not
otherwise included (i) any Capitalized Lease Obligations, (ii) obligations
secured by a Lien to which the property or assets owned or held by such Person
is subject, whether or not the obligation or obligations secured thereby shall
have been assumed (provided, however, that if such obligation or obligations
shall not have been assumed, the amount of such Indebtedness shall be deemed
to be the lesser of the principal amount of the obligation or the fair market
value of the pledged property or assets), (iii) guarantees of items of other
Persons which would be included within this definition for such other Persons
(whether or not such items would appear upon the balance sheet of the
guarantor), (iv) all obligations for the reimbursement of any obligor on any
letter of credit, banker's acceptance or similar credit transaction (provided
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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.
"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,
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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
$10,000,000 above the amount that could be borrowed at the time of
determination under the first paragraph under "Certain Covenants--
Limitation on Additional Indebtedness";
(ii) Indebtedness of the Company's Canadian subsidiary (and related
guarantees) under the Credit Facility in an aggregate amount at any one
time outstanding not to exceed Cdn $30,300,000;
(iii) Indebtedness under the Notes and the Guarantees;
(iv) Indebtedness not covered by any other clause of this definition
which is outstanding on the date of the Indenture;
(v) Indebtedness of the Company to any Restricted Subsidiary and
Indebtedness of any Restricted Subsidiary to the Company or another
Restricted Subsidiary;
(vi) 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;
(vii) Interest Rate Agreements;
(viii) additional Indebtedness of the Company not to exceed $3,000,000 in
principal amount outstanding at any time; and
(ix) Refinancing Indebtedness.
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"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) the Real Estate Transactions and the Stock Redemption; and
(ix) Investments for any purpose not to exceed $2,000,000.
"Permitted Liens" means (i) Liens on property or assets of, or any shares of
stock of or secured debt of, any Person or business existing at the time such
Person becomes a Restricted Subsidiary of the Company or at the time such
Person is merged into or consolidated with the Company or any of its
Restricted Subsidiaries or at the time such business is acquired by the
Company or a Restricted Subsidiary, provided that such Liens are not incurred
in anticipation of such Person becoming a Restricted Subsidiary of the Company
or merging into or consolidating with the Company or any of its Restricted
Subsidiaries or such business being acquired by the Company or a Restricted
Subsidiary, (ii) Liens securing Refinancing Indebtedness, provided that any
such Lien does not extend to or cover any Property, shares or debt other than
the Property, shares or debt securing the Indebtedness so refunded, refinanced
or extended, (iii) Liens in favor of the Company or any of its Restricted
Subsidiaries, (iv) Liens securing industrial revenue bonds, (v) Liens to
secure Purchase Money Indebtedness that is otherwise permitted under the
Indenture, provided that (a) any such Lien is created solely for the purpose
of securing Indebtedness representing, or incurred to finance, refinance or
refund, the cost (including sales and excise taxes, installation and delivery
charges and other direct costs of, and other direct expenses paid or charged
in connection with, such purchase or construction) of such Property, (b) the
principal amount of the Indebtedness secured by such Lien does not exceed 100%
of such costs, and (c) such Lien does not extend to or cover any Property
other than such item of Property and any improvements on such item, (vi)
statutory liens or landlords', carriers', warehousemen's, mechanics',
suppliers', materialmen's, repairmen's or other like Liens arising in the
ordinary course of business and with respect to amounts not yet delinquent or
being contested in good faith by appropriate proceedings, (vii) other Liens
securing obligations incurred in the ordinary course of business which
obligations do not exceed $1,000,000 in the aggregate at any one time
outstanding, (viii) Liens for taxes, assessments or governmental charges that
are being contested in good faith by appropriate proceedings, (ix) Liens
securing Capitalized Lease Obligations permitted to be incurred under clause
(v) of the definition of "Permitted Indebtedness," provided that such Lien
does not extend to any property other than that subject to the underlying
lease, (x) Liens securing Designated Senior Indebtedness, (xi) easements or
minor defects or
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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, for so long as 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.
"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
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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 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
96
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 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.
BOOK-ENTRY; DELIVERY AND FORM
The Original Notes were issued in the form of one Note certificate (the
"Original Global Note"). Except for Exchange Notes issued to Non-Global
Purchasers (as defined below), the Exchange Notes will initially be issued in
the form of one or more Global Notes (collectively, the "Exchange Global
Notes"). The Original Global Note was deposited on the date of the closing of
the sale of the Original Notes, and the Exchange Global
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Notes will be deposited on the date of closing of the Exchange Offer, with, or
on behalf of, The Depository Trust Company ("DTC" or the "Depository") and
registered in the name of a nominee of the DTC.
Notes that are (i) originally issued or transferred to institutional
"accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under
the Securities Act) that are not "qualified institutional buyers" (as defined
in Rule 144A under the Securities Act) (the "Non-Global Purchasers") or (ii)
issued as described below under "--Certificated Securities" will be issued, in
registered form, without interest coupons ("Certificated Securities"). Upon
the transfer to a qualified institutional buyer of such Certificated
Securities initially issued to a Non-Global Purchaser, such Certificated
Securities will, unless the Global Note has previously been exchanged in whole
for such Certificated Securities, be exchanged for an interest in the Global
Note. "Global Notes" means the Original Global Notes or the Exchange Global
Notes, as the case may be.
The Global Note. The Company expects that pursuant to procedures established
by the DTC (i) upon deposit of the Global Note, the DTC will credit the
accounts of persons who have accounts with DTC ("participants") or persons who
hold interests through participants designated by such person with portions of
the Global Note and (ii) ownership of the Notes will be shown on, and the
transfer of ownership thereof will be effected only through, records
maintained by DTC or its nominee (with respect to interests of participants)
and the records of participants (with respect to interests of persons other
than participants). Qualified institutional buyers may hold their interests in
the Global Note directly through DTC if they are participants in such system,
or indirectly through organizations which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee will be considered the sole owner or holder of the
Notes represented by the Global Note for all purposes under the Indenture. No
beneficial owner of an interest in the Global Note will be able to transfer
such interest except in accordance with DTC's applicable procedures, in
addition to those provided for under the Indenture.
Payments of the principal of, premium (if any) and interest on the Global
Note will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of the Company, the Trustee or any Paying Agent will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Note
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
the principal of, premium (if any) and interest on the Global Note, will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note,
as shown on the records of DTC or its nominee. 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 instructions and
customary practice, as is now the case with securities held for the accounts
of customers registered in the names of nominees for such customers. Such
payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in accordance with
DTC rules and will be settled in clearinghouse funds. If a holder requires
physical delivery of a Certificated Security for any reason, including to sell
Notes to persons in states which require physical delivery of such securities
or to pledge such securities, such holder must transfer its interest in the
Global Note in accordance with the normal procedures of DTC and the procedures
set forth in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange
as described below) only at the direction of one or more participants to whose
account the DTC interest in the Global Note is credited and only in respect of
such portion of the aggregate principal amount of Notes as to which such
participant or participants have given such direction. However, if there is an
Event of Default under the Indenture, DTC will exchange the Global Note for
Certificated Securities, which it will distribute to its participants.
98
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such
as banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is
under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by the Company within 90 days, the Company will issue Certificated
Securities in exchange for the Global Note. In addition, subject to certain
conditions, any person having a beneficial interest in the Global Notes may,
upon request to the Trustee, exchange such beneficial interest for Notes in
the form of Certificated Securities. Upon any such issuance, the Trustee is
required to register such Certificated Securities in the name of, and cause
the same to be delivered to, such person or persons (or the nominee thereof).
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 2,000,000 shares of
Common Stock with a par value of $.01 per share. Of the 2,000,000 shares of
Common Stock that the Company is authorized to issue, 1,000,000 shares are
designated as Class A Common Stock (the "Class A Common Stock") and 1,000,000
shares are designated as Class B Common Stock (the "Class B Common Stock").
Currently, 900 shares of Class A Common Stock and 9,000 shares of Class B
Common Stock are outstanding. In addition, 1,141 shares of Class B Common
Stock are reserved for issuance with respect to the exercise of certain rights
under the Company's Non-Qualified Stock Option Plan.
Holders of shares of Class A Common Stock are entitled to one vote per share
for each matter submitted to the shareholders of the Company without
cumulative voting rights in the election of directors. Holders of Class B
Common Stock have no right to vote on any matter voted on by the shareholders
of the Company, except as may be provided by law. In all other respects, all
shares of Common Stock shall have identical rights, preferences and
privileges. The shares of Common Stock have no pre-emptive rights. In the
event of a liquidation, dissolution or winding up of the Company, the holders
of the Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities. The holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time
by the Board of Directors out of funds legally available therefor. Except for
distributions to the shareholders to pay their tax obligations resulting from
the Company's Subchapter S status, the Company has not declared any dividends
on the Common Stock and, except with respect to Permitted Tax Distributions
and possible distributions to shareholders aggregating less than $700,000
annually, does not expect to declare dividends in the foreseeable future. See
"The Company." Payment of future dividends rests with the discretion of the
Board of Directors and will depend on, among other things, the earnings,
capital requirements and financial condition of the Company and shall be
subject to limitations set forth in the Notes and other Indebtedness,
including Senior Indebtedness, of the Company.
99
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain federal income tax
considerations for holders who elect to exchange their Original Notes for
Exchange Notes in the Exchange Offer. This summary is for general information
purposes only and does not address specific tax aspects of the Exchange Offer
which may be relevant to certain holders such as foreign persons, financial
institutions, broker-dealers, tax-exempt organizations or insurance companies.
THEREFORE, EACH HOLDER OF A NOTE SHOULD CONSULT HIS OR HER OWN TAX ADVISOR
CONCERNING THE PARTICULAR FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES
OF EXCHANGING HIS OR HER ORIGINAL NOTES FOR EXCHANGE NOTES IN THE EXCHANGE
OFFER.
Under current provisions of the Internal Revenue Code of 1986, as amended,
the Treasury Regulations promulgated thereunder and current judicial authority
and administrative rulings and practice, an exchange of the debt instrument of
an issuer for a new debt instrument of the issuer will be treated as an
"exchange" for federal income tax purposes if the new debt instrument differs
materially either in kind or in extent from the old debt instrument. Because
the Exchange Notes are substantially identical to the Original Notes and
because the Exchange was contemplated by the Indenture pursuant to which the
Original Notes were sold, the Exchange Notes and Original Notes should not be
considered to differ materially either in kind or in extent and, accordingly,
the Exchange should not constitute an "exchange" for federal income tax
purposes. Therefore, for federal income tax purposes, no gain or loss should
be recognized by the holder on the exchange of an Original Note for an
Exchange Note, the holder's adjusted tax basis in the Exchange Note should be
the same as his or her basis in the Original Note and the holding period for
the Exchange Note should be the same as the holding period for the Original
Note.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with the resale of Exchange Notes received in exchange for
Original Notes where such Original Notes were acquired as a result of market-
making activities or other trading activities. The Company has agreed that for
a period of 180 days after the Expiration Date, it will use reasonable efforts
to make this Prospectus, as amended or supplemented, available to any broker-
dealer for use in connection with any such resale; provided that such broker-
dealer indicates in the Letter of Transmittal that it is a broker-dealer. In
addition, until , 1996, all broker-dealers effecting transactions in the
Exchange Notes may be required to deliver a Prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers or any other persons. Exchange Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or at negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such Exchange Notes
may be deemed to be an "underwriter" within the meaning of the Securities Act,
and any profit on any such resale of Exchange Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that
by acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
100
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such
documents in the Letter of Transmittal.
By acceptance of this Exchange Offer, each broker-dealer that receives
Exchange Notes pursuant to the Exchange Offer agrees that, upon receipt of
notice from the Company of the happening of any event which makes any
statement in the Prospectus untrue in any material respect or which requires
the making of any changes in the Prospectus in order to make the statements
therein not misleading (which notice the Company agrees to deliver promptly to
such broker-dealer), such broker-dealer will suspend use of the Prospectus
until the Company has amended or supplemented the Prospectus to correct such
misstatement or omission and has furnished copies of the amended or
supplemented Prospectus to such broker-dealer. If the Company gives any such
notice to suspend the use of the Prospectus, it shall extend the 180-day
period referred to above by the number of days during the period from and
including the date of the giving of such notice up to and including when
broker-dealers have received copies of the supplement or amended Prospectus
necessary to permit resales of Exchange Notes.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the holders (including any broker-dealers) and certain parties
related to the holders against certain liabilities, including liabilities
under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the Notes offered hereby will be
passed upon for the Company by Cozen and O'Connor, Philadelphia, Pennsylvania.
EXPERTS
The financial statements and schedules of Pierce Leahy Corp. as of December
31, 1994 and 1995, and for each of the three years in the period ended
December 31, 1995 and the financial statements of certain businesses acquired
(Command Record Services Limited and AMK Document Services, Inc.), included in
this Prospectus and elsewhere in the Registration Statement have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The financial statements of Security Archives, Inc. as of June 30, 1994 and
1995, and for the years then ended, included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
The financial statements of InTrust, Inc. as of December 31, 1995, and for
the year then ended, included in this Prospectus have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their report appearing herein
and are included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
101
INDEX TO FINANCIAL STATEMENTS
PAGE
----
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 COMMAND RECORDS SERVICES LIMITED................... F-17
FINANCIAL STATEMENTS OF SECURITY ARCHIVES, INC. ........................... F-23
FINANCIAL STATEMENTS OF AMK DOCUMENT SERVICES, INC. ....................... F-29
FINANCIAL STATEMENTS OF INTRUST, INC. ..................................... F-34
F-1
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, 1994 and
1995, and the related consolidated statements of operations, shareholders'
deficit and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pierce Leahy Corp. and
Subsidiary as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Philadelphia, Pa.,
March 4, 1996
F-2
PIERCE LEAHY CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31
------------------ JUNE 30,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash......................................... $ 358 $ 722 $ 860
Accounts receivable, net of allowance for
doubtful accounts of $554, $487, and $770... 11,513 14,182 18,234
Inventories.................................. 333 762 633
Prepaid expenses and other................... 554 1,025 2,091
-------- -------- --------
Total current assets....................... 12,758 16,691 21,818
-------- -------- --------
PROPERTY AND EQUIPMENT......................... 79,129 109,755 126,829
Less--Accumulated depreciation and amortiza-
tion........................................ (31,003) (35,328) (38,288)
-------- -------- --------
Net property and equipment................. 48,126 74,427 88,541
-------- -------- --------
OTHER ASSETS:
Intangible assets, net....................... 17,834 38,621 50,953
Other........................................ 1,028 1,589 1,484
-------- -------- --------
Total other assets......................... 18,862 40,210 52,437
-------- -------- --------
$ 79,746 $131,328 $162,796
======== ======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt............ $ 2,144 $ 1,478 $ 1,723
Current portion of noncompete obligations.... 70 200 200
Accounts payable............................. 4,848 4,641 7,116
Accrued expenses............................. 3,871 9,533 8,706
Deferred revenues............................ 7,027 8,978 8,675
-------- -------- --------
Total current liabilities.................. 17,960 24,830 26,420
LONG-TERM DEBT................................. 75,294 116,812 144,799
NONCOMPETE OBLIGATIONS......................... -- 517 417
DEFERRED RENT.................................. 2,558 2,814 2,899
DEFERRED INCOME TAXES.......................... 3,100 3,492 3,366
COMMITMENTS AND CONTINGENCIES (Note 9)
REDEEMABLE WARRANTS............................ 175 1,064 --
SHAREHOLDERS' DEFICIT.......................... (19,341) (18,201) (15,105)
-------- -------- --------
$ 79,746 $131,328 $162,796
======== ======== ========
The accompanying notes are an integral part of these statements.
F-3
PIERCE LEAHY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
FOR THE YEAR ENDED FOR THE SIX MONTHS
DECEMBER 31 ENDED JUNE 30
------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- --------- ---------
(UNAUDITED)
REVENUES:
Storage....................... $42,122 $47,123 $55,501 $ 25,965 $ 35,485
Service and storage material
sales........................ 31,266 35,513 39,895 18,599 25,837
------- ------- ------- --------- ---------
Total revenues.............. 73,388 82,636 95,396 44,564 61,322
------- ------- ------- --------- ---------
OPERATING EXPENSES:
Cost of sales, excluding de-
preciation and amortization.. 45,391 49,402 55,616 25,937 35,189
Selling, general and adminis-
trative...................... 11,977 15,882 16,148 7,815 9,911
Depreciation and amortiza-
tion......................... 6,888 8,436 8,163 4,304 5,612
Consulting payments to related
parties...................... -- 500 500 250 --
------- ------- ------- --------- ---------
Total operating expenses.... 64,256 74,220 80,427 38,306 50,712
------- ------- ------- --------- ---------
Operating income............ 9,132 8,416 14,969 6,258 10,610
------- ------- ------- --------- ---------
INTEREST EXPENSE................ 6,160 7,216 9,622 4,156 5,953
------- ------- ------- --------- ---------
Income before extraordinary
item....................... 2,972 1,200 5,347 2,102 4,657
EXTRAORDINARY ITEM--Loss on
early extinguishment of debt... 9,174 5,991 3,279 -- --
------- ------- ------- --------- ---------
NET INCOME (LOSS)............... (6,202) (4,791) 2,068 2,102 4,657
ACCRETION/(CANCELLATION) OF RE-
DEEMABLE WARRANTS.............. (746) 16 889 445 1,561
------- ------- ------- --------- ---------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS............ $(5,456) $(4,807) $ 1,179 $ 1,657 $ 3,096
======= ======= ======= ========= =========
The accompanying notes are an integral part of these statements.
F-4
PIERCE LEAHY CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(IN THOUSANDS)
COMMON STOCK
--------------
ADDITIONAL
CLASS CLASS PAID-IN ACCUMULATED
A B CAPITAL DEFICIT TOTAL
------ ------ ---------- ----------- --------
BALANCE, JANUARY 1, 1993........ $ -- $ -- $ 24 $ (9,052) $ (9,028)
Cancellation of common stock
warrants..................... -- -- -- 746 746
Net loss...................... -- -- -- (6,202) (6,202)
Distributions to sharehold-
ers.......................... -- -- -- (24) (24)
------ ------ ---- -------- --------
BALANCE, DECEMBER 31, 1993...... -- -- 24 (14,532) (14,508)
Accretion of redeemable war-
rants........................ -- -- -- (16) (16)
Net loss...................... -- -- -- (4,791) (4,791)
Distributions to sharehold-
ers.......................... -- -- -- (26) (26)
------ ------ ---- -------- --------
BALANCE, DECEMBER 31, 1994...... -- -- 24 (19,365) (19,341)
Accretion of redeemable war-
rants........................ -- -- -- (889) (889)
Net income.................... -- -- -- 2,068 2,068
Distributions to sharehold-
ers.......................... -- -- -- (39) (39)
------ ------ ---- -------- --------
BALANCE, DECEMBER 31, 1995...... -- -- 24 (18,225) (18,201)
Accretion of redeemable war-
rants (unaudited)............ -- -- -- (1,561) (1,561)
Net income (unaudited)........ -- -- -- 4,657 4,657
------ ------ ---- -------- --------
BALANCE, JUNE 30, 1996 (unau-
dited)......................... $ -- $ -- $ 24 $(15,129) $(15,105)
====== ====== ==== ======== ========
The accompanying notes are an integral part of these statements.
F-5
PIERCE LEAHY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE SIX
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31 JUNE 30
---------------------------- ----------------
1993 1994 1995 1995 1996
-------- -------- -------- ------- -------
(UNAUDITED)
CASH FLOWS FROM OPERATING AC-
TIVITIES:
Net income (loss)............. $ (6,202) $ (4,791) $ 2,068 $ 2,102 $ 4,657
Adjustments to reconcile net
income (loss) to net cash
provided by operating activi-
ties--
Extraordinary item............ 9,174 5,991 3,279 -- --
Depreciation and amortiza-
tion......................... 6,888 8,434 8,163 4,304 5,612
Amortization of deferred fi-
nancing costs................ 836 1,068 533 266 173
Imputed interest on long-term
debt and noncompete obliga-
tion......................... 647 231 -- -- --
Change in deferred rent....... (104) 50 29 (22) 85
Foreign currency adjustment
of long-term debt............ -- -- -- -- (23)
Change in assets and
liabilities, net of the
effects from
the purchase of businesses--
(Increase) decrease in--
Accounts receivable, net.... (2,671) (2,061) (360) 43 (3,663)
Inventories................. (5) (46) (347) (266) 128
Prepaid expenses............ 173 (91) 57 193 (989)
Other assets................ (504) 255 (536) (373) 117
Increase (decrease) in--
Accounts payable............ 96 1,763 (978) (1,309) 2,376
Accrued expenses............ (702) (170) 4,693 1,841 (1,416)
Deferred revenues........... 393 367 921 392 (302)
Deferred Income Tax......... -- -- -- -- (126)
-------- -------- -------- ------- -------
Net cash provided by operat-
ing activities.............. 8,019 11,000 17,522 7,171 6,629
-------- -------- -------- ------- -------
CASH FLOWS FROM INVESTING AC-
TIVITIES:
Capital expenditures.......... (5,827) (6,352) (16,288) (4,790) (7,657)
Client acquisition expendi-
tures........................ (2,840) (1,905) (2,245) (976) (2,253)
Payments for businesses ac-
quired, net of cash ac-
quired....................... (1,500) (4,663) (28,355) (6,772) (18,546)
Increase in intangible as-
sets......................... (47) (943) (4,274) (1,779) (3,564)
Payments on noncompete agree-
ments........................ (3,570) (70) (153) -- (100)
-------- -------- -------- ------- -------
Net cash used in investing
activities.................. (13,784) (13,933) (51,315) (14,317) (32,120)
-------- -------- -------- ------- -------
CASH FLOWS FROM FINANCING AC-
TIVITIES:
Net borrowings (payments) on
revolving line of credit..... 5,200 (7,700) (900) 1,200 5,998
Proceeds from issuance of
long-term debt............... 60,084 76,850 128,420 8,200 22,925
Payments on long-term debt.... (41,257) (61,121) (90,937) (2,370) (669)
Payments on capital lease ob-
ligations.................... (2,113) (74) (21) -- --
Prepayment penalties and can-
cellation of warrants........ (10,715) (1,781) -- -- (2,625)
Payment of debt financing
costs........................ (5,343) (3,385) (2,366) -- --
Distributions to sharehold-
ers.......................... (24) (26) (39) -- --
-------- -------- -------- ------- -------
Net cash provided by financ-
ing activities.............. 5,832 2,763 34,157 7,030 25,629
-------- -------- -------- ------- -------
NET INCREASE (DECREASE) IN
CASH.......................... 67 (170) 364 (116) 138
CASH, BEGINNING OF PERIOD...... 461 528 358 358 722
-------- -------- -------- ------- -------
CASH, END OF PERIOD............ $ 528 $ 358 $ 722 $ 242 $ 860
======== ======== ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest........ $ 5,610 $ 6,738 $ 8,356 $ 3,650 $ 6,173
======== ======== ======== ======= =======
The accompanying notes are an integral part of these statements.
F-6
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(IN THOUSANDS EXCEPT SHARE DATA)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995
AND 1996 IS UNAUDITED)
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:
Interim Consolidated Financial Statements
The consolidated balance sheet as of June 30, 1996 and the consolidated
statements of operations for the six months ended June 30, 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 six months ended June 30, 1995 and 1996 are not necessarily
indicative of the results to be expected for the full year.
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, currently 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
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 represents the average initial
contract term.
Deferred Rent
Certain of the Company's leases for warehouse space, including the related
party leases discussed in Note 9, 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 is limited to $75 in claims per
insured individual per year, 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 $75 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. In addition, the
carrying value of certain assets acquired exceeded their tax bases. If the
Subchapter S corporation status was terminated, a deferred income tax
liability would need to be recorded.
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.
Revenue Recognition
Storage and service revenues are recognized in the month the respective
service is provided. Storage material sales are recognized when shipped to the
customer. Deferred revenues represent amounts invoiced for storage services in
advance of the rendering of the services. The costs of storage and service
revenues are not separately distinguishable, as the revenue producing
activities are interdependent and costs are not directly attributable or
allocable in a meaningful way to those activities.
Change in Accounting Estimates
Effective January 1, 1995, the Company revised its estimates of the useful
lives of certain long-term assets, as management re-evaluated in 1995 the
appropriate useful lives of these types of assets given the significant
increase in the level of capital expenditures and payments for businesses
acquired (see Note 12) 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:
USEFUL LIFE (YEARS)
--------------------
LONG-TERM ASSET OLD NEW
--------------- --------- ----------
Buildings............................................. 25 40
Warehouse equipment................................... 12 12-20
Client acquisition costs.............................. 3 6
Other intangibles..................................... 3 10
Goodwill.............................................. 5-20 30
F-8
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 June 30, 1996 is 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 is required to adopt this standard for the year ending December 31,
1996. The Company has elected to adopt the disclosure requirement of this
pronouncement. The adoption of this pronouncement will have no impact on the
Company's consolidated statement of operations.
3. PROPERTY AND EQUIPMENT:
DECEMBER 31
------------------ JUNE 30,
LIFE 1994 1995 1996
----------- -------- -------- --------
Land............................. -- $ 3,594 $ 4,780 $ 5,848
Buildings and improvements....... 10-40 years 23,397 35,758 42,192
Warehouse equipment (primarily
shelving)....................... 12-20 years 39,485 53,943 60,553
Data processing equipment and
software........................ 7 years 9,051 10,684 12,392
Furniture and fixtures........... 7 years 2,515 2,970 3,309
Transportation equipment......... 5 years 1,087 1,620 2,535
-------- -------- --------
79,129 109,755 126,829
Less--Accumulated depreciation
and amortization................ (31,003) (35,328) (38,288)
-------- -------- --------
Net property and equipment..... $ 48,126 $ 74,427 $ 88,541
======== ======== ========
Depreciation expense was $4,036, $5,066, $4,325, $2,129, and $3,084 for the
years ended December 31, 1993, 1994, and 1995 and for the six months ended
June 30, 1995 and 1996, respectively.
4. INTANGIBLE ASSETS:
DECEMBER 31
------------------ JUNE 30,
1994 1995 1996
-------- -------- --------
Goodwill................................... $ 8,308 $ 25,857 $ 35,058
Client acquisition costs................... 6,435 8,680 10,933
Noncompete agreements...................... 6,180 6,980 8,160
Customer lists............................. 4,220 4,720 4,720
Deferred financing costs................... 3,409 2,248 2,283
Other intangible assets.................... 224 4,679 7,043
-------- -------- --------
28,776 53,164 68,197
Less--Accumulated amortization............. (10,942) (14,543) (17,244)
-------- -------- --------
Net intangible assets...................... $ 17,834 $ 38,621 $ 50,953
======== ======== ========
F-9
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
-----------------------------
ACCUMULATED NET BOOK
LIFE COST AMORTIZATION VALUE
---------- ------- ------------ --------
Goodwill............................ 30 years $35,058 $ 3,074 $31,984
Client acquisition costs............ 6 years 10,933 4,033 6,900
Noncompete agreements............... 3-7 years 8,160 6,381 1,779
Customer lists...................... 5 years 4,720 2,394 2,326
Deferred financing costs............ 5-8 years 2,283 222 2,061
Other intangible assets............. 3-15 years 7,043 1,140 5,903
------- ------- -------
$68,197 $17,244 $50,953
======= ======= =======
Amortization of all intangible assets, other than deferred financing costs
which are charged to interest expense, was $2,852, $3,370, $3,838, $2,175, and
$2,505, for the years ended December 31, 1993, 1994, and 1995 and the six
months ended June 30, 1995 and 1996, respectively. Amortization of deferred
financing costs was $836, $1,068, $533, $266 and $173 for the years ended
December 31, 1993, 1994, and 1995 and the six months ended June 30, 1995 and
1996, respectively. Capitalized client acquisition costs were $2,840, $1,905,
$2,245, $976, and $2,253, and related amortization expense was $727, $1,536,
$909, $930, and $609 for the years ended December 31, 1993, 1994, and 1995 and
for the six months ended June 30, 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 June 30, 1996, the Company believes that no revisions to
the remaining useful lives or write-downs of intangible assets are required.
5. ACCRUED EXPENSES:
DECEMBER 31
------------- JUNE 30,
1994 1995 1996
------ ------ --------
Accrued salaries and commissions...................... $ 603 $2,190 $1,297
Accrued vacation...................................... 1,723 2,140 2,505
Other................................................. 1,545 5,203 4,904
------ ------ ------
$3,871 $9,533 $8,706
====== ====== ======
F-10
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT:
DECEMBER 31
----------------- JUNE 30,
1994 1995 1996
------- -------- --------
U.S. Revolver, variable interest rate (10.13%
at June 30, 1996)............................ $ -- $ -- $ 4,900
Canadian Revolver, variable interest rate
(8.38% at June 30, 1996)..................... -- -- 1,098
Standby Acquisition Note, variable interest
rate (10.13% at June 30, 1996), payable in
quarterly installments ranging from 4.17% to
11.67% of the outstanding balance beginning
December 1997 through November 2000.......... -- -- 22,925
Tranche A term loan, variable interest rate
(10.13% at June 30, 1996), payable in quar-
terly installments ranging from $313 to $938
beginning December 1995 through September
2000......................................... -- 12,188 11,563
Tranche B term loan, variable interest rate
(10.38% at June 30, 1996), payable in quar-
terly installments ranging from $425 to
$6,500 beginning March 1998 through September
2002......................................... -- 47,500 47,500
Tranche C term loan, variable interest rate
(10.63% at June 30, 1996), payable in quar-
terly installments of $9,500 beginning Decem-
ber 2002 through September 2003.............. -- 38,000 38,000
Canadian term loan, variable interest rate
(7.89% at June 30, 1996), payable in quar-
terly installments ranging from $138 to $276
beginning March 1997 through June 2002, with
final payment of $15,624 in September 2002... -- 20,520 20,497
Borrowings under previous credit agreement
(repaid in October 1995)..................... 76,750 -- --
Other......................................... 688 82 39
------- -------- --------
77,438 118,290 146,522
Less--Current portion......................... (2,144) (1,478) (1,723)
------- -------- --------
$75,294 $116,812 $144,799
======= ======== ========
In October 1995, the Company entered into a credit facility (the "1995
Credit Facility"), which provides for borrowings of up to $143 million (U.S.
dollars) and $36 million (Canadian dollars). In addition to refinancing the
borrowings under the former credit facility and paying the related accrued
interest, the Company used the proceeds of the 1995 Credit Facility to acquire
Command Record Services, Inc., increase its available borrowing capacity for
acquisitions, and pay financing costs of $2,248.
F-11
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the aggregate commitment under the 1995 Credit Facility is as
follows:
CANADIAN
U.S. DOLLARS DOLLARS
------------ --------
A Term Note............................................ $ 12,500 $ --
B Term Note............................................ 47,500 --
C Term Note............................................ 38,000 --
Standby Acquisition Note............................... 30,000 --
U.S. Revolver.......................................... 15,000 --
Canadian Term Loan..................................... -- 28,000
Canadian Revolver...................................... -- 8,000
-------- -------
$143,000 $36,000
======== =======
At the closing of the 1995 Credit Facility, the A, B and C Term Notes and
the Canadian term loan were drawn in full and $2.3 million was drawn under the
Canadian Revolver. No proceeds were drawn under the Standby Acquisition Note
or the U.S. Revolver at that time.
Borrowing capacity under the U.S. Revolver and the Canadian Revolver has
scheduled reductions beginning in March 1997 and December 1997, respectively,
and expires in September 2000. Borrowing capacity under the Standby
Acquisition Note is reduced quarterly by amounts ranging from 4.167% to
11.666% of the outstanding borrowings under the Standby Acquisition Note
beginning on December 31, 1997. In addition to the scheduled principal
payments under the term loans and reductions in the borrowing capacity under
the U.S. Revolver, Canadian Revolver and Standby Acquisition Note, the Company
is subject to mandatory prepayments equal to 50% of excess cash flow, as
defined, and upon certain other events including sale of assets, stock or
incurrence of any other indebtedness, among others.
The highest amount outstanding under the U.S. and Canadian revolvers during
the year ended December 31, 1995 and the six month period ended June 30, 1996
was $3,200 and $4,235, respectively. The average amount outstanding on the
revolvers during such periods was $888 and $1,605, respectively, while the
weighted average interest rate was 10.43% and 9.76%, respectively.
The 1995 Credit Facility specifies certain minimum or maximum relationships
between operating cash flows (earnings before interest, taxes, depreciation
and amortization) and interest, total debt and fixed charges, along with
minimum levels of operating cash flows and defined current ratio and operating
cash flows to debt service targets. There are restrictions on dividends,
capital expenditures, incurrence of indebtedness and lease obligations, among
other items. The Company was in compliance with the applicable provisions of
the 1995 Credit Facility at June 30, 1996. The 1995 Credit Facility is secured
by substantially all of the assets and outstanding common stock of the
Company.
Future scheduled principal payments on the Company's long-term debt at June
30, 1996 are as follows:
1996.............................................................. $ 1,723
1997.............................................................. 7,101
1998.............................................................. 15,135
1999.............................................................. 22,167
2000.............................................................. 20,208
2001 and thereafter............................................... 80,188
--------
$146,522
========
F-12
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Based on the borrowing rates currently available to the Company for loans
with similar terms and average maturities, the Company believes that the
carrying amount of debt at June 30, 1996 approximates fair value.
In connection with entering into credit facilities in 1993 and 1994, the
Company issued warrants to certain lenders to purchase common stock. Warrants
to purchase 217 shares at $.01 per share were issued in 1993 and 52 shares at
$2,839.72 per share were issued in 1994. Management assigned an initial value
of $338 to the 1993 warrants and $87 to the 1994 warrants for financial
reporting purposes. The outstanding warrants at December 31, 1994 and 1995
represent the right to purchase 2.63% of the Company's fully diluted common
stock. The warrant holders may put the warrants to the Company, and the
Company may call the warrants beginning in February 1996 and June 1997,
respectively, at amounts which are determined by a formula, as defined in the
Credit Facility. 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.
Debt refinancings occurred in 1993, 1994 and 1995 resulting in the write-off
of previously deferred financing costs of $1,043, $3,981 and $2,779,
respectively, and prepayment and other charges (including the write-off of
unamortized debt discount) of $8,131 in 1993, $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, 1994 and 1995 and June 30, 1996, the Company's common stock
was comprised of the following:
CLASS A CLASS B
---------- ----------
Par value........................................... $ .01 $ .01
Shares authorized................................... 1,000,000 1,000,000
Shares issued and outstanding....................... 1,000 9,000
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 1,141 shares of common stock. Options to purchase 567 shares at
$5 per share were granted in 1995 and options to purchase 340 shares at $6 per
share were granted in 1996. Option grants 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 or
greater than 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 June 30, 1996, options for 113
shares were vested. The exercise of the options is subject to certain
restrictions.
9. COMMITMENTS AND CONTINGENCIES:
Operating Leases
At June 30, 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 2007 and require minimum rentals, subject to escalation,
as follows:
F-13
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1996.............................................................. $ 16,867
1997.............................................................. 16,147
1998.............................................................. 15,109
1999.............................................................. 13,647
2000.............................................................. 12,930
2001 and thereafter............................................... 34,733
--------
$109,433
========
Rent expense was approximately $11,052, $12,262, $14,098, $6,630, and $8,433
for the years ended December 31, 1993, 1994, and 1995 and for the six months
ended June 30, 1995 and 1996, respectively.
The Company leases office and warehouse space at prices which, in the
opinion of management, approximate market rates from entities which are owned
by various shareholders of the Company. Rent expense on these leases was
approximately $7,036, $7,658, $8,201, $2,026, and $2,185 for the years ended
December 31, 1993, 1994, and 1995 and for the six months ended June 30, 1995
and 1996, respectively. These related party leases require minimum rentals,
subject to escalation, as follows:
1996............................................................... $ 8,779
1997............................................................... 8,079
1998............................................................... 7,126
1999............................................................... 6,515
2000............................................................... 6,383
2001 and thereafter................................................ 12,942
-------
$49,824
=======
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:
1996................................................................ $ 911
1997................................................................ 140
1998................................................................ 48
1999................................................................ 40
2000................................................................ 40
2001 and thereafter................................................. 150
------
$1,329
======
The Company has an agreement with a shareholder of the Company that requires
payments of $60 per year for five years upon the death of the shareholder. The
present value of this benefit has been recorded as a liability in the
accompanying balance sheets.
In December 1993, the Company borrowed $80 from a shareholder which bears
interest at 7%. The note was repaid during 1996.
F-14
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
10. 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 pre tax 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 on the Company's matching
contribution over three to seven years. The expense relating to these plans
was $262, $506, $591, $301, and $545 for the years ended December 31, 1993,
1994 and 1995 and the six months ended June 30, 1995 and 1996, respectively.
11. STOCK PURCHASE AGREEMENTS:
The Company and its 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 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).
12. 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. During the six months ended June 30, 1996,
the Company completed four acquisitions for an aggregate cash purchase price
of $19,310 (of which $14,000 was for one transaction in May 1996). Subsequent
to that date, the Company completed four additional acquisitions with an
aggregate cash purchase price of $11,849. In addition to these cash payments,
one of the acquisitions in 1995 provides for a $800 noncompete obligation
payable over three years. The noncompete liability at December 31, 1995 was
$717. 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 $9,201 in 1995 and the six months ended
June 30, 1996, respectively) and is being amortized over the estimated benefit
period of 30 years. In connection with the acquisitions, the Company entered
into consulting agreements with several of the former owners of the acquired
businesses which require aggregate commitments of $980 at June 30, 1996 (see
Note 9).
A summary of the cash consideration and allocation of the purchase price as
of the acquisition dates are as follows:
1995 1996
------- -------
Fair value of assets acquired............................ $36,171 $34,004
Liabilities assumed...................................... (7,177) (2,845)
Cash acquired............................................ (639) (1,097)
------- -------
Net cash paid.......................................... $28,355 $30,062
======= =======
F-15
PIERCE LEAHY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Included in the 1996 amounts are $14,005 of fair value of assets acquired,
$2,156 of liabilities assumed, $333 of cash acquired and $11,516 of net cash
paid on acquisitions that were completed subsequent to June 30, 1996.
The following unaudited pro forma information shows the results of the
Company's operations for the year ended December 31, 1995 and six months ended
June 30, 1996, as though each of the completed acquisitions had occurred as of
January 1, 1995:
SIX
YEAR MONTHS
ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
Total revenues...................................... $124,824 $66,586
Net income (loss)................................... (1,635) (123)
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-16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pierce Leahy Corp.:
We have audited the accompanying statements of operations and cash flows of
Command Records Services Limited for each of the periods ended December 31,
1993, December 31, 1994 and October 26, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Command
Records Services Limited for each of the periods ended December 31, 1993,
December 31, 1994 and October 26, 1995 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Philadelphia, Pa.,
June 21, 1996
F-17
COMMAND RECORDS SERVICES LIMITED
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
FOR THE YEARS ENDED FOR THE TEN MONTHS
DECEMBER 31 ENDED OCTOBER 26
-------------------- ------------------
1993 1994 1995
--------- --------- ------------------
REVENUES:
Storage.............................. $ 5,290 $ 6,299 $ 5,525
Service.............................. 4,618 6,453 5,447
Product.............................. 368 596 453
--------- --------- -------
10,276 13,348 11,425
--------- --------- -------
OPERATING EXPENSES:
Salaries............................. 4,277 5,472 4,020
Occupancy............................ 1,568 2,214 1,806
Archive operating.................... 1,129 1,474 1,498
Selling, general and administrative.. 1,578 1,781 2,243
Depreciation and amortization........ 848 1,012 926
Cost of product...................... 153 225 220
Restructuring expenses (Note 6)...... -- -- 670
Loss on write down and disposal of
property and equipment (Note 5)..... 526 25 105
--------- --------- -------
10,079 12,203 11,488
--------- --------- -------
Operating income (loss)............ 197 1,145 (63)
INTEREST EXPENSE....................... 198 249 300
--------- --------- -------
Income (loss) before provision for
income taxes...................... (1) 896 (363)
PROVISION FOR INCOME TAXES............. 184 531 22
--------- --------- -------
NET INCOME (LOSS)...................... $ (185) $ 365 $ (385)
========= ========= =======
The accompanying notes are an integral part of these statements.
F-18
COMMAND RECORDS SERVICES LIMITED
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED FOR THE TEN MONTHS
DECEMBER 31 ENDED OCTOBER 26
-------------------- ------------------
1993 1994 1995
--------- --------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................... $ (185) $ 365 $ (385)
Adjustments to reconcile net income
(loss) to net cash provided by op-
erating activities--
Loss on write down and disposal of
property and equipment........... 526 25 105
Depreciation and amortization..... 848 1,012 926
Deferred income taxes............. (10) 10 63
Increase in deferred rent......... 123 25 (33)
Change in assets and liabilities
excluding effects from the pur-
chase of businesses--
(Increase) decrease in--
Accounts receivable, net...... (36) (229) (35)
Inventories................... 114 (56) 21
Prepaid expenses.............. (41) (43) 112
Income taxes receivable....... -- -- (406)
Other assets.................. 7 (37) 7
Increase (decrease) in--
Accounts payable.............. 126 26 (439)
Accrued expenses.............. 173 (89) 453
Accrued income taxes.......... 195 (58) (173)
Deferred revenues............. 167 96 112
Other deferred liabilities.... 98 (157) 33
--------- --------- ------
Net cash provided by operating
activities..................... 2,105 890 361
--------- --------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds on sale of property and
equipment.......................... 288 456 187
Capital expenditures................ (454) (983) (275)
Increase in intangible assets....... (95) (376) 1
Payments for businesses acquired,
net of cash acquired............... (1,986) -- --
--------- --------- ------
Net cash used in investing ac-
tivities....................... (2,247) (903) (87)
--------- --------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit.... -- 140 614
Due to associated companies......... (133) (524) 12
Deferred payments for businesses ac-
quired............................. 1,004 (676) (270)
--------- --------- ------
Net cash provided by (used in)
financing activities........... 871 (1,060) 356
--------- --------- ------
NET INCREASE (DECREASE) IN CASH....... 729 (1,073) 630
CASH, BEGINNING OF YEAR............... 353 1,082 9
--------- --------- ------
CASH, END OF YEAR..................... $ 1,082 $ 9 $ 639
========= ========= ======
The accompanying notes are an integral part of these statements.
F-19
COMMAND RECORDS SERVICES LIMITED
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
1. FINANCIAL STATEMENTS
On January 1, 1995, Command Records Services Limited ("CRSL"), Arcodex
Records Manager Ltd. ("ARML") and Data Repro Com Enterprises Ltd. ("DRCEL"),
amalgamated to form Command Records Services Limited (the "Company").
The financial statements include the accounts of CRSL, ARML and DRCEL. All
significant intercompany transactions and balances have been eliminated.
The Company stores and services business records for a nationwide customer
base located throughout Canada. The Company also sells storage containers and
provides records management consulting services, software products for
managing customer records and microfilming services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Ultimate settlement of these amounts could differ from those
estimates.
Revenue Recognition
Storage revenue is recognized as storage services are provided. Deferred
revenues represent amounts invoiced for storage services in advance of the
rendering of the services. Service revenue is recognized as the services are
provided.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Goodwill
Goodwill is being amortized over 10 years using the straight-line method.
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 October 26, 1995, the Company believes that no revisions
to the remaining useful lives or write downs of intangible assets are
required.
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 balance
sheets.
Client Acquisition Costs
The unreimbursed costs of moving the records of new clients into the
Company's facilities have been capitalized. All such costs are being amortized
on a straight-line basis over the contract term.
F-20
COMMAND RECORDS SERVICES LIMITED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
Income taxes are recorded using the liability method. Under this method
deferred tax assets and liabilities are recognized based on differences
between the financial statement and tax basis of assets and liabilities using
presently enacted tax rates.
Foreign Currency Translation
The statements have been translated from the functional currency of Canadian
dollars to U.S. dollars using the average exchange rate for the results of
operations.
3. ACQUISITIONS
On December 6, 1993, CRSL purchased 100% of the shares of ARML and DRCEL.
The acquisition has been accounted for using the purchase method. The net
assets acquired were as follows:
Assets............................................................... $1,692
Liabilities.......................................................... 1,237
------
455
Integration and Acquisition Costs.................................... (181)
Goodwill............................................................. 1,718
------
Purchase Price....................................................... $1,992
======
ARML and DRCEL results of operations have been consolidated with Command
Records Services Limited as of December 6, 1993, the date of acquisition.
4. INCOME TAXES
The Company's provision for income taxes is made up as follows:
1993 1994 1995
---- ---- -----
Provision for income taxes based on combined basic Canadian
federal and provincial income tax rate of 44%............. $-- $394 $(159)
Impact of permanent differences
Capital loss on disposal of property with no future tax
benefit................................................... 169 -- --
Non-deductible meals and entertainment..................... 12 27 25
Non-deductible goodwill amortization....................... -- 70 58
Non-deductible awards to employees......................... 3 10 3
Increase in valuation allowance............................ -- 30 95
---- ---- -----
Actual provision for income taxes.......................... $184 $531 $ 22
==== ==== =====
5. DISPOSAL OF PROPERTY
In 1994, the Company sold its Agincourt property. The Company recorded a
write down of $509 in 1993 which is included in the loss on write down and
disposal of property and equipment. The write down was recorded when the
decision to sell the property was made by management.
F-21
COMMAND RECORDS SERVICES LIMITED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. RESTRUCTURING EXPENSES
During 1995, the Company recorded a restructuring charge of $775 comprising
termination and other costs.
7. RELATED PARTY TRANSACTIONS
The accompanying consolidated statements of operations include the following
related party transactions:
1993 1994 1995
---- ---- ----
Sales......................................................... $246 $198 $175
Interest expense.............................................. $198 $184 $177
Corporate charges............................................. $ 78 $ 82 $128
In 1991, the Company purchased its Brampton property from its parent. The
property was transferred at the carrying value of $3,844 in consideration for
17,260 common shares of the Company.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases
At October 26, 1995, the Company was obligated under non-cancelable
operating leases for warehouse space, office equipment and transportation
equipment requiring minimum rentals as follows:
1996.................................................................. $1,149
1997.................................................................. 913
1998.................................................................. 659
1999.................................................................. 604
2000.................................................................. 501
2001 and thereafter................................................... 958
------
$4,784
======
Other Matters
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.
9. SUBSEQUENT EVENT
On October 27, 1995 the Company was acquired by Pierce Leahy Command Company
("PLCC"). PLCC was incorporated by Pierce Leahy Corp. for the purpose of the
acquisition. On November 6, 1995, PLCC and CRSL were amalgamated.
F-22
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-23
SECURITY ARCHIVES, INC.
BALANCE SHEETS
JUNE 30,
------------------------ MARCH 31,
1994 1995 1996
(UNAUDITED)
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
=========== =========== ===========
See notes to financial statements.
F-24
SECURITY ARCHIVES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE NINE MONTHS
FOR THE YEAR ENDED ENDED
JUNE 30, MARCH 31,
---------------------- ----------------------
1994 1995 1995 1996
---------- ---------- ---------- ----------
(UNAUDITED)
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
========== ========== ========== ==========
See notes to financial statements.
F-25
SECURITY ARCHIVES, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE
FOR THE YEARS ENDED MONTHS ENDED
JUNE 30, MARCH 31,
------------------------ ----------------------
1994 1995 1995 1996
----------- ----------- --------- -----------
(UNAUDITED)
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 $ --
----------- ----------- --------- -----------
See notes to financial statements.
F-26
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-27
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:
1995 1994
-------- --------
Current federal........................................... $641,704 $471,383
Current state............................................. 78,706 58,260
Deferred.................................................. (17,762) 86,848
-------- --------
Total..................................................... $702,648 $616,491
======== ========
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-28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AMK Document Services, Inc.:
We have audited the accompanying statements of operations and cash flows of
AMK Document Services, Inc. (an Arizona corporation) for the ten-month period
ended October 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of operations and
cash flows are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
statements of operations and cash flows. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the statements of operations and cash flows referred to
above presents fairly, in all material respects, the results of operations and
cash flows of AMK Document Services, Inc. for the ten-month period ended
October 31, 1995, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pa.,June 5, 1996
F-29
AMK DOCUMENT SERVICES, INC.
STATEMENT OF OPERATIONS
FOR THE TEN MONTHS ENDED OCTOBER 31, 1995
REVENUES:
Storage........................................................... $ 706,434
Service and storage materials and sales........................... 1,550,762
----------
Total revenues.................................................. 2,257,196
----------
OPERATING EXPENSES:
Cost of sales, excluding depreciation............................. 1,613,409
Selling, general and administrative............................... 348,247
Depreciation...................................................... 58,262
----------
Total operating expenses........................................ 2,019,918
----------
Operating income................................................ 237,278
INTEREST INCOME..................................................... 4,740
----------
NET INCOME.......................................................... $ 242,018
==========
The accompanying notes are an integral part of this statement.
F-30
AMK DOCUMENT SERVICES, INC.
STATEMENT OF CASH FLOWS
FOR THE TEN MONTHS ENDED OCTOBER 31, 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 242,018
Adjustments to reconcile net income to net cash provided by oper-
ating activities--
Depreciation.................................................... 58,262
Increase in deferred rent....................................... 16,544
Decrease in assets--
Accounts receivable........................................... 78,948
Inventories................................................... 12,242
Prepaid expenses and other assets............................. 7,829
Increase in liabilities--
Accounts payable and accrued expenses......................... 10,548
Deferred revenues............................................. 22,194
---------
Net cash provided by operating activities..................... 448,585
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................................. (68,629)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholder...................................... (482,040)
---------
NET DECREASE IN CASH................................................ (102,084)
CASH, BEGINNING OF PERIOD........................................... 324,889
---------
CASH, END OF PERIOD................................................. $ 222,805
=========
The accompanying notes are an integral part of this statement.
F-31
AMK DOCUMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business
AMK Document Services, Inc. (the "Company"), stores, services business
records and provides microfilming services for a customer base primarily
located in Phoenix, Arizona.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
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. Property and equipment consist of the following:
OCTOBER 31,
LIFE 1995
----------- -----------
Leasehold improvements............................. 15-39 years $ 317,372
Warehouse equipment (primarily shelving)........... 3-7 years 329,562
Microfilming equipment............................. 5-7 years 210,422
Furniture, fixtures and office equipment........... 3-7 years 113,981
Transportation equipment........................... 3-5 years 46,841
----------
1,018,178
Less--Accumulated depreciation and amortization.... (594,642)
----------
Net property and equipment....................... $ 423,536
==========
Depreciation expense was $58,262 for the ten-month period ended October 31,
1995.
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.
Deferred Rent
One of the Company's leases for warehouse space provides 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.
Income Taxes
The Company is a Subchapter S corporation and, therefore, any taxable income
or loss is passed through to the shareholder. The Company reports certain
expenses in different periods for financial reporting and income tax purposes.
If the Subchapter S corporation status was terminated, deferred income taxes
would need to be recorded in the financial statements.
F-32
AMK DOCUMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. COMMITMENTS AND CONTINGENCIES
Operating Leases
At October 31, 1995, the Company was obligated under a noncancelable
operating lease for warehouse space. The lease expires in 1997 and requires
minimum rentals, subject to escalation of $51,072 in 1996 and $53,760 in 1997.
The Company also leases office and warehouse space at prices which, in the
opinion of management, approximate market rates from entities which are owned
by the shareholder of the Company. These related party leases are month-to-
month leases.
Rent expense on the above leases was $352,953 for the ten-month period ended
October 31, 1995, including $287,985 paid to the related party.
3. 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 21 and with more than
1,000 hours of service. There was no Company contribution to these plans in
the ten-month period ended October 31, 1995.
4. SUBSEQUENT EVENT
Effective November 1, 1995, the Company, sold its assets and business to
Pierce Leahy Corp. and ceased active operations. Certain assets and
liabilities not essential to the ongoing business were retained by the
Company.
F-33
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of InTrust, Inc.
We have audited the accompanying balance sheet of InTrust, Inc. as of
December 31, 1995 and the related statement of operations and accumulated
deficit and of cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of InTrust, Inc. at December 31, 1995, and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
March 26, 1996, except for Notes 4 and 9, as to which the dates are June 13,
1996 and October 4, 1996, respectively.
F-34
INTRUST, INC.
BALANCE SHEETS
DECEMBER 31, JUNE 30,
1995 1996
------------ -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ 126,866 $ 63,341
Accounts receivable (Note 4):
Trade (less allowance for doubtful accounts--
$17,000)....................................... 421,964 515,264
Other........................................... 11,340 7,001
Inventory (Note 4).................................. 17,809 10,789
Prepaid expenses.................................... 27,414 3,644
---------- -----------
Total current assets........................... 605,393 600,039
---------- -----------
PROPERTY AND EQUIPMENT (Notes 4 and 5):
Machinery and equipment............................. 1,513,867 1,576,354
Furniture and fixtures.............................. 40,121 38,411
Computer hardware and software...................... 133,356 145,581
Leasehold improvements.............................. 45,565 48,083
---------- -----------
Total.......................................... 1,732,909 1,808,429
Less accumulated depreciation and amortization...... 779,718 841,507
---------- -----------
Property and equipment--net.................... 953,191 966,922
---------- -----------
OTHER ASSETS:
Goodwill and other intangibles (net of accumulated
amortization:
1995--$175,464; 1996--$243,231) (Note 4)........... 2,334,092 2,266,325
Prepaid expenses.................................... 28,416 22,537
Deposits............................................ 43,121 41,495
---------- -----------
Total other assets............................. 2,405,629 1 2,330,357
---------- -----------
TOTAL................................................ $3,964,213 $3,897,318
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease
obligations (Notes 4 and 5)........................ $ 460,672 $ 359,885
Accounts payable--Trade............................. 86,441 143,766
- --Affiliates (Note 3)................................ 45,000 --
Accrued expenses.................................... 259,681 240,313
Rent concession received............................ 7,143 7,143
Unearned revenue (Note 2)........................... 442,045 484,282
---------- -----------
Total current liabilities......................... 1,300,982 1,235,389
NONCURRENT LIABILITIES:
Rent concession received............................ 94,005 90,470
Long-term debt (Note 4)............................. 1,625,629 1,501,770
Capital lease obligations (Note 5).................. 51,404 37,550
---------- -----------
Total liabilities................................. 3,072,020 2,865,179
---------- -----------
COMMITMENTS AND CONTINGENCIES (Note 5)...............
SHAREHOLDERS' EQUITY (Note 7):
Common stock, no par value, 1,000,000 shares
authorized;
9,900 shares issued and outstanding................ 1,477,471 1,477,471
Additional paid-in capital.......................... 25,000 25,000
Accumulated deficit................................. (610,278) (470,332)
---------- -----------
Total shareholders' equity........................ 892,193 1,032,139
---------- -----------
TOTAL................................................ $3,964,213 $3,897,318
========== ===========
See accompanying notes to financial statements.
F-35
INTRUST, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEAR FOR THE SIX MONTH PERIOD
ENDED ENDED JUNE 30,
DECEMBER 31, ---------------------------
1995 1995 1996
------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
REVENUES............................ $3,830,421 $1,833,791 $ 2,300,730
---------- ------------ ------------
COSTS AND OPERATING EXPENSES (Notes
3, 5 and 6):
Salaries and wages................ 1,600,289 766,399 787,476
Facilities expenses............... 763,684 417,685 439,165
General and administrative
expenses......................... 482,924 220,590 232,494
Depreciation and amortization..... 245,570 131,252 130,659
Marketing and sales expenses...... 240,061 120,533 145,055
Cost of boxes sold................ 161,529 97,137 104,265
Freight and other................. 146,725 71,521 89,974
Vehicle expenses.................. 146,527 72,490 70,425
---------- ------------ ------------
Total........................... 3,787,309 1,897,606 1,999,513
---------- ------------ ------------
OTHER EXPENSES--Interest expense.... 367,918 152,326 161,271
---------- ------------ ------------
NET INCOME (LOSS)................... (324,806) (216,142) 139,946
ACCUMULATED DEFICIT, BEGINNING OF
PERIOD............................. (285,472) (285,472) (610,278)
---------- ------------ ------------
ACCUMULATED DEFICIT, END OF PERIOD.. $ (610,278) $ (501,614) $ (470,332)
---------- ------------ ------------
See accompanying notes to financial statements.
F-36
INTRUST, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR FOR THE SIX MONTH PERIOD
ENDED ENDED JUNE 30,
DECEMBER 31, --------------------------
1995 1995 1996
------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................... $ (324,806) $ (216,142) $ 139,946
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization..... 245,570 131,252 130,659
Change in operating assets and
liabilities, net of effects from
acquisition:
Accounts receivable............. 203 178,278 (88,961)
Inventory....................... 3,055 7,467 7,020
Prepaid expenses................ 44,950 11,796 23,770
Other assets.................... 20,927 (12,847) 7,509
Accounts payable................ (24,456) (12,491) 12,325
Accrued expenses................ 32,354 (54,681) (19,368)
Rent concession received........ 40,668 31,265 (3,535)
Unearned revenue................ 103,753 (160,352) 42,235
----------- ------------ ------------
Net cash provided by (used in)
operating activities......... 142,218 (96,455) 251,600
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.. (205,888) (100,944) (68,950)
Acquisition of RSS, net of cash
acquired........................... (70,519) (70,519) --
----------- ------------ ------------
Net cash used in investing
activities................... (276,407) (171,463) (68,950)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit........ 2,794,335 1,527,109 2,601,325
Repayments on line of credit........ (2,782,196) (1,545,122) (2,707,205)
Proceeds from long-term debt........ 274,726 239,688 40,671
Repayments of long-term debt and
capital lease obligations.......... (158,938) (39,689) (180,966)
----------- ------------ ------------
Net cash provided by (used in)
financing activities......... 127,927 181,986 (246,175)
----------- ------------ ------------
NET DECREASE IN CASH.................. (6,262) (85,932) (63,525)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD............................ 133,128 133,128 126,866
----------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD............................... $ 126,866 $ 47,196 $ 63,341
----------- ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest.............. $ 277,453 $ 109,443 $ 112,926
NONCASH INVESTING AND FINANCING
ACTIVITIES:
Debt incurred to finance RSS
acquisition........................ $ 940,739 $ 940,939 --
Related party account receivable
realized through transfer of debt.. 642,961 -- --
Purchase price paid via repricing of
outstanding warrants............... 25,000 25,000 --
Assets acquired under capital
leases............................. 9,459 -- $ 7,647
See accompanying notes to financial statements.
F-37
INTRUST, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30,
1996 AND 1995 IS UNAUDITED)
1. BASIS OF PRESENTATION
Background--On May 31, 1994, three previously independent records storage
and management companies were merged with and into InTrust, Inc. (the Company)
pursuant to a transaction in which the owners of all of the respective shares
of common stock in their respective companies exchanged such shares for shares
of common stock in InTrust, Inc. The predecessor companies were as follows:
Rocky Mountain Records Managers--Records Retention Center, Inc. (RRC)--
Denver, Colorado
Record Keepers, Incorporated (RKI)--Ft. Wayne, Indiana
Vanco Records Retention Center, Inc. (Vanco)--Colorado Springs, Colorado
The pre-existing shareholders of RRC were considered to have the ability to
control the Company and, therefore, RRC's net assets were recorded by the
Company at their historical basis. Additionally, RRC's shareholders owned
approximately 40% of Vanco and this portion of Vanco's net assets was recorded
by the Company at historical cost. The remainder of Vanco and RKI were
considered to have been effectively acquired by the former RRC shareholders
who control the Company and thus purchase accounting was applied by the
Company to record the net assets acquired. The assets and liabilities of RKI
and approximately 60% of Vanco were recorded at their fair value and the
excess purchase price paid by the Company of approximately $1,512,000 was
recorded as goodwill.
On May 31, 1994, the Company purchased the net assets of MasterFile Capital
Corporation, its largest competitor in Colorado Springs, for $260,000. The
assets were recorded at their fair value and the excess purchase price paid by
the Company of approximately $173,000 was recorded as goodwill.
On January 20, 1995, the Company purchased the assets of Records Storage
Services (RSS), Albuquerque, New Mexico, and received a related noncompetition
agreement from the seller, for notes totaling $940,739. The assets of RSS were
recorded at their fair value and the excess purchase price paid by the Company
of approximately $810,000 was recorded as goodwill. The results of operations
for RSS are included in the Company's financial statements for the period from
January 20, 1995 through December 31, 1995.
Interim Consolidated Financial Statements--The balance sheet as of June 30,
1996 and the statements of operations and accumulated deficit and of cash
flows for the six month periods ended June 30, 1996 and 1995 are unaudited
but, in the opinion of management of the Company, include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the Company's financial position as of June 30, 1996 and the results of its
operations and cash flows for the periods ended June 30, 1996 and 1995. The
results of operations for the six month period ended June 30, 1996 are not
necessarily indicative of the results to be expected for the full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business--The Company was incorporated in 1994 and its principal lines of
business are file storage and related services. The principal markets for the
Company are Colorado Springs and Denver, Colorado; Ft. Wayne, Indiana; and
Albuquerque, New Mexico.
Cash and Cash Equivalents--The Company considers all investments purchased
with a remaining maturity of three months or less to be cash equivalents.
Inventory--Inventory, which consists principally of boxes, is stated at the
lower of cost, using the FIFO method, or market.
F-38
INTRUST, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30,
1996 AND 1995 IS UNAUDITED)
Property and Equipment--Property and equipment is stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets ranging from 3 to 20 years. Amortization of
leasehold improvements is provided over the lesser of the lease term or the
lives of the assets.
During 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("SFAS 121")." SFAS 121 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable and establishes guidelines
for determining recoverability based on future net cash flows from the use of
the asset and for the measurement of the impairment loss. Impairment loss is
calculated as the difference between the carrying amount of the asset and its
fair value. Any impairment loss is recorded in the period in which the
recognition criteria are first applied and met. The Company adopted SFAS 121
effective January 1, 1996 and adoption did not have a material effect on the
financial position or results of operations of the Company.
Goodwill and Other Intangible Assets--Goodwill and other intangible assets
are amortized using the straight-line method over lives ranging from 4 to 30
years.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition--The Company recognizes revenue on storage and related
services as work is performed. Payments received in advance of performance,
generally for customer storage service contract renewals, are recorded as
unearned revenue.
Income Taxes--The Company has elected to file its tax returns under
Subchapter S of the Internal Revenue Code. The Company's taxable income or
loss is includable in the income tax returns of the shareholders.
3. RELATED-PARTY TRANSACTIONS
The Company leases certain facilities (see Note 5) and also receives certain
general and administrative services from shareholders and entities controlled
by certain of the Company's shareholders. The total amount of such
transactions for the year ended December 31, 1995 were as follows:
General and administrative ..................................... $209,912
Facilities expenses............................................. 95,615
The Company also has certain notes payable to shareholders at December 31,
1995 (see Note 4).
The Company incurred the following related party expenses during the year
ended December 31, 1995:
Rent.............................................................. $86,788
Interest.......................................................... 12,662
Sales commissions................................................. 22,465
Financing services................................................ 25,000
F-39
INTRUST, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30,
1996 AND 1995 IS UNAUDITED)
4. LONG-TERM DEBT
Long-term debt consists of the following as of December 31, 1995:
Note payable to bank with interest at bank's prime rate plus 3%,
plus deferred interest of 8% which is due at maturity, plus
contingent interest, if any, at maturity; quarterly principal
payments of $37,500 with interest at the bank's prime rate plus
3%; due May 31, 1999; contingent interest is calculated at
maturity of note and represents the difference between 5% of
total Company value, as defined, and the amount of deferred
interest due at maturity; collateralized by all equipment,
inventory, receivables and intangibles; requires maintenance of
certain financial and operating ratios and limits dividends to
amounts necessary to allow Company's shareholders to pay taxes
on income from the Company..................................... $1,192,255
Note payable to bank with interest at the bank's prime rate plus
3%; collateralized by all equipment; monthly principal payments
of $11,459 plus accrued interest; due January 31, 1998......... 504,167
Revolving line of credit with a bank; interest at the bank's
prime rate plus 3%; collateralized by all equipment, general
intangibles, inventory and receivables; guaranteed by certain
shareholders; due January 1, 1998.............................. 111,651
Note payable to shareholder with interest at a bank's prime rate
plus 2% payable monthly; annual principal payments of $25,000
due June 1, 1997 through June 1, 2000.......................... 100,000
Notes payable for acquisition of MasterFile (see Note 1), net of
discount of $7,293 respectively, based on interest imputed at
10%; principal and interest payments totaling $24,500 due
annually on January 15 through maturity in 1998................ 66,207
Note payable to shareholder with interest at a bank's prime rate
plus 2% payable monthly; annual principal payments of $12,500
due November 30, 1997 through November 1, 2000................. 50,000
Note payable to shareholder with interest at a bank's prime rate
plus 2% payable monthly; monthly principal payments of $1,042;
due January 31, 1997 through December 31, 1998................. 25,000
----------
Total......................................................... 2,049,280
Less current portion............................................ 423,651
----------
Long-term debt.................................................. $1,625,629
==========
At December 31, 1995, the Company was not in compliance with certain
financial covenants of its two largest bank borrowing agreements. On May 29,
1996 and June 13, 1996, respectively, the Company amended the terms of the
respective bank borrowing agreements to allow for its compliance with the
financial covenants and to allow one of the banks to revise the interest rate
to prime plus 5% ($615,181 balance outstanding at December 31, 1995) if the
Company does not meet certain operating results. The Company also received
waivers of any covenant violations for all periods prior to the date of the
amendments.
F-40
INTRUST, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30,
1996 AND 1995 IS UNAUDITED)
Future principal payments on long-term debt are as follows at December 31:
RELATED
YEAR ENDING DECEMBER 31, PARTY OTHER TOTAL
------------------------ -------- ---------- ----------
1996.......................................... -- $ 423,651 $ 423,651
1997.......................................... $ 62,500 312,000 374,500
1998.......................................... 62,500 396,374 458,874
1999.......................................... 25,000 742,255 767,255
2000.......................................... 25,000 -- 25,000
-------- ---------- ----------
Total....................................... $175,000 $1,874,280 $2,049,280
======== ========== ==========
5. CAPITAL AND OPERATING LEASES
The Company leases various property and equipment under leases classified as
capital leases. The Company also leases office and warehouse space and certain
vehicles under leases classified as operating leases. Under the terms of these
office and warehouse leases, the Company is required to pay certain costs,
such as upkeep and maintenance.
Total assets under capital leases are comprised of the following at December
31, 1995:
Machinery and equipment............................................ $139,882
Computer systems................................................... 23,057
Furniture and fixtures............................................. 4,323
--------
167,262
Less accumulated amortization...................................... 39,064
--------
Total............................................................ $128,198
========
At December 31, 1995, future minimum annual lease payments under
noncancelable operating and capital leases are as follows:
OPERATING LEASES
---------------------
CAPITAL RELATED
YEAR ENDING DECEMBER 31, LEASES PARTY OTHER
- ------------------------ -------- ---------- ----------
1996........................................... $ 45,646 $ 233,400 $ 494,050
1997........................................... 37,981 233,400 499,722
1998........................................... 24,931 233,400 377,742
1999........................................... -- 233,400 261,177
2000........................................... -- 233,400 145,390
Thereafter..................................... -- -- 137,200
-------- ---------- ----------
Total minimum lease payments................... 108,558 $1,167,000 $1,915,281
========== ==========
Less amounts representing interest............. 20,133
--------
Present value of future minimum lease
payments...................................... 88,425
Less current portion........................... 37,021
--------
Noncurrent..................................... $ 51,404
========
Total rent expense for the year ended December 31, 1995 was $604,922
(including the related-party rent expense discussed in Note 3).
F-41
INTRUST, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30,
1996 AND 1995 IS UNAUDITED)
6. PROFIT-SHARING PLAN
The Company sponsors a 401(a) profit-sharing plan which covers substantially
all employees. Amounts contributed are determined at the discretion of the
Company's Board of Directors. During the year ended December 31, 1995, the
Company contributed $25,000 to the plan.
7. SHAREHOLDERS' EQUITY
All shareholders of the Company entered into a Shareholder Agreement
(Agreement) on May 31, 1994 providing the Company and its shareholders the
right of first refusal to match any offer to purchase stock from a selling
shareholder. The Agreement also provides for other limitations on the
Company's shareholders' ability to transfer ownership of stock.
There is a warrant outstanding which gives the holders the right to purchase
526 shares of the Company's no-par value, common stock for $225,000, subject
to adjustment for antidilution. The warrant expires the earlier of the sale of
substantially all of the outstanding stock or assets of the Company, the
effective date of a registration statement filed in accordance with the
Securities Act of 1933, or May 31, 2004.
In 1995 the warrant exercise price was reduced by $47.53 per share to
compensate a third party for services provided during the purchase of RSS's
assets (Note 1). In connection with the reduction of the warrant exercise
price, the Company recorded additional paid-in capital of $25,000 and a
corresponding increase in acquisition related costs.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value of the Company's financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments." The estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is
required to interpret market data in order to develop the estimates of fair
value. Accordingly, the estimates herein are not necessarily indicative of the
amounts the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
For certain of the Company's financial instruments, including cash, account
receivable, accounts payable and accrued expenses, management believes that
the carrying amounts approximate fair value due to their short maturities.
Carrying amounts and estimated fair values of the other financial instruments
are as follows at December 31, 1995:
Payables to Affiliates--For these short-term instruments, management
believes that the carrying amount is a reasonable estimate of fair value.
Long-Term Debt--The carrying amount of the Company's long-term debt, which
are tied to prime interest rates, approximate their fair value based upon the
nature of the borrowing.
9. SUBSEQUENT EVENT
The Company entered into an asset sale agreement on October 4, 1996 pursuant
to which it will sell substantially all of its assets to Pierce Leahy Corp.
for approximately $13.5 million. Consummation of the sale is planned for the
fourth quarter of 1996. The Company may be subject to income taxes on built-
in-gains that existed at the date it elected S Corp. status if and when the
sale is consummated. The amount of built-in-gains and related taxes have not
been determined by the Company; however, the amounts may be material.
F-42
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- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER CONTAINED
HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UN-
DER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CON-
TAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-----------
TABLE OF CONTENTS
PAGE
----
Available Information.................................................... 1
Prospectus Summary....................................................... 2
Risk Factors............................................................. 16
The Exchange Offer....................................................... 21
The Company.............................................................. 31
The Transactions......................................................... 31
Use of Proceeds.......................................................... 33
Capitalization........................................................... 33
Selected Historical and Pro Forma Consolidated Statement of Operations,
Balance Sheet and Other Data............................................ 34
Pro Forma Financial Data................................................. 37
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 44
Business................................................................. 53
Management............................................................... 63
Certain Transactions..................................................... 70
Principal Shareholders................................................... 71
Description of Credit Facility........................................... 73
Description of the Notes................................................. 74
Description of Capital Stock............................................. 99
Certain Federal Income Tax Considerations................................ 100
Plan of Distribution..................................................... 100
Legal Matters............................................................ 101
Experts.................................................................. 101
Index to Financial Statements............................................ F-1
-----------
UNTIL JANUARY 21, 1997, (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICI-
PATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN SELLING
EXCHANGE NOTES RECEIVED IN EXCHANGE FOR ORIGINAL NOTES HELD FOR THEIR OWN AC-
COUNT. SEE "PLAN OF DISTRIBUTION."
- -------------------------------------------------------------------------------
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[LOGO OF PIERCE LEAHY CORP. APPEARS HERE]
PIERCE LEAHY CORP.
OFFER TO EXCHANGE ITS 11 1/8% SENIOR SUBORDINATED NOTES DUE 2006 WHICH HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT FOR ANY AND ALL OUTSTANDING 11 1/8%
SENIOR SUBORDINATED NOTES DUE 2006
----------------------
PROSPECTUS
----------------------
OCTOBER 23, 1996
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